Bogleheads® on Investing Podcast 030 – Sarah Newcomb, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:10.760 | Welcome to Bogle Heads-On Investing, episode number 30.

00:00:14.240 | Today, our special guest is Dr. Sarah Newcombe,

00:00:17.560 | a behavioral economist at Morningstar.

00:00:19.880 | Dr. Newcombe is well-versed in consumer psychology,

00:00:23.640 | economic decision-making, personal money management,

00:00:26.480 | and cognitive and social psychology.

00:00:28.640 | [MUSIC PLAYING]

00:00:38.160 | Hi, everyone.

00:00:38.840 | My name is Rick Ferry, and I'm the host

00:00:40.520 | of Bogle Heads-On Investing.

00:00:42.520 | This episode, as with all episodes,

00:00:44.840 | is brought to you by the John C. Bogle Center

00:00:47.280 | for Financial Literacy, a 501(c)(3) nonprofit organization

00:00:52.780 | that can be found at boglecenter.net.

00:00:56.640 | Today, our special guest is Sarah Newcombe.

00:00:59.440 | Dr. Newcombe is a behavioral economist for Morningstar

00:01:02.800 | and the author of the book Loaded--

00:01:05.120 | Money, Psychology, and How to Get Ahead Without Leaving

00:01:08.240 | Your Values Behind.

00:01:10.320 | I think you're really going to enjoy this podcast.

00:01:13.000 | It focuses on the fear of money.

00:01:16.680 | And even though you may not have a fear of money,

00:01:19.860 | you know people who do.

00:01:21.800 | Today, we're going to find out why that is

00:01:25.400 | and how all people along the economic spectrum

00:01:28.120 | are overcoming their fears.

00:01:30.400 | So with no further ado, let me introduce Sarah Newcombe.

00:01:34.400 | Welcome to the podcast, Sarah.

00:01:36.120 | Thanks, Rick.

00:01:36.800 | Great to be here.

00:01:38.000 | Well, thank you for doing this.

00:01:39.400 | You're an expert on psychology and money.

00:01:43.940 | And today, we're going to be doing a deep dive

00:01:47.720 | into the psychology of people and how they approach money.

00:01:52.560 | Some people are afraid of money.

00:01:54.000 | Some people don't want to deal with money.

00:01:55.960 | And this podcast is devoted to those people who do not

00:02:00.400 | have a good relationship with money,

00:02:02.480 | even though they may have a lot of money.

00:02:05.200 | So Sarah, with that in mind, start the conversation,

00:02:09.280 | if you will, with how you and your background

00:02:12.440 | got to the point where you studied this phenomenon,

00:02:15.200 | the fear of money.

00:02:16.680 | Yeah, for sure.

00:02:18.040 | Well, so one of my favorite definitions of expert

00:02:21.440 | is someone who has made all the mistakes that

00:02:23.880 | can be made in a certain area.

00:02:26.240 | That's how you get to be an expert.

00:02:27.720 | And that is absolutely how I got to be an expert

00:02:30.320 | in financial psychology.

00:02:32.680 | I found myself in my late 20s with a degree in math.

00:02:37.000 | I love numbers.

00:02:38.560 | I will work on logic puzzles and number puzzles

00:02:41.440 | for an inordinate amount of time,

00:02:43.240 | and I have such a good time with it.

00:02:45.000 | And yet, I still, with a degree in math,

00:02:48.840 | could not get my finances together.

00:02:51.520 | And at that point in my life, having grown up

00:02:55.920 | in a situation with no or very little money

00:03:00.240 | and having to put myself through undergraduate school

00:03:03.600 | starting at 24, really starting from zero in survival mode,

00:03:08.840 | I was having to wrestle with my finances.

00:03:12.840 | And you would think that if I could

00:03:14.560 | handle the fundamental theorem of calculus,

00:03:17.000 | then I should have been able to get my finances together.

00:03:20.120 | And I couldn't.

00:03:21.160 | I was still living pretty much hand to mouth,

00:03:23.800 | and I was married with a child with a math degree.

00:03:28.160 | And I thought, this cannot be about numbers.

00:03:31.320 | It just is not about numbers.

00:03:33.480 | And I started to get really curious at that point.

00:03:36.200 | I had been frustrated with money and with my--

00:03:40.200 | what I thought was just an inability

00:03:42.040 | to manage my own money.

00:03:43.760 | I just thought of myself as, I'm not good with money.

00:03:47.040 | And that was part of my identity at that point.

00:03:49.720 | When I started to get curious, I started to think,

00:03:52.200 | wait a minute.

00:03:53.120 | If I can handle calculus, I should

00:03:54.760 | be able to handle money.

00:03:56.520 | What is it that's going on here?

00:03:58.360 | There's something else going on.

00:04:00.720 | So that curiosity-- and it was a combination

00:04:03.560 | of the curiosity, intellectual curiosity,

00:04:06.360 | but also just exhaustion.

00:04:08.360 | Because the reality is that when money is tight,

00:04:12.120 | life is stressful.

00:04:13.320 | And I had spent my entire life up to that point

00:04:16.920 | always in a situation where money was tight,

00:04:20.040 | whether it was my parents' finances or my own.

00:04:22.920 | The stress of not having enough had always

00:04:26.800 | been hanging over me.

00:04:27.960 | And it's exhausting.

00:04:29.160 | And I was tired of it.

00:04:30.240 | I was tired of being poor.

00:04:32.080 | So at 28, I gave it a lot of thought.

00:04:34.920 | And I decided to leverage my math degree

00:04:37.680 | and turn it into an intellectual exercise.

00:04:41.120 | I will learn how the pros do this.

00:04:43.200 | I am going to go to graduate school

00:04:45.520 | for personal financial planning.

00:04:47.480 | I will learn how to master money.

00:04:49.520 | And I will get out of this poverty trap that I'm in.

00:04:54.280 | And so I did.

00:04:55.920 | I started going to Bentley for personal financial planning

00:04:59.120 | and started studying tax and estate planning and portfolio

00:05:04.240 | management and all the basics.

00:05:05.760 | And I found a lot of it to be somewhat boring

00:05:08.480 | because I was hoping for more.

00:05:10.440 | Oh, God, to hear you say that, I can't believe it.

00:05:15.000 | But I was surprised because I thought

00:05:16.640 | that financial planning was going

00:05:17.720 | to be a lot more interesting.

00:05:18.800 | I thought I'd be picking stocks.

00:05:20.120 | I didn't realize I'd be scanning people for their risk profile

00:05:24.160 | and then putting them in one of various buckets based on that.

00:05:28.720 | I thought there'd be more to it.

00:05:30.120 | But what really got me interested in thinking

00:05:33.960 | about money differently was when I took this elective.

00:05:36.800 | It was led by James Grubman.

00:05:39.320 | It was the first class of its kind that we know of.

00:05:42.280 | And it was on psychology in financial planning.

00:05:45.520 | And it just struck me as interesting.

00:05:47.320 | I thought it was good to understand how psychology

00:05:49.960 | connected to financial planning.

00:05:51.880 | And in that class, for the first time,

00:05:55.560 | we did not discuss interest rates or risk or asset

00:05:59.640 | allocation or the capital asset pricing model.

00:06:02.640 | We didn't talk about any of that.

00:06:04.400 | We talked about classism.

00:06:07.440 | And we talked about cultural tensions.

00:06:11.500 | We talked about how each of us has a personal relationship

00:06:15.560 | with money that is largely inherited and usually

00:06:19.000 | unexamined and will then affect the decisions that we

00:06:23.440 | make with our money, whether we are conscious of that or not.

00:06:27.320 | And it was in that class that I started

00:06:29.520 | to really finally get power in my own relationship with money

00:06:33.760 | because I started to examine and then challenge

00:06:37.120 | the deep beliefs I had about money that

00:06:39.880 | had been creating knee-jerk responses around earning

00:06:44.360 | and spending that I had not ever examined before.

00:06:48.120 | And so for me, the light bulb went on.

00:06:50.860 | And I realized my issues with managing money

00:06:54.360 | weren't numeric.

00:06:55.400 | They were psychological.

00:06:56.760 | There were reasons why I hated and feared money.

00:07:00.840 | And that was causing all sorts of unconscious decisions

00:07:07.920 | that I was sabotaging myself financially.

