2021-02-16_The_Psychological_Freedom_of_Ratios
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00:00:15.200 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:18.960 | skills, insight, and encouragement you need to live a rich and meaningful life now,
00:00:23.360 | while building a plan for financial freedom in 10 years or less. On today's show, we're going to
00:00:28.000 | talk about the freedom of ratios, or the freedom of percentages, if you prefer.
00:00:33.040 | Let me give you a quick introductory comment so that you understand where this show is coming
00:00:40.160 | from. Over the past few shows, I've developed a few ideas. I've talked about the importance of
00:00:45.360 | living rich, focusing on living that rich life now, and not focusing excessively on frugality
00:00:53.520 | or extreme savings unless that's something that's getting you where you want to go.
00:00:58.160 | I talked about my personal experience of how, once I understood the concept of extreme savings,
00:01:04.160 | it brought me to a place of wanting to save as much of my income as possible so that I could
00:01:09.040 | be financially independent. But then over time, realizing that I don't actually need to be
00:01:13.680 | financially independent to live the life of my dreams. It's not necessary. And so for me,
00:01:18.400 | extreme savings is a valuable tool to know that it exists, but it's not the way that I want to
00:01:23.200 | live my life right now because I'm not trying to escape from anything. I wouldn't quit working. I
00:01:27.520 | wouldn't retire. And so why not? Why should I not focus on living a richer life and on spending
00:01:32.560 | money on things that matter to me? Now, after developing that concept, I quickly followed it up
00:01:37.920 | with the seeming opposite concept, the freedom that comes with frugality. I talked about how
00:01:44.480 | saving money and frugality is important because it brings you a level of freedom,
00:01:51.200 | and it brings you a level of control over your life. And so you've got to find the right balance
00:01:56.720 | between these two things, between the freedom of frugality and also living a rich life now,
00:02:02.560 | and the enjoyment that comes with consumption. So how do you find that appropriate balance?
00:02:07.600 | How do you balance these things in a correct way? Well, sometimes this is easy, and it's obvious
00:02:13.440 | that you should not have a sense of balance. For example, let's say that you are, you know,
00:02:20.480 | a man or a woman who has decided, "I don't want to work at this job anymore. I want to leave this
00:02:25.360 | job." And you calculate that you want to leave this job and you want to move across the country
00:02:29.680 | or move around the world, and you calculate that you need a $5,000 budget to do that.
00:02:33.680 | Well, in my opinion, there's no need for balance or, you know, trying to handle mutually opposing
00:02:40.640 | things of that situation. If you've decided, "I want to leave this job, and I want to move
00:02:43.680 | across the country, around the world, and get a better job," then your goal is as quickly as
00:02:46.880 | possible to save $5,000. You do it now. And you live on beans and rice and stop spending any money
00:02:52.480 | because this is a goal that can be achieved quickly. Now, you could expand that if you are
00:02:56.880 | convinced that extreme savings is an appropriate path for you, and you just want to stop working as
00:03:01.760 | quickly as possible so you can be financially independent. Then you might buckle down and
00:03:05.680 | live on nothing and execute that plan as quickly as possible. There are many people who have
00:03:12.400 | clearly defined goals. And when you have a clearly defined goal, especially a short or
00:03:16.720 | medium-term goal, it makes sense to move towards it in an extreme way. That might be to start your
00:03:23.040 | own business. When I started Radical Personal Finance, I put my household on an extreme
00:03:29.040 | financial diet, on an extreme budget. Why? Well, because by lowering my expenses to nothing,
00:03:35.120 | I had the freedom to start a business that I thought would give me a really good lifestyle.
00:03:39.040 | If I had just simply tried to continue consuming and consuming and consuming,
00:03:42.880 | it might have taken me a longer period of time to generate the amount of money that I
00:03:46.400 | needed in order to go full-time on Radical Personal Finance. And so it's wise in those
00:03:52.000 | situations to put yourself into an austere budget so that you can quickly achieve your goal.
00:03:57.360 | Or perhaps you have some kind of event or adventure that is very clearly laid out. For example,
00:04:04.240 | I've over the years read many stories about travelers who decided they wanted to go and
00:04:07.840 | travel. Maybe I've read stories about people who decided, "You know what? We're going to drive the
00:04:12.880 | Pan-American Highway. We're going to drive from Alaska to Argentina." And so they calculate the
00:04:17.280 | budget that they need. They figure we need a suitable vehicle, plus we need, say, $75,000
00:04:23.760 | of budget over the course of two years. And we're going to plan to spend $60,000 total over the
00:04:29.280 | course of two years on our traveling expenses. Then we need a $15,000 emergency fund and/or
00:04:35.200 | resettlement fund. So their target is very simple. We're going to save $75,000 and have a paid-for
00:04:40.320 | vehicle. Then we're going to drive from Argentina to Alaska. Well, that's a very simple thing.
00:04:44.560 | What do you do when you have a goal like that in a specific short-term timeline? Well,
00:04:48.560 | you focus on it. And it's very gratifying to put yourself on an austere budget, beans and rice,
00:04:54.720 | and spend no money, and house-sit for people so you can spend nothing, and you live a super
00:04:59.680 | minimalistic lifestyle. You work all the time because you can quickly accomplish that goal.
00:05:04.960 | And in one year, perhaps, of spending very little and saving everything, you can purchase your
00:05:11.360 | vehicle and have enough money to leave and go travel for two years, or purchase your sailboat
00:05:15.440 | and have enough money to start off on your trip across the world. So in those situations,
00:05:20.720 | an extreme plan where it's all in, that makes a lot of sense.
00:05:25.520 | But those kinds of plans don't make a lot of sense to those of us who've already set up a
00:05:32.560 | lifestyle that we're somewhat comfortable with. Maybe you don't dream of driving from Alaska to
00:05:38.960 | Argentina, or at least not this year. Maybe you don't dream of sailing the world. Maybe you don't
00:05:45.200 | dream of retiring early. But that doesn't mean you don't want to live well, and it doesn't mean
00:05:51.840 | you don't want to become wealthier. So what's the solution? What do you do? My answer is,
00:06:00.720 | you impose upon yourself ratios that make sense. You choose percentages,
00:06:07.120 | and you use those rules of percentages to help you to handle your money.
00:06:14.080 | You get to choose the percentages, and I'm going to give you a number of ideas.
00:06:19.120 | But what I find helpful about ratios or percentages is simply that they help me
00:06:26.640 | to balance my emotionalism, and they help me to think about where I want to go and how I'm
00:06:34.800 | going to get there, and then to impose a logical path onto myself so that I know I'll get where
00:06:41.200 | I want to go in the fullness of time. You can apply these ratios to your own life when it
00:06:49.040 | comes to how much money you save, how much money you spend, how much money you give,
00:06:54.400 | and they're all useful. I'm going to give you a large number of examples here of ratios that I
00:06:59.840 | think are worth your consideration. Let's start with how much money you save.
