What Financial Experts Won't Tell You About Money

you don't have to worry about whether you're doing the quote unquote right or wrong if it's working for you and it's making you happy then maybe it's the right thing to do there is no one right answer in finance in investing like we know it's not intuitive for people but this is an Endeavor where you might Morgan household here today Morgan household author of the psychology of money no wonder it's an international bestseller when he was a child and his refrigerator was empty and his mom had three dollars to her name and he said look three dollars is not going to fill the refrigerator it's not going to make a vent but three dollars will buy you three lottery tickets that will give you the potential to fill the refrigerator by far the biggest problem for new investors is not understanding how much time is needed to put the odds of success in your favor if you want to break it down like the simplest terms live below your means save the difference invest for the long term and be Diversified so tell us I mean do you think we're heading for a global recession be very wary of certainty including like certainty and forecasts like if someone says we know that a recession is going to come in the next six months or someone says we know this stock is going to double any level of confidence like that is just not how the world works there's a lot of advice out there that is either bad advice or it's good advice for one person but not for you Morgan hausel is a behavioral Finance expert and the author of the best-selling book the psychology of money we're going to be talking today about how you can be smarter with your finances and how psychology plays a huge role in your relationship with money this book was my personal favorite read of the year so it's such an honor to be having this conversation I'm Erica kohlberg this is Erica taught me and today we're here with Morgan hausel Morgan I'm so happy to have you here so I want to first talk about your book that has sold millions of copies it's really resonated with people what is the story that people say wow that really had an impact on me or that really helped me to understand this concept of personal finance I think one that resonated a lot and resonated with me personally too it was maybe my favorite it's just the idea that there is no one right answer in finance I think we tend to think of finance and finance is taught like it's math and in math there's one right answer for everybody no matter who you are or where you're from or how old you are it's just like two plus two equals four for everybody that's how math works and finance is I just in my view it's not like that at all that people who are equally smart equally educated equally informed can come to totally different conclusions about how to manage their money and I think once you Embrace that it does two things one it makes you less cynical about other people and less judgmental about how other people are spending their money and two it gives you permission to just be like what works for you you don't have to worry about whether you're doing it quote unquote right or wrong if it's working for you and it's making you happy then maybe it's the right thing to do and there are things that I do with my own money my wife and I do with our own money that are probably the quote unquote wrong thing to do that if you looked at it on a spreadsheet you would say oh you should be doing this differently but it works for us and it makes us happy and it helps us sleep well at night so therefore it's the right thing for us to do and I think once you have that little nugget of like nobody's crazy people do crazy things but everything that people do with their money makes sense to them it works for them and yes there's always room for improvement and people can be misinformed and do things that they're going to regret and we should try to help them understand what their options are but people do so many different things with their money can I give you one quick story that's in the book that I really liked the majority of lottery tickets in the United States are purchased by the poorest Americans the lowest decile of income earners by the majority of lottery tickets now someone like me or you might look at that and say that's crazy these people who can barely feed themselves are buying scratcher tickets that makes no sense it's not rational I have a friend who's a financial advisor he's successful now but he grew up in abject poverty he was homeless most of his childhood and he told me a story one time that he remembers when when he was a child and his refrigerator was empty and his mom had three dollars to her name and he said look three dollars is not going to fill the refrigerator it's not going to make a dent but three dollars will buy you three lottery tickets that will give you the potential to fill the refrigerator and he said until you can understand that mindset you don't understand why these poor people are buying so many lottery tickets when it's your only chance of Hope of literally feeding your kids in this situation it doesn't make sense and so that's that's an extreme example but it just shows like there's so much going on inside of people's heads and there's no one right answer of what's what's the right thing to do then I think all of us just need to find out what works for us be a little more introspective about who we are and what we want and what our goals are our social aspirations are and just find a plan that works for us so I've also been as I've started creating content around personal finance I feel like a lot of a lot of ask me okay what is the formula how do I do it and I was thinking about dieting or or I was thinking about how this relates to dieting like people love the 10 000 steps a day for whatever reason that was so formulaic that it really resonated and stuck with a bunch of people and people can remember that ten thousand steps a day yeah Dave Ramsey's save a thousand dollars people remember that because that's formulaic it applies across the board according to him and people resonate with that again so do you think while I I agree that personal finance is personal I feel like some people are just looking for a formula what is the closest thing to formula you could give them that's that's a great question because I don't know the answer off the top of my head if the formula was like if you want to break it down like the simplest terms of like live below your means save the difference invest in for the long term and like be Diversified like it's probably something I would say it's something really Broad and non-specific like that I think once people get into a formula of like save X percent then it's really different like Rd you make ten thousand dollars a year do you make ten million dollars a year that's a big difference one of my qualms if you're watching like CNBC to invest and you'll see the guy on CBC who's like you should sell Apple stock I don't be like who are you talking to are you talking to the 19 year old day trader are you talking to the Widow living on a fixed income because the advice is going to be completely different there so it's like yeah if there was a formula of like live below your means save for the long term but that's so dry and non-specific but I honestly think that's this in my view that's as close to a formula as you can get you just mentioned ten thousand steps okay great save a thousand dollars from Dave Ramsey like yeah wonderful but there's still going to be so many people who listen to that and might say I can't save a thousand dollars or a thousand dollars I make I make a quarter million dollars a year that's not so like there's still a large number of people who are going to listen to that and say that doesn't apply to me specifically and I think it's almost like Diet too where are there principles of diet like eat your vegetables eating like yes but there's also going to people who are like uh I'm gluten intolerant so this this doesn't work for me and that doesn't there's going to be so many differences within the group yeah I think especially for financial content when by definition you hope that so many different people are going to be watching this all different ages different income groups the more specific it gets the more dangerous I get the more dangerous it gets I think that's what's so dangerous about something like CNBC where they're giving Universal advice to a wide audience no that totally makes sense what about so I know one of the while I agree that maybe there's no specific formula do you think that there are principles that apply across the board I know in your book one of the things you talk about is the this principle of greed and wanting things quicker wanting your money to double quicker and not having that patience and the long the long-term vision for your money is that something that you think applies to everyone I think it's true that in most Endeavors in life there's a pretty quick payoff so like if you go to the gym you'll be sore tomorrow like there's a pretty there's a there's an indication that something's working if you're if you're on like a new diet you might feel different that day the next day it's a pretty quick thing so people take those payoff time periods and when they apply it to investing if they're new to investing they might think oh I'm going to invest a thousand dollars and I'm going to check back next Wednesday and see how it's done and then or maybe I'll check back you know two weeks from now and see what's in six months feels like a long time because if you're going to the gym for six months and you saw no progress you're like you're doing something wrong here but in investing like we no it's not intuitive for people but this is an Endeavor where you might lose money over it 10-year period and that doesn't mean you did anything wrong investing is a very very long Endeavor I think the closest example is like planting an oak tree like it takes if you planted a seed in your backyard and checked it next Wednesday and you're like oh it doesn't work it's a scam you're like no it just it takes a long time and the results are going to be magnificent but it's going to take 50 years and I think investing is really close to that and it throws a lot of people off by far the biggest problem for new investors is not understanding how much time is needed to put the odds of success in your favor and it's not it's not a month it's not a year it's something closer to five or ten years before you're like okay if you've given it that much time you should start to see most likely whether you're doing it right or wrong but even in that scenario even in 10 years even if you're doing it right it's not without precedent at all that maybe you've done fairly poorly if the economy is doing really poorly if there's a financial crisis if there's a pandemic whatever it might be so that's what it's it's really a lifelong Endeavor and that's what screws people up if they're not familiar with that time frame but as the time Horizon what do you think are also the biggest mistakes that people are making when they're when it comes to their money I think there is a lot of money to be made in the money business and because of that there is a lot of bad advice and there are a lot of people who look fairly reputable and sound fairly reputable who are scam is the wrong word because that implies it's it's illegal I think you're you're you're you're the lawyer you know but there are a lot of people who I think mean well but they operate in a system where the incentives push them to giving not the best advice and charging outrageous amounts for it I always think like one of the best financial skills you can have is a very very finely tuned BS detector so that you can see an ad or hear a pitch and say like I'm not saying you're a bad person but that's that's a bad product that you're selling having that that sensitivity is really important and a lot of people don't because there are a lot of other fields in their life that are pretty heavily regulated medicine and whatnot if you go to a doctor who has an MD you can be reasonably sure I'm not saying there's no bad doctors but you can be reasonably sure that they are educated and tested and qualified and the advice that they give you is very likely good advice and in the finance World there are things like cfp and CFA these credentials that are pretty good but there's there's no requirement that you have them if you if you get surgery that that person has to have an MD this would be a licensed surgeon but you can go to a financial advisor who has very few credentials either they took a regulatory exam that took them two weeks to study for they have a degree from Google effectively and they can be a financial advisor and so a lot of people kind of get taken for a ride because of this and there are a lot of also just online again I'm not going to use the word scams but just things online that want to push you in one direction or the next that leads to a lot of bad advice and a lot of these two are not even commercial products to buy but there's just so many blogs and social media feeds I'm I'm one of them I'm not going to throw them all under the bus but there's a lot of advice out there