00:07:11.800 | Sarah, you mentioned the word "inherited."

00:07:13.840 | You say you inherited these ideas.

00:07:16.720 | Can you expand on that a little bit?

00:07:19.080 | Yeah, well, so interestingly, another thing

00:07:21.880 | we talked about in this class was the three-generation

00:07:24.980 | problem, the shirtsleeves to shirtsleeves

00:07:27.720 | in three generations, how money and wealth tends

00:07:31.320 | to be built up by one generation,

00:07:33.680 | spent by the next generation, and then the third generation

00:07:36.600 | is left to start over.

00:07:38.280 | Well, my parents, each of them in their own right,

00:07:42.000 | happened to be that third generation.

00:07:44.600 | Their grandparents had great wealth

00:07:47.640 | on both sides of my family.

00:07:49.040 | Their parents inherited that wealth and squandered it.

00:07:52.280 | And they themselves were left to start over.

00:07:55.120 | And so both of my parents had complex relationships

00:07:58.520 | with money that involved a little bit of hostile envy

00:08:02.660 | of those who had it, for lack of a better term,

00:08:05.720 | and some really critical attitudes

00:08:07.720 | toward wealth and the wealthy.

00:08:09.680 | And without ever explicitly saying

00:08:13.400 | that they looked down on the wealthy,

00:08:16.040 | I sure got that message in lots of little ways.

00:08:20.040 | My upbringing was anti-wealth.

00:08:23.240 | There was also a deep religious vein in my upbringing,

00:08:27.400 | very deep religious vein, that glorified poverty

00:08:30.880 | and demonized money as being the root of all evil.

00:08:35.880 | And so there was a fear that I had inherited

00:08:39.360 | that if I were to focus on making money

00:08:42.440 | and focus on financial security as a goal in my own life,

00:08:45.860 | that would mean that I was materialistic and greedy

00:08:48.780 | and therefore failed as a moral human being.

00:08:51.840 | - Wow, wow.

00:08:54.000 | How did you resolve this?

00:08:55.960 | - Well, it wasn't until I started to dig in

00:08:59.060 | and write my own financial story

00:09:01.340 | and start to uncover these things

00:09:03.520 | that helped me have that moment to realize

00:09:06.400 | how unhealthy my own attitudes toward money were

00:09:10.280 | and how that in the natural effect

00:09:14.800 | of that unhealthy relationship with money

00:09:17.160 | was a myriad of bad financial choices.

00:09:19.860 | - I think you sum it up well in your book,

00:09:23.040 | Loaded, Money Psychology and How to Get Ahead

00:09:26.640 | Without Leaving Your Values Behind.

00:09:28.920 | You say in the introduction that you were brought up

00:09:31.800 | with the belief that either you cared about people

00:09:35.840 | or you cared about money.

00:09:37.780 | - There was no in between.

00:09:39.800 | - Yeah, and I don't think I'm the only person

00:09:42.520 | that got that message.

00:09:43.460 | I think that's a message that's rampant out there.

00:09:45.920 | Take our service industries, for example.

00:09:48.280 | People who love serving others, teachers, social workers,

00:09:52.840 | they have notoriously low salaries

00:09:55.520 | and so they're asked to make this choice

00:09:57.680 | between serving people or serving themselves financially.

00:10:01.960 | Because that's there and because we moralize

00:10:04.920 | all these things and we justify our systems to ourselves,

00:10:08.360 | it's become almost a badge of honor among some

00:10:12.560 | to not earn money or not focus on money.

00:10:15.160 | And that was the environment that I grew up in

00:10:18.000 | where the people that I knew and loved and respected

00:10:22.120 | had a deep disrespect for wealth and those who had it.

00:10:25.560 | And I think that it was a cultural defense mechanism

00:10:29.860 | we tend to like to put down the other

00:10:32.360 | in order to feel okay about ourselves.

00:10:34.640 | But this demonizing of wealth really caused me

00:10:39.640 | to fear earning and to fear money and to demonize money.

00:10:44.680 | There was this little distinction I needed

00:10:47.680 | to learn how to make in my mind

00:10:49.360 | where I had conflated money itself,

00:10:52.760 | which is an inanimate object

00:10:55.800 | that you can use to any purpose,

00:10:58.320 | but I had mistaken money itself

00:11:00.720 | and was blaming money itself for the choices

00:11:04.000 | that individual people make with their stores of money.

00:11:07.400 | I looked around and I saw inequality, lots of injustice

00:11:12.400 | and money being used to exploit,

00:11:17.360 | capital being used to exploit.

00:11:19.200 | And it's easy to blame money and the financial system

00:11:23.680 | because it's almost easier to do that than to recognize,

00:11:26.760 | no, there are human actors making choices

00:11:30.000 | and it's more productive to deal with the human actors

00:11:33.240 | and the social systems that we have set up as human actors.

00:11:36.480 | That's where our frustration and our efforts at change

00:11:41.480 | are really actually productive.

00:11:44.280 | But if we just blame money, which a lot of people do,

00:11:48.140 | they just decide not to have anything to do with money

00:11:51.080 | or the financial system.

00:11:52.600 | They just say, well, money corrupts people

00:11:54.620 | and I don't wanna think about money.

00:11:56.200 | I don't wanna be the kind of person that focuses on money.

00:11:59.800 | I wanna focus on something else.

00:12:01.120 | And it may be a very easy decision to make in the choice

00:12:04.560 | or in that moment.

00:12:06.040 | It relieves the psychological pressure in the moment

00:12:09.080 | and you feel better.

00:12:10.440 | But the problem with dismissing the world of money

00:12:13.920 | in that way is that you never learn how to use it

00:12:17.760 | to create the world you want.

00:12:19.760 | And so you are left with fewer resources

00:12:22.360 | to make the world you want.

00:12:23.600 | And I think that's just a self-fulfilling prophecy.

00:12:26.080 | Then the only thing we have is a whole bunch of people

00:12:28.560 | who are materialistic handling all the money.

00:12:31.240 | That's not good for everybody either.

00:12:33.840 | - You took this course.

00:12:35.480 | It was sort of a life-changing course

00:12:38.120 | as you were going through

00:12:38.960 | the personal financial planner master's program.

00:12:42.320 | Where did it go from there?

00:12:44.600 | - Once I was able to recognize the things in my own mind

00:12:48.320 | that had been tripping me up

00:12:50.040 | and keeping me from being comfortable with earning

00:12:52.640 | and managing money.

00:12:54.480 | Then I was able to get my own finances under control.

00:12:59.240 | But like I said, I wasn't really fascinated

00:13:01.760 | by the job of financial planner.

00:13:03.440 | And a lot of people are, I'm not dismissing the job.

00:13:06.080 | I got really curious at that point

00:13:08.080 | about what are the ways I know how I got in my own way.

00:13:13.000 | But could I look at research in general

00:13:16.800 | on consumer psychology and look at how are the ways

00:13:20.640 | that we tend to systematically get in our own way?

00:13:23.920 | And you have to know, you have to remember

00:13:25.440 | that this is 2007, 2008, but I'm thinking about this

00:13:28.200 | and behavioral finance wasn't really a thing yet.

00:13:30.760 | And so this was just me off in my little bubble of my mind

00:13:35.760 | saying, look, I cannot be the only person

00:13:38.560 | who was smart and ambitious and motivated

00:13:41.040 | and fab with money because of unexamined beliefs

00:13:45.400 | that we're getting in my own way.

00:13:47.120 | And so I decided I wanted to pursue a doctorate

00:13:50.360 | where I combined economics and psychology

00:13:54.920 | to really examine the psychological barriers

00:13:59.520 | to sound money management and look at,

00:14:01.840 | do a survey of the literature of what do we know

00:14:04.360 | about how we tend to get in our own way

00:14:07.640 | when it comes to money and then from there,

00:14:11.400 | how we can step out of our own way

00:14:14.280 | and iron out our relationship with money

00:14:16.600 | so that we can be better with it.

00:14:18.880 | - You had this epiphany and you started

00:14:20.840 | really working on this and eventually you ended up

00:14:23.760 | at Morningstar, could you tell us about that?