00:07:05.680 | One of the simplest things that you can do in the beginning is simply choose a percentage of
00:07:11.760 | your income that you're going to save and choose a percentage of your income that you're going to
00:07:16.400 | spend. You can choose these ratios depending on how aggressive your goals are. For an average
00:07:25.040 | person, a normal household, a normal household that chose intentionally to set aside 10% of
00:07:31.600 | their income up front to pay themselves first 10% of their income, that normal household
00:07:38.160 | can be massively improved by that simple decision.
00:07:44.240 | Pay yourself first is a tricky concept, but there's no question in my mind that it's an effective
00:07:49.360 | tool. You decide, "I'm going to save first X percentage of my income," and traditional advice,
00:07:56.400 | right, going back for a very long period of time is something like 10%. If you will save and invest
00:08:01.600 | 10% of your income, you can become financially independent over the course of a reasonable time
00:08:07.360 | period during your lifetime. So let's start with that. Let's say that you decide, "I'm going to
00:08:14.480 | save 10% of my income." You should also consider how much of your income you want to give to others.
00:08:23.280 | Having a giving budget, a specific budget that is allocated in advance that's done based upon
00:08:30.160 | percentages can give you a great deal of personal freedom because now you've chosen how much of your
00:08:37.200 | money you're going to give to others. Let's say that you choose to give 10% of your income.
00:08:42.240 | Well, if you set that up in advance, and what I recommend, you set up a separate account,
00:08:47.520 | just like you would have a separate savings account for your financial freedom fund, and
00:08:51.440 | you set up a separate account for your giving account, and then just simply put 10% of your
00:08:56.640 | income into that, now you have a budget. You know how much money you can afford to give away.
00:09:01.280 | You've already decided it in advance. And this can help you to do two things. It can help you
00:09:06.480 | to have enough money to give to people when you want to give to them, but it can also help you to
00:09:11.920 | know when to say no when you run out of money so that when your heart is being pulled in a certain
00:09:16.880 | direction and you feel like you want to give more money, but you look and realize, "I should not
00:09:21.360 | right now give more money," you know you've got a budget. But you've chosen that budget based upon a
00:09:27.040 | ratio. There's an incredible freedom in that. You can choose a more aggressive ratio. You could say,
00:09:34.720 | "I want to save 20% of my income. I want to save 20% of my income, give 10% of my income, and spend
00:09:41.680 | 70% of my income." This is a great financial plan. Anybody who continually over the course of their
00:09:47.040 | lifetime saves 20% of their income every year gains an incredible amount of financial freedom.
00:09:52.720 | And as their assets grow and they start to experience the joyful part of the compound
00:09:57.200 | interest curve, it just grows and grows and grows and grows. And that's a very reasonable
00:10:03.360 | number for you to set. I don't think there's anybody that would look at you and say, "If you're
00:10:07.520 | spending 70% of your income, saving 20 and giving 10," there's nobody that would look at you and
00:10:13.040 | say that you're being irresponsible in any part of your life. That's a very balanced way to approach
00:10:20.160 | your income. You're saving quite a lot of money. You're giving a healthy amount of money,
00:10:25.680 | and yet you still have the significant majority of your income to spend. That's profoundly
00:10:33.040 | helpful. Or you might choose a more aggressive path. Let's say that you live on the "spend half,
00:10:39.360 | save half" mantra. I think that's a reasonable number. You might say, and then you can figure
00:10:47.280 | out how you put in your giving budget in there, maybe you say, "I'm going to give away 10% of
00:10:51.040 | my income. I'm going to save 40% of my income, and I'm going to spend 50% of my income."
00:10:56.560 | That's a reasonable thing to do. That's a reasonable way to decide it. Whatever the
00:11:02.880 | percentages or the ratio is that you choose, once you've chosen it, you now have a sense of freedom
00:11:10.960 | because you've analyzed your situation, you've decided, "This is my goal," and now you can play
00:11:17.040 | with the other factors. For me, this is, I think, one of the most important things
00:11:22.560 | that I didn't understand earlier in my life. I didn't understand that by choosing a fixed
00:11:28.720 | percentage, it would bring me the freedom to say, "Now, when I want to increase it,
00:11:33.680 | I don't have any conflict." Let's keep it simple. Let's say that you want to save 50% of your
00:11:39.600 | income and you want to spend 50% of your income. Well, if you've chosen that and you want to spend
00:11:46.640 | more money, you know that you've chosen the rule for yourself is that you're going to save half,
00:11:51.280 | spend half, so now you go to the income side, which is where the freedom comes in.
00:11:55.280 | You figure out, "Well, if I want to double my expenses, but I also want to be rich,
00:12:00.160 | all I need to do is double my income. If I can double my income, I can double my spending and
00:12:04.480 | double my saving," and that's where you should focus. It's usually the most productive thing.
00:12:08.720 | That's why I have this course on how to increase your income with a job and a career that you love.
00:12:14.240 | I think it's the most powerful, most important thing. A good financial advisor
00:12:19.760 | should first and foremost be a career coach, an income coach,
00:12:24.560 | because that's the single most important driver of how wealthy you become.
00:12:30.320 | A good financial advisor should not be someone who sits around and optimizes $1,000 by figuring out
00:12:38.080 | to put your bonds in this account to minimize the taxation on the ordinary income and put your
00:12:42.640 | capital gains assets over here. These things are piddly stuff, piddly. A good financial advisor
00:12:49.040 | should start by saying, "How are we going to double your income in the next three years?"
00:12:53.520 | Because if we can double your income in the next three years, everything in your financial plan
00:12:58.160 | can change, and you can live a bigger, better lifestyle with more consumption. You can give
00:13:03.440 | more money away with more joy, and you can save a whole lot more money and get richer all the
00:13:08.720 | way across the board. When you realize that when I choose my percentage and stick to it,
00:13:17.760 | I can do both. I'm not stuck into either spending more or saving more. I can do both,
00:13:22.240 | because I have a ratio, and the ratio gives me freedom.
00:13:24.720 | I encourage you, as a first part of your plan, to think about what percentage of your income
00:13:37.120 | it's right for you to spend and what percentage it's right for you to save.
00:13:43.120 | Choose that in the most advised, thoughtful way that you're capable of, and then commit to it,
00:13:49.680 | and then put in place the appropriate structure, maybe automatic transfers,
00:13:54.240 | maybe splitting your income into multiple accounts, assigning your direct deposit to
00:13:59.600 | multiple accounts, or whatever way you handle your finances, so that you can make sure that
00:14:03.680 | that takes place over time. I think these are some ratios that are worthy of your consideration,
00:14:10.400 | a 10/10/80, a 10/20/70, or maybe a 10/40/50. These are some good ratios for you to consider.