that is either bad advice or it's good advice for one person but not for you and I think having that sensitivity to information is really critical for new investors but it's so hard though I imagine for these new investors when they don't when you don't understand what you're looking for it's hard even if you have a good BS meter in general it's very hard to know like what is who is good and who's looking out for you truthfully and who's good for your specific personal finances versus who is not right like if someone wears a suit and speaks very confidently it's kind of easy to feel like oh they're trustworthy so easy especially when you know the stakes are really high in money this is sending your kids to college this is retiring this is not just a little game this is like one of the biggest areas of your life and since it's generally not taught in high school or even or even College even if you are a very smart woman very smart guy Highly Educated you have a degree in chemical engineering you might know nothing about money but I always say like the two areas of your life that are going to impact everyone no matter whether they like it or not or health and money it doesn't matter if you don't like those fields those fields are going to impact you they're there they're going to impact your life so the fact that we don't generally don't teach those fields in school has always been crazy to me but also just makes it so that even very educated people who are not gullible in any other area of their life kind of get taken for a ride very often what are some red flags that people can look out for so if you're mentoring someone who's 20 years old new to this world of personal finance and money what would you say hey if someone says buy this product or do this with your money what's the red flag that they should look out for I'd say in general be very wary of certainty including like certainty and forecasts like if someone says we know that a recession is going to come in the next six months or someone says we know this stock is going to double any level of confidence like that is just not how the world works the best you can do when you're studying the economy or investment markets is just putting the odds of success in your favor so the best you could do is be like we're 60 confident in in buying this stock and if it's not pitched that way if it's pitched in any level of this is a sure thing run for your life because it just does not exist in this world outside of an FDIC insured savings account certainty does not exist in the finance world but certainty is what sells and so that's why a lot of the pitches that are online promote this degree of certainty that I think could be really dangerous that's that's a big red flag those are really good so anything guaranteed results if they say oh if you invest in this stock you're going to double your money that's obviously a big red flag Why is the industry this Finance space so or what is it about this industry that you see people on TV saying oh there's going to be a recession oh buy this stock what is their incentive there I think again there's so much money to be made in finance if you think I mean in the United States for financial assets stocks bonds checking accounts it's over 100 trillion dollars it's like unfathomable amount of money and globally it's several hundred trillion dollars if you are in the finance world and you're taking one percent of that as a fee it's a lot of money incredible amount of money that you can make and you know in fields like Investment Banking and whatnot you have the people who can graduate college make half a million dollars a year out of undergraduate college and they're smart people these are not just any Joe from the street but relative to other Industries there's so much money to be made in finance and because of that I think otherwise moral good well-meaning people when they are introduced to a system where their incentives are to promote certainty or to kind of pull the wool over people's eyes even if they're otherwise good people these are not shysters they are willing to sell products that are not good for people because they are they have the potential to make so much money themselves I think that was true like during the financial crisis when there were so much of 2008 when there's so much view of like the greedy Wall Street Bankers who ruin who ruin the world that was kind of like the narrative at the time one kind of unpopular opinion that I had was I think 99 of those people were very good moral honest people who were operating in a system of terrible incentives and most of us who may have been saying that the greedy Bankers who ruined the world underestimate how you and I may have acted if someone said hey 22 year old Erica I'll give you four million dollars if you package these subprime loans and sell them to widows and orphans yeah I think a lot of us underestimate what we would have done in that situation and because those incentives exist in finance in a way that they don't in medicine or engineering or any other field like that it really kind of you have this boom bust cycle of where the incentives kind of pile up and you have a big Financial bubble and then everything comes crashing down I I know that you've been in the finance space for a long time over over a decade that you've been writing about finance and personal finance do you think what's happened with social media and the accessibility now of personal finance information through social media is overall a good thing for people or do you think it is a bad thing because it is even now harder to differentiate between possibly the Bad actors with ulterior motives versus the good ones who actually want to give good personal finance tips to everyone this is a a boring answer but I think it's the truth I think it's on net good but it's very slim I think I'm making this up but I think it's like 51 amazing and 49 terrible like it evens out to where it's like I think it's an on net a good thing and it's a good thing because if you go back to the world before social media most financial advisors were Gatekeepers if you were just an average Joe and you wanted to invest for your retirement you want to buy a mutual fund you need to book an appointment with a guy down the street go into his office you know wear your suit and tie like wait in the waiting room so you could go have permission to invest in the stock market and pay him an egregious fee and commission to do it that was the world that existed like 15 years ago not that long ago and I think it's a wonderful thing that it has been democratized so much not just the access to financial products but the access to information and I don't think it's an exaggeration that an 18 year old with an iPhone today has more financial information than a partner at Goldman Sachs did 20 years ago that's not an exaggeration it's like so a lot of people were just information Gatekeepers too the financial advisors if you was like forget buying a mutual fund if you wanted to know what mutual funds existed 20 years ago you had to go talk to that guy and pay him a crazy fee and you don't anymore so a lot of those financial advisors who are like commission based a lot of them don't exist anymore because it's been so democratized both the information and the product access that's an amazing thing the other side of that though are the number of people who are either promoting products they shouldn't be or people who are innocently putting advice on social media and whatnot that they're very innocently they're just naive to the fact that it might be bad advice to somebody else they're not doing it you can't criticize them but if they're someone who went on and said like oh everyone should buy this stock they just might not have the knowledge or haven't thought through that a 16 year old in his mother's basement might might listen to that put his entire life saving into it and lose everything because he didn't know what the consequences of it were so I think there's a lot of innocent bad information out there as well you can't just put everyone in as like a bad actor a lot of it is is really innocent and I encourage I think it's great that if you are someone who's interested in finance and you want to start a blog start doing Tick Tock start making YouTube that's amazing that's great yeah but if you turned it a little bit and said should everyone who's interested in medicine start posting medical advice in that situation you're like you might might not be a great idea but we do that with Finance so that's why like I can see both sides of it and on net I prefer this world to the old world full stop yes we're in a better position but it is not without consequences I'm with you on that I mean it's interesting things like what happened with Dogecoin would not have happened free social media no way there's no way even social media five years ago it was not that established and things like GameStop uh in early 2021 these things that would have been unfathomable like 24 months ago are now the reality of the world we live in I think a lot of that was coveted related too where people who would otherwise be watching football games going out their friends were all sudden stuck inside and the only thing that you could do all sports were shut down in 2020 the only thing you could do was day trade and the explosion in Robin Hood accounts and crypto trading in 2020 you can Market to the day of that the lockdowns began it just exploded after that and again I think a lot of it is great that a lot of these young people teens and 20s are now active participants in investing and even if they're doing it in ways that they will regret I would much rather that someone make learn how Finance works and learn how risk works when they're 19. yeah versus when they're 45 and putting their kids through College like it's actually great to the extent that Robin Hood was sucking in a bunch of young investors I'm kind of like that's even if they end up regretting what they did and a lot of them already have I think that's actually a good thing I think so because I think a lot of the fear of investing comes from not having done it at all and that's what made it so for me at least growing up I didn't know this was a thing that not I I thought investing was a thing for the rich and it all it took was me investing my first twenty dollars to be like wow maybe someone like me can do it too yeah and so I do think ultimately it is a good thing yeah but I think you know you learn these lessons very quickly if you invest in something and it goes down 98 like oh maybe maybe that was the wrong thing to invest in a lot of it will be an unfortunate takeaway if you have someone who was young and new to investing and they invested all of their money into call options on Robinhood and lost everything and that just what I just described as like millions of investors were in that situation the takeaway that they might come away with is investing is a scam and I'm never going to invest again in my view that's the wrong takeaway the takeaway is like you should just not have invested in call options or penny stocks or bankrupt companies but investing in a more Diversified way in more established companies is not only the right thing to do but is absolutely critical to your retirement and sending your kids to a college eventually like it's a really critical part of the rest of your life so that's that is one downside is like if they get scarred so much because of what's happened in the last six months during when tech stocks have exploded imploded uh if that scares them away for life then that's that's a bad thing and I do think a lot of these platforms you know they would pitch themselves as democratizing investing but really what they were doing was was promoting trading which is very different from investing those are two different beasts I don't look down upon Traders I'm not going to say it's wrong but I think for a lot of people who are like oh I'm not that interested in finance I'm not a finance nut I don't want to be doing this 24 7. those people should probably be investing now if you are a finance nut and you love this stuff and you want to be a Trader like I think that's great that's amazing but I think there are a lot of people who wanted to be investors who are pushed into a trading product and end up having a bad experience with it just for the people who are listening and may not know the difference between an investor and a Trader can you kind of go into how you define that I think a lot of it is the difference between like investing in a business for the long term where I'm going to buy Apple stock because I believe in their products and their products are going to generate profits and those profits will accrue to me as an investor over the next 20 years that's that's investing investing in a business for the business results trading is I'm going to buy a stock because I think the stock price will go up over the next week and it's more of a speculative Endeavor and you might be right about that bet you might make money doing it I'm not saying it's wrong but it's a speculation that a stock price might rise versus I'm investing in a business whose profits are going to be paid out to me as dividends over the next 