00:14:27.200 | - Yes, when I left academia with this degree

00:14:32.000 | in psychology and economics where I had focused

00:14:36.640 | on the psychological barriers to sound money management

00:14:39.920 | and specifically financial education

00:14:42.200 | and a real passion to help other people like myself

00:14:45.560 | get out of their own way and get unstuck

00:14:47.880 | so that they could start using their resources

00:14:50.880 | to support the lives they want to live.

00:14:53.080 | So I went to Morningstar because Morningstar

00:14:55.800 | had a subsidiary, Hello Wallet,

00:14:58.600 | which is a personal financial management application.

00:15:01.880 | And the goal there was to try to teach people

00:15:04.600 | who were pre-investors in the saving

00:15:08.320 | or maybe even pre-saving stage of their financial life

00:15:12.000 | how to make those choices and focusing

00:15:14.920 | on trying to get people to think longer term,

00:15:17.520 | contribute to their savings and learn how to invest.

00:15:20.640 | And so my career from there has taken a different arc

00:15:25.440 | than I had originally thought it would,

00:15:27.640 | but I'm still very focused on the principles

00:15:30.320 | of personal financial planning,

00:15:32.880 | really demystifying the complex,

00:15:35.760 | helping people realize that they can take control

00:15:39.200 | of their finances, that it's not too complex

00:15:41.720 | for them to be good enough at it,

00:15:43.680 | and also recognizing not just the simple things

00:15:48.040 | about money management that they need to know

00:15:50.360 | in order to manage it well,

00:15:51.960 | but also how to maybe detect the things

00:15:54.560 | in their own mindset that could be tripping them up

00:15:57.840 | if they don't examine those.

00:16:00.000 | And so this blend of basic money management principles

00:16:04.200 | combined with knowing yourself

00:16:07.840 | and that intersection between your mind

00:16:10.720 | and knowing money and how it works

00:16:12.960 | is that sweet spot for being really good with money.

00:16:16.120 | - There are some studies that show that financial education,

00:16:19.880 | financial literacy doesn't work.

00:16:22.840 | - There's a lot of mixed results

00:16:25.600 | when it comes to the success of financial education programs.

00:16:29.080 | And some people will go so far

00:16:30.600 | as to say financial education doesn't work.

00:16:32.360 | Well, I have to disagree with that

00:16:35.160 | because it's demonstrably true

00:16:37.400 | that when you know more about money,

00:16:39.600 | you do make better decisions with your money.

00:16:42.520 | If learning about money didn't help us make better decisions

00:16:46.120 | then we'd all be sunk.

00:16:47.600 | But what's also true is that if you learn an abstract concept

00:16:52.080 | and you have no way to apply it

00:16:53.840 | and it's not relevant to your life,

00:16:55.280 | you will forget it almost instantly.

00:16:57.520 | And so most financial education transfers knowledge

00:17:01.560 | that is immediately forgotten.

00:17:03.360 | And that's the problem is we're teaching a math class,

00:17:06.840 | we're not teaching a life skills class.

00:17:09.640 | And I think we need to be speaking to people's minds,

00:17:13.800 | not to their wallets, for one thing,

00:17:16.760 | and talking about the financial decisions

00:17:19.240 | that matter to them.

00:17:20.120 | So just in time financial education

00:17:22.560 | has been shown to have some really good results.

00:17:25.120 | And financial advisors do just in time financial education

00:17:28.880 | because people come to you when they have a question,

00:17:31.760 | when they have a decision to make,

00:17:33.320 | they're ready to learn because it's relevant to them.

00:17:35.840 | So just in time financial education is great.

00:17:38.600 | But then where we get tripped up

00:17:40.760 | is that we start teaching the equations

00:17:44.040 | and we start hitting people

00:17:45.040 | with the fire hose of information

00:17:46.800 | that just makes them shut down

00:17:48.040 | because they don't need to know the calculus.

00:17:50.640 | - I completely agree that when someone is ready to learn

00:17:53.040 | that they learn a lot faster.

00:17:54.560 | What I have found true after 30 some odd years of doing this

00:17:58.600 | is that the amount of money you have

00:18:01.440 | doesn't make you any more comfortable working with money.

00:18:05.480 | I don't think that the level of wealth you have

00:18:09.200 | actually addresses the problems that people have.

00:18:12.600 | - No, it definitely doesn't.

00:18:14.280 | And I think that while mindset can contribute

00:18:18.240 | to whether or not you're able to do the things

00:18:21.400 | that help you build wealth,

00:18:22.920 | there is definitely certain factors of mindset

00:18:25.320 | that help you build wealth

00:18:26.520 | and certain factors of mindset

00:18:27.760 | that will stand in your way of building wealth.

00:18:30.440 | But the other part of mindset that I think matters

00:18:32.720 | is just simply confidence.

00:18:34.400 | Confidence with money, confidence with numbers,

00:18:36.760 | and just money is the most taboo topic of conversation

00:18:40.680 | in our culture.

00:18:41.600 | More than sex, more than death, more than politics,

00:18:45.080 | we do not like to talk specifically about money.

00:18:48.760 | - It is difficult for people.

00:18:50.760 | The thing that's coming to mind is this program

00:18:52.920 | that I listened to where a woman had gone

00:18:55.400 | and she wanted to interview people about money

00:18:58.000 | and they were more than willing

00:18:59.440 | until she asked them to actually tell her

00:19:02.520 | how much they made.

00:19:03.640 | And then people got so offended.

00:19:06.000 | It's just something that we don't feel comfortable

00:19:08.920 | talking about.

00:19:10.040 | And it may be that we find it uncouth.

00:19:13.800 | It may be that we just don't understand it well enough

00:19:17.560 | to feel confident talking about it.

00:19:19.720 | For whatever reason, we are pretty clammed up

00:19:22.680 | when it comes to talking about money.

00:19:25.120 | And the result is that most of us end up

00:19:29.160 | with a pretty poor excuse for a financial education.

00:19:33.600 | And so we are left to try to figure all this stuff out

00:19:37.080 | on our own.

00:19:38.320 | And you can be incredibly educated, very smart,

00:19:41.840 | very successful, high earner, high net worth,

00:19:45.160 | and still not understand the basics

00:19:48.400 | and mechanics of money.

00:19:49.760 | And at that point, it can be very embarrassing

00:19:53.240 | to even mention to someone,

00:19:55.640 | who are you gonna tell?

00:19:56.560 | Who are you gonna ask for help?

00:19:58.200 | Financial planners, I think, know very well

00:20:00.960 | that one of their biggest jobs is financial education.

00:20:04.400 | But I think that we really underestimate

00:20:07.640 | the level of financial illiteracy,

00:20:11.240 | even among very talented, smart, educated,

00:20:14.280 | and successful people.

00:20:16.080 | - Let me just tell you a story in this.

00:20:17.680 | I've been a financial advisor for more than 30 years.

00:20:22.560 | And it amazes me when this happens,

00:20:24.880 | but it happens much more frequently

00:20:27.400 | than I would have ever expected.

00:20:29.920 | By the way, as a financial advisor,

00:20:32.640 | there's an old saying

00:20:33.880 | that if you really wanna get to know somebody,

00:20:35.720 | you either marry them or manage their money.

00:20:38.760 | One of them.

00:20:39.600 | (laughs)

00:20:40.440 | And people tell you things.

00:20:42.080 | But I think one of the most interesting things for me

00:20:45.760 | in my career as a financial advisor

00:20:47.520 | is the amount of very wealthy people who say to me,

00:20:51.240 | do I have enough to retire?

00:20:53.240 | Do you think I have enough to retire or can I retire?

00:20:56.000 | And these are not people who don't have a lot of money.

00:21:00.880 | I mean, these people have five, $10 million or more.

00:21:05.880 | They're spending maybe $100,000 a year, maybe.

00:21:10.560 | And the first few times I heard this,

00:21:12.040 | I was taken back.

00:21:13.840 | I would say to myself, can't you do the math?

00:21:16.600 | I mean, if you've got $10 million

00:21:19.840 | and only spending $100,000 a year,

00:21:22.920 | I mean, you gotta live 100 years

00:21:24.960 | if you had made no income, spend all of that money.

00:21:29.000 | I do the math and I said, well, let's look at it.

00:21:30.840 | You've got the X amount of money,

00:21:32.560 | let's divide it by how much you spend it.

00:21:34.520 | And that's how many years this thing will last.