00:14:17.840 | I think if you get to beyond 50% of your income, you want to make sure that you really have very
00:14:25.680 | compelling goals for fast financial independence, and you know why you're pursuing such an aggressive
00:14:31.600 | plan, or you make sure that you have a very high income. I think that if you go beyond 50% savings,
00:14:39.280 | you better be clear as to why you're doing that. It's fine if you do, it's your money,
00:14:43.920 | you handle it any way that you want, but I think you want to be clear on exactly why you're doing
00:14:50.400 | that, because I fear that in this audience, there are more of us who are saving excessively,
00:14:57.280 | and would be really served by spending more, giving more, rather than just by hoarding more.
00:15:05.440 | Now, I want to give you another idea of how to get to it. Let's say that you're currently saving
00:15:10.080 | nothing. Nothing. Well, here again, ratios are your friend. What do you do? Well, start to stick
00:15:19.760 | a wedge in your income. If I come along and I'm dealing with somebody who's spending everything,
00:15:24.640 | we start with a goal of, say, getting to 10% of their income of savings. But I think the wedge
00:15:31.680 | principle is extremely valuable. This month, let's not save 10% of your income. This month,
00:15:38.000 | let's save 1% of your income. So if you're making $10,000 per month, well, take $10,000,
00:15:46.560 | 1% of that is $100. So this month, let's save $100. And then let's make a plan to increase it
00:15:53.760 | by 1% every month for the next 10 months until we get to 10%. That's a really useful rule.
00:16:01.440 | This is the kind of rule that, in a normal situation, gives somebody the confidence that
00:16:07.040 | I can do it. I can just increase my savings by 1% every month until I get to my target goal of 10%.
00:16:14.080 | Very useful. Utilize that wedge principle. It's a rule that you impose upon yourself that has a
00:16:22.240 | really strong success chance. Another rule that I consider very useful if you want to increase
00:16:34.080 | your income – excuse me, if you want to increase your savings. If you're somebody who's prone to
00:16:38.800 | spending too much or you're working with someone who's prone to spending too much, one of mine is
00:16:42.800 | when you make more money, save half, spend half. Let's say your current income is $100,000 a year.
00:16:51.280 | Well, when you increase your income, maybe this year you get a 3% cost of living raise or a 5%
00:16:58.720 | bonus. Just simply commit to saving half and spending half. And then these ratios start to
00:17:05.200 | give you freedom. It's not all consumption. It's not, "Hey, we got a $5,000 bonus. Let's all go
00:17:10.640 | to Disney World." But it's not all savings. For some people, savings are fun because they
00:17:16.240 | understand why they're saving. But for many people, savings is viewed as a form of torture.
00:17:21.120 | They want to consume because consumption is fun. Well, the ratio gives you freedom. You can do
00:17:25.760 | both. Just save half, spend half. Whenever you make more money, save half, spend half.
00:17:29.920 | And if you do that, over a course of a period of years, those ratios will help somebody to get
00:17:36.320 | very quickly into a very strong financial position. Where else can you use ratios to
00:17:43.280 | inform your decisions? Let's stick with these spending habits for a moment before we get to
00:17:49.760 | investments. Ratios can help you to make an intelligent decision on some of your consumption
00:17:56.640 | items. For example, how much of your money should you spend on housing? Well, if you go to the
00:18:03.760 | internet and you pull up DuckDuckGo and ask it how much money you should spend on housing,
00:18:08.880 | you'll quickly find some answers. You'll find answers like 35% of your income should be spent
00:18:13.760 | on housing. 45% of your income should be spent on housing. These are not bad places to start.
00:18:19.440 | 45% is too high. But the point is, these are not bad places to start. These ratios
00:18:25.520 | basically show what is, and they're important to inform you. If somebody comes along to me
00:18:33.440 | and says that they're going to spend 60% of their income on housing expenses, I know that's too much
00:18:37.920 | house because the other parts of life are also important. All of us have other expenses, and
00:18:46.400 | you don't want to be so house poor. That's why a lending company has a ratio. That's why if you go
00:18:51.520 | and you want to rent, you'll have a landlord that'll say you have to have three times the rent
00:18:56.880 | in terms of your monthly income because they know that if you only have two times the rent in your
00:19:01.440 | monthly income, you're not going to be able to pay the rent in the fullness of time. So those
00:19:05.840 | are a good place to start. What I think is more important though is to understand where those
00:19:10.800 | things start and then ask yourself, if I do this, will it get me where I want to go? If I spend 35%
00:19:17.680 | of my income on housing, will that get me where I want to go? When you care about wealth building,
00:19:23.360 | those ratios are probably not appropriate for you. You might need to spend 35% of your income on
00:19:29.040 | housing, but if you're spending 35% of your income on rent, it's probably going to be very difficult
00:19:37.680 | for you to save 50% of your income so that you can start your business, which is going to make
00:19:42.240 | you a multimillionaire. And so you want to choose your own ratios, choose your own decisions.
00:19:48.080 | With regard to renting, there's not really a right or a wrong number. Lower is generally better,
00:19:55.440 | but you need to rent an appropriate lifestyle. Here I would ask you, what are your opportunities?
00:19:59.760 | I have consulted with people who were building a fast growing company, something like a tech
00:20:07.280 | specifically. I'm thinking of one guy who was building a tech company. When I came along,
00:20:10.960 | he was spending all of his money on personal living expenses, and yet he had this fast
00:20:15.600 | growing tech company that had tremendous opportunity. When I came along, he was worried
00:20:20.640 | about credit card debt. My answer to him was, I said, "Don't worry about the credit card debt.
00:20:24.160 | Pay the minimum payments. Pay what you need to pay in order to keep your household going.
00:20:29.600 | Your financial engine here is this fast growing company, and there's very good evidence that this
00:20:36.720 | should be a very productive investment for you." Lo and behold, came true. Five years later,
00:20:43.680 | he exited the company, multimillion dollar exit, and he was able to pay off all his debt. He was
00:20:49.440 | able to become wealthy seemingly overnight, but it was actually that period of time of fighting
00:20:55.840 | through where he didn't have any money, was living on credit cards for a significant period of time.
00:20:59.680 | So you want to look and see what kind of opportunities do I have. But by having a
00:21:05.120 | personal rule, especially a personal rule that's oriented towards wealth,
00:21:10.000 | you'll make better decisions. So let me give you a couple of ideas regarding housing and vehicles.
00:21:16.160 | One of the major differences between people who are wealthy and people who are ordinary not wealthy,
00:21:24.480 | especially in a country like the United States of America, has to do with what percentage of
00:21:28.960 | your income and/or what percentage of your wealth is invested in your personal home.
