2021-01-28_The_Freedom_of_Frugality
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00:00:30.560 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight,
00:00:34.500 | and encouragement you need to live a rich and meaningful life now,
00:00:37.640 | while building a plan for financial freedom in 10 years or less.
00:00:40.740 | Today's show features the discussion on the freedom of frugality.
00:00:47.780 | In the most recent two episodes of Radical Personal Finance, I've talked extensively about living rich.
00:00:53.280 | I've talked about eschewing frugality.
00:00:55.760 | I've talked about focusing on how money is something that is ultimately renewable, but time is not.
00:01:03.560 | So I want to balance those shows with a discussion on the value of frugality,
00:01:08.640 | and what I would say the freedom of frugality.
00:01:11.340 | We're going to begin with a thought experiment.
00:01:15.080 | Here it goes.
00:01:16.280 | Let's pretend that you are enrolled in a program where you're guaranteed to receive,
00:01:24.820 | for the rest of your life, without question, guaranteed, every single month,
00:01:31.120 | to receive a monthly check for $10,000.
00:01:36.900 | Call it a UBI payment, right?
00:01:38.800 | Universal Basic Income payment.
00:01:41.600 | UBI is increasingly a point of conversation in our modern world,
00:01:46.400 | currently mostly associated with the liberal set of ideas.
00:01:49.840 | The idea is that, hey, the government should pay everyone a basic income
00:01:53.180 | so that everyone can at least have some kind of living wage that they could live on,
00:01:57.080 | and that would free them up.
00:01:58.580 | Usually considered to be a liberal idea in the current political climate,
00:02:02.380 | but not necessarily.
00:02:03.080 | There have been libertarians for decades who've been arguing for UBI.
00:02:06.220 | So let's just assume it's UBI, and let's pretend, for the sake of my little thought experiment,
00:02:09.420 | that you actually trust it.
00:02:11.420 | You actually believe that, yeah, they're actually going to pay me this money every month for the rest of my life.
00:02:16.100 | They're not going to stop it when the next administration comes in.
00:02:19.000 | They're actually going to pay it to me every month for the rest of my life.
00:02:22.980 | So pretend that you earn $10,000 or you receive $10,000 every month for the rest of your life.
00:02:28.680 | Here's my question.
00:02:30.180 | How much money would you spend on a monthly basis
00:02:34.980 | if you knew that you were going to receive $10,000 every month for the rest of your life?
00:02:42.460 | How much money would you spend every month on a monthly basis
00:02:46.600 | if you knew that you were going to receive $10,000 a month every month for the rest of your life?
00:02:55.100 | Now, the answers will vary.
00:02:58.740 | Answers will vary, and we're going to talk through some of those answers.
00:03:01.340 | The first answer that I think is the most common answer,
00:03:05.240 | people would say, "Well, Joshua, if I knew I was going to receive $10,000 a month every month for the rest of my life,
00:03:09.740 | I would spend $10,000 a month every month for the rest of your life.
00:03:13.640 | I would just spend it."
00:03:15.740 | And I think that's a really good answer.
00:03:19.740 | That's an answer that I would give at first before I thought about it more,
00:03:23.740 | which we'll get to in a moment.
00:03:25.440 | And to me, the reason I would give an answer like that is because I think that money is designed to move.
00:03:33.740 | And when you take away the idea that you somehow have to earn the money,
00:03:38.740 | when you somehow realize I'm just going to receive the money,
00:03:42.740 | then it puts you in a place where you realize, "You know what? I like spending money."
00:03:47.740 | Now, you get to choose what you spend the money on.
00:03:49.740 | You can spend the money on a new set of fancy designer clothes for you and all those that you love.
00:03:56.740 | You can spend the money on Christmas gifts for the less fortunate.
00:04:00.740 | You can spend the money on big experiences for you and your family,
00:04:05.740 | or you can spend the money on charitable experiences for others, whatever you want.
00:04:09.740 | You choose how you spend it.