10 or 20 years so part of it is time Horizon and part of it is just like the bet that you're making and why you are attracted to that company and it's so interesting though how it all goes back to the psychology because you think about the story you told about the lottery ticket why is GameStop so much more exciting than saying hey invest in a low-cost Index Fund right it's because there's that hope that wow I could double triple my money in a short period of time yeah versus oh on average it returns 10 year over year right and here's like a lot of people don't like their expectations are really inflated I remember someone on Twitter last year when markets were going crazy high last year they tweeted me and they said if you can't double your money every year in the stock market you have no idea what you're doing I remember being like there's like a sentiment check of where we are in the world but also like I don't blame them because that if you're new to investing you might think that is totally reasonable but the actual statistics is like if you can earn 12 per year you're a hero in this market if you can earn 15 a year for your career you are on the Mount Rushmore of investors over time like on average the last 100 years the stock market in America has returned 10 on average annually if you can outperform that by one percent per year and earn 11 you're amazing you're one of the top professional investors in the world literally and so those are the expectations to Anchor to so when you when that's the world like 11 annually is amazing when you have people who think that you should earn 100 annually they're so disconnected from the reality of what's likely to occur and maybe they go through a period where they actually did double their money in one year but there's just a reversion to the mean that's all going to come back to bite them which is exactly what's happened over the last six months yeah do you remember when you first invested your first hundred dollars yeah how old were you and what were you investing in I was 19 and I was day trading a bankrupt Steel company I don't know why I thought that would be a good idea and then I that didn't work I lost money doing that and then I tried day trading other stocks and then I tried holding stocks for a month and none of it worked and I don't regret any of that I lost a lot of money doing that but it was a great learning process I think there's one thing I did right it's that I I learned quickly like not that that didn't work let's try something else rather than just being like stubborn and being like I gotta keep trying this over and over and over again and it took me a long time to get to where I am now and how I invest which we can talk about if you want but I would also say before I get into that I'd say there's a good chance that I will change how I invest in the future the idea that I figured I have it all figured out now I think is is pretty naive and there's a good chance that 10 20 years from now I will look back and I will say that how I invested today and even things that are written in my book that I will disagree with I actually hope that's the case I hope I'm not I I I I I I hope my view of the world and my learning of the world didn't Peak at at this age I hope I'd go on to learn more things and change how I invest but it is interesting as I was reading your book I know a lot of these Finance books they have to be updated every year every two years because some of what's written is become irrelevant but your book to me it strikes me as very Timeless principles what do you think do you have specific chapters that you're looking at you think might have to be Rewritten in five years I mean the one thing that sticks out is I finished writing it in December 2019. so just before covet started I think there's one sentence on covet in the book because we didn't want to look like we were oblivious to it so threw it in but I wrote all of that before covet now there's nothing that disagrees there's no this is something like covet can't happen but covet changed a lot of people's views of risk including mine I don't again I don't think there's anything that I would change in the book but you go through these events in life 911 2008 covid and all sudden you're like oh how I thought the world works is actually not how how it actually works and I think you and I and everyone else over the rest of our lives hopefully we live another 50 plus years you know I think historically every 10 years something happens in the world that shatters people's World Views again like 9 11 and whatnot it just something happens we're like oh I had this view of the future and I know it's wrong and I need to readjust or even at the personal level if you have some personal crisis your view of what you thought the future is going to be can change in an instant whether it's a medical condition or whatever it might be so I don't know what the event would be but I'd be highly confident that in 20 years there will be some massive Global event that changes how I think about risk I've told this story before but it was it was pretty telling so I write about this stuff for a living and have for more than a decade about investing psychology and stay calm and whatnot my wife and I had this long-standing plan to sell our house in Virginia in uh April of 2020. well before covet that was our plan we're gonna we're gonna put our house on the market in April in hindsight like the worst timing possible because April 2020 was Peak covid Panic the economy was melting down the unemployment rate was higher than it was during the Great Depression and so in March of 2020 I called our realtor and I said hey I know the plan was to put it on the market in April but I want to put them on the market right now tomorrow and he said he said Morgan don't panic and I said oh I'm panicked you are looking panic in the face right now and I'm someone who wrote a book about like don't panic and in that situation I I did I don't regret it because we were going to sell anyways and it ended up fine the house sold it was like no problem but there's a big difference between how you think you're going to react when everything is calm and everyone's happy versus when you're actually in the trenches experiencing it firsthand there could be a big gap between that and I would say in general most people think they have a high risk tolerance when everything's going well yeah whenever when you're gainfully employed and happy and healthy and I said Erica what's your risk tolerance like you're probably like oh it's great if the market fell 30 I think it's an opportunity it's great but then when you actually you're one of these big events happens and there's a pandemic that might kill you and your family and you might be heading into the Next Great Depression then you think differently about the world so that's why it's like I I know that whether it's personal or Global there will be something that happens in my life where I'm like ah I think differently now and I don't think that's bad I don't regret it it's just everyone is constantly learning how the world works and what they want that's another side of this is that I'm sure that my wife and I and my kids will have different goals different aspirations in my 50s than I did in my 30s of course so it would be naive for me to think that I've got this all figured out for the next 50 years it's just not how it works yeah you're so right I remember in March 2020 my dad who to me is very much like a patient person with his money he understands that look just hold on for the long term but he's a couple years away from retirement so he saw his 401k just crashing and when you're versus me many years out when you're a few years away from retirement and you see your retirement having like that's scary that's scary and that elicits this emotional response that you couldn't have predicted two days before or five days before right yeah and was was really bad about covet too is that so in 2008 the financial crisis that was a financial crisis the thing that was happening was in finance covet out of this whole other element of it was a financial crisis and a Health crisis not only did your dad's 401K cut in half but I'm sure he was worried that he might die that's what everyone was worried about in the time so it was like this double whammy of fear at the time that really just shook people in a way that they'll never forget yeah so I know that 50 now you might have a different Theory but what is your approach today to investing so the other thing I made clear in my book is that this is not advice and that's not not just to make the lawyers happy like everyone invests differently so just just because this is what I do doesn't mean that it's what you're not Financial advice not not Financial advice for everyone I'm a passive investor because I invest mostly in index funds which are very broad low-cost Diversified funds and I plan on holding them for 50 plus years I never sell and I do what's called dollar cost averaging so I invest the same amount of money every single month come hell or high water every month from the first of the month the same dollar amount over and over again it's not based off of where I think the Market's going to go next or what the economy is doing it's just a consistent system to invest a little bit more for as long as I can and hold that for as long as I can so that's how I invest in the stock market we have my wife and I have a fairly high percentage of cash as our net worth like if most financial advisors looked at it they'd say like what's going on here are you saving for a new house or whatnot and I always say no it's I'm saving for a world that I know is gonna take me and everyone else for a wild ride and I think most people most people think about risk they only think about the risk that they can Envision that the risk that makes sense to them and the thing that we know about risk is that the biggest risk is always what you don't see coming I've just I've used like 911 2008 in covid nobody saw those things coming before they had destroyed the world effectively and and at the personal level it's the same very few people see a divorce coming very few people see cancer coming it just it and and most people think it's not going to happen to them until it does so I have a higher level of cash than most people because I want to stay cognizant that even if things are going well now like things change and change abruptly so in a world where risk is what you don't see coming you need to have a level of conservatism in your finances that seems like it's a little bit too much because if you're only planning for the risks that you can see you're going to miss the surprise 10 times out of 10. so that's those are my like high level Finance philosophies investing low-cost Diversified for the next 50 years and a fairly level of a high level of conservatism I like to think of it as like saving like a pessimist and investing like an optimist yeah I want to save my money with the idea that like oh the world's fragile and my career might be fragile and I want to be prepared for that so I can endure it but I invest with the idea that like if I can endure it and and put up with all the ups and downs then if I can stay invested for 50 years the results will be incredible it's like that barbell personality besides this investing in the stock market do you have real estate other Investments we own our house and I write in the book we own it outright which is I'd write it was the worst financial decision we could have ever made but the best money decision we ever we could have ever made that's an important thing that's one of the things that like I can't explain on a spreadsheet why we don't have a mortgage because up until six months ago you could have gotten a 30-year fixed rate mortgage for two and a half percent basically free money and not having more helps us sleep better at night we like the feeling that it gives us so that's another like saving like a pessimist I put it in that camp like I can't I can't show you on a spreadsheet I can't justify on a spreadsheet why we did it but if for like moral reasons in our household it's the best money decision that we've ever made so that's that's the only real estate that we have and then other than that other than I mean our effectively our entire net worth is a house a checking account and index funds that's 99 of our net worth and I think it doesn't need to be more complicated than that there's always an assumption that the more complicated your finances the better you'll do I think that's like a knee-jerk reaction of like oh how can I make it more sophisticated and I think it's almost always wrong yeah almost always the case that simpler is going to be better most so much of the time I know it sounds cynical but a lot of times complexity and finance is just an excuse for higher fees but the results that come from it are are always like rarely show up so I think the more simple it can be a I love that I can like wrap my head around my finances in two seconds I know it is it's so easy for me to track and think about and B I think that when it's that simple you're cutting out so many middlemen from the equation to make it as loafy as possible which I think is uh for us at least