00:21:34.720 | Wealthy people in the United States of America, and I think around the world,
00:21:39.520 | but wealthy people tend to have a very small percentage of their net worth invested in their
00:21:43.840 | home. The home may be very, very nice. You might live in a $20 million home,
00:21:49.440 | but there's a very good chance that the majority of people who live in a $20 million home
00:21:57.440 | have a $200 million net worth. And so one of my goals is that I never want more than 10%
00:22:04.640 | of my wealth tied up in my personal home. That doesn't necessarily mean you can't live in a nice
00:22:12.320 | home. It does mean that if I'm going to live in a nice home, I'm going to make sure that nice home
00:22:18.000 | is mortgaged and I don't have all of my net worth in that home. I think it's a major mistake for
00:22:24.800 | somebody with $150,000 saved to go and pay cash for a $150,000 home. Why? Well, first of all,
00:22:32.240 | the home is a consumption item. I don't mind it being classified on the balance sheet as an asset,
00:22:37.840 | but I think the classic Robert Kiyosaki, "A home is not an asset because it uses money," that's
00:22:43.120 | true. If you care about building wealth, you should think of your home more as a liability
00:22:47.680 | than as an asset, because even if it is an asset, it's a very unproductive asset.
00:22:52.720 | It's something that you consume. That's just what it is. It's a consumption item. It's not
00:22:56.640 | something that's productive. And so by qualifying it as unproductive, you want to minimize the
00:23:03.120 | amount of money that you spend on unproductive things and maximize the amount of money that
00:23:07.760 | you spend on productive things. And so if I'm talking to somebody who has $150,000 saved and
00:23:12.800 | they're thinking about buying a house, especially in the North American context where mortgage money
00:23:17.440 | flows down like rain, I would encourage them, never put more than, say, 10% of your net worth
00:23:24.080 | into that house. Put down the small down payment and keep your wealth, keep your money invested as
00:23:30.480 | something that's going to go higher. Now, this would change if we moved into another culture
00:23:36.000 | where mortgage financing wasn't quite so free and available, but not change all that much,
00:23:41.840 | because the same lesson still stands. I would rather rent in one of those places and keep my
00:23:47.200 | money invested in something that's going to be productive rather than in a personal consumption.
00:23:51.440 | And so I think that you should set a goal that in terms of my housing, I don't want more than 10%,
00:23:58.080 | maybe to a max of, say, 20% of my money invested in my house. Beyond that, it's too much. It's too
00:24:05.200 | much risk. It's too much concentration. And it's not putting you on the path towards wealth. It's
00:24:10.320 | keeping you in the path of having a nice fancy house, which raises other areas of your expenses,
00:24:16.160 | but it's not putting you in a direction towards wealth. If I lived in a house and I looked down
00:24:22.480 | at my budgets, my balance sheet, and I realized that 70% of my net worth is in the house,
00:24:26.400 | I would change that. And I'd recommend that you change that. And again, a target, say 10% to 20%
00:24:32.240 | of your net worth in the house. Now, can you do that and still live in a nice house? Yes.
00:24:38.960 | If your income is high enough, and if the financing is available to you,
00:24:43.200 | if I lived in a house where mortgage financing was not cheap, sorry, excuse me, in a nation where
00:24:47.120 | mortgage financing was not cheap and not available, and I woke up and lived in a million dollar house
00:24:51.760 | and that was the only asset that I had, I would first analyze my business and say,
00:24:55.760 | "Does my business have the opportunity to grow massively?" If there is, maybe I would keep the
00:25:02.000 | house. But if the business is not a hyper, hyper fast growing business, I think you're better off,
00:25:10.400 | sell the house, get something more modest and redeploy those assets into money, into assets
00:25:15.200 | that are going to make you money. Now, if you're in a mortgage environment, then refinance the
00:25:21.120 | house. Minimize the amount of money that's exposed to the personal housing expenses. And if the
00:25:27.760 | ratios still work, where a modest percentage of your income is used to pay the mortgage payment,
00:25:32.960 | take that money and invest it in something that's more productive. I think it's one of the biggest
00:25:37.440 | mistakes that low income and middle income people make often in Western countries, is too much money
00:25:43.040 | spent on housing. What else? Well, this is less important at the middle income ranges, but it's
00:25:49.680 | more important at the low income ranges. What percentage of your income is, or net worth,
00:25:54.960 | is being spent on vehicles? As with anything, some care is needed here. I believe there are
00:26:01.360 | good times and good reasons why it makes sense to have expensive vehicles. I don't personally
00:26:07.760 | subscribe to the theory across the board that one should always drive the cheapest jalopy that they
00:26:13.200 | can find. I think that's a real mistake. I think this is something that has hurt me in my own
00:26:18.160 | personal life, that there are times because I was always committed to driving the most frugal car
00:26:22.960 | that I could find and the most intelligent kind of thoughtful decision. I believe it hurt me. It
00:26:26.480 | hurt my income generating abilities. And there've been times in my life where I should have had a
00:26:31.200 | nicer car. However, the fact still remains that unless the car is making you money in a fairly
00:26:40.880 | direct manner, it's probably one of your fastest appreciating things that you own, your fastest
00:26:47.680 | appreciating assets. So you want to minimize the amount of your net worth that is exposed to that
00:26:53.440 | if you care about being wealthy. The ratios that I like, for the hardcore of us, I think that you
00:27:00.160 | should spend 10% of your income on a car. Total, meaning that you take your income, take 10% of it,
00:27:07.280 | and that's the total value of the car. So let's try this on for size. Let's say that you make $100,000
00:27:13.920 | a year. I think you should spend about 10% of your income total on a car, about $10,000,
00:27:19.120 | if you care about wealth. Now, could that be higher? Yes. I think you could go up as high as
00:27:24.000 | 50%. I think you'd go up to 50% of your income being used and still build wealth over time.
00:27:31.200 | But it should be across the border. It should be across all of your household's vehicles.
00:27:35.040 | If your household income is $10,000 and you have two cars worth $15,000 each and you have a $15,000
00:27:42.720 | boat and $5,000 of ATVs, okay, I think you can still build enough wealth. But it's slower than
00:27:49.840 | if you're at 10%. So I like the 10% number and I think that should be where we start.
00:27:54.480 | What a difference this makes when we tell people a ratio to start with. Think about your 16-year-old
00:28:04.800 | son or your 16-year-old daughter. If you train them, as I will mine, that if you're going to
00:28:10.480 | have a vehicle at all, which who knows, increasingly there are good reasons not to
00:28:14.960 | have a vehicle. We'll see what the world looks like 10 years from now. But if you're going to
00:28:18.160 | have a private vehicle at all, that it should be worth no more than 10% of your annual income.
00:28:25.200 | You set them on the path for wealth in a profound way. If your child is making $30,000 per year,
00:28:39.360 | I think they should be driving a good quality, safe $3,000 car. And they're going to be,
00:28:45.760 | have so much money available to invest that they can get wealthy very quickly.