00:04:10.740 | But the idea is if you knew that there were an influent flow of money, there was always money coming in,
00:04:15.740 | then you wouldn't worry about stockpiling money very much.
00:04:19.740 | You would just simply let the money flow through.
00:04:22.740 | You would be a conduit for the money.
00:04:24.740 | It would flow in and it would flow out.
00:04:26.740 | And you wouldn't try to reserve it just for the rainy day because you knew the money is coming in.
00:04:34.740 | Okay, that's the first thing.
00:04:36.740 | And to me, when I think that through and realize that what it shows me is, "Yeah, you know what?
00:04:41.740 | I do like spending money."
00:04:44.740 | I like to play with these numbers.
00:04:45.740 | "Okay, Joshua, what if you had $40,000 a month coming in every month for the rest of your life guaranteed
00:04:50.740 | or $100,000 a month coming in every month for the rest of your life guaranteed?
00:04:53.740 | Then how much money would you spend?"
00:04:55.740 | And the point is that we would spend it.
00:04:57.740 | We would pass it on if we knew we didn't need it for the future.
00:05:01.740 | Now, that's the first lesson that we have when we go out of our thought experiment.
00:05:10.740 | If we come to the real world where very few of us have a guaranteed income no matter what of $10,000 a month
00:05:16.740 | for the rest of our life and we think about the fact that I have to earn money,
00:05:20.740 | we quickly realize that, "You know what?
00:05:22.740 | Something could happen to my income.
00:05:28.740 | And so why would I choose to be frugal?
00:05:30.740 | And here I'm going to define frugality as simply spending less money than I have coming in.
00:05:35.740 | Why would I choose to be frugal and spend less than I make?
00:05:38.740 | Well, because there could be some sense of uncertainty with what I make."
00:05:45.740 | I think that's true.
00:05:46.740 | I think that's right.
00:05:47.740 | Notice I had to give all my qualifiers.
00:05:49.740 | You actually believe that the money is going to come in the rest of your month.
00:05:51.740 | You can do this, by the way.
00:05:53.740 | This is a strategy that I've recommended to many people who are retiring.
00:05:57.740 | It's just simply buy an annuity.
00:05:59.740 | This is what you can do for yourself if you simply go and buy a commercial annuity.
00:06:04.740 | You can go to an insurance company.
00:06:06.740 | You can give them a lump sum of money, and they'll give you a payment that's going to come in every single month
00:06:11.740 | for the rest of your life.
00:06:12.740 | And that can actually help people to feel very confident and feel very able to budget their money
00:06:20.740 | because they have a paycheck.
00:06:21.740 | It comes in as an annuity payment, like your Social Security is an annuity payment
00:06:25.740 | or a pension, a defined benefit pension if you're enrolled in one of those is an annuity payment.
00:06:30.740 | But you recognize, "Hey, something could happen."
00:06:33.740 | If you bought a commercial annuity, you would probably still want to have a little bit of money on the side,
00:06:37.740 | even if you spent most of it, because you recognize there could be a problem with the bank transfer.
00:06:42.740 | There could be an issue from time to time, and that money might not come in.
00:06:46.740 | So the first benefit of frugality is it provides against the uncertainty of income,
00:06:51.740 | and that's extremely valuable, extremely valuable.
00:06:56.740 | Let's not minimize that.
00:06:58.740 | Now, back to our thought experiment.
00:07:00.740 | You got the $10,000 a month coming in.
00:07:02.740 | Maybe you say, "I'm going to save a little bit of money to take care of any risk of the income stopping,
00:07:09.740 | but I have a high degree of confidence in this."
00:07:11.740 | What else would you do?
00:07:13.740 | Well, one thing you might do is you might realize that in some months,
00:07:17.740 | you might want to spend more than $10,000.
00:07:20.740 | Maybe your normal spending is $10,000 a month, but there might be months in which you want to spend $15,000.
00:07:27.740 | Maybe you want to take an extra trip, right?
00:07:30.740 | Go snow skiing or go to the Caribbean in the middle of the winter or whatever.
