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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 48
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of the best interest podcast my name is
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Jesse Kramer one of the biggest myths
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about money is that personal finance is
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both complex and difficult complex in
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that there are many moving pieces and
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there's some math involved difficult in
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that it's hard for someone who already
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has too much on their mind someone like
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you and me probably that it's difficult
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for someone to execute a smart efficient
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financial plan the truth is personal
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finance is not that complex it's
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actually quite simple but on the
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difficult part now ah that is a more
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interesting question so let's break that
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down a little bit personal finance I
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think is pretty simple in that there's a
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small number of easy to understand
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foundational rules with a sprinkling a
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small amount of math but it's middle
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school math at that however personal
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finance is not easy because while the
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rules themselves are easy to understand
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easy to comprehend our very human
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shortcomings often get in the way and
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those make personal finance habits
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pretty difficult to maintain over the
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long
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run so recently I was at a party and
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someone asked me about the best interest
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and I gave them my usual answer about
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loving to write and loving to write
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about personal finance and investing
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helping people with their personal
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finance and investing questions and a
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third person in the conversation piped
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up and said you know no offense Jesse
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but isn't personal finance pretty simple
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you know make a budget spend less than
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you earn invest keep fees low you know
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once you get past the eight basic rules
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or whatever it is then you're done I
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don't get how there can be so many blogs
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so many books so many podcasts all about
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personal finance they're all just
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rehashing the same exact thing it was a
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great point because yes personal finance
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is simple in fact I don't even think
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there are eight rules there are just
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three the first one spend less than you
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earn the second then you should save
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invest the difference and then the third
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rule create safety nets and we'll get
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into what those are really that's it
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just three rules that's personal finance
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in its simplest form even simple books
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out there like the index card which is
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premised on nine rules that fit on an
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index card they really all play off the
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three rules so here's an example you
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know the nine rules of the index card
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are Rule Number One max out your 401K or
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equivalent employee contribution okay
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that's my second rule rule number four
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of the index card save 20% of your money
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great that's my first rule spend less
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than you earn so basically everything's
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a derivative of either spend less than
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you earn invest and save the difference
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or create safety nets pretty much every
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piece of personal finance advice fits
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nicely into one of those three rules so
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then why is there all of this content
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all these blogs all these books all
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these podcasts
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there are many reasons why we should all
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be learning about better personal
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finance principles so I'm going to go
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through a few of those for example the
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8020 principle so even if three rules my
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three rules alone can complete say 80%
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of someone's personal finance repertoire
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we need more details to fill in the
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remaining 20% that's a good reason for
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you to read blogs books or listen to
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podcasts the next reason the devil's in
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the details so how can I spend less
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money how can I earn more how should I
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invest what's a good insurance premium
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or a good insurance policy that's the
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real pudding of personal finance and it
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needs more explanation than three Simple
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Rules good personal finance content
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Dives deep into those
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details next peeling back the onion you
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know Shrek the ogre he famously quipped
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ogres are like onions we've got layers
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personal finance is no different every
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rule in personal Finance has many layers
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to it it's subdivided there are
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exceptions
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explanations and those deserve someone
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out there to explain what's going on the
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next reason there are differences at the
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margins so assuming we agree on the
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basics of personal finance there's still
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plenty of room for disagreement out at
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the margins and lots of personal finance
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content lives in that space should you
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aim to save 10% of your income 20% 30%
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what's a low interest rate what's a high
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interest rate how detailed should your