00:28:50.080 | Maybe you double it up. Maybe 10% is too much for you. 20%? Great. You can get to a $6,000 car.
00:28:58.320 | But you're not going to get to a $30,000 car, at least not if they care about wealth. And thus,
00:29:07.120 | you can help them to avoid one of the most expensive mistakes that we often make when
00:29:12.400 | we're young. So think about what percentage of income. Net worth-wise, let's say that you
00:29:19.200 | have a significant net worth. Well, here, I think you need to choose a percentage. And think about
00:29:24.560 | that percentage and how that makes sense in your overall scenario. Maybe you say, "I'm not going
00:29:29.840 | to have more than 5% of my net worth that's used up and spent on vehicles." And you're going to
00:29:37.040 | have less than 5% of your net worth. So put some numbers to these things and see what feels right.
00:29:42.400 | Let's say someone has a million dollar net worth. Is it fine for someone with a million dollar net
00:29:46.640 | worth to have $50,000 worth of vehicles, boats, RVs, etc.? I think that's fine. Is it fine for
00:29:52.400 | them to have $100,000? Of course, it's their money. They can do what they like. Maybe that's okay.
00:29:59.920 | But what it's often going to start to do is it's going to start to put them on the path
00:30:03.440 | of wanting to become wealthy. And so if you want to become wealthy, you want to make sure that you
00:30:10.160 | have assets that are going up in value. Now, these percentages, I think, will change over time.
00:30:15.760 | Let me give you an example. Let's say that you have a person who is earning $100,000 a year
00:30:23.120 | from a job and has no savings. Well, in that situation, I'd like them to drive a $10,000 car
00:30:31.360 | and save and invest money. But that person is in a very different situation than somebody who's
00:30:38.320 | generating $100,000 of income from their portfolio of investments, and those investments are increasing
00:30:47.120 | in value every year by 10% per year. Well, now the person with $100,000 of portfolio income,
00:30:56.480 | next year is expected to be $110,000, and the next year expected to be $125,000, et cetera.
00:31:01.840 | They can now spend more money on their stuff, their consumption items,
00:31:07.920 | while still becoming wealthier. So I'm trying to give you ratios that I think make a lot of sense,
00:31:14.320 | but you should also analyze these ratios in the context of where you are in life.
00:31:20.480 | Now, we've talked a lot about spending. We've talked about income. Let's talk about investments.
00:31:26.800 | Ratios will give you freedom with regard to your investments. Let me ask you a question.
00:31:32.000 | How much money from your investment portfolio should be invested into safe assets,
00:31:39.360 | conservative assets? How much money from your investment portfolio should be invested in
00:31:49.520 | speculative assets? How much money in your investment portfolio should be exposed to any
00:31:58.640 | one particular investment? How much money in your investment portfolio should be invested
00:32:06.080 | in a certain asset class? Now, I don't know these numbers for you. I'm going to give you
00:32:12.480 | some ideas here. I don't know these numbers for you. What I do know is that you should come up
00:32:17.840 | with a number that works for you. And if you're trying to figure out and you're trying to analyze
00:32:21.760 | your finances, you should try to figure out a number that makes sense to you. And I'm going
00:32:25.840 | to give you some ideas on how to get there. As with all of the previous ratios, there's really
00:32:30.720 | no science to any of these numbers. We can run some math, but there are exceptions to all of them.
00:32:36.720 | But there are some ways that we can think it through in a somewhat disciplined way,
00:32:42.000 | a scientific way, and then I think get in the right range, the right ballpark.
00:32:48.560 | Let's talk for a moment about, let's start with speculative assets rather than safe assets or
00:32:53.920 | conservative assets. What percentage of your portfolio should be invested into speculative
00:32:59.760 | assets? Well, I think it should be enough of a percentage where a big win would be meaningful,
00:33:07.520 | but not so much of a percentage that a big loss would wipe you out.
00:33:14.640 | So let's play with some numbers. Let's assume that you have an investment portfolio of $1 million.
00:33:19.360 | And for the sake of analysis, let's say you're earning $100,000 per year, living on your income,
00:33:27.200 | and you've got a $1 million investment portfolio. Lots and lots of, this describes kind of the,
00:33:33.120 | probably the median listener of radical personal finance, median listener. So you've got a million
00:33:39.200 | dollar portfolio. Let's play with some numbers. Let's say you put 1% of your portfolio into
00:33:45.360 | speculative assets. So 1% of $1 million would be $10,000. So you're going to put 10,000 into
00:33:54.320 | speculative gambles. First, before I go to 1%, why do I think you should have some money in a
00:34:02.640 | speculative portfolio? Well, I think it helps to protect the bulk of your portfolio from big
00:34:08.640 | mistakes. I think there are a lot of people who don't have a gambling money account who can
00:34:16.320 | probably feel frustrated when they miss out on things they would have liked to have gambled on.
00:34:20.000 | If you have a speculative portion of your portfolio and you want to invest in Bitcoin,
00:34:25.760 | and you're not sure about the future of Bitcoin, you could just invest it in Bitcoin or Dogecoin
00:34:29.600 | or GameStop or whatever it is, whatever game you want to play. Because you know, look, hey,
00:34:34.160 | I have this percentage of my portfolio over here. This is speculation. I want to gamble on this.
00:34:39.120 | And it allows you to feel like you're part of something. It allows you to educate yourself
00:34:43.600 | on something, but it doesn't put you in a position where you're risking too much.
00:34:48.240 | So I think everybody needs a, it's almost a safety valve of sorts. You need a gambling portfolio
00:34:54.080 | so that you can just simply put money on, the guy at the barber shop says, "Hey, you should buy
00:34:59.440 | XYZ stock." You don't know anything about it. You should have a portfolio that you can pull
00:35:03.920 | out your phone and buy XYZ stock and just gamble on it just for fun. Okay. Now let's talk about the
00:35:09.440 | right number associated with it. What I like to do is I like to say, what would be the downside
00:35:14.160 | and what would be the upside? So let's start with downside. If you have a million dollar portfolio
00:35:18.560 | and you put 1% of that into a gambling speculative portfolio, that'd be $10,000.
00:35:27.280 | If you lost $10,000, would that hurt? I think the obvious answer is not much, right? If you
00:35:34.880 | have a million dollar portfolio, make it a hundred grand a year, it's just not going to hurt much.
00:35:38.640 | 10,000 bucks, no big deal if it's gone. All right. So we got, we covered the downside. We
00:35:42.880 | know it's not too much to hurt, but here's the big question. Is it enough to matter?