00:07:33.740 | And so you would practice some frugality to stockpile some money for big purchases.
00:07:43.740 | You would save for purchases, and that's a major benefit of frugality.
00:07:49.740 | When you are frugal and you spend, say, $8,000 a month on an ongoing basis,
00:07:55.740 | then every month there's $2,000 a month accumulating.
00:07:59.740 | And so after, say, six months, now there's an extra $12,000.
00:08:03.740 | So in that month, if you want to spend $22,000 per month, you can.
00:08:08.740 | And this is a very practical way for you to run your finances.
00:08:11.740 | In theory, you might be able to do this to some degree with debt, right,
00:08:15.740 | borrowing money and then paying it back off.
00:08:17.740 | That's what a lot of people do.
00:08:19.740 | Instead of saving up for a car, they choose to buy a car and have payments,
00:08:23.740 | and they just pay off those payments out of their income.
00:08:25.740 | And that works.
00:08:27.740 | It works very well if you have that guaranteed income and if you have a stable income.
00:08:32.740 | What doesn't work about that, the reason that plan is usually not the first one that a financial advisor would suggest,
00:08:38.740 | is, well, if your income goes away, now you have a whole bunch of obligations.
00:08:45.740 | In addition, when you have everything lined up with payments,
00:08:50.740 | your wants can often continue to get bigger, but now you can't service those wants.
00:08:55.740 | If you have $10,000 a month coming in and you go and you spend $4,000 a month on leasing an apartment,
00:09:02.740 | then you go and you get a car lease for $1,000 a month, you get a boat lease for $1,000 a month,
00:09:08.740 | you have $1,500 a month of miscellaneous bills and a couple thousand dollars a month on fun and food, etc.
00:09:16.740 | Well, now, if you want to do something more, you can't.
00:09:19.740 | All those payments stack up.
00:09:21.740 | Now you can't set aside the $2,000 to save up for the extra $10,000 snowski vacation.
00:09:28.740 | So that's the second thing that the savings can be used for, is they can be stockpiled for big purchases.
00:09:35.740 | So now you start to see that frugality is a tool.
00:09:37.740 | One, frugality is a tool that protects you if something happens to your income.
00:09:41.740 | And for the vast majority of us, that's a very relevant concern.
00:09:45.740 | The second thing is that frugality is a tool that allows you to handle lumpy expenses,
00:09:50.740 | to make big purchases from time to time.
00:09:53.740 | And that's a useful part of life.
00:09:56.740 | What's the third point of frugality?
00:10:00.740 | Well, what if $10,000 a month is not very much money for you?
00:10:05.740 | I would say that $10,000 a month is not even the median income of radical personal finance.
00:10:14.740 | And so it might sound like a lot to some people, but to other people it doesn't sound like much at all.
00:10:20.740 | And so maybe there's a guy who's used to living on $30,000 a month.
00:10:24.740 | For him, $10,000 a month is not fun.
00:10:27.740 | His financial thermostat is calibrated very differently.
00:10:31.740 | It's in a very different space.
00:10:33.740 | And so what would that guy do?
00:10:35.740 | Imagine a wealthy person that you know and look up to, I don't know, a Warren Buffett or a Bill Gates or an Elon Musk,
00:10:43.740 | maybe a Mark Cuban or a Donald Trump or, you know, some guy that you look up to and you admire as this is a person who is good with money.
00:10:52.740 | What would they do if they woke up and they had nothing but they had $10,000 a month?
00:10:57.740 | Do you really think that Warren Buffett, if he woke up and had an income of $10,000 a month, would sit back and just spend the $10,000 a month?
00:11:07.740 | Of course not.
00:11:09.740 | Now, in his case, he probably wouldn't ever spend it no matter what.
00:11:13.740 | But maybe a better example, I don't know, maybe a Mark Cuban or something, somebody who spends money a little bit more of a flashy way.
00:11:21.740 | Would he be happy with $10,000 a month?
00:11:24.740 | My answer is no.