00:21:36.520 | And they say to me, and I'm just amazed in this,

00:21:38.440 | but I hear it all the time.

00:21:39.520 | God, I never looked at it that way.

00:21:41.320 | Yeah, I mean, I really never thought about it that way.

00:21:43.560 | You know, to me, it's like, wow, really?

00:21:45.120 | You've never thought about it that way?

00:21:46.920 | - How did you not do this very simple equation?

00:21:50.000 | Well, the reason they didn't do it

00:21:51.440 | is because no one ever taught them how.

00:21:54.560 | And we know how bad we are

00:21:56.840 | at understanding compound interest, right?

00:21:59.280 | We just don't think that way.

00:22:00.800 | But I think we are really, really bad

00:22:03.120 | at mental math in general.

00:22:05.560 | And a lot of people also are just afraid of numbers.

00:22:07.960 | They just think they are not good with numbers.

00:22:09.840 | Once you give them an equation, it's like white noise.

00:22:12.880 | They just stop, stop thinking, stop listening.

00:22:16.720 | They don't wanna run the numbers.

00:22:18.560 | But one thing that has been shown over and over

00:22:20.720 | is the typical person is pretty bad

00:22:22.840 | at translating a lump sum into an annuitized income.

00:22:27.840 | We're really bad at knowing that relationship.

00:22:31.640 | You know what they need is a rule of thumb.

00:22:34.920 | And I know rules of thumb,

00:22:36.480 | I heard on one of your previous podcasts,

00:22:38.840 | you were saying, "I'm always up against rules of thumb.

00:22:41.440 | "People come in to my office with rules of thumb

00:22:44.040 | "and I need to like fix the rules of thumb in their head."

00:22:48.320 | And the wrong rule of thumb can be very dangerous,

00:22:52.360 | but the right rule of thumb in the right circumstances

00:22:55.920 | can be an incredible cognitive device.

00:23:00.400 | And so the general idea of a rule of thumb,

00:23:05.080 | it's a big idea.

00:23:06.960 | You learn it's flexible knowledge.

00:23:08.840 | You can use it in lots of different circumstances.

00:23:12.280 | It's different from an equation

00:23:14.520 | because an equation you need to really know

00:23:17.120 | when do you use that formula?

00:23:19.040 | What are all the inputs?

00:23:20.320 | How do you do it exactly?

00:23:22.080 | The rule of thumb,

00:23:22.960 | you can bring into lots of different scenarios.

00:23:25.440 | I'm trying to think of just what's a really good,

00:23:28.200 | simple rule of thumb for people.

00:23:29.880 | - Your agent bonds.

00:23:31.440 | - Yeah, you know, something like that.

00:23:34.440 | It's not exact.

00:23:35.680 | Obviously it's not optimized.

00:23:37.280 | It's a starting point and it's a conversation starter.

00:23:41.040 | - Yeah, usually I started by saying ignore it.

00:23:44.360 | So it does come up.

00:23:45.280 | And when it does come up, I say,

00:23:46.640 | "Well, let's talk about why that doesn't apply to you."

00:23:48.720 | But at least it's a starting point.

00:23:50.520 | - So a rule of thumb I love is the rule of 72.

00:23:54.000 | And the reason I love the rule of 72,

00:23:56.960 | you have to understand why we invest.

00:24:00.560 | And we invest because really rough rule of thumb,

00:24:03.680 | but using the rule of 72 under 3% inflation

00:24:07.000 | costs double every 25 years.

00:24:09.440 | Your lifestyle will cost double

00:24:12.160 | what it does today in 25 years.

00:24:14.600 | - But before we go there,

00:24:16.680 | let's just define what the rule of 72 is.

00:24:19.040 | - Yeah, so the rule of 72

00:24:21.600 | is this great little mathematical phenomena

00:24:24.480 | that if you take a growth rate or a shrinking rate,

00:24:28.760 | a growth rate or a diminishing rate,

00:24:30.960 | you divide 72 by the growth rate

00:24:35.960 | and that gives you the number of years

00:24:39.040 | that it will take for an amount to double.

00:24:42.600 | It really just comes down to,

00:24:43.960 | there are a few simple concepts about how money works

00:24:48.960 | that most people don't learn.

00:24:51.560 | - Well, the way that we used to talk about the rule of 72

00:24:54.400 | back in the good old days was that

00:24:56.760 | if you get a 10% return on your money compounded,

00:24:59.600 | it will take 7.2 years to double.

00:25:02.800 | Or if you get a 7.2% rate of return on your money,

00:25:05.400 | it'll take 10 years to double.

00:25:06.960 | So it's like one or the other.

00:25:09.440 | But that was in the good old days

00:25:10.880 | when of course everything went up by 12 or 13% a year.

00:25:13.640 | - Right, I mean, it's flexible, right?

00:25:15.440 | So you can use the rule of 72

00:25:16.920 | to teach the impact of inflation on the cost of living.

00:25:20.840 | 72 divided by three is about 24 point something.

00:25:25.080 | That means that prices double roughly every 25 years,

00:25:29.120 | every 24 point something years.

00:25:30.960 | And so why do we invest?

00:25:33.680 | Because we want to beat inflation.

00:25:35.760 | Not because we want to beat our neighbor

00:25:37.680 | or because we want to beat the market,

00:25:39.440 | but because we want our money to, at the very least,

00:25:42.720 | maintain its value, if not grow in value over time.

00:25:46.760 | That's why you have to invest.

00:25:48.040 | That's why saving alone is not enough

00:25:51.560 | because the dollar's value is constantly being eroded.

00:25:55.320 | - Of course, if you believe that there's going to be

00:25:57.160 | a 2% inflation rate, which is the Federal Reserve target,

00:26:00.760 | then you take two into 72 and you're at 36.

00:26:05.760 | - 36, okay, it's not as bad.

00:26:07.560 | - Well, it becomes really important

00:26:09.720 | if you want to retire early, say in your fifties,

00:26:12.720 | and what is the amount that I can withdraw

00:26:15.320 | off of my portfolio to live happily ever after?

00:26:18.080 | You do have to do this calculation to say,

00:26:21.600 | well, you want to live off of $80,000 a year now,

00:26:25.080 | you'll be needing $160,000 a year

00:26:27.960 | by the time you're in your eighties

00:26:29.520 | to have the same spending.

00:26:31.280 | Now, I wouldn't know, it's questionable whether or not

00:26:32.920 | people actually have the same spending

00:26:35.000 | when they're in their eighties.

00:26:36.440 | - Right, and again, the exactness of the math,

00:26:40.680 | I think when someone is hiring a financial advisor,

00:26:45.200 | a lot of times they want the advisor

00:26:46.800 | to do the exact math for them,

00:26:48.760 | but giving them the rule of thumb

00:26:50.280 | so they can understand the concept,

00:26:52.240 | so they can understand the general macro movements

00:26:55.720 | that are happening with their money,

00:26:57.600 | I think really helps them get a sense

00:27:00.960 | of knowing what's going on.

00:27:02.760 | You can do the equations that get down to the nitty gritty,

00:27:06.960 | but showing them the general relationship

00:27:09.240 | between time and money as it relates to cost of living,

00:27:12.920 | and also as it relates to compound interest,

00:27:16.200 | helps them understand why we're doing what we're doing

00:27:19.800 | and why we're translating something to a future value

00:27:23.520 | rather than the present value.

00:27:24.840 | Why we care so much about inflation.

00:27:26.920 | Why do these things matter?

00:27:28.280 | Because they really affect the bottom line

00:27:30.320 | of what you need to save in order to be prepared

00:27:33.080 | to maintain your lifestyle.

00:27:35.320 | - I'm gonna circle back a little bit.

00:27:36.440 | You talked about having a mindset to build wealth.

00:27:39.320 | So this idea of how much you need

00:27:43.200 | to have a sustainable retirement is one part of it

00:27:47.800 | and getting people to understand how inflation works

00:27:51.080 | and how much money that is

00:27:52.600 | and how much they need to save and so forth.

00:27:54.760 | What other mindsets do people need to build wealth?

00:27:59.760 | - We each tend to have a mental time horizon.

00:28:04.400 | So I'm not talking about your financial time horizon,

00:28:07.440 | just your mental time horizon.