00:35:49.680 | Well, let's run the numbers. Let's say that you have $10,000 and you invest it into something
00:35:56.160 | speculative that triples this year, right? You get a three X return this year and your $10,000
00:36:02.880 | grows into $30,000. Is that enough to matter? My guess would be probably not much, right?
00:36:11.520 | It's not going to, a person with a million dollars, so you've got a million, 30,000,
00:36:16.080 | okay, big deal, right? You're not going to change anything in your life in that situation.
00:36:21.280 | So 1% of your portfolio in a gambling speculative portfolio environment is probably,
00:36:29.040 | certainly not enough that it's going to hurt, but it's not enough that it's actually going to
00:36:32.080 | matter if you're successful. So it's probably too small. Now you could go and let's say you did 20%.
00:36:38.400 | Well, 20% would be $200,000. If you lost $200,000 of your portfolio,
00:36:48.160 | would that be too much to lose? Could you afford to lose $200,000 of a million dollar portfolio?
00:36:54.160 | You judge for yourself. Some people, yeah, I could afford to lose it, right? I'm making $100,000 a
00:36:59.280 | year. Some people, no, that's too much, right? But then look at it the other way. Let's say that you
00:37:06.000 | tripled $200,000. You had a three X return this year on your speculative investment and you turned
00:37:12.080 | $200,000 into $600,000. Is that enough to matter? My answer is absolutely. Turning a million dollar
00:37:18.000 | portfolio into a million six because of a nice speculative investment, that's enough to matter.
00:37:23.760 | And so think through these numbers, right? Think through the downside and the upside
00:37:28.720 | and try to find a number that would make sense for you. My guess would be that for most people,
00:37:33.760 | it would probably be something like 5% or 10% of your portfolio. Again, I can't say what yours is
00:37:39.600 | because the guy who has a million dollar portfolio and has no income coming in and is living on that
00:37:45.360 | million dollar portfolio is going to be very different in a different position from the guy
00:37:49.440 | that has a million dollar portfolio and is making a million dollars a year from his income, from his
00:37:54.880 | day job, right? That guy making a million dollars a year could say to himself, "Hey, I've only got a
00:38:01.200 | million dollars. I got a hunch on this thing. I'll go ahead and put half my money into this deal.
00:38:07.120 | And if I can't do it, I'm not set behind much because I've got a big income." But you try to
00:38:11.920 | figure out a percentage that feels right for you. Now, on the flip side, let's go to safe and
00:38:16.560 | conservative assets. What percentage of your portfolio or your net worth should be invested
00:38:21.440 | in safe and conservative assets? Well, you want to do basically the same analysis. You want to say,
00:38:28.240 | "I need a number that's meaningful. If I've got a million dollar portfolio and I've got $10,000
00:38:34.960 | in safe money, is that really meaningful? Is that going to do what I need? But I also need a number
00:38:41.600 | that's going to be significant enough to be meaningful, but not too much." Let's talk about
00:38:48.320 | life insurance, whole life insurance. My concern with whole life insurance as a primary tool for
00:38:53.360 | people is often that it's just too conservative. It's going to underperform most other things. It's
00:38:59.120 | going to be stable, but it's just too conservative often. And so that's why I get really nervous when
00:39:04.880 | people put too much of their income into too safe stuff. You shouldn't have 30% of your income going
00:39:12.240 | into some safe conservative CD account or money market account or life insurance policy. It's too
00:39:17.840 | much, too much, unless there's a specific goal for it. "I'm saving $200,000 so that I can build this
00:39:24.480 | million dollar, develop this million dollar real estate complex over here, and then I'll..." Okay,
00:39:28.640 | that's fine. But in terms of just general ratios, too much. But yet, people that don't have anything
00:39:34.560 | saved, too little. So you got to find some kind of appropriate balance here where how much of my
00:39:42.480 | money do I need invested into something safe, something conservative. A ratio can work here.
00:39:48.720 | I always keep 10% of my money in something safe. Or a number that's informed by something else.
00:39:56.640 | I always keep three years worth of living expenses in an emergency fund. These are fine.
00:40:03.600 | Now, there's other things that would involve other forms of asset allocation.
00:40:07.440 | A percentage gives you the ability to take a bet on something without being committed to its success.
00:40:15.280 | How much of your portfolio should be invested in gold?
00:40:19.600 | I'm uncomfortable if you get to that with anything except a percentage.
00:40:27.840 | Maybe some people are okay with a number. Maybe you say, "I want to have 10 ounces of gold for
00:40:34.640 | every member of my family." I've talked about this, right? You're going to say, "I want to have
00:40:38.160 | 10 ounces of gold for every member of my family. I'm going to have 10 one-ounce coins sewn in a
00:40:43.680 | money belt for every member of my family. So if we have to disappear in the middle of the night,
00:40:47.040 | and our family has to... We're being targeted or harassed for something, and we have got to set up
00:40:51.200 | shop in another country somewhere, at least we've got 10 ounces of gold to start with." Okay, that's
00:40:56.720 | fair, right? That could be fine. A personal goal like that can make a lot of sense. I like these
00:41:02.800 | because they give me a round number, but I think a percentage makes a lot of sense. I'm going to
00:41:07.040 | have 5% of my net worth in gold. That would be reasonable. I don't think 50% of your net worth
00:41:13.200 | is reasonable, but 5% is reasonable. And so you can, by choosing a percentage and going through
00:41:20.080 | that same analysis of, "This needs to be a big enough number to matter, but not so much that
00:41:26.960 | it's too big of a bet," you'll get to some of these numbers. You'll get to 5% of my portfolio
00:41:33.440 | should be invested in precious metals. 5% of my portfolio should be invested in cryptocurrency.
00:41:38.240 | 60% of my portfolio should be invested in large cap stocks, 20% in mid cap, etc.
00:41:43.680 | 60% should be invested in Western stocks, other international stocks, whatever the number is.
00:41:50.320 | That's all that asset allocation means. It's basically a way of deciding and saying,
00:41:56.080 | "We have this certain portfolio." Then we study and say, "How is this portfolio done in the past?"
00:42:03.680 | So therefore, it's probably going to do something like it in the future. Of course, we don't know
00:42:08.240 | that for sure. So do we like these results in the future that we had in the past? And then by
00:42:14.880 | committing to it and committing to that overall asset allocation plan, you have the freedom that
00:42:25.040 | comes with knowing, "I've covered my bases and I'm not being stupid in any area." That's the power.
00:42:32.160 | You've covered your bases and you're not being stupid. The guy who doesn't have any cryptocurrency
00:42:40.320 | at all is probably feeling like he missed out. That can be a dangerous emotion because the fear
00:42:48.400 | of missing out can now pile up on you and then you do something rash or foolhardy, something
00:42:52.960 | that's just not wise for your situation. On the flip side, the guy that's got 100% of his money
00:42:58.080 | in cryptocurrency might not be sleeping very well at night. Maybe, maybe not. You just got to
00:43:07.120 | understand what are the risks here and what could I do. And the way to think about them is often in
00:43:12.880 | percentages. Percentages allow you to make an informed decision. Percentages are not perfect.