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budget be that might be the narcissism
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of small differences if you're not
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familiar with that it's this idea from
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Sigman Freud that says people tend to
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have very big arguments about very small
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differences of opinion and maybe a lot
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of that is going on in personal finance
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but I do think it's important to get
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into the Nuance get into the margins and
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understand the details of these rules
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that we're talking about okay a big one
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coming up here behavioral shortcomings
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even if you can boil down personal
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finance to three rules or nine rules or
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20 rules whatever the number it is
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people still need discipline and
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consistency to follow those rules more
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and more personal finance content these
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days focuses on behavioral Finance
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pointing out the all to human
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shortcomings that prevent us from
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reaching our financial goals the next
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reason different voices so there's a
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reason guys why Morgan howel is famous
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if you haven't heard of him he's the
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best known Current financial writer and
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there's a reason why he's well-known and
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I'm not he's a better writer than me or
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at the very least he's got a much
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different and more appreciated voice
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than me so different voices bring new
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life to Old rules and that helps people
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learn so a big reason why I love writing
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on the best interest I love talking into
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this microphone it's not that I'm
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inventing new content but it's that I've
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got multiple thousands of people who
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appreciate my unique voice bringing New
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Life to Old personal finance rules the
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next idea reinforcement one of my
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personal finance friends just passed
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100,000 followers on Twitter he focuses
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his tweets every single tweet on five
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different statements or five different
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personal finance ideas that's it every
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tweet he sends is a variation on one of
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those five ideas while that kind of
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content definitely gets stale it also
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serves to reinforce his followers
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beliefs and we know that confirmation
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bias is a powerful stimulant well it's
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not my preferred cup of tea I understand
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the content strategy and clearly his
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audience appreciates it so yes personal
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finance is simple but there's a reason
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why books blogs podcasts why they're all
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thriving there's a reason why a few
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thousand of are listening to this so
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like Morgan howel I write about things
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that I find interesting and I trust that
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some of you will find it interesting too
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and as long as that's the case I'll keep
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coming
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[Music]
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back so let's apply a simple but not
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easy idea to the biggest rule in
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Personal Finance in fact I call it the
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golden rule of personal finance and
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there's a cool side note here this
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article about the golden rule of
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personal finance it's proof of this
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interesting theory in content creation
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the theory is that nobody ever knows
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when something is going to go viral so I
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wrote this post pretty quickly I think I
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wrote it back in November I thought it
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was pretty basic I just published it
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sent it out into the universe and
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figured it's something on my mind I'll
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I'll see how it does next thing you know
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it got shared on a few popular websites
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and social media platforms and it had
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over 50,000 people read it in a twoe
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stretch so that's pretty cool okay the
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golden rule of personal finance now
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we're not going to start on finance
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we're going to start with the Leaning
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Tower of Pisa the Leaning Tower of Pisa
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has a foundational problem it's 186 ft
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tall it weighs
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14,500 tons but its foundation is built
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only 10 ft deep and it's built into silt
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and Clay about 5 years after its
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construction this was around the year
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1178 ad D the foundation of the Leaning
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Tower shifted and the tower quite
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famously it leaned oops now every
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building needs a strong foundation and
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that rule it applies to all buildings of
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all sizes at all locations it's truly a
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fundamental foundational rule of
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structural engineering and that brings
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us to a golden rule of personal finance
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one that applies to all people at all
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levels of income and that rule is spend
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less than you earn okay now it's time to
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shut off the podcast I get it you get it
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we all know this rule I know you think
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you know what I'm talking about but in
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my ever Growing Experience in personal
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finance most people think they know this
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idea but have not truly internalized it
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it's a foundational rule we too often
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ignore you know we know the stories of