00:28:08.840 | When you think about your money,

00:28:10.400 | how far into the future do you tend to think and plan?

00:28:15.080 | And a lot of people who are investing,

00:28:17.520 | especially long-term investors,

00:28:19.840 | they're thinking 20 or 30 years ahead.

00:28:22.040 | And that's one of the reasons why they are long-term investors

00:28:24.960 | because they have a long-term mindset.

00:28:27.280 | But many, many, many people don't think more

00:28:31.160 | than a few months ahead.

00:28:32.920 | And then other people think just about a year ahead.

00:28:36.040 | When I did a survey, I've done several of these surveys

00:28:39.520 | and what I find is that a good 70% of people

00:28:43.920 | are thinking less than 10 years ahead

00:28:47.080 | when they think about their money.

00:28:49.280 | Less than 10 years ahead,

00:28:51.160 | majority of people, about 70% of people.

00:28:53.760 | What I found was this almost one-to-one relationship

00:28:58.360 | where the further ahead people were thinking

00:29:01.760 | when it came to money,

00:29:03.040 | the more money they had accumulated.

00:29:06.200 | And this relationship was still significant

00:29:09.800 | when I controlled for age, for income,

00:29:13.360 | for financial education and financial literacy.

00:29:17.600 | The point here was that the people who,

00:29:21.600 | there was like a breaking point.

00:29:22.640 | When people who thought 10 years or more ahead

00:29:25.040 | had 10 times more saved.

00:29:27.000 | - Oh, that's interesting, wow.

00:29:29.360 | - Yeah, and what was really interesting

00:29:31.320 | was breaking the results up by income group.

00:29:35.080 | For example, I had a group of people

00:29:36.520 | who were making less than $25,000 a year.

00:29:40.360 | But those who were thinking more than 10 years ahead

00:29:43.680 | had several times their annual income already saved.

00:29:47.960 | But then the people who were thinking

00:29:51.040 | less than 10 years ahead

00:29:52.760 | needed to be making well into six figures

00:29:55.600 | before they were even saving significantly.

00:29:58.280 | And so what was really interesting

00:29:59.680 | is that yes, income matters.

00:30:01.840 | If you just look at savings by income,

00:30:05.000 | yes, people who have higher income do save more.

00:30:08.280 | But if you break that down and you say,

00:30:10.760 | okay, now within each income group,

00:30:13.120 | the people who are thinking far into the future

00:30:15.480 | versus the shorter term thinkers,

00:30:18.080 | short-term thinkers don't save as much.

00:30:20.480 | Long-term thinkers save significantly more

00:30:23.120 | in every income group, every income group.

00:30:27.160 | And so income matters, but mindset matters more.

00:30:32.160 | - We talked about understanding

00:30:34.320 | how inflation can affect what you have.

00:30:36.960 | That's a long-term outlook.

00:30:38.720 | I mean, I just don't think people who think about inflation

00:30:41.080 | and really work it into their equation for retirement,

00:30:43.960 | they have to be looking out more than 10 years.

00:30:47.440 | So it's sort of like they go together in a way.

00:30:50.080 | - Yes, in order to be considering it in the first place.

00:30:52.400 | Like I said, people who are investors

00:30:54.920 | are probably already, especially long-term investors,

00:30:57.120 | are probably already long-term thinkers.

00:30:59.320 | Now let's think about the case of a person

00:31:01.200 | who's an investor, but a short-term thinker.

00:31:03.840 | What kind of investor do you think

00:31:05.760 | that person is more likely to be?

00:31:08.240 | - A Robin Hood investor.

00:31:09.920 | - They're more likely to be speculating

00:31:12.680 | and trying to get rich fast.

00:31:15.040 | They're gonna take on more risk

00:31:16.600 | because there's a link between our mental time horizon

00:31:20.560 | and our discount rate and our patience.

00:31:24.240 | And if you don't, if you're a short-term thinker,

00:31:26.680 | and I say this as someone who,

00:31:28.400 | I am naturally a very short-term thinker.

00:31:30.760 | One of the things I learned

00:31:31.880 | is that some of the root of my own mismanagement of money,

00:31:36.280 | yes, there's the emotional stuff around money,

00:31:38.160 | but I also was a very short-term thinker.

00:31:40.520 | And so short-term thinkers have special challenges

00:31:44.200 | when it comes to building wealth.

00:31:46.080 | And we have to be very, very deliberate and conscious

00:31:50.280 | about retraining our minds

00:31:51.880 | because having a short-term mindset

00:31:53.920 | leads to more impulsiveness, less patience.

00:31:58.000 | You're gonna be more likely to take on higher debt lows,

00:32:01.360 | less likely to save, more likely to overspend.

00:32:05.560 | And when you do invest,

00:32:06.880 | you're gonna be more risk-seeking

00:32:10.120 | because you're impatient about the returns.

00:32:12.760 | And so I think that if there were one aspect of mindset

00:32:16.680 | that is really the wealth killer, it's short-term thinking.

00:32:20.320 | And we tend to be either short-term or long-term thinkers,

00:32:24.320 | but it's not a trait level thing.

00:32:27.520 | It's not character level.

00:32:31.240 | It's more like they're malleable.

00:32:34.360 | They're not always easy to change, but they are malleable.

00:32:37.600 | You can retrain them over time.

00:32:39.640 | And so if you're a short-term thinker,

00:32:43.080 | training yourself to think longer and longer term

00:32:45.960 | is probably the best bottom line,

00:32:48.080 | best thing you could do for yourself and your money.

00:32:50.560 | - Let me talk again about conversations

00:32:52.760 | that I have with clients.

00:32:54.480 | When I run into this short-term thinking

00:32:57.200 | about investing mindset,

00:33:00.200 | I tend to talk with people about their careers

00:33:03.640 | at that point.

00:33:04.480 | I said, you know, you are a physician

00:33:08.280 | or an engineer or a something.

00:33:11.760 | And it wasn't as though you just got up this morning

00:33:15.640 | and decided I'm gonna be a doctor,

00:33:17.480 | I'm gonna be an engineer,

00:33:19.080 | I'm gonna be a lawyer or whatever.

00:33:21.000 | You had to plan this

00:33:22.600 | and you had to do it for a long period of time

00:33:25.640 | to go to undergrad, go to grad school,

00:33:28.280 | medical school, law school,

00:33:29.560 | whatever it is that you did.

00:33:31.400 | And you wanted to get a job with a company

00:33:34.320 | where you were able to use your skills

00:33:37.400 | and do something great for the world and so forth.

00:33:39.840 | And this was a very long-term plan of yours

00:33:42.600 | that had been going on for years and years and years.

00:33:44.360 | And generally people will agree with that.

00:33:46.560 | That's correct.

00:33:47.560 | Then at that point I say,

00:33:49.480 | well, you know, investing is many ways the same way.

00:33:52.080 | It's not like you could decide tomorrow

00:33:53.800 | you're going to be a value investor or a growth investor,

00:33:56.240 | or maybe you're gonna get out of the market.

00:33:57.880 | That's not how it works.

00:33:59.360 | You have to look at investing

00:34:00.600 | just like you look at your career.

00:34:02.080 | It takes years and decades

00:34:05.280 | to get to where it is you want to go.

00:34:07.760 | And I think that formulating

00:34:09.560 | or trying to make a connection

00:34:10.520 | between how long it takes to build a career

00:34:12.920 | and to become successful in a career

00:34:15.640 | to investing in the markets,

00:34:17.600 | I think helps to stretch out

00:34:19.840 | that timeframe that you're speaking about.

00:34:23.320 | That mental time.

00:34:24.160 | You said expectations that, you know,

00:34:26.040 | we're not expecting that if you're a good investor,

00:34:28.560 | you're going to have a thousand percent return

00:34:32.000 | in the first five years.

00:34:33.920 | We're looking at a thousand percent return

00:34:37.480 | over a 25 year period.

00:34:39.880 | One study that was done showed that people with,

00:34:42.600 | you know, more impulsive people,

00:34:44.240 | actually time, actually the pain of waiting is greater.

00:34:48.920 | Time does actually seem to take longer.

00:34:51.840 | So inpatient people literally pay

00:34:54.920 | a higher psychological cost for waiting

00:34:58.240 | than patient people.