00:43:26.560 | You need to always look at the situation and say, "What is someone doing?" For example,
00:43:32.640 | maybe you're a new college graduate. You've just graduated from college and you've just
00:43:37.600 | gotten your first job. You have no money saved, but you've just gotten your first job and you're
00:43:42.800 | making $60,000 a year. Well, percentages would say that you're in a wildly dangerous position.
00:43:50.240 | Think about it. 100% of your income is being generated from one thing. Having a job is one
00:44:00.000 | of the riskiest things you could possibly do because if one income stream fails, you're sunk.
00:44:06.480 | You've got nothing. Now, that's true. That's the thing that always drove me away from employment.
00:44:13.600 | It's just employment is too risky. To have all of your income come from one source where they can
00:44:19.120 | call you up on Friday afternoon and say, "Don't come in on Monday," that's a big risk,
00:44:23.760 | financially speaking. But of course, that's a risk that we take all the time. Why? Well,
00:44:29.680 | because that's where you start a lot of times. If you need money, one of the best ways to get
00:44:33.360 | money is to go get a job. You say, "This gives me a job and at the end of the day, it's not so risky.
00:44:38.080 | So I'm going to go ahead and save some of my money. I'll build up a little bit of freedom,
00:44:41.120 | a little bit of cushion, a little emergency fund, and I can go get another job if I need to."
00:44:45.120 | We can look at these same set of facts. But what we do is we look at the person making the $60,000
00:44:51.840 | and we say, "Where is he going to go from here? What's next?" I'm okay with taking big risks.
00:44:58.000 | I'm okay with that person making $60,000 saying, "I'm going to save 50% of my income for one year,
00:45:04.240 | then I'm going to leave this job and I'm going to put 100% of my income into the next business."
00:45:08.800 | I think it's fine to take big risks if you're informed about them.
00:45:12.480 | But during those times in life where you don't have a clear plan, you don't have a clear business
00:45:22.400 | I'm going to start or a clear career move I'm going to make or a clear way to make a fortune,
00:45:27.680 | the ratios can help to keep you safe. The ratios can help to make sure that you're being responsible
00:45:33.520 | and the ratios can make sure that you're balancing that goal of consuming enough today,
00:45:39.280 | enjoying things today, while also saving for the future. The ratios can help. So in closing,
00:45:47.840 | what I would suggest that you do is you think through the ratios that you believe make sense
00:45:52.640 | for you. I've tried to mention some that I think are useful and I'll give you a quick reprise of
00:45:59.280 | those things today. Here are the ratios that I would encourage my son or daughter to start with
00:46:06.960 | as a good starting point. Number one, with regard to the income, I think it makes a lot of sense to
00:46:14.000 | save half, spend half. Save half, spend half. What I currently encourage my children to do is
00:46:21.120 | whenever they make money we split into thirds. We give a third, we invest a third and we spend a
00:46:25.760 | third. That's fine, thirds work. I just do that because it makes the math easy with working with
00:46:32.880 | children. But for someone who's building an income and just starting, I think that giving away 10%
00:46:38.480 | of your money, saving 40% of your money and spending 50% I think is really a perfectly
00:46:44.000 | adequate scenario. Now the reason I like people to start with that is because if you get people
00:46:50.320 | starting with that then they don't ever have the pain of cutting back. I used to when I was younger
00:46:56.720 | and more aggressive and more excited about extreme savings. I would encourage people,
00:47:00.400 | "Hey, get to half and half." I don't think it's necessary for most people. I don't think it's
00:47:04.400 | necessary for the average person making $100,000 a year to only spend $50,000. What makes a lot of
00:47:11.360 | sense to me is to the average person, if you have the ability, if you're the average person is
00:47:18.560 | living in a high tax country, let's say in the United States making $100,000 you're probably
00:47:24.720 | paying about $30,000 to $35,000 a year of tax. Well move to a no tax environment and then save
00:47:31.840 | the $30,000 to $35,000 a year of tax plus what you were doing before. You'll have in most high
00:47:39.520 | tax places, you'll have someone making $100,000. Again, they're going to be spending $30,000 to
00:47:44.560 | $35,000 a year on tax depending on how much of their wages are employment wages. There's 15.3%
00:47:53.280 | in the United States of tax on $100,000 for Social Security and Medicare. Then depending on whether
00:47:59.440 | they're married, do they have children, what are the deductions that they have, are they enrolled
00:48:02.560 | in a retirement plan, et cetera. But you would often have another $7,500 a year of income tax
00:48:08.160 | on the first $100,000. So you would get up to a total of something like, excuse me, you would
00:48:13.440 | often have about 15%. You would often get up to a total depending on state tax, et cetera, of say
00:48:18.240 | $30,000 of tax on $100,000 income. Well now if you take $100,000 and you turn it into $70,000 after
00:48:26.160 | tax and then you tell someone live on half your income, if you're going to calculate it based
00:48:31.440 | upon the net, now all of a sudden they're down to a $35,000 annual expense, which is probably a
00:48:37.520 | little bit heavy for most of us that make $100,000 a year. So you can do something, my recommendation
00:48:43.920 | if someone's capable is move into a more tax efficient environment, move to a tax haven,
00:48:49.680 | cut your taxes on $100,000 to zero legally, and then save the tax money plus the other 15%, 20%,
00:48:57.840 | and just live on 50% or 60%. It's a better solution. So forgive me for the tangent,
00:49:04.320 | just the point is if you can often get to things in a creative way. So save 20%, give 10%, live on
00:49:10.960 | 70. These are good ratios. At least 10% of money saved, my number is probably not higher than 50%.
00:49:18.240 | On investments and asset allocations, I think that something in the range of 10%
00:49:24.960 | of your assets invested in something safe, conservative, and stable feels pretty good to me.
00:49:32.400 | Another 10% invested in something that's speculative, when you run those numbers,
00:49:37.200 | that often seems to be the kind of number that's pretty good. And then the 80% invested in something
00:49:44.000 | that is strong, aggressive, but not so totally speculative that you could lose it all.
00:49:49.760 | I'm not married to those numbers, but those are the kinds of ratios that I would encourage someone
00:49:54.640 | to think about. On housing expenses, I say no more than 10% of your net worth into a personal house.