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former athletes or Hollywood stars who
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end up filing for bankruptcy and we
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think how is that possible well it's
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simple they spent more than they earned
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and then we think to ourselves but
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surely someone with 100 million dollars
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should be able to not spend all their
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money right I get it but overspending
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Behavior it's the classic slippery slope
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just as buildings of all sizes see
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foundational issues people across the
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wealth Spectrum all across the wealth
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spectrum they struggle with
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overspending I have a friend of a friend
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who played division one football and
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eventually made it to the NFL he
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actually retired within the last couple
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years but his family growing up was dirt
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poor very rural and poor and he wrote
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this admission that I thought was very
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profound so I'm going to start it with
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an open quote and I'll end it with an
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end quote when I'm done quote we were so
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poor there was never much money but the
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money that was there it always quickly
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disappeared you got used to this idea
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that money is scarce and never sticks
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around around so whenever I got money as
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a kid it was like spend it now or you
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might not get another chance to spend it
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boom and I had this big list of things I
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wanted to spend money on it's like the
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perfect storm so now I just want to
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spend everything save nothing I don't
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trust saving because I've never actually
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seen it work end quote so here's a guy
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making millions of dollars but his
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financial Foundation was only inches
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deep not nearly strong enough to support
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such a large income and our brains
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just like in this example of the NFL
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player our brains often work against us
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this is a foundational lesson from
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behavioral economics we criticize others
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for overspending but we find ways to
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justify our own similar Behavior we say
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if I earned another 20% Then I'd start
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saving more money but when that 20%
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raise comes we buy clothes that are 20%
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softer or buy houses that are 20% bigger
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or meals that are 20% more organic the
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slope remains slippery all the way down
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if you're a global touring music star
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partying at the club you justify a
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$10,000 bottle of champagne if you're
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the heavyweight champion of the world
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you justify owning a tiger we all
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struggle to say enough no way you say I
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just don't get it I'd never own a tiger
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well you're not alone I don't get it
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either I'm with you but a few weeks ago
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Kelly and I my wife and I we spent
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about1 $5 on a dinner for two pretty
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nice treat right but a big part of the
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US population would look at our dinner
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and say no way I just don't get it $125
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is a full week of groceries or a month
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of gas I'd never spend that much on one
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meal a smaller segment of the population
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would say you call $125 a nice dinner
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how quaint my point is overspending and
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comparison they happen to all people at
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all income levels
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we all spend money we all judge others
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on what they spend and most of all we
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all look at people richer than us and
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think if I were them I'd be all set
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because I'd never spend money like they
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do on that
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thing getting back to foundational
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fundamentals I don't care what people
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spend money on meals cars Tigers
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although I'm not sure there's an ethical
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way to own a tiger because the key is
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spending less than you earn preferably
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spending Mone much less than you earn
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personally I ensure I'm doing this
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through my budget and through net worth
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tracking in my experience most people
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including myself at times we pay lip
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service to the idea of spend less than
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you earn don't worry you're only human
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it happens to us but if you want to find
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financial success you'll eventually have
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to back up that lip service with real
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action you'll need to dig deep and build
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a financial Foundation that supports
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your current and future life on the
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spending front remind yourself of this
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simple truth first advertisers convince
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you that buying stuff will make you
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happy and second actual psychological
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research provides no such evidence that
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it will make you happy in fact buying
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more stuff might make you unhappy you
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want to spend less remind yourself that
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you've probably been brain hacked by
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advertising I know I have you've been
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brain hacked into thinking that more
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spending equals more happiness
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personally I don't like that I've been
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brain hacked I resent it so out of spite
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towards advertisers I actively fight my
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impulse to spend and if you'll notice I
