Entitlement_and_Mistakes
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai.
00:00:02.960 | And in this episode, I want to talk about the biggest financial mistakes you can ever
00:00:07.160 | make and also sign up for my newsletter.
00:00:10.360 | It's a free weekly newsletter at FinancialSamurai.com/news.
00:00:15.620 | So on to the topic of biggest financial mistakes.
00:00:18.980 | The first rule of financial independence is to not lose money.
00:00:22.120 | If you lose lots of money, you are ultimately losing valuable time.
00:00:27.520 | And when we only have so much to live, losing time is the biggest financial mistake you
00:00:32.480 | can make because it's the most valuable asset.
00:00:34.800 | I hope you agree this makes absolute sense, which is why we listen to financial podcasts,
00:00:41.120 | we read books, we try to listen and get educated about our finances.
00:00:46.800 | And we have a risk appropriate asset allocation framework.
00:00:50.820 | We cannot risk losing so much money that we end up going backwards.
00:00:56.800 | In true Fight Club fashion, I could say the second rule of financial independence is to
00:01:02.200 | never forget the first rule.
00:01:04.640 | However, the second rule, the real second rule is to never expect your income to always
00:01:09.380 | go up.
00:01:10.560 | That would be your second biggest financial mistake you could ever make.
00:01:14.760 | Life is not a straight line.
00:01:16.340 | Bad things happen all the time.
00:01:18.200 | If it's not a pandemic that crushes your income, it might be a bear market that takes your
00:01:23.020 | net worth down 20%.
00:01:24.940 | And if it's not a bear market that leaves you jobless, it might be a health issue that
00:01:28.720 | prevents you from working.
00:01:30.840 | People over 40 don't need to be told that life is both wonderful and difficult.
00:01:35.000 | For all of you still relatively early on your financial journey, please take heed.
00:01:40.500 | Listen to your elders.
00:01:41.500 | I'm 45.
00:01:42.500 | So if you're younger than me, and you want to go where I've been, well, it might be a
00:01:47.160 | good idea to listen to what I have to say, because I share with you both the good and
00:01:51.600 | the bad.
00:01:52.600 | I don't want you to be full of regrets, because you didn't know the risks.
00:01:58.120 | Back in 2007, at the time I made the most amount of money in my career.
00:02:02.560 | I had gotten recently promoted to vice president and thought I was on top of the world.
00:02:07.360 | In my spreadsheet to calculate my future net worth growth, I estimated I would conservatively
00:02:13.160 | make 10% more annually for the next five years.
00:02:15.840 | I mean, why not?
00:02:16.840 | It was a bull market.
00:02:18.160 | 2007 was crazy times, just like 2000.
00:02:21.120 | When you're flush with cash and have a promising career, and you believe in the importance
00:02:25.620 | of spending your money to enjoy your life, why not reward yourself?
00:02:29.960 | That's what I did.
00:02:30.960 | I bought a two bedroom, two bath condo in Lake Tao for $715,000.
00:02:36.800 | This is in 2007.
00:02:39.800 | That was right before the financial crisis.
00:02:42.000 | I thought it was a good deal, because condos of similar size sold previously at $810,000
00:02:48.480 | a year before, but then of course, everything went to hell.
00:02:52.840 | The S&P 500 crashed by 38.5%.
00:02:56.840 | The housing market collapsed.
00:02:58.480 | My income got slashed by 50%.
00:03:02.420 | And within a couple of years, my condo's value plummeted from $715,000 to under $500,000.
00:03:09.560 | It might have gone under $400,000 at the worst of the cycle, but I didn't pay that close
00:03:14.640 | attention because it was too depressing.
00:03:16.960 | Investors were conducting short sales left and right, dragging all of us fools who kept
00:03:21.120 | on paying our mortgages down with them.
00:03:23.800 | And I say fool in a loving way, because I do believe it is the honorable thing to fulfill
00:03:29.880 | the promises of your contract.
00:03:32.120 | And the silver lining is today that condo is paid off.
00:03:35.280 | I finally paid it off in 2022, and I'm bringing my kids up there.
00:03:39.400 | But man, every time I went up to the condo, I was reminded about my financial mistake
00:03:45.440 | for 15 years.
00:03:47.200 | And I'm still going to be reminded.
00:03:48.960 | Thankfully, the condo as a percentage of my net worth is much, much smaller than it was
00:03:53.520 | in 2007.