00:50:00.800 | If you can borrow the money and keep it down to say 25% to 30%, somewhere in that range of your
00:50:07.600 | income and cover the mortgage payment, it's probably reasonable. But no more than 10% of
00:50:12.800 | your net worth in a house. And then when it comes to other consumption items, I say 10% to maybe 20%,
00:50:20.240 | certainly no higher than 50% of your income going into consumption items like cars, boats,
00:50:32.640 | that kind of stuff. Because those things just, you lose too much value. Do that until you're
00:50:37.040 | a multimillionaire. And then once you're a multimillionaire, think about your insurance
00:50:39.760 | funds. If you put 10% of your money in cash, 10% of your money in gold, 10% of your money in
00:50:45.920 | cryptocurrency, then you keep 50% invested in your business or 50% invested in stocks. These are the
00:50:51.200 | kinds of ratios that give you comfort. Because you know you've got exposure to multiple things,
00:50:56.800 | but you're not overexposed in multiple areas. In conclusion, think about the ratios that you
00:51:02.880 | believe in. As I've said, there's nothing scientific about these ratios. We can do an analysis
00:51:07.680 | of percentage of savings, right? I've talked about the math of early retirement, the famous
00:51:14.720 | charts that Jacob Lund Fisker outlined in his book, Early Retirement Extreme,
00:51:18.880 | that Mr. Money Mustache profiled in his blog. I've got episodes of the show on how inspirational that
00:51:24.160 | was to me. If you haven't heard that, go all the way back to episode 163, published in March of
00:51:29.520 | 2015, called The Impact of Your Savings Rate on Your Time to Financial Independence. So that math
00:51:37.120 | works, but math can always be broken, right? For example, the math behind that movement, that idea
00:51:45.440 | would say that if you save 10% of your income, you could take one year off every time you work
00:51:49.840 | nine years. If you go forward and you say save 10% of your income over your working career, it'll
00:51:54.960 | take you something like 45 years under standard kind of stock market expectations to become
00:51:59.840 | financially independent. There's nothing wrong with that. But you could also save 0% of your
00:52:05.760 | income and be like my client who built a massive tech company and sold it out after about eight
00:52:12.240 | years of work and became a multi-multi-millionaire because he exited his tech company and saved 0%
00:52:17.200 | along the way, lived on credit cards the whole time until he got it profitable, had a few years
00:52:21.440 | of good income, and then sold and exited with a massive deal. So there's always a way to break
00:52:26.160 | the math. But you want to understand the math before you start breaking the rules. The artists
00:52:33.760 | who break the rules effectively are those who understand the rule and then how breaking it can
00:52:42.480 | bring an impact. If I use poor language, let's say I come out here and I start using a word like ain't
00:52:51.040 | or a word like funnest or something like these. I can use those words as a skilled public speaker.
00:52:59.360 | I can come out and I can use these words, these mistakes in the English language, and I can break
00:53:05.680 | the rules and it works for impact. I might say something like well that ain't gonna work for you.
00:53:11.120 | And I have an emphasis that comes from breaking the rules of the English language,
00:53:18.560 | breaking the rules of speaking with proper English grammar.
00:53:23.440 | But I can only do that effectively because I understand the rule and then I break the
00:53:29.440 | rule when it matters. There's a big difference between me coming out, between my coming out,
00:53:35.760 | here we go, there's a big difference between my coming out and speaking eloquently and effectively
00:53:42.000 | on a topic and then for emphasis saying well that ain't gonna work out so well for you, is it?
00:53:49.440 | Versus my coming out and from the very beginning of the show to the end speaking like an uneducated
00:53:56.720 | hick. Same thing comes to place with these ratios. There's a big difference between a financial
00:54:06.640 | advisor like me saying to somebody right now I don't think you should pay off your credit card
00:54:14.640 | debt because in my estimation you have a working business here that's growing and you're using the
00:54:22.400 | credit card debt to fund your lifestyle and to cover enough living expenses so that you can
00:54:28.080 | get this business growing and we're gonna break these rules about spending less and spending
00:54:35.280 | credit card debt and piling up debt, blah blah blah blah blah, etc. temporarily to see if this
00:54:39.920 | works. That was the advice that I gave. My client was spending a lot of money, going out to eat a
00:54:46.160 | lot, living not an extravagant but living a non-frugal lifestyle. Why? Well he had a bunch
00:54:51.680 | of children and he was trying to keep his family going while he got this business going and by
00:54:56.400 | spending money on the home front it freed him up enough to get the business going and so the right
00:55:01.440 | plan at that point was not to come in and say what you need to do is you need to put your household
00:55:06.080 | on a budget and you need to tell your wife while she's taking care of all these children you need
00:55:09.520 | to tell your wife honey you got to spend a maximum of $450 at the grocery store. That would have been
00:55:13.360 | a suicide right and it would have broken his whole plan of building the business but a few years of
00:55:19.120 | just limping along and then exiting the business it worked right so you can break the rules on
00:55:27.200 | occasion if you know them but you can't make a habit of breaking the rules and that's where the
00:55:32.080 | ratios come in. Could you convince me if you were a sharp young lawyer you've just graduated from
00:55:38.160 | the best law school in the land you've gotten a job could or you're getting a job could you convince
00:55:43.440 | me that you need to come in and lease a brand new very nice BMW for $2,000 a month? Answer is yes.
00:55:51.280 | I could absolutely be convinced of that. Signaling matters and so if you're going to signal yourself
00:55:56.400 | as the hot shot who is extremely successful I think that absolutely can work but we're not
00:56:04.480 | going to apply the same thinking as a general rule to the guy that just got a store manager job.
00:56:12.080 | It's suicide for the guy who just got a job as a store manager to go out and have the same $2,000
00:56:20.880 | a month lease payment. Hope you understand. Hope that's a helpful addendum here at the end. You
00:56:26.080 | need to understand what the rules are in order to understand when it's okay for you to break them.
00:56:33.440 | You can't just go out and break the financial rules willy-nilly and expect it to work out
00:56:37.760 | well for you. Thank you for listening to my show today. I hope this is useful to you.
00:56:42.800 | I would remind you that I sell a course called the Radical Personal Finance Guide to Career and
00:56:46.720 | Income Planning and the single most effective thing that you can do to build your financial
00:56:52.640 | life in a way that allows you to properly balance building wealth and also enjoying consumption
00:56:59.360 | is to increase your income. I spent far too many years of my life focusing on frugality.
00:57:05.520 | That was a mistake. If I had spent that same time focusing on building my income,
00:57:11.200 | I would have had all the things that I was trying to get with frugality, namely higher savings,
00:57:16.080 | higher investments, but a whole lot more of the things that weren't available with frugality,
00:57:21.440 | more vivid high-class experiences, richer memories, etc. if I had focused earlier on
00:57:28.240 | building my income. So don't make my mistake. Don't repeat my mistake. From the very beginning,
00:57:33.280 | you should have a plan to build your income. So if you don't have one of those plans,
00:57:39.680 | go to RadicalPersonalFinance.com/store and sign up for my Radical Personal Finance Guide to Career
00:57:44.080 | and Income Planning. Thank you for listening.
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