the right way to do it how are you thinking about crypto see I don't I don't I don't own any so I could probably stop there and say that's how I feel about it but I also would not in a million years bet against it either yeah I have no fomo in finance the fear of missing out like it does not bother me in the slightest that when other people do better than me so I would it would not surprise me in the slightest if crypto does amazing things completely changes the world I also if there is one view on crypto that I have it's like if you don't find a lot of it incredible you're not paying attention and if you don't find a lot of it absurd you're not paying attention you get like both of those things and actually in any new industry it's always like that I always use the example of like in the early 1900s there were 2 000 car companies and 1997 of them went bankrupt and three of them GM Ford and Chrysler like went on to change the world yeah in any new industry it's like that in the 80s there were like dozens of PC companies and it ended up as like Hewlett Packard and Dell and a couple of others there's always in any new industry like a massive washout 99 of new entrants go just disappear and crypto will be no different than that whether that'll take six months or six years but I would have high confidence that 99 of new crypto projects today won't exist but as an industry it can still do very well if the one percent that stick around become trillion dollar companies that's what happened with GM Ford and Chrysler like if you invested in every automaker in the early 1900s even if 99 went bankrupt you still did pretty well but then the question is do people have the iron gut that that lets them do that like do crypto investors if they make 100 Investments are you okay that 99 of them might go under and are do you have all of your hope that crypto and and eth might or that Bitcoin and eth might be the are the winners if people have that mentality and they think they have that risk tolerance and I would say I would say great but that's the whole industry of all of these the whole history of all these industries not just crypto it's like whenever there's a big innovation there's going to be a massive massive washout and not like volatility but these projects just disappearing forever yeah I know so you've gone the very conservative route of low-cost S P 500 index funds I assume do you have any do you have a portion allocated to just individual stocks that of companies you believe in I'm on the board of directors of a company called Markell so I have a lot of Markel stock as as a board director should have a lot of skin in the game I have some Berkshire Hathaway uh Warren Buffett's company he was a big inspiration early on so almost for sentimental reasons I haven't gotten rid of that have you been to the annual shareholders many times it's great really yeah it's a it's a really cool time to go it's 40 000 investors that show up and it's crazy a lot of times the last couple times I've gone I haven't I've gone to Omaha during that time but I actually don't go inside to the shareholder meeting it's turned into just like an excuse for friends to meet at the place it's kind of a pathetic way that people have but why don't you go into it they say the same things over and over again every single year they don't say anything new and everything is like live stream you can watch it afterwards if you were to summarize what he says year after year what is it uh we don't know what the Market's gonna do next buy cheap stocks politics is crazy have a nice day Warren Buffett has the most legendary investor out there has really changed his views on things yeah you look at what he the bet he made on Apple in dollar terms he's made more money on Apple than anything else he's ever invested which is insane in one of his annual shareholders meetings he said that like I will not invest in companies I do not understand and that was a company he didn't understand before he actually invested in it yeah people I don't think people would have seen would have been able to see that that he would invest and that would go on to be his his number one pick I think the Hallmark of a good investor is that they can perform well in multiple different economic cycles and in multiple different assets that's how you can really separate skill from luck because like during any given economic cycle or any Market cycle where things are booming by luck alone you're going to have people who are very very successful and some who make billions of dollars the only way to tell whether they are not lucky is during the next economic cycle when there's a new crop of Investments new Industries do they do well then too and Warren Buffett has been successfully investing for 80 years and I think honestly every 10 years he's almost completely updated his views there are a lot of core principles that don't change yeah which is the principles that are really important but in terms of what industries he's investing in how he values them what he's looking for there's constant update I think that's a like a a big area that people get wrong about him is that he's kind of been stuck in the past and has been investing the same way forever if you look at how he invested in the 1950s could not be more different than how we invest today and so I think that's why he's been successful is because he is willing to learn I think he's just a learning machine yeah in ways that most investors are not I mean it's well known that he his investing process is sitting on the couch reading a book 10 hours a day he's not trading he's not on the phone with his broker he's just trying to learn how the world works and updating his View and using the core principles that never change and applying those core principles to how the world has evolved and where the world is today what would you say are his core principles I mean he wants to invest in companies that have good honest competent CEOs he wants to invest at a good price and make sure he's not paying it too rich valuation and he wants to invest as you mentioned in a company that he understands and a business that he understands so that he has a high degree of confidence at least in where the industry is going those are the really basic core principles now someone like Buffett could talk for two weeks straight about the details of those topics that I just mentioned it's not that simple he's the best at it and he's the richest one of the richest men in the world because he's so good at the details of those principles but at the very highest level that's really what it is it's buying good companies at a good price and holding them for a very long time yeah but a distinction I actually learned from you is that he is one of the best investors out there but actually in terms of performance the fact his win is that he's been doing it for so long you talk about this in your book right yeah so like if you look at Warren Buffett's net worth he's worth he's 90 years old 91 or two something like that and he's worth 100 billion dollars and he's given away about 50 billion so let's say he's worth 150 billion dollars if you count what he's given away 99 of that money was accumulated after his 50th birthday and like 98 came after his 65th birthday so literally if Buffett have retired at age 65 like a normal person might you would have never heard of him he never would have accumulated a fraction of what he actually has and the other part of this is that he started investing full-time when he was 11 years old so by the time that he was in his 20s he was adjusted for inflation he was worth over 10 million dollars in his early 20s he'd been that successful investing during that time if he had started investing when he was 25 again like a normal person might you would have never heard of him the whole secret to his success is that he's been a good investor not an amazing investor but a very good investor for 80 years and the time is everything in there and it's so easy to overlook that because everyone in the industry when they're trying to answer the question like how has he done it how is he so successful they go into all this Grand detail about how he values companies and what he looks for in products and Market Cycles when really the big takeaway especially for every day people like you and I the big takeaway is he's been doing this for 80 years that's that's the takeaway and I think for ordinary people even if you're not as good an investor as he is if you can earn average returns for an above average period of time it equals magic in investing like like the time is everything and especially if you're a young investor listening to this if you're in your teens or early 20s early 30s whatever it might be the amount of time you have in front of you is an asset that Warren Buffett who's 92 cannot even dream of and even if you are a teenager and you don't have a lot of money you are like a Time millionaire you don't have a lot of cash but you have so much time in front of you and when you realize that the time is the part of the finance equation makes all the difference like that's a huge asset that hopefully you value and take advantage of on the on the topic of time is there anything you wish you at 20 years old would have done differently to to set yourself up better for the future I would say not differently but that doesn't mean I did everything right I don't regret it but I made every mistake that you can but I don't regret it because I learned from it and I think nothing is more persuasive than what you've learned firsthand like you can try to watch other people screw up but until you've burned yourself burned your own fingers you're like okay I'll never do that again so I made all kinds of mistakes the one thing that I regret a little bit is I've always been a big Warrior kind of a high anxiety and I had a lot of financial worry as well a lot of career worry and I wish I could go back and just be like it all it all worked out it's okay it wasn't perfect you didn't do everything right there were some painful times but like it all worked out but sometimes I'm like maybe it worked out because I was worried maybe like the anxiety is what pushed me ahead but sometimes I feel like I worry I've worried too much that was that was my that was I think that's the only thing that I regret but other than that the mistakes that I made I don't regret and I would still if my if my own kids made the same mistakes I'd be like no it's it's okay it's okay to screw up when you're 19. it's not that not that big a deal and like I said earlier I would rather screw up at 19 than 45 when the stakes are so much higher 100 I think I think that the risk being of risk averse does make you a better investor similar to what you were saying about the having a higher portion of cash then advisors would typically recommend I'm I also lean that way I have more cash because I am a bit scared for the future in general like I I worry that okay well what if there is this unexpected event yeah I'd rather have more cash sitting that's liquid there than cash that I can't access and I think the question is not like is there going to be an expected event it's like oh there's definitely going to be and then the question is like can you endure it yeah for me too having kids was a huge shift of like the stakes are much higher now and it's one thing especially when you're 19 and single of like if I screw up it's like there's no collateral damage it's just me and it's going to be a big ding to my ego and it's going to hurt but when you're married with kids it's like if I screw up I'm letting everyone else down and therefore I Can't Screw Up and therefore I want more cash to prepare for not only my own you know problems that I'll come across but now I got kids who are going to run into problems in their lives to take care of so that that was a big shift in my thinking so when your baby was born what what changed immediately were you just like okay I'm Gonna Save this percentage of cash now instead what did you do differently I think at the finance level it was probably like a higher I think at the career level I'd say more more ambition but I was about the finance level like ambition mixed with conservatism if that I don't know that's kind of counter-intuitive but I was like I really gotta I really like it's not just about me anymore I got this other person who's 100 reliant on me to do the right thing so I want I have more career ambition but I can't screw it up so I have more conservatism now it's kind of like that there's like a little bit of a it was a disconnect there but uh um they'll say what every parent knows too is like the moment you see your child you don't matter anymore it's like this instant shift of like I had like no one like I don't matter it's all just about the child now but there's a lot of Finance thought that it goes into that immediate shift yeah I know my audience there's a lot of parents what as a parent now are you doing to set your kids up financially for the future do you have certain accounts set up for them or we have 529 accounts to save for their college my kids are three and six so there's not they don't have an allowance or there's there's really not much that we've taught them yet but I think I have two