00:11:26.740 | If a Mark Cuban woke up and was making $10,000 a month, he'd immediately set a household budget of, say, $3,000 and start saving $7,000 a month and start investing.
00:11:37.740 | Why? Why is he investing?
00:11:39.740 | Well, because he wants to spend more money than $10,000 a month.
00:11:43.740 | And so this is the third big reason as to why frugality is so valuable.
00:11:48.740 | Frugality allows you to set money aside, which you can then invest and you can grow, so that you can have more money in the future, more money to spend.
00:12:00.740 | Now, notice that that last part, more money to spend, is not automatic.
00:12:04.740 | Some people simply set aside money and they grow money, grow money, grow money, and they never spend it.
00:12:10.740 | I think there are a lot of times where you understand that and where you even venerate that a little bit.
00:12:17.740 | I appreciate people who have kind of a frugal instinct.
00:12:21.740 | They're conservative.
00:12:22.740 | I don't personally like to see money wasted, so I appreciate people who are careful, who are thoughtful, etc.
00:12:28.740 | And what happens is you put that set of habits in place and you see a person live that way and they kind of never really change.
00:12:39.740 | They just continue living that way on an ongoing basis.
00:12:43.740 | Now, if they ultimately have a goal for their money that is their goal, then that makes sense to me.
00:12:49.740 | Like you have people who say, "I want to raise $100 million for the SPCA and leave an endowment of $100 million to the SPCA when I die."
00:12:59.740 | Okay, fine.
00:13:00.740 | That's their goal.
00:13:01.740 | It's their money.
00:13:02.740 | They can spend it however they want.
00:13:03.740 | If they want to spend it on the SPCA, great.
00:13:05.740 | That brings them pleasure, brings them joy.
00:13:07.740 | That makes sense.
00:13:08.740 | But I think where I personally have a little pain is if somebody just has a whole lot of money and they don't have any plan for it.
00:13:15.740 | They just have a bunch of money and they're not going to spend it.
00:13:18.740 | They're not going to enjoy it with others.
00:13:20.740 | They're not going to – they don't have some really important charitable goal that's important to them and they just have a stack of money.
00:13:26.740 | Well, just because.
00:13:27.740 | To me, that seems irresponsible in a sense.
00:13:32.740 | And by irresponsible, I mean it just doesn't feel like good stewardship.
00:13:36.740 | Like you're taking care of the things that have been entrusted to you.
00:13:39.740 | I think having a plan for that and saying, "These are the things that I'm going to do with the money," is important.
00:13:46.740 | Now, the numbers can get very big, right?
00:13:49.740 | You can have an investor who's so good that it builds so much money that it's not possible to spend it, right?
00:13:56.740 | Jeff Bezos can't spend all of his money no matter how hard he might try.
00:14:01.740 | That's why you find that people give so much money away.
00:14:06.740 | Number one, it fits their values generally, but they just – you can't spend it.
00:14:09.740 | What on earth are you going to spend billions and billions of dollars on?
00:14:14.740 | But the point stands that if you had $10,000 per month of income and if you wanted to have more than $10,000 a month of income,
00:14:24.740 | you could use frugality as a tool to allow you to set money aside so you could invest it and use it to make more money.
00:14:40.740 | Now, would you want to do that?
00:14:44.740 | Depends, right?
00:14:45.740 | How much more money do you want?
00:14:47.740 | And that's where we get to a very personalized decision.
00:14:53.740 | I could very happily have one person who says, "I make $10,000 a month at my job and I have enough money set aside for big purchases.
00:15:03.740 | I've taken care of emergencies in case something happens to my income, so I'm just going to spend $10,000,"
00:15:10.740 | because I don't want to actually invest for more.
00:15:12.740 | That would be fine.
00:15:13.740 | On the other hand, there would be someone who says, "I need more money, so I'm going to invest for a lot more,
00:15:17.740 | and I'm going to be very frugal now.
00:15:19.740 | I'm going to live like no one else now, so later I can live like no one else."
00:15:22.740 | And later I can spend a lot more money.