00:35:00.320 | And so to me, I think it kind of throws a wrench

00:35:02.920 | in the works of the idea of us being irrational

00:35:07.280 | because actually what's happening

00:35:08.880 | is there's a mental cost benefit analysis going on

00:35:12.320 | and people who are short-term thinkers

00:35:14.360 | pay a higher cost for waiting.

00:35:16.560 | And so therefore their utility equation is totally different

00:35:20.000 | from a person who is patient

00:35:23.560 | and doesn't feel pain

00:35:26.080 | or as much pain when needing to wait.

00:35:29.000 | So when you have a short-term thinking investor,

00:35:31.800 | an investor who has a short-term mindset

00:35:33.920 | or is just a short-term thinker,

00:35:35.760 | you have to be prepared to deal with all the complications

00:35:38.680 | that come with the impulsiveness, the impatience,

00:35:42.600 | and the risk seeking

00:35:45.520 | that goes along with short-term thinking.

00:35:48.360 | And if you have a long-term thinker,

00:35:50.320 | those are the people who are just naturally inclined

00:35:52.960 | to be long-term value investors.

00:35:54.800 | And so they're not gonna give you any trouble.

00:35:57.080 | It's the short-term thinkers

00:35:58.320 | who first have a hard time getting wealth in the first place

00:36:01.080 | and then when they get it,

00:36:02.240 | they have a hard time holding onto it.

00:36:04.440 | - So I've seen some studies on this.

00:36:06.800 | Are women better at this than men?

00:36:08.600 | - Are women better at this than men?

00:36:11.520 | Okay, there are some studies that seem to suggest

00:36:15.000 | that women tend to have a longer term,

00:36:18.120 | tend to tend toward a longer term view.

00:36:20.080 | I don't know that I'm really bought in yet.

00:36:23.440 | I haven't seen enough to really prove to me

00:36:26.240 | that women and men are fundamentally different

00:36:28.640 | when it comes to investing.

00:36:30.880 | I do think that if there's any research that I've seen

00:36:35.880 | that I find meaningful in this area,

00:36:39.480 | it's again in the financial education research.

00:36:42.520 | What we know about financial literacy and gender

00:36:46.560 | is that women score lower on financial literacy tests

00:36:51.240 | than men do globally.

00:36:53.040 | But there's an interesting caveat.

00:36:55.920 | In all these financial literacy questions,

00:36:59.160 | they ask the big five

00:37:00.840 | or the big three financial literacy questions,

00:37:04.240 | which you can look up, they're the same around the world.

00:37:07.400 | But the big five and the big three

00:37:09.360 | allow you to say, "I don't know,"

00:37:12.440 | as an option for every question.

00:37:14.800 | And if you say, "I don't know,"

00:37:16.960 | you will get the question wrong.

00:37:19.640 | So women have lower financial literacy scores,

00:37:23.840 | but are more likely to say they don't know.

00:37:27.120 | - Well, I know that.

00:37:28.800 | Men know it.

00:37:29.840 | I know the answer.

00:37:31.000 | I mean, that's clear.

00:37:32.560 | I mean, a man is not gonna say they don't know.

00:37:34.960 | I mean, we're men.

00:37:36.640 | - But it's interesting that culturally,

00:37:39.680 | the willingness to admit not knowing,

00:37:44.200 | and women are also,

00:37:45.880 | there's some research that I've seen recently

00:37:48.320 | saying that some older women

00:37:50.000 | are more likely to seek out financial advisors

00:37:53.120 | and admit that they need help there.

00:37:55.160 | And so women may be better investors,

00:37:57.360 | partly because of a cultural acceptability

00:38:02.080 | of being able to say, "I don't know, help me out."

00:38:05.080 | - Well, look, I'd like to get into your book a little bit

00:38:06.840 | because you've got some really interesting information

00:38:09.400 | and loaded money psychology

00:38:12.080 | and how to get ahead without leaving your values behind.

00:38:14.640 | And this goes with Maslow's "Higher Order of Needs."

00:38:18.800 | And you've taken this concept

00:38:21.800 | and you've broken it down to personal finance.

00:38:24.520 | I found it fascinating.

00:38:26.120 | Can you go through it with us?

00:38:27.800 | - Yeah, most of what I've studied

00:38:31.320 | and where my knowledge lies

00:38:34.200 | is in the area of learning about money

00:38:36.680 | and financial education, financial literacy.

00:38:39.680 | And so often when in the programs that we have

00:38:42.840 | that teach us about money,

00:38:44.600 | there is a common trope that we hear in

00:38:47.480 | when it comes to budgeting.

00:38:49.120 | And that is, you could probably finish the sentence for me.

00:38:52.000 | You have to know the difference between a want and--

00:38:56.320 | - A need.

00:38:57.800 | - A need, right?

00:38:59.280 | You can hear your grade school teacher saying,

00:39:02.320 | "Okay, to make good financial decisions,

00:39:04.440 | you have to know the difference between a want and a need."

00:39:07.400 | And I hear this all the time in financial education circles

00:39:10.360 | and it makes my skin crawl

00:39:11.760 | because the reality is

00:39:14.000 | that if we really wanna go down that logical route,

00:39:18.040 | then what we're saying is,

00:39:19.520 | if you don't need it to survive,

00:39:22.160 | you can't justify spending money on it.

00:39:24.920 | And I think that's absolutely bogus.

00:39:27.080 | When you think about Maslow's hierarchy, right?

00:39:29.800 | It is not Maslow's hierarchy of wants.

00:39:33.200 | It's Maslow's hierarchy of needs.

00:39:36.360 | Yes, they're a hierarchy.

00:39:37.640 | Yes, you care more about survival

00:39:39.640 | than you do about your emotional wellbeing.

00:39:41.960 | And yet, there are times when we flip

00:39:45.800 | that hierarchy on its head.

00:39:47.720 | Anytime somebody texts while driving,

00:39:51.240 | they're putting their need for connection

00:39:53.920 | ahead of their need for safety.

00:39:56.160 | Anytime that somebody goes out,

00:39:58.040 | instead of putting gas in their car,

00:39:59.760 | they go out for beers with their friends.

00:40:01.800 | They're putting their need for friendship and for fun

00:40:05.080 | ahead of their need for transportation.

00:40:07.320 | We will flip these all the time.

00:40:10.840 | And the fact is that they're all needs.

00:40:13.280 | What really revolutionized money management,

00:40:15.720 | personal money management for me,

00:40:17.880 | was realizing that all of the things

00:40:20.360 | that we do with our money,

00:40:21.320 | whether it's paying our mortgage

00:40:24.160 | or buying a pack of stickers

00:40:26.840 | at a checkout line for our kid,

00:40:29.360 | and even the impulsive decisions,

00:40:31.440 | every one of them can be traced back

00:40:33.520 | to an attempt to meet one of the fundamental human needs.

00:40:38.520 | And all of those can be found on Maslow's hierarchy.

00:40:41.800 | So yes, I can survive without friendship

00:40:45.760 | and love and meaning and spiritual fulfillment.

00:40:48.520 | I can survive without those things.

00:40:50.640 | Do I want to?

00:40:52.320 | No.

00:40:53.280 | So I don't think we should make money management

00:40:57.120 | about only budgeting for the things

00:41:00.000 | that are down at the bottom of Maslow's hierarchy.

00:41:04.120 | What that is basically doing

00:41:05.640 | is turning budgeting into an exercise

00:41:08.680 | in how we're going to feel bad.

00:41:11.560 | Here's how I'm going to deprive myself

00:41:13.800 | of the things that I really want in my life, right?

00:41:16.560 | That's why budgeting feels like a diet.

00:41:18.520 | That's why people hate it.

00:41:19.680 | That's why people make a budget and then can't stick to it

00:41:22.880 | because they're budgeting based on this definition of need

00:41:25.880 | that if you don't need it to survive,

00:41:28.480 | you can't justify spending money on it.

00:41:30.640 | And I think that makes for very unhappy people,

00:41:33.800 | very unfulfilling lives.

00:41:36.120 | And we will not stick to a budget.

00:41:38.680 | Like, yes, yes, the numbers need to work,

00:41:41.720 | but your life needs to work too.

00:41:43.960 | And so the goal I think of healthy money management

00:41:47.240 | is not recognizing the difference between a want and a need.

00:41:50.280 | I think that's the wrong framework.