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don't run ads on the best interest I
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don't run ads here on the podcast and
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one reason is because I don't want
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advertisers to brain hack you into
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spending more money than you need to
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it's a struggle on the personal side
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going back to my myself being brained
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act I have to dig deep just like digging
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a foundation but if you want to build a
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strong financial life that's where it
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starts a strong Foundation spend less
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than you
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[Music]
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earn one more topic today guys on the
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idea of simple and easy personal finance
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this idea comes from an article I wrote
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recently in January and it's called the
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easiest money that investors ignore so
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investing is about risk and reward we
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know that when investors take more risk
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they should demand more reward and one
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such risk premium is the concept of ill
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liquidity liquid assets are easily
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converted to cash stocks are pretty
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liquid you can buy or sell them five
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days a week on the stock market but real
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estate for example is not as liquid as
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stocks are it takes weeks months
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sometimes even years to finalize a real
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estate deal if you own real estate and
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you suddenly need to convert it into
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cash you can't just do it at the snap of
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a finger so investors in those types of
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illiquid deals they're taking a risk by
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locking up their money in a rigid
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investment for an indeterminate time
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period that extra risk necessitates a
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larger reward this is the so-called
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illiquidity premium more reward
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compensates more risk it might surprise
00:16:24
you then that liquid assets those that
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can be bought or sold quickly that
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liquid assets have a major downside too
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millions of investors have lost billions
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of dollars from this issue and if you're
00:16:36
not careful it might nip you too so
00:16:40
what's the problem with
00:16:41
liquidity simple the mere ability to buy
00:16:45
or sell an asset tempts investors to do
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so at the worst possible times it's why
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Charlie Munger says quote when Warren
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Buffett lectures at Business Schools he
00:16:56
says I could improve your ultimate
00:16:58
Financial Welfare by giving you a ticket
00:17:00
with only 20 slots in it so that you had
00:17:02
20 punches representing all the
00:17:05
Investments that you got to make in a
00:17:07
lifetime and once you'd punch through
00:17:09
the card you couldn't make any more
00:17:11
Investments at all end quote 20
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investments in a lifetime see Munger
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believes that forcing yourself into
00:17:20
illiquidity actually leads to better
00:17:22
long-term outcomes that too much trading
00:17:25
that too much liquidity is a bad thing
00:17:28
and that's why Warren Buffett backs up
00:17:30
what Charlie Munger just said Warren
00:17:32
Buffett's investment approach is quote I
00:17:35
never attempt to make money on the stock
00:17:37
market I buy on the assumption that they
00:17:40
could close the market the next day and
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not reopen it for 5 years end quote 5
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years Buffett completely ignores the
00:17:49
daily liquidity of the stock market
00:17:51
long-term investors make decisions over
00:17:53
years even decades they don't worry
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about days or weeks when asked how long
00:17:58
buff prefers to hold a stock he answers
00:18:01
our favorite holding period is
00:18:04
forever and that's why one of John
00:18:06
bogle's most famous and most repeated
00:18:08
quotes is quote while the interests of
00:18:11
business are served by the aphorism
00:18:13
don't just stand there do something the
00:18:16
interests of investors are served by an
00:18:18
approach that is diametrically opposite
00:18:21
don't do something just stand there end
00:18:25
quote these are legendary investors all
00:18:27
sharing the same idea so maybe we should
00:18:30
follow their lead IL liquidity doesn't
00:18:33
bother Buffett or Munger or Bogle in
00:18:36
fact they view liquidity as an
00:18:39
unnecessary tease most normal investors
00:18:42
like you or I don't understand that fact
00:18:45
too many of us see the stock market as a
00:18:47
volatile Casino where short-term timing
00:18:49
whether it's luck or skill can help us
00:18:51
make a quick say 5% and then you rinse
00:18:54
and repeat that 5% 3% 2% 5% next and you
00:18:58
know you're rich but study after study
00:19:00
shows that short-term investors they
00:19:03
perform poorly compared to the simple
00:19:06
market indices there's a very very
00:19:09
famous study that came out recently from
00:19:11
JP Morgan and it shows diversification
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in the average investor the 20-year
00:19:17
annualized return by asset class from
00:19:19
2001 to 2020 so it shows everything from
00:19:23
you know small caps to high yield to S&P
00:19:26
500 all that stuff S&P 500 7.5% per year
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over 20 years a 6040 balance portfolio
00:19:34
of stocks and bonds 6.4% per year and
00:19:39
yet the average investor over that time
00:19:41
period only saw a 2.9 perear return
00:19:46
balance portfolios are returning 6 or 7%
00:19:49
per year turning 1 million into $3.5
00:19:52
million over the 20-year period but the
00:19:56
average investor only saw a 3 3% annual
00:19:59
return in that period turning 1 million
00:20:01
into 1.77 million that's a huge
00:20:05
difference and it's largely attributable
00:20:07
to average investors making dumb
00:20:09
short-term decisions or as JP Morgan's
00:20:12
team wrote quote why does this happen
00:20:15
because most investors buy and sell too
00:20:17
much without knowing what they're doing
00:20:20
they buy and sell at the wrong time but
00:20:22
they think they are doing the smart
00:20:24
thing end quote it's the liquidity daily
00:20:27
decision to buy or sell hurt our
00:20:30
long-term returns personally I've made
00:20:32
three or four investment decisions in
00:20:34
the past decade all of those decisions
00:20:36
involved buying Diversified Assets in
00:20:38
small increments or dollar cost
00:20:40
averaging and holding them for many
00:20:42
decades I was lucky to have read John
00:20:44
Bogle and Burton M and Warren Buffett
00:20:47
before going down the wrong Rabbit Hole
00:20:49
this is the liquidity premium it only
00:20:52
rewards you if you recognize it and
00:20:54
choose to ignore it and there in lies
00:20:56
the rub can you ignore the the
00:20:58
short-term noise the media headlines the
00:21:00
loudmouth at the office coffee machine
00:21:02
your suddenly Rich neighbor who bought
00:21:04
Tesla options can you ignore them and
00:21:06
hold your simple Investments for the
00:21:08
long term it's easier said than done but
00:21:11
it's the easiest money investors ignore
00:21:14
and there's a big premium if you get it
00:21:16
[Music]
00:21:19
right thanks for tuning in to this
00:21:22
episode of the best interest podcast if
00:21:24
you have a question for Jesse to answer
00:21:26
on a future episode send him an email at
00:21:28
Jesse bestin interest. blog again that's
00:21:32
Jesse bestter interest. blog did you
00:21:35
enjoy the show subscribe rate and review
00:21:38
the podcast wherever you listen this
00:21:40
helps others find the show and invest in
00:21:42
knowledge themselves and we really
00:21:44
appreciate it we'll catch you on the
00:21:46
next episode of the best interest
00:21:49
[Music]
00:21:51
podcast the best interest podcast is a
00:21:53
personal podcast met for education and
00:21:56
entertainment it should not be taken as
00:21:58
Financial advice and is not prescriptive
00:22:00
of your financial
00:22:02
situation