00:15:25.740 | These are your choices.
00:15:27.740 | It's also relevant that you could possibly be able to make a lot more money without actually needing to save money at all.
00:15:35.740 | So many traditional investments require somebody to have some money up front.
00:15:41.740 | This is certainly true in the realms of stocks, right?
00:15:45.740 | You can't buy stocks unless you have money.
00:15:47.740 | This is very true in the world of real estate.
00:15:49.740 | While in theory you can do no-money-down deals, it's a little bit easier and advisable to be involved in something like real estate if you have some money.
00:15:59.740 | It's also possible to, if you're going to invest in business, which I think is certainly usually your best way to take a little bit of money and turn it into a lot more,
00:16:10.740 | many of the best businesses require some money up front.
00:16:13.740 | And so I could imagine a guy making $10,000 a month says, "You know what? I'm going to spend $4,000 a month for a couple of years, stack up $100,000.
00:16:23.740 | I'm going to go out and I'm going to buy a Jimmy John's franchise, and now I'm going to add a couple hundred grand of income to my $10,000 a month, and I'm set.
00:16:32.740 | Now I'll have, instead of $10,000 a month to spend, I'll have $30,000 a month."
00:16:37.740 | That makes a lot of sense to me.
00:16:39.740 | But it's not strictly necessary.
00:16:43.740 | There may be a guy who's working at a business where he doesn't need any investment capital, but he's got an idea.
00:16:50.740 | He's programming an app, right?
00:16:52.740 | Some of these things that are immaterial, he's programming an app or building a digital company.
00:16:57.740 | He doesn't need to spend a lot of money on plants and equipment and salaries.
00:17:01.740 | He's just focusing on building something on the side.
00:17:04.740 | Maybe you've got a guy who's trying to build an intellectual property portfolio.
00:17:08.740 | He's writing books that he's selling.
00:17:11.740 | He's writing music that he's selling or making songs to some kind of intellectual property or copyrights or patents.
00:17:19.740 | These are the kinds of things that you don't need money to create, and you can sit back and you can live on your $10,000, create an intellectual property portfolio,
00:17:30.740 | and then that intellectual property portfolio, assuming that it works, will then give you a higher income.
00:17:36.740 | And the whole time, you could have spent $10,000.
00:17:40.740 | So I'm giving you these examples because these are the tools that you and I have available to us in real life.
00:17:46.740 | Yes, we do have to actually go and earn the money.
00:17:50.740 | I don't have $10,000 a month of UBI.
00:17:54.740 | You might, right?
00:17:56.740 | Maybe your father set up a trust for you and allowed you to do that.
00:17:59.740 | I have a good friend of mine.
00:18:00.740 | His dad had a bunch of oil wells, bought a bunch of oil wells, left them all in a trust, and for his entire life, he always had several thousands of dollars a month that came in from his oil well, from the family oil investments.
00:18:13.740 | And I think that's great.
00:18:14.740 | It always provided him with an ability to live a lot better than his salary would indicate that he could.
00:18:23.740 | Many people would just live on that money.
00:18:25.740 | He didn't.
00:18:26.740 | He would go and take jobs and have jobs, but he never really worked at any big jobs just because he had the money to spend and he was able to live well.
00:18:35.740 | And that's reasonable.
00:18:36.740 | So the point is that you and I might not have the ability to live on $10,000 of UBI, but we still have that same choice with regard to our frugality.
00:18:47.740 | So do you want to spend the whole $10,000?
00:18:50.740 | Well, if you're going to spend the whole $10,000, then you would need to value the things that a $10,000 lifestyle would get you.
00:18:58.740 | So, for example, I can easily spend $10,000 and easily do that and have that be a very good lifestyle based upon the size of family that I have because of the family connections that I have and the number of children and whatnot.
00:19:17.740 | For the kind of place that I want to live in and the expenses that come with children and the things that I want to do with children, I could easily spend $10,000 a month.
00:19:27.740 | And so this is where we go back to that question of frugality, of should I be frugal?