00:41:52.600 | We need to recognize the difference between a need

00:41:55.800 | and a need can be found on Maslow's hierarchy.

00:41:59.240 | The needs are all human needs.

00:42:02.040 | They're universal human needs.

00:42:03.800 | We all need to matter.

00:42:05.120 | We all need to belong.

00:42:06.360 | We all need a connection and intimacy and solitude

00:42:10.520 | and shelter and food and clothing.

00:42:12.800 | But we need all of these things

00:42:14.240 | in order to thrive as human beings.

00:42:16.360 | And if we only meet our physical needs

00:42:19.680 | at the expense of our emotional and social

00:42:23.240 | and spiritual needs, we will be unfulfilled people.

00:42:26.320 | And so we don't wanna plan our financial lives

00:42:29.600 | in such a way that sets us up to be unfulfilled people.

00:42:33.600 | That's not the point of money management.

00:42:35.840 | That makes the numbers work at the expense of yourself.

00:42:39.760 | But instead, what we want is we want to be more

00:42:43.280 | fully conscious when we plan our budget to say,

00:42:46.560 | how will I meet all of my needs?

00:42:49.240 | My need for connection, my need for a social life,

00:42:51.680 | my need for fun, my need for belonging

00:42:53.680 | and my need for food, shelter and clothing

00:42:55.880 | within the confines of my available resources.

00:43:00.200 | And yes, it's a harder problem to solve,

00:43:03.000 | but you're gonna get a better answer on the other side.

00:43:06.600 | You'll end up with a budget that you can keep

00:43:08.920 | and not only a budget that you can keep,

00:43:10.520 | but one that allows you to enjoy your life now

00:43:14.120 | and in the future.

00:43:15.280 | It's not an exercise in depriving yourself now

00:43:17.920 | so that you can enjoy your life in the future.

00:43:20.400 | It's how do you live the most fulfilling life now

00:43:23.880 | and in the future?

00:43:25.600 | And that's why I think we need to recognize

00:43:28.400 | that Maslow's hierarchy tells us

00:43:31.680 | all of the things that a human needs.

00:43:33.440 | We need self-actualization

00:43:36.760 | as well as food, shelter and clothing.

00:43:39.240 | And so if our budgets aren't allowing us

00:43:41.600 | to be driving for and achieving self-actualization now,

00:43:46.520 | that's not the right budget for us.

00:43:48.200 | - Yeah, it's great.

00:43:49.040 | Good stuff.

00:43:49.920 | You know, it's funny.

00:43:50.760 | I talk with a lot of retirees and they say,

00:43:52.440 | "Well, things get tight and the market goes down.

00:43:55.200 | "We just won't spend as much money.

00:43:56.640 | "We just won't go on vacation anymore

00:43:58.280 | "or go out to eat anymore

00:43:59.360 | "or get a nice bottle of wine anymore."

00:44:00.880 | And I said, "Oh, well, I don't know if that's true or not."

00:44:03.480 | But what you're saying is it's not

00:44:04.920 | because you'll become immediately depressed

00:44:07.280 | by not doing those things.

00:44:08.120 | - Right, right.

00:44:09.360 | And the thing that's really interesting

00:44:11.040 | is once you start to work with your budget,

00:44:13.880 | and I make some suggestions in the book

00:44:16.200 | of how to do a budgeting exercise

00:44:19.520 | where you're reducing expenses

00:44:21.840 | while increasing life satisfaction.

00:44:24.920 | And that's the real beauty of it

00:44:26.800 | is being able to come up with a budget

00:44:28.560 | that meets all of your needs

00:44:30.560 | so that you're really satisfied and thriving

00:44:33.760 | without sabotaging your ability.

00:44:35.720 | Like one of your needs is long-term solvency.

00:44:38.760 | So you can't meet your need for long-term solvency

00:44:42.240 | at the expense of short-term happiness,

00:44:46.080 | but you also can't have short-term happiness

00:44:49.160 | at the expense of long-term solvency.

00:44:50.840 | You have to find solutions where both needs get met.

00:44:54.440 | And it is possible.

00:44:56.120 | It just takes some practice

00:44:58.320 | and a bit of deeper, different kind of thinking

00:45:01.800 | than we're used to when we just make a list of expenses

00:45:05.840 | and make a list of income and expenses.

00:45:09.000 | - Oh, that's great.

00:45:09.840 | The name of the book is called

00:45:10.680 | "Loaded Money Psychology and How to Get Ahead

00:45:12.560 | "Without Leaving Your Values Behind."

00:45:14.800 | Sarah, I got a couple more questions for you.

00:45:16.920 | And I run into this all the time,

00:45:19.520 | and it is with people who just can't stop working.

00:45:23.440 | They just continue to feel like they have to work,

00:45:28.440 | even though they know they have enough money,

00:45:30.080 | even though they know they can retire.

00:45:31.960 | They still put in 50, 60 hours a week.

00:45:34.800 | They do wanna cut back, but they can't cut back.

00:45:37.400 | They just feel like if they cut back,

00:45:39.360 | the whole world is gonna collapse.

00:45:41.240 | They're going to lose all their money.

00:45:44.040 | What, first of all, what is this called?

00:45:46.080 | - I like to call them the worried wealthy.

00:45:48.760 | - Okay.

00:45:50.000 | And how do you solve this problem?

00:45:51.720 | Because I run into it quite often.

00:45:53.880 | - I worked on a framework a year or so back

00:45:56.240 | on financial mindset.

00:45:57.920 | And what I was really trying to drive at

00:46:00.840 | is a model that can sort of place people

00:46:04.120 | in how healthy is your financial mindset?

00:46:07.920 | And there were a couple of key factors

00:46:10.640 | that contributed to financial well-being.

00:46:14.080 | First of all, you gotta understand

00:46:16.000 | that there's two axes to financial well-being.

00:46:19.920 | Economic, so yes, you have to have assets,

00:46:23.720 | but there's also the emotional aspect

00:46:26.320 | of financial well-being.

00:46:28.000 | And so if you think about this as an X, Y axis,

00:46:31.080 | you can have people that are very high on the economic part,

00:46:35.080 | but low on emotional well-being.

00:46:36.920 | So they're stressed, they're worried,

00:46:39.680 | they're anxious, they feel helpless,

00:46:42.200 | but they have plenty of assets.

00:46:43.960 | And you can also have people on the other extreme

00:46:46.480 | that are feeling completely satisfied and happy

00:46:49.800 | and carefree, but they have no assets at all.

00:46:52.480 | And both of those extremes are unhealthy.

00:46:55.880 | One, because you're at risk

00:46:57.240 | of complete catastrophic financial failure

00:46:59.840 | if you have no solvency and you're carefree about it.

00:47:03.880 | And two, if you have plenty of economic stability,

00:47:07.760 | but no life satisfaction, what good is your money anyway?

00:47:11.160 | So the goal of wealth is not to be wealthy.

00:47:15.480 | The goal of wealth is to be happy.

00:47:17.480 | I mean, I love Brian Portnoy's "Funded Contentment."

00:47:20.160 | That's what it's all about.

00:47:21.560 | So if you don't have the contentment,

00:47:23.280 | even once you have the funding, there's something wrong.

00:47:26.280 | So I like to refer to this as the worried wealthy.

00:47:29.160 | These are people who would be high on the economic scale,

00:47:33.560 | low on the wellbeing scale.

00:47:35.120 | And the drivers that I have found are really linked

00:47:38.280 | to the emotional side of financial wellbeing

00:47:41.120 | are two things.

00:47:42.480 | Number one is locus of control.

00:47:46.120 | And that's just a scientific way of saying,

00:47:48.280 | where do you believe the control in your life is centered?

00:47:52.200 | So people who have an internal locus of control

00:47:55.000 | are the people who say, I create my financial destiny.

00:47:58.640 | I'm in the driver's seat.

00:48:00.200 | I can make it happen.

00:48:02.080 | I'm the one in control.

00:48:03.920 | People with an external locus of control

00:48:06.280 | believe that forces outside themselves

00:48:09.080 | control their financial future and wellbeing.

00:48:12.160 | Imagine a graph where you've got people grouped

00:48:15.480 | in different income groups from like 25,000 a year

00:48:19.640 | all the way up to 150 plus a year.