00:03:55.640 | If only I had avoided the financial mistake of income extrapolation, I would be at least
00:04:01.960 | $300,000 richer, maybe $500,000 richer based on the money I could have reinvested in the
00:04:08.000 | stock market and in real estate.
00:04:10.240 | Please keep your income expectations conservative.
00:04:14.320 | If you do not, you may end up buying things beyond what you're capable of affording.
00:04:20.200 | The main reason why I'm recording this podcast on financial independence rules is because
00:04:26.120 | of the New York Times strike.
00:04:28.120 | For over 24 years, I wasn't really paying attention to how other folks make money.
00:04:34.760 | The first world of income expectations is based on a meritocracy.
00:04:39.480 | The better you do at your job, the more you tend to get paid.
00:04:42.840 | If you stink it up, then your pay will rightly be less.
00:04:46.920 | If you feel you aren't getting paid what you're worth, you'll leave.
00:04:50.400 | You'll rationally send out resumes to try to find a better job that will pay you more.
00:04:55.400 | Now, the second world of income expectations is based on always getting paid more, no matter
00:05:01.520 | what.
00:05:02.520 | The economy may be in a recession.
00:05:04.600 | We might be in a bear market.
00:05:06.200 | Your company's stock might be in the toilet.
00:05:08.560 | A nuclear bomb may have detonated.
00:05:11.240 | Yet you still think you deserve to get paid more, guaranteed, every year.
00:05:18.120 | Well, this second view of getting paid violates the second rule of financial independence.
00:05:23.840 | Having this entitlement mindset of always getting paid more is dangerous.
00:05:29.080 | Based on my realization of how journalists get paid at the New York Times and other places,
00:05:34.360 | I understand why they're striking.
00:05:37.040 | We all want to get paid more.
00:05:39.120 | Inflation is high.
00:05:40.120 | Hopefully, our salaries can keep up with or beat inflation rates because that way we can
00:05:46.280 | get ahead.
00:05:47.600 | But this type of expectation for always getting more is very dangerous.
00:05:52.560 | Here are a couple of examples of entitlement and how it can hurt your wealth and happiness.
00:05:57.240 | Let's say in high school or let's say college, you study on average one hour for your final
00:06:02.800 | exam while all your peers study for three, four, seven hours.
00:06:07.680 | And so as a result, you get a B but your peers get an A because there's a bell curve.
00:06:11.960 | And then you get pissed off because employers reject you for not having a 3.75 GPA or above.
00:06:19.880 | I remember back at Goldman Sachs, the minimum GPA cutoff was 3.7.
00:06:26.320 | Now you're rejected and you start questioning why life isn't fair.
00:06:30.000 | And then you end up lonely and spiteful and you hate on anybody who has more than you.
00:06:35.920 | That's terrible, right?
00:06:37.840 | And then let's say three years out of college, you expect to go to the corner office.
00:06:41.960 | You haven't put in your dues.
00:06:43.200 | The average CEO has worked for 25 years to be able to become CEO.
00:06:48.540 | And so you get passed over for a promotion and you start bad mouthing your colleagues.
00:06:53.920 | And then you start undermining your boss.
00:06:56.360 | You start thinking to yourself, "Do you know who I am?
00:06:58.720 | I come from this prominent family.
00:07:01.200 | I went to this fancy school.
00:07:03.720 | You should feel gratitude that I'm even working for you."
00:07:07.320 | That type of mentality is like a virus.
00:07:10.960 | Nobody likes that.
00:07:12.120 | And as a result, your career trajectory derails.
00:07:15.620 | And speaking of viruses, I wrote a post before that talks about how to get revenge from an
00:07:20.840 | employer who let you go or passed you over.
00:07:25.600 | And one way is to actually implant a recommended virus to that employer.
00:07:31.400 | So in other words, let's say you hate your employer because they lied to you and wronged
00:07:34.880 | you.
00:07:35.880 | Well, you recommend some employee who has a terrible attitude, full of entitlement,
00:07:40.840 | spreads gossip, undermines bosses, and you say, "Hey, this is a great employee.
00:07:46.360 | Go ahead, hire them.
00:07:47.640 | They'll do great."
00:07:48.640 | And what happens is the virus eats the company from within and blows it up.
00:07:53.600 | We know 2022 is a terrible year.
00:07:56.640 | We've had a recession and a bear market.
00:07:59.520 | With the way the Fed is raising rates, hopefully not to 5% terminal, we're likely going to
00:08:04.520 | have another recession in 2023.