thoughts on this one is I have no clue what my kids are going to grow up to be or want or what they're going to desire as my does my daughter want to be a partner at a law firm does she want to work for Greenpeace do you want to be a kindergarten teacher and the finance principles that I might want to instill in her might be different depending on it's one depending on which way she wants to go and I have no clue where she's going to go so I feel like it'd be really hard for me even if she's three to say like you should do this and this is what you should aim for I'm like it's different for everybody yeah so I don't want to push them in any way I also know that what every teenager knows is that it's very natural to rebel against your parents and when you're 19 if your parents say you you need to do this you're instantly going to say I'm going to do the other thing I was like that most 19 year olds are like that and therefore rather than when my kids are teenagers rather than sitting them down and lecturing them about the right thing to do because I know they're going to rebel against it instantly is just trying to set the right example and lead by Just Lead quietly but here this is what my wife and I do is what your mom and dad do and just I'm not going to tell you to watch but I know you're going to learn vicariously just by kind of picking up what we do there's so much evidence that in politics most parents do not sit their kids down and say this is the right political view this is who you can most parents don't do that but there's a huge correlation between your political beliefs and particularly your father's political beliefs even if it's not explicitly transferred people pick it up vicariously I think for money it's the same that most people will learn so much about money from their parents good and bad I think most people will be like oh I saw my parents screw up and I'm never going to do that or oh they did this well and I want to do that but it's usually not explicitly stated it's just picked up vicariously so that's that's my general thought on teaching your kids about money is just like you got to lead by example rather than trying to drill it into them yeah were your parents quite financially illiterate yes my parents had an interesting background my my dad started undergraduate college when he was 30 and had three kids I'm the youngest of three and then he became a doctor when we were all teenagers so all of our teenage years growing up my siblings and I we had no money at all my parents were students and we had we were just absolute like free lunch at school poverty we were happy it was a great childhood but we had no money and then my dad became a doctor when we were teenagers and things changed after that so we saw both ends of the spectrum what's interesting about my parents is that the frugality that was necessitated in them when they were students with three kids that stuck around after they had higher incomes so even after my parents had a much higher income like that frugality that Frugal mentality really stuck around it just became part of their identity who they were so my parents were pretty you know we had no money growing up and then we had money but we were still really cheap and when I was a teenager especially I really looked down upon them for that it was really like a critical like I looked at them I was like I know how much money you make and I know that we could live in a bigger house but we don't and I I looked down on you for that and then so my dad was an ER doctor for 20 something years and the ear doctor I think is like literally the most stressful profession you can have it's people dying in front of you every day so after 20 years you just said I'm done I quit I retire and he could do that because they were so cheap and so Frugal that they had saved up enough that they could just retire whenever they wanted to yeah and that was the moment which was not that long ago this is like in the last 10 years I was like I get it now the reason you are so cheap is not because you were just a cheapskate it's because you saved your money so that you could control your time and have full Independence and autonomy the moment he wanted to quit he just said I'm out of here and he had all these colleagues who were just as stressed as he was but they had a bigger house and a nicer car and their kids went to private schools and they couldn't quit and that was like a big shift in my thinking of like I want wealth not for nicer stuff I I like nice homes and nice cars but the reason I want wealth is to have total Independence in my life I don't want to rely on any on anyone else I don't want to rely on any career I don't rely on any boss I want to wake up every day and just say I can do whatever I want today and when my dad woke up one morning and he said I want to quit and he did it I was like that's that's the dream I want Total Independence and autonomy so that's how I think about wealth today it's not to gain nicer stuff more flashy stuff it's I want Total Independence and autonomy in my life a hundred percent and I so when I graduated from law school I had over 200 000 of debt and I made it a priority to continue to think like a broke law student even though my first job as a corporate lawyer was paying 200k a year I still like I was walking 30 minutes to work in my suit instead of taking a three dollar bus like I very much continue to live as if I didn't have any money and that was the looking back that was the best thing I could have done because it's very hard once you inflate your lifestyle to go oh yeah people are very sensitive to retrenching the lifestyle it hurts whereas it's very easy to go up oh you go from the Honda to the BMW it's great you know you're back to the Honda your life's over it's over it's tough people are really and I think people should be careful when they have a windfall especially to not overdo it because if you're gonna have to retrench it's going to be one of the most painful things you ever do people are very sensitive about that and I say it's even harder I don't have kids myself but I see that it's even harder with parents with kids once you start to send your kids to private school oh yeah you have to pull them out oh yeah you feel like you failed yeah so I I think about a lot I think about that a lot too my wife and I do it like what lifestyle do we want to give our kids so a they don't grow up to be spoiled little brats but B like if we did have to retrench is that going to destroy their social lives destroy their feelings sense of dignity like that's a that's a tough thing are you quite Frugal like your parents maybe not as much as my parents but we have a really high savings rate like it's it's all relative but we we have we save most of what of of what we make what's your biggest Splurge you've had in the past year it's not it's really not not much I like I like to fly first class that's it you pay cash yeah wow at all I do but I I Bank them up a lot and sometimes I'll cash them in okay that's that's the only thing and that's that's a big thing that is but that's that's the only thing where it's other than that it's we haven't really changed that much in a long time but even even the first class I I do fly first class only if I can buy it get it free with points but now I justify it I'm like oh if I'm on a 14-hour flight I need to be well rested for that speech I'm going to be doing that's the big thing and back to retrenching your lifestyle once you've gotten a taste of it you're like I don't want to give that up I know it's so hard I love what you said about the value of financial Independence do you follow this fire movement the financial dependent retire early I I don't and the reason why is I know a couple of people and I've seen many people who are in the fire movement and they retire when they're 28 whatever it might be and within six months they hate it and the financial Independence part of it is great yeah the retire early I think is very easy to overlook what that's going to do to you particularly if you are on your way towards fire you imagine this world we're like I don't work anymore I'm gonna have all the stuff to do but then by and large when you actually retire you realize that all of your friends who you want to hang out with work five days a week and they're not gonna hang out with you they're not they don't they're not they'll have time to go golfing with you on a Tuesday afternoon they're at work and that's why I've seen a lot of people in this movement regret and go back to work doing it and I just think like work is a from the huge majority of people is a big sense of identity and purpose so the independence part a hundred percent so that you can work in a job that you really enjoy and love Mr Money Mustache who is one of the kind of Originators of this he makes his porn a lot too he was one of the original fire people he retired I think he was 30 with 600 Grand and he quit his job then doesn't mean he didn't work he started like a home building company and he's one of the busiest guys you will ever meet he is not like sitting around playing golf he just retired to a job that he enjoyed and he was doing it on his own terms without a boss telling him what to do and when to do it so I think that's a critical part that if you are financially independent so that you can quit your job at a law firm and become a tick tock star amazing like that's great if you want to retire so that you can sit on the couch and watch TV all day you are nine times out of ten you're going to regret it yeah that's that's the distinction that I make for your financial Independence do you have a specific number you're targeting saying oh if I have this much money I'm going to be financially independent I do I always have and it's always changed like it's like the goal post always moves in theory I have a number in my head that lives like okay if I got to this number I won't share it but like if I got there I'd be like I think I'd shut everything down and just be like but I know it's it's not true I know like if I'm lucky enough to get there it'll be like no I'm Gonna Keep I'm gonna you're gonna change it and I think what's important is that your material aspirations don't grow in lockstep with that I think it's great and fine to Aspire to have more money but if your expectations grow faster than your income you're always going to be disappointed with what you have yeah so like our lifestyle has not changed that much even if our income has gone up and I think that's what's important it's the gap between your expectations and reality that creates all happiness and satisfaction so even if you Aspire for more money almost if it's like at some level just like kind of becomes a game for you then I think that's great I think where people really get into trouble though is when their income doubles and their expectations triple then they're like oh I'm in this great financial spot I got this great new job with a huge raise and I'm not as happy as I used to be it's because our expectations went up by so much yeah for the average person when we talk about financial Independence they're reaching a point where you can retire and not have to worry about money it seems very unattainable if they're making let's say 15 an hour what what is your advice what would you say for someone who is making 15 an hour and wants to eventually Achieve Financial dependence what should they be doing to get there there's two parts of it like income and and expenses and breaking that down so much of modern spending is spending to show other people how much money that you have and the what you actually need to live a pretty happy dignified life if you if your expectations are low enough is really not that much money particularly if you're a single person or you're a couple that's on the same page doing this it's not tremendous and I think people would be surprised how much modern spending is just like the keeping up with the Joneses effect of whether it's like travel not travel for enjoyment but travel for Instagram photos to show people where you've traveled and clothes and cars and whatnot is just it's just I always say like a lot of spending is the gap between your ego and your income it's like so much of of what we spend not all of it but so much what we spend is just to signal to other people that you've made it and if you can subtract at least part of that from your life most people would be surprised at how little you can spend and live a happy dignified life Mr Money Mustache mentioned before he was the first to show that he was married with a kid and his all-in total spending he owned his house out right so it's take housing payments that equation maybe that's unfair but take it out he was spending like 20 grand a year and living an amazing life and so for a lot of people there's a lot of room to play with the expense side of the equation and on the inside of the the income side of the equation it's like whether it's a a side hustle or just moving up in the world it's there's a lot of opportunity like this is this true it still is despite everything that's going on in the world like the land of opportunity yeah and I think what I think a great thing that we're moving towards is probably a less of a world of