00:48:23.800 | And you just ask them,

00:48:26.360 | which statement do you most agree with?

00:48:29.280 | Either I control my financial destiny

00:48:32.200 | or I have very little control over my financial future.

00:48:36.760 | So I asked people to tell me which statement

00:48:39.160 | they most agreed with.

00:48:40.880 | And then I looked at their emotional wellbeing

00:48:44.680 | with respect to money.

00:48:45.720 | So how often were they feeling stressed, angry,

00:48:50.240 | sad or helpless?

00:48:52.680 | How often were they feeling joy, peace,

00:48:55.760 | satisfaction and pride with respect to their money?

00:48:59.080 | And what I found was across the board,

00:49:01.840 | people who feel that they are in control

00:49:04.800 | of their financial future were generally feeling

00:49:07.920 | pretty good about their finances,

00:49:10.000 | regardless of which income group they were in,

00:49:12.920 | they felt more positive than negative emotions

00:49:16.160 | with respect to money.

00:49:17.520 | But regardless of income,

00:49:20.800 | people who felt that external forces

00:49:24.880 | were really in the driver's seat of their financial life,

00:49:27.760 | it didn't matter how much money they were making,

00:49:29.760 | they were feeling more stress than peace,

00:49:32.720 | more depression than satisfaction,

00:49:35.600 | more helplessness than pride, et cetera, et cetera.

00:49:38.720 | - And this had nothing to do with how much wealth

00:49:40.360 | they actually had.

00:49:42.160 | - Yeah, this was just whether or not they felt

00:49:44.800 | they were in the driver's seat

00:49:46.320 | of their own financial future or not.

00:49:49.160 | So this sense of being able to,

00:49:52.480 | having a sense of personal control

00:49:54.520 | over your own financial life.

00:49:56.680 | And you see this in entrepreneurs.

00:49:58.600 | They can make millions, lose millions and bounce back.

00:50:02.080 | And what do they say?

00:50:02.920 | I did it once, I can do it again.

00:50:04.880 | And they're right.

00:50:05.800 | They believe they can go and do it again

00:50:07.680 | because that's an internal locus of control.

00:50:10.200 | Whereas the people who are the worried wealthy,

00:50:12.360 | they feel out of control.

00:50:13.720 | They're what if thinking.

00:50:15.600 | There are so many what ifs that go on in their mind.

00:50:18.200 | And the thing is, the things we can scare ourselves with,

00:50:21.480 | there's no amount of money that can make you feel safe

00:50:24.320 | if you're gonna what if yourself all the time.

00:50:26.800 | - Interesting.

00:50:27.640 | I speak with a lot of physicians

00:50:28.800 | and a lot of them are always worried about

00:50:32.160 | Medicare repayment and the health of the medical industry.

00:50:35.200 | And they're worried so much of that.

00:50:37.880 | It really kind of surprises me.

00:50:39.320 | But now the way you explain it.

00:50:40.920 | - Their attention, yeah.

00:50:42.040 | Their attention is on what they can't control.

00:50:44.480 | - That's correct, yeah.

00:50:45.320 | - Large macro trends that they can't control.

00:50:48.480 | And if your attention is focused

00:50:50.560 | on the things you can't control, you will feel worried.

00:50:53.880 | But if your attention is focused

00:50:55.440 | on the things that you can control,

00:50:57.280 | you'll feel more peaceful.

00:50:58.600 | Or alternately, if you can do what Jim Grubman calls

00:51:03.600 | turning the what if into a so what.

00:51:07.200 | Where you say, okay, what if it really did

00:51:10.480 | all go down the toilet?

00:51:11.840 | What would you do then?

00:51:12.960 | Let's talk about that.

00:51:14.160 | What would we do?

00:51:15.800 | And sometimes getting people to take that extra step

00:51:19.120 | past the big nebulous catastrophe in their mind

00:51:23.640 | to, okay, let's assume that happened.

00:51:25.440 | Let's assume it all went away.

00:51:28.280 | What would you do?

00:51:29.200 | - Right, good point.

00:51:30.200 | - How would you rebuild?

00:51:31.360 | Where would you go?

00:51:32.320 | And one of the things that I think is really comforting

00:51:35.720 | for people when they do this exercise is to recognize

00:51:38.720 | that the thing that really matters to them

00:51:41.600 | is that even if they lost all their money,

00:51:43.840 | the people who loved them would still love them.

00:51:46.600 | - Yes, correct.

00:51:47.440 | - I know that that sounds really simplistic,

00:51:49.720 | but it's so real.

00:51:51.640 | So much of what we're really afraid of losing

00:51:54.520 | is our sense of belonging.

00:51:56.440 | - Let me ask one last question and wrap it up today.

00:51:58.960 | We're in the middle of COVID.

00:52:00.360 | We have a lot of young people who are just getting started

00:52:02.800 | who have lost their job, can't find jobs.

00:52:05.960 | Or they fear losing their job.

00:52:07.520 | They fear that the economy is not coming back.

00:52:10.320 | But they're out there, they're working at this.

00:52:14.240 | What kind of advice would you give to them?

00:52:16.240 | - I would say, honestly,

00:52:17.840 | if you're looking at a 40, 50 year time horizon,

00:52:20.920 | you are looking at being on the cusp

00:52:22.840 | of an entirely new economy.

00:52:24.760 | How is that not extremely exciting?

00:52:28.600 | A lot of uncertainty, but also very exciting.

00:52:31.040 | And I think as hard as it is to trust your gut

00:52:34.200 | when you're young, I think really,

00:52:37.200 | if you're looking on, if you're on the job market

00:52:40.400 | or you're thinking about,

00:52:41.760 | what do you wanna do for a career?

00:52:43.280 | Or how do you want, if you're just starting investing,

00:52:46.200 | this is an interesting time.

00:52:48.240 | There's a lot that we don't know right now,

00:52:50.080 | but we do know a few things on the very macro level.

00:52:54.720 | And we know the economy of 30 years from now

00:52:58.000 | must be lower carbon.

00:53:00.760 | So investment decisions and career decisions

00:53:05.760 | and real estate purchase decisions and things like that.

00:53:11.120 | I mean, we're at a point, a moment in history

00:53:13.880 | where there are a couple things that we can say

00:53:16.840 | we know about the future economy.

00:53:19.640 | And I think that makes it a very exciting time

00:53:22.560 | to be a long-term investor,

00:53:24.000 | whether you're investing in a career or assets.

00:53:28.000 | But in terms of the day-to-day,

00:53:30.600 | what do I do to make ends meet right now?

00:53:33.520 | I think that we need to relax the pressure

00:53:37.520 | we put on ourselves to be hugely independent at all times.

00:53:42.600 | And right now is a time when people are coming together

00:53:45.440 | and family groups are helping support each other

00:53:48.640 | and friend groups are coming together to support each other.

00:53:52.560 | And I think that the economics of communities

00:53:55.440 | is gonna become more and more something

00:53:57.840 | that we hear about and think about.

00:53:59.440 | So I would say, look to your community,

00:54:02.280 | your social and economic network,

00:54:05.640 | and be looking for how you can contribute to that

00:54:10.600 | and make that both efficient, but also satisfying.

00:54:15.600 | Because I think it's our small communities and tribes

00:54:19.760 | that are gonna see us through this really weird time.

00:54:24.760 | - Well, Sarah, thank you for contributing

00:54:27.600 | to the Bogleheads community with your wisdom

00:54:30.680 | and your experience.

00:54:31.520 | It's been a really interesting discussion

00:54:34.520 | and I greatly appreciate you being on the show.

00:54:36.920 | - Thank you so much.

00:54:38.520 | - This concludes episode 30 of Bogleheads on Investing.

00:54:42.640 | I'm your host, Rick Ferry.

00:54:44.920 | Join us each month to hear a new special guest.

00:54:48.240 | In the meantime, visit bogleheads.org

00:54:51.600 | and the Bogleheads Wiki.

00:54:53.360 | Participate in the forum and help others find the forum.

00:54:57.600 | Thanks for listening.

00:54:58.600 | (upbeat music)

00:55:01.180 | (upbeat music)

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00:55:08.920 | [BLANK_AUDIO]

Bogleheads® on Investing Podcast 030 – Sarah Newcomb, host Rick Ferri (audio only)

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