00:08:07.280 | Therefore, maybe a million jobs will be lost over the next one or two years.
00:08:13.000 | Wall Street strategists expect no gains for 2023 in the S&P 500.
00:08:18.560 | The housing market is not looking too good because mortgage rates are so high.
00:08:23.320 | Further, the New York Times stock price is at a three-year low.
00:08:28.700 | So perhaps expecting a guaranteed 5.25% annual raise over the next four or five years while
00:08:35.600 | the industry is struggling and while inflation is heading down is illogical and perhaps dangerous.
00:08:43.520 | Plenty of people in the media are losing their jobs.
00:08:46.680 | Instead of striking, maybe it would be more rational to revert to 2019 level pay given
00:08:52.220 | the New York Times stock price is back to 2019 levels.
00:08:55.960 | Now I know people are going to be angry, especially journalists who are listening to this, and
00:09:00.360 | I'm sorry.
00:09:01.360 | I don't mean to be cruel.
00:09:03.160 | I'm just trying to help everyone think about the mindset of not always expecting to get
00:09:08.120 | paid more and more, even in bad times.
00:09:11.720 | Here's the thing.
00:09:12.900 | It's important to feel fear, to have your back against the wall when you look down,
00:09:18.040 | there's no safety net.
00:09:19.720 | Because when there is no safety net, you need to survive.
00:09:22.820 | You will do everything possible in your power to make more money, side hustle, save more,
00:09:29.080 | invest more, budget more, and so forth.
00:09:32.040 | The sooner you can better align your expectations with the current realities of the world, the
00:09:37.560 | sooner you can make optimal financial decisions.
00:09:41.080 | Just because you are a certain race or work at a certain prestigious organization or went
00:09:45.720 | to some elite university doesn't mean you automatically deserve to make more.
00:09:50.920 | You deserve to make more when you do great work and when the economic conditions are
00:09:56.320 | right.
00:09:57.320 | There's a great saying, "Nothing is given, everything is earned."
00:10:01.920 | This is a very powerful mindset to have.
00:10:04.500 | The best situation for wealth building is to have that guaranteed pay race every single
00:10:10.040 | year for years and years and years, while also adopting the mindset of nothing is given
00:10:15.860 | and everything is earned, pretending you have no guarantees, no safety net.
00:10:21.460 | This way, you have this one-two punch where you have security, but you're hustling because
00:10:26.440 | you're pretending you don't have the security.
00:10:28.920 | As a result, I think you'll end up building way more wealth.
00:10:33.260 | After making one of the biggest financial mistakes at age 30, I had to suffer for the
00:10:37.360 | next 15 years with the consequences of overpaying.
00:10:41.320 | Here's what I did do.
00:10:42.360 | I learned to never expect my income to always go up again.
00:10:47.360 | I developed a strong money mindset that nobody was going to save me.
00:10:51.300 | As soon as I stopped expecting to always get paid and promoted, I began doing everything
00:10:55.840 | I could to generate alternative income streams.
00:10:59.260 | Real estate became my salvation.
00:11:00.840 | I sucked up the pain of managing property because I knew it was my main way to get free
00:11:05.720 | from working forever.
00:11:07.720 | Instead of only modeling, let's say, realistic or blue sky scenarios in my retirement planning
00:11:13.000 | model, I introduced dark sky scenarios by talking about bear markets, what would happen
00:11:19.400 | if I got let go, just realistically bad things that tend to happen to everyone.
00:11:25.600 | By doing so, I forced myself to always be aware of downside risks.
00:11:29.840 | With such awareness, I maintained an elevated saving rate and ensured I had risk-appropriate
00:11:34.960 | asset allocation.
00:11:36.680 | Stopping 80% of my net worth in cryptocurrency, NFTs, or SPACs was never going to happen because
00:11:43.240 | I was aware of dark sky scenarios.
00:11:46.080 | Very important.
00:11:47.080 | And when you know your pay is highly volatile and it goes up and down with the economy and
00:11:52.680 | your performance, you tend to not splurge on things you probably shouldn't buy.
00:11:58.320 | For example, I kept my $8,000 Land Rover Discovery 2 for 10 years until it was worth about $2,000.
00:12:06.280 | And then I traded it in for a Honda Fit that cost about $20,000 and I drove that for three
00:12:11.960 | years.
00:12:13.120 | That was actually a luxury splurge at the time, a brand new car, but I leased it for
00:12:17.120 | my business.