credentialism where you don't need to go to the right college or even any college to have a pretty good income these days it's still this there still is a lot of that I think we're slowly moving away from the world of credentialism more towards a world to a world of like are you good are you talented are you a coder I don't care if you went to Stanford if you're a good coder you're going to have a good career in Tech so I think there I think that's a positive movement on the inside on the income side of the equation what's funny when you mention that that gap between what did you say the gap between your ego and your income that's that's usually like the the amount of money that you're spending or the amount of money that you're are saving is the gap between your ego and your income that's just like how much money do you make and how much do you want to show the rest of the world how much you make is really like you don't need that much to spend that much money to have a dignified life a lot of it is the clothes the cars the house to show other people I always make this point too that like showing other people like waving your peacock feathers to show people that you made it is not an entirely bad thing particularly if you're young and you're like trying to find a boyfriend a girlfriend a spouse then it's like it's really critical that you're not dressing like a schmuck like it's really important it's easy for someone like me who's happily married to be like oh you don't need to do any of that my wife's gonna love me no matter what I wear no matter what car I drive but I I'm not I'm not throwing that completely under the bus but I think people if they really dug into it would be surprised how much of their current spending is just kind of a keeping up with the Joneses effect even myself when I look back at 10 years ago the way I was spending when I had no money I was working I was in college working at Subway and all of my Subway income I would take you to the mall and buy shoes that I didn't I couldn't afford purses that I couldn't afford but then it gets tough because at that time I remember I was buying Coach purses but there's always a level up like I was proud of my 200 300 Coach purses and was carrying them around but then you have the people at my school who were carrying the Louis Vuittons it was up from there and then it goes to that it never ends I don't know what's next maybe a Birkin I was gonna say the burger I'm not an expert I know there's some that get it's never figures really quickly yeah six figures maybe I don't know yeah it gets nuts and what's so funny now is like now I I just cannot wear brand name clothing I feel like dude that's smart but do you think that's like a wisdom as as you get older that when you're 19 you can't really piece together or maybe it is like I said that when you are 19 that your ability to have nice clothes and a nice purse is really important and even if you were to go back would you tell yourself don't buy the purse or did you tell yourself actually the purse made my friends think that I'm part of their group and that was really important no I think you're exactly right I think if I were really to dig back into what it was it was I was insecure I felt like I didn't fit in I went from I I grew up in a military family so my dad was in the military most of my graduating class didn't go to college and I ended up at this school called Notre Dame a lot of the kids there went came directly from private high schools and I just I wanted to fit in I wanted to I felt like I didn't fit in so I wanted to buy whatever was necessary to make me feel like a little better like oh wow I belong here and that's what it was it was just that's this insecurity and wanting to fit in I don't know if it's do you think insecurity is the right word though or is it more just like wanting to fit in when you're older you have other things to hold on your career and other like wisdom that you've learned but when you're 21 or whatever and you don't have other very much else to show other than your purse so to speak that maybe it's not so much of a bad thing sometimes I get I get stuck on this I don't know for me I feel like insecurity is accurate but I was also young I was I was I wanted to fit in more than I wanted to be smart with my money yeah yeah but I also hope I hope that when my kids are 19 that they do fit in I I don't want them to be so Frugal that nobody wants to hang out with them that's not that that would that would be a terrible thing in that situation I'd say please go buy the purse so they'll like it like it's a really tough I think there's no black and white answer for these things yeah it's a really tough thing there's not but I'm glad I'm not spending like that now I'm glad I've reached a point maybe it did come with age or maybe it did come with the the confidence that came with making more money that oh I don't feel the need to do that and it is never ending it is you know if I bought the Louis Vuitton then I'd have to buy the Birkin yeah I do I do think that when you see a 45 year old playing that game whether it's the sports car game or the purse game that I tend I'm kind of like ah there's some there's something going on there but I totally understand why the young person who's trying to for the first time in their life make it in the adult world and show the adult world who they are I totally understand why it happens I understand why it happens but I do I it it makes me sad because some of these young people will go into credit card debt yeah and then it becomes very difficult that could impact you for 10 years before you climb out of that and it becomes so so difficult so I wish if I could go back to my 20 year old self I would be like you know what you fit in don't worry about it yeah yeah that's good that's good advice so during college I was a valet at a really nice hotel in Los Angeles and this was in the mid-2000s there was so much money flowing through LA and so as a valet people would come in in Ferraris and Lamborghinis and rolls royces and as I got to know some of these people who would come in I got to realize that like some of them were actually not that successful there's people driving in in a 300 000 Rolls Royce were actually like not that successful they spent half their income on a Rolls-Royce lease payment that was like a lot of these and it was that to me was the first impression of like so much wealth is fake and fake it till you make it and the thing that's so hard about wealth is that I can't see that guy's bank account I can't see his brokerage statement the only thing I could see was his car and it gave me such a fake impression of what was going on and the counter to that is there's so many people who drive in in a Honda Accord that you would never bat an I had that are actually very wealthy and so wealth is what you don't see wealth is what's hidden wealth is money that you did not spend that is just like banked away in savings or in investing and it's really difficult because like for something like physical fitness you can see it you can see and then so it gives you more and more accurate view of a role model you can say like I want to look like this person I want to do what they're doing but for wealth you don't have that you might look at the guy in the Rolls Royce and say I want to I want to do what that guy did and you're actually no actually you don't he hasn't done that much and the guy in the Honda Civic Jeff Bezos used to drive a Honda Accord when he was a Deca billionaire like you might see him on the street and be like what's that chump doing well he's actually like an amazing amazing person so since so much wealth is hidden I think it gives us a flaw of our role models and who we aspire to and people really have to be careful using what they see as an indication for how successful that person is or is not it's a really tough thing and it's funny because it goes back to what we're talking about in the beginning like knowing who online to trust and who not to trust there are reasons why people with Lamborghinis behind them making videos get more followers than people with you know normal houses and normal cars yeah it's because you you associate that Lamborghini with wow he must be successful he must be smart he know he must know what he's talking about yeah I know it's one of the most pathetic things I've ever heard there was like a cottage industry on Instagram of renting a private jet on the tarmac you never leave but you can rent it for an hour and go in and take your picture of yourself sitting in the Jet and post on Instagram so these people will literally like Photoshop clouds into the window so it looks like they're flying but they actually just paid 100 bucks to rent it on the tarmac and it's a huge huge industry I bet more than half the time you see a private jet photo on Instagram it's on the ground but to but to your point the people who post it now everyone who views them like wow that guy's in a 60 million dollar jet he must know what he's doing we should follow that guy it's so easy to fake it till you make it on on social media yeah or you wear a fake watch and it's like oh look at his protectively totally yeah it is crazy and a lot of it comes down to people wanting things quicker and so they buy it before they can actually afford it there's a story in your book I like that kind of is on this theme about over leveraging I don't know if you know which one I'm talking about yeah so two of them the greatest investors of all time Warren Buffett and his parley his partner Charlie Munger Warren Buffett's worth 100 billion dollars Charlie Munger is a multi-billionaire he's given a lot of way though so he's not as rich as Warren but they're two of probably like the Mount Rushmore of investors the greatest investors of all time and it's been this Duo they've been investing together for 60 years and then actually if you go back to the 1970s 1960s and 70s there was a third member of this group this guy named Rick gurin and Warren Rick and Charlie used to be this investing Trio and they used to make investments together and interview CEOs together kind of disappeared off the face of the planet he was he was still around if you looked like you could still find him but I was wondering like why did Warren and Charlie become household names and no one's ever heard of Rick urn and I I heard someone tell a story that they heard from Warren Buffett about what happened to Rick Warren which is back in the 1970s he had borrowed a ton of money to invest he was going into debt so he could buy stocks it's called margin debt leverage and during a bear Market in the 1970s when the stock market fell a lot he got wiped out because when you borrow a lot of money if the stock market goes down 30 40 50 you're done you're completely out and Warren told the story that he said Rick was just as smart as he and Charlie were he was just as talented as an investor but he said Warren and Charlie always knew that they would get rich so they were not in a hurry and he said Rick was just kind of in a hurry to get there so he wanted to borrow money to speed up the process and it blew up in his face and that I thought was was really interesting that the people who was born as one of the richest men in the in human history and he was not in a hurry at all he said he knew it was going to happen there was no rush I thought that was a really interesting thing that a lot of times when people try to speed up the process above its natural rate of growth it's just it's just going to backfire on you yeah and it's I think that's that that had a big you know big impact on me it's so natural to want to speed it up and in a perfect world I would love to get rich overnight of course but it's just not how it works there's usually a natural speed in which these things occur and when you try to speed them up above that level it's going to come back to bite you and that's why a lot of these get rich quick schemes you just you could never trust them ever trusted Warren has a great quote about investing on margin borrowing money he says if you're smart you don't need it and if you're dumb you shouldn't be using it like there's no justification to be using it I thought that was that was a big takeaway but a lot of investors do even first time retail novice investors you open up an account with E-Trade or Robin Hood and you can go into margin debt you can borrow money to buy stock and a lot of people don't realize the ramifications of that until you're in a bear market like we are now and some of these stocks fall 50 70 80 percent and they're wiped out they lose everything yeah it's a it's a tough situation when you were researching these stories for the book was it you know you what was the process like did you take six months to just go in a cabin and write the book and research all of these stories it definitely wasn't that it was I had spent uh over a decade writing about Finance I started as a blogger at the Motley Fool and then I worked for the Wall Street Journal for many years and then I started at the collaborative fund six or seven years ago so I've been a full-time writer for over a decade and I started as a writer in 2008 which was an interesting time because that's when the world was falling to pieces