00:12:18.120 | It was like $245 a month, not that big of a deal.
00:12:21.760 | But I used the $80,000 I wanted to spend on a new car in 2005 and invested it in the S&P
00:12:28.040 | 500.
00:12:29.040 | And as a result, that $80,000 is worth over $200,000 now.
00:12:33.400 | And because I realized bear markets happen every seven to 10 years, I decided to keep
00:12:39.240 | financial samurai going without fail.
00:12:42.480 | Three posts a week for 10 years is not easy, but it was a promise I made in 2009 because
00:12:46.800 | I expected good things to happen if I stayed consistent.
00:12:50.520 | I knew that if all my investments failed, at least I would have a financial samurai
00:12:55.400 | spitting out some pennies.
00:12:57.220 | So in conclusion, I say expect nothing and get richer as a result.
00:13:03.400 | I remember talking to my dad maybe 10 years ago and I asked him why he didn't save more,
00:13:10.240 | more money.
00:13:11.240 | I mean, he was doing fine, but it was just one of those personal finance conversations.
00:13:15.040 | And he said, "Well, I had a pension.
00:13:17.040 | I had a government pension, so there was no real need to aggressively save as much as
00:13:21.880 | you're talking about, dear son."
00:13:23.560 | Because for me, in the FIRE community, we talk about saving at least 20% of our after
00:13:29.240 | tax income after contributing the maximum to our tax advantage accounts.
00:13:33.980 | And then I started talking about trying to shoot for a 50% after tax rate, right?
00:13:38.280 | Every year you save 50%, you buy one year of freedom.
00:13:41.660 | It's easy math.
00:13:42.860 | But I think to most people, that seems a little nuts.
00:13:45.860 | And what I realized was that my dad's actions were completely rational.
00:13:50.700 | The US government wasn't going to go under.
00:13:53.380 | If my dad paid off all his debts, which he did by the time he retired and lived a frugal
00:13:58.540 | life, the pension would be more than enough to pay for his lifestyle, his desired lifestyle.
00:14:04.580 | However, if you do not work for the government, if you work for a private sector company,
00:14:11.140 | you work in the private sector, be aware that executives have a duty to shareholders, public
00:14:17.620 | shareholders to try to outperform the market or to get that stock up.
00:14:23.280 | But just as employees have a right to fight for more compensation, executives have a fiduciary
00:14:28.860 | responsibility to their shareholders.
00:14:31.340 | So just be careful.
00:14:32.780 | If you argue too loudly in a tough economic environment, when there's layoffs and a terrible
00:14:39.740 | stock price that you deserve to get paid more and more every year for years and years and
00:14:43.820 | years, you might be putting yourself at risk.
00:14:46.860 | And absolutely, there is strength in numbers with the union.
00:14:50.180 | But as we see industry ride in the media and in other sectors, people are getting let go
00:14:57.140 | because industries go through these down cycles and then they go through these up cycles.
00:15:01.780 | It's just the way the economy is.
00:15:03.700 | It's capitalism and we have to figure out how to deal with that.
00:15:07.260 | And I say the best way to deal with that is by not relying on anybody to have low expectations,
00:15:13.380 | to have no expectations except for the expectations of yourself to work hard and to figure out
00:15:19.700 | how to become anti fragile and build your net worth and passive income streams.
00:15:25.540 | Thanks so much everyone for listening.
00:15:27.020 | Again, my free weekly newsletter subscribed by over 55,000 people is that financial samurai
00:15:32.980 | dot com forward slash news.
00:15:35.300 | If you subscribe this way, you won't miss a thing.
00:15:37.940 | I'll talk about the stock market, real estate, current events, latest posts, and so much
00:15:43.540 | more in a future episode.
00:15:45.700 | I'm going to talk about the importance of doing a cost benefit analysis before making
00:15:50.580 | any financial career or big decision.
00:15:54.660 | I got a fired up comment in my latest post on the second biggest financial mistake you
00:15:59.980 | can ever make.
00:16:01.140 | And I want to address that because it's important.
00:16:04.180 | Click over to the post and read the comment yourself if you're curious.
00:16:07.900 | And finally, if you want to give the gift of education this holiday season, go to financial
00:16:13.180 | samurai dot com forward slash btn t to pick up a copy of my Wall Street Journal bestseller
00:16:19.340 | by this not that how to spend your way to wealth and freedom.
00:16:23.700 | Thanks so much everyone.