everything was breaking left and right and so I started my first couple of years as a writer and that's one to answer the question like why did that financial crisis happen I just wanted to try to explain it really simple and I realized like as time went on that I could not answer that question through the lens of Finance or economics there's nothing in an economics textbook that would explain why 2008 happened it just wasn't in there but if you're looking through the lens of Sociology like keeping up with the Joneses or psychology greed and fear or politics or history or biology all these other topics that had nothing to do with Finance could perfectly explain exactly what happened in 2008. so that to me just opened up this idea that like you can explain the world of Finance through the lens of things that have nothing to do with finance and as a content creator that was actually really big because Finance tends to be very dry and boring so if I could explain Finance through the lens of biology or military history or something that might catch your attention a little bit more that was a way that I could catch people's attention as a writer so for years I just wanted to try to explain what's going on inside of people's heads I never believed that anyone could forecast the stock market or forecast the economy that had no interest to me I am very skeptical that people can pick the next best stock like I had I that had no interest but I was always really interested in what's going on inside of people's heads how are they thinking about greed and fear and risk because it's usually totally counterintuitive to what the textbook says you should do and it's just counterintuitive to what people think that they are actually doing how they think about greed and fear so I wanted to just find these little nuggets these little stories to explain it and after doing that for 10 or 12 years I felt that there was enough to take 20 of what I thought were the most interesting stories and anecdotes and turn them into this book that's where it came from wow that's incredible on the I want to touch on the Fear Part because I remember I was quite shocked when I saw this on YouTube YouTube gives you a ranking for when you release videos this is a one out of ten this is a 10 out of 10 which is not good and the fear-based when I talk to all of my other YouTube content grader friends the fear-based title recession is coming is always going to outperform something like five millionaire habits yeah right yeah do you think fear in finance is a good thing overall because it makes people cautious or do you think it's not I think whether it's good or bad is I don't know but I know it's very natural like pessimism is is seductive people are so attached to pessimism in a way that optimism is not I think a lot of it is optimism can sound like a sales pitch and pessimism sounds like someone trying to help you yeah so back to your example five millionaire tips it sounds like a sales pitch and it probably is frankly versus recessions coming Red Alert here's what you should do that's like oh you're trying to help me you're trying to like alert me to Danger a lot of that is just like basic Evolution that we are primed to react to threats with greater urgency than we are opportunities like that's that's a good thing that's always going to be like that but I think it's it's it's really true in the media too like the classic line in the media if it bleeds it leads that's like that catches people's attention so that's what gets pushed out there some of this too is that bad news tends to happen very quickly and good news happens very slowly and again I think that that there's is a good side of that of like keeping people alert to threats and cognizant of threats but between it gaining more clicks on social on in in the media and just how much more alert people are of it it's always going to be that even if we are living in a society that has been like growing and improving with new Innovations and new technologies it's always going to be the case that in any given day the top headlines are always negative yeah there's a story in your book you told about a guy named Ronald Reed that would never would never make the headlines because it is too positive but I thought it was a really nice reminder of just how an average person can go on to do very well can you tell that story Ronald Reed was like the humblest guy you can ever imagine he was a janitor and a gas station attendant like lived like not only humble but basically a life of poverty that you would not look at him and think he was a success in any way when they interviewed him his friends after he died the only friend who could think of a hobby he had was cutting fire would that was like the only thing that they knew he did other than work as a janitor he's like this really not even salt of the earth but just kind of guy where you're like oh it's kind of a sad existence and then when he died he left eight million dollars to charity and people are like where did where did the Gen the guy who's mopping the floors get eight million dollars from and they figured it out like they dug through his paperwork and all he did he saved what tiny money he could from his job as a janitor and he invested in the stock market and he left it alone for like 80 years and that was that was it was all you needed to do one thing I regret about the book is that I think I inadvertently tried to frame it that Ronald Reed was a hero and I actually don't think I admire someone who's living a life of destitute poverty with eight million dollars in the bank I I I don't aspire to that I wish Ronald Reed would have bought himself a nice house and traveled the world so I used him as an example to say like hey you can you don't need to be a Harvard MBA from a blue blood family to achieve a lot of success this janitor did it but I used him as an extreme example and I think most people should aspire to a little bit more balance than he had but you know like just like anything those extreme examples just highlight what's possible yeah so you can find more balance than he did yeah I I actually don't know if he was that happy in life I think he I think his frugality was almost like a disease that he put up with and when he died he left it all to charity to a hospital and like a local church and maybe he got a lot of pleasure thinking about that but the more I learned about him read about him I kind of said like no it's it's amazing what you did but I don't look up to that how do you think people can find that balance between being good with their money and smart and that they are not spending all of it and living paycheck to paycheck but then also living life a little and traveling or buying the things that they want I think it's it's so different for everyone in terms of what's going to make them happy the first class travel for me I I enjoy that but there's a lot of things that you might enjoy that I would say I'm not I'm I'm a cheap wine and coffee guy and I have friends who like could not look themselves in the mirror if they were drinking the wine that I was drinking but it's totally fine for me everyone's got to find their little thing I do think one thing that people tend to overlook back to when I was a valet in college I also noticed this thing where if someone would drive in in a Ferrari I would not look at the driver and say that guy's so cool I would imagine myself as the driver and I would say people would think I was cool and like that disconnect between like I didn't care about the driver I just wanted to be the driver so people would care about me it made no sense and then I realized the game that was playing is like no one's thinking about you as much as you are everyone when you have a fancy car a nice house nice clothes you tend to think everyone's looking at me and everyone thinks I'm cool and by and large it's not true people are thinking about themselves and even when they look at your nice purse your friends are probably looking at your person not thinking Erica's cool they thought if I had that person Erica would think I'm cool and so once you realize that game you're like no one's thinking about you as much as you are then you're like okay then my my aspirations to show off money have come down a lot and I want to spend my money on things that will actually make me internally have like the internal Benchmark versus the external measure of our other people looking at me because they're probably not that realization for me had a big impact on how I spend of just like I want to spend money on things that make myself and my wife and my kids happy and I don't care what anyone else is thinking because they're not thinking about me they're thinking about them that was that was really important for me what has the trajectory I know you went from working as a valet you spent many years at the Motley Fool and then the Wall Street Journal what has your money and income trajectory looked like are you making the most money this year than you've ever made yeah yeah the huge majority of that is from the book yeah so income wise absolutely spending hasn't changed that that much with kids you know grocery bills double what it used to be because we have two more mouths to feed but spending wise it really hasn't changed that much I think I'm really proud of how my wife and I have kept the goal posts from moving in terms of what we aspire to do and where we aspire to travel and where we aspired the house that we want to live in has stayed not flat but it hasn't has gone up at a slower rate than our income in a way that I think is really important I said earlier like if your income doubles but your expectations triple you you're worse off and that happens to a lot of people and this is why you have a lot of people I'm sure you knew lawyers who are making quarter million dollars a year who may have been less happy than they were when they were in college yeah I think there's a lot of evidence that people's happiness in life is like an upside down you or or their unhappiness isn't upside down you they're pretty happy in their 20s they're pretty miserable at 40s and 50s and then they get happy again in their 70s and 80s I think a lot of the reason that is is because in your 20s your expectations are pretty low most people like live in the same dorm maybe you have a 12 hour job everyone's kind of in the same situation in your 40s and 50s there's a huge difference in how people live you know people who are making 20 grand a year people are making 20 million dollars a year a huge SKU and then in your 80s things tend to equalize even more like whether you're rich or poor every everyone's body starts breaking down in their 80s everyone's in the kind of in the same boat there and so I think a lot of that is like your happiness is so anchored to your expectations and those around you if you can go out of your way to keep your expectations anchored it has a bigger impact on your financial happiness than growing your income does that's that's easy to overlook and we spend all of our effort in this industry on how can I grow my income how can I grow my wealth and that's important that's that's good we're totally ignorant to the idea of keeping our expectations in check but it's just as important as growing your income if you ask me would you rather my if my if my income could double but my expectations would triple or my income would stay right here with the same expectations 10 times out of 10 I want I want the latter I would rather have a lower expectation lower income and sane expectations than high income and crazy expectations always you see this in Major League Sports a lot where like in Major League Baseball the the minimum salary is I think seven hundred thousand dollars which to most people watching this would be like that's amazing everyone who plays professional baseball is Rich by any standard but I guarantee you the rookie on the team was making 700 Grand who is playing with teammates who make 25 million he feels broke yeah he feels absolutely broke and that's that's that's the best example of like how your expectations can run away from you well there are all these studies of professional athletes who've made millions in their career and then within a few years afterwards they are they're broke they're gone I did an event with some pro athletes a year or two ago and one of them told me like kind of the the details behind that a lot of these athletes come from inner city poverty you know there's really not that much correlation between like how rich your parents were and your abilities to get into the MBA so a lot of these people came from Deep poverty and then when they're 19 they sign a contract for 20 million dollars it's such Whiplash and one of the things he said is like when you come from a neighborhood that is that poor and all of a sudden you as a 19 year old make more money than the rest of the neighborhood combined has ever made that money's not yours that money belongs to grandma and your aunt and your cousin that's their money too you can't just tell your destitute Grandma sorry the 20 million dollars is mine you keep living in poverty I'm gonna go by the Mansion it just doesn't work that way so the pressure on a lot of these 19 year olds to spend enormous amounts of money is huge the other thing is like if you sign a 20 million dollar contract your friends and family might think you have 20 in the bank but like no your agent gets 10 taxes take 50 like it goes down real real quick that's what you thought it would would be so all these people even when the headline number is huge they're friends and family think it's much much more than it actually is when it's so tough now that you bring it up that it is public information the deals that these people find because there are all these studies also about lottery winners how the best ones are the ones who keep it secret keep it secret secret that's the first thing if you are not that anyone listening is but if you win the lottery the first thing you should do is get a lawyer and tell that lawyer that you no one is going to learn your name yeah even if even if it's going to come at like less less if if there was a situation where the lottery says you can have 10 million but we need to interview you or 5 million and you can stay Anonymous like I'd take 5 million every single time yeah but I never thought of it like that like these poor athletes it's public you can just Google how much money does so and so make and you see exactly how much they make that's a tough thing when you when your friends and family are poor and they know how much you make but they're also blind they see your salary they're blind to the taxes and the Agents fees and the training fees Etc that's that's a tough thing I also asked one of some of these athletes that said if you are a rookie making 700 Grand and you want to save that money so you're driving the Honda Civic and you get to your training practice next to your teammates and their Bentleys and their Ferraris are you ostracized from the team she said yes absolutely so that's a really tough thing they really feel like they have to keep up with their teammates and it's like you're a poor person living in Beverly Hills and you have to keep up with your neighbors so not that I have sympathy for people making 700 Grand in their early 20s but I think it's harder than people from the outside would think so speaking of business models and how people get paid this is your here it says one million copies sold but now you've just hit 2 million copies sold Congratulations by the way how does the book business work was there a is there a signing bonus like how does how do you make money off of this well I had an interesting path towards it because I thought the idea for psychology money was good I was really excited about it and every publisher in the United States turned it down every single one and not only did they turned it down but some of them were pretty vicious about there's no way this is ever going to work don't even try and those are the ones who are kind enough to return our emails so everyone rejected it there was a small publisher in London called Harriman house who actually published the book and they're amazing people I've really fallen in love with them they're great but they were just they were the only ones who were willing to do it and so I took that I signed to them out of desperation and I I ended up loving them but at the time it was just like I'll sign with you because you're the only ones who are willing to give me a chance so that was no Advance they're a small publisher but kind of a larger back-end deal the back end royalty so it it ended up working out now most people that how it's traditionally worked is you would get in advance and 99 chance that's the only money you're ever going to see you're not going to earn out your Advance through royalties it's like you get a check up front and that's that's your payment for the book and if it was a blockbuster success maybe there'd be royalty payments after that but that it didn't happen that often I think it's moving much towards it's moving more towards the idea of no advance but a bigger back end that tends to be how it's how it's going to be now I think for the majority of authors that's a worse deal it would have been better if you got a big check that you never earned out versus if you're just gonna be getting in royalties the book business is very difficult too where the median book that's published and a lot of them are really good books might sell 2 000 copies and so it's it's it's not an easy way to make money there are over a million books published every year and the huge majority of them will sell a couple hundred a couple maybe a couple thousand if you can sell ten thousand books that's a big a big success and I always think of it like a Siege stage startup where it's like even if you do everything right you're probably going to fail doing it it's not going to be a big success that's how any Tech startup would work even if you're really smart doing the right thing I think books are are like that as well and even authors that have established names can't count on their books being Mega success I was thinking someone like Stephen King like one of the greatest writers of our time he's published 50 books something like that and like 90 of the sales come from two books like even Stephen King and John Grisham and all these people publish books that don't sell that well yeah and those are the biggest names in the world I think it's even true for people like the Beatles who probably wrote 200 songs and like five of them were really popular even at the at the highest level of success there's always a pretty big like loss rate in what you're doing so that's true for books as well interesting it's funny you mentioned that the average book is selling 2 000 copies because you were telling me earlier when you first made this you only prepared 2 000 copies to be sold it's either two or five thousand that we print it was the first print run that we did we thought that would be that's eight all it's probably gonna sell and B if it if it sold five thousand copies I would have been like great that's like I would have felt good about that I was pretty realistic both because it had been rejected by every publisher and just my not from what I knew about the book world that it's hard it's hard to get people to pull their credit cards out to buy a piece of content yeah so my expectations were were very low when it when it came out and then what happened we printed either two or five thousand copies and I think it did 30 000 pre-orders before it even came out so when the Burke when the book was published on like launch day you couldn't buy it because it was all sold it was sold out everywhere and it took us like six weeks to get it back into stock and that was a like I thought it was just like a failure at that point even though like okay great like we thought it would sell five and it sold five times that many yeah but it was actually like well no you can't you can't actually buy it these people like put it in order but they're not actually gonna get it for six so I thought it was over at that point and it took like six weeks to get it back into stock and then it still just kind of took off from there and about half the sales are international outside of the United States is the best-selling book in India in 2021 wow like the India alone is hundreds of thousands of copies and it sold really well in China and Japan Brazil so it's definitely been kind of a global thing not just the United States and you didn't anticipate that zero and I think that was the right thing to do and I'm writing a second book right now and I don't anticipate much from that either like you if you know the the hit rate of books you can't have that much confidence in anything that you do so I have to ask what is next for you it's very hard to outdo this success but I'm sure that you have it in you so what what are you planning now I'm writing another book right now I'll probably be out next summer or something like that and but I tried to spend the huge majority of my time reading and going for walks and talking to people to try to come up with new ideas and I think a lot of people in content once they get away from the core of what may have made them successful to begin with once they move away from that when they're like oh I'm gonna go work on these other projects and they lose the core of what they had to begin with so I don't want to do that I still want to spend the huge majority of my time just casually reading and listening to podcasts and talking to friends and whatnot I really don't want to lose that I got I remember the extreme example of this not to compare either of us to this person but Jerry Seinfeld said part of the reason that he canceled the show when it was at it's the peak of its success and he just pulled the court and quit is because he was becoming so famous that he could not casually sit in a deli and watch how people order their food or watch how people check into their Airline flight which is where he was getting his jokes material when he was a nobody he would just observe the world and come up with little jokes about ordering a sandwich at a deli and when he was a global Superstar he couldn't do that anymore and he was worried that he had lost the thing that made him successful and rather than experiencing the decline he just said cut it I'm out I'm out of here so I think at a much different lower level I think if if finding little stories by spending my whole life reading and thinking about it is is what made this book I just want to keep doing that without trying to push it or force it just a bunch of casual reading I love that I'm very curious about the business side of things do you think you're monetizing to the extent you could be or do you think there are other opportunities where you're leaving money on the table yeah that's an interesting question because I think the answer is probably yes I could be I could be doing more but I've seen so many people who when they try to force it or when they try to really maximize it they end up going going over the cliff and I think just rather just like trying to go naturally and just being like Oh I enjoy doing this so let's do that not because I can make a lot of money doing it because I enjoy it then that's when you'll probably actually make the most money over your career that's the irony of it is like if you don't force trying to make a lot of money you'll probably end up making a ton of money at the business level the two examples are like when Mark Zuckerberg started Facebook he wrote in the annual reports he's like we don't care about money we're not in this for the profits we're in this to make great social media Lehman Brothers by example their annual report to investors was like we are in the business of making money we don't care about anything else and the irony is like Facebook went on to become a trillion dollar company Lehman Brothers went bankrupt so I think for a lot of these things even at the personal career level the more you force it the worse you're going to do versus if you're just following something that you enjoy the biggest profits will come from it from then I love that I think that's very good advice for people of all ages wherever you are in your career I want to end end this with a little tradition we do so in my videos there's a catchphrase Erica taught me and that's why the podcast is called Erica taught me but what do you want people to walk away from this podcast being able to say Morgan taught me let me give you two things I think are really important at the personal finance level like we talked about if your expectations rise faster than your income you'll be miserable so people should spend just as much time focusing on their expectations as increasing their income that's not intuitive to most people and I think it's so critically important in investing you got to realize that volatility and the market going up and down is the price it's the cost of admission to success it doesn't if your portfolio follows 20 30 it doesn't necessarily mean you screwed up it doesn't mean you made a mistake you're just paying the cost of admission to earning great returns over time and once you view volatility as a fee not an indication that you screwed up and then dealing with their markets like we're in right now just becomes a little bit more palatable easier to deal with I think at a high level those are two things from like personal finance and investing that are really critical to people I love that thank you so much thanks Erica if you enjoyed today's conversation Morgan housel's book is called the psychology of money and I'll put the link to the book in the show notes and I have a huge favor to ask it would mean a lot if you could take just a moment to write a review of this podcast if you enjoyed the episode all it takes is just one sentence it really helps support the work that we're doing thank you so much for choosing to spend your time with me today I hope you learned something and I'm so excited to talk to you next Tuesday for a brand new episode of Erica taught me see you then

Channel: Erika Kullberg

Views: 1,554,457

Keywords: morgan housel, erika kullberg, erika taught me, personal finance, The Psychology of Money Book, investing, finance, money mindset, financial management, financial independence

Id: EIoEkbk4zcM

Length: 92min 38sec (5558 seconds)

Published: Fri Apr 07 2023