00:00:01
welcome to the best interest podcast
00:00:04
where we believe Benjamin Franklin's
00:00:06
advice that an investment in knowledge
00:00:08
pays the best interest both in finances
00:00:11
and in your life every episode teaches
00:00:13
you personal finance and investing in
00:00:16
simple terms now here's your host Jesse
00:00:21
Kramer hello and welcome to episode 48
00:00:25
of the best interest podcast my name is
00:00:27
Jesse Kramer one of the biggest myths
00:00:30
about money is that personal finance is
00:00:32
both complex and difficult complex in
00:00:36
that there are many moving pieces and
00:00:38
there's some math involved difficult in
00:00:40
that it's hard for someone who already
00:00:43
has too much on their mind someone like
00:00:44
you and me probably that it's difficult
00:00:47
for someone to execute a smart efficient
00:00:50
financial plan the truth is personal
00:00:53
finance is not that complex it's
00:00:56
actually quite simple but on the
00:00:59
difficult part now ah that is a more
00:01:01
interesting question so let's break that
00:01:04
down a little bit personal finance I
00:01:07
think is pretty simple in that there's a
00:01:09
small number of easy to understand
00:01:12
foundational rules with a sprinkling a
00:01:14
small amount of math but it's middle
00:01:16
school math at that however personal
00:01:19
finance is not easy because while the
00:01:22
rules themselves are easy to understand
00:01:25
easy to comprehend our very human
00:01:28
shortcomings often get in the way and
00:01:31
those make personal finance habits
00:01:34
pretty difficult to maintain over the
00:01:36
long
00:01:37
run so recently I was at a party and
00:01:40
someone asked me about the best interest
00:01:41
and I gave them my usual answer about
00:01:44
loving to write and loving to write
00:01:46
about personal finance and investing
00:01:48
helping people with their personal
00:01:49
finance and investing questions and a
00:01:51
third person in the conversation piped
00:01:53
up and said you know no offense Jesse
00:01:56
but isn't personal finance pretty simple
00:01:58
you know make a budget spend less than
00:02:00
you earn invest keep fees low you know
00:02:04
once you get past the eight basic rules
00:02:06
or whatever it is then you're done I
00:02:08
don't get how there can be so many blogs
00:02:09
so many books so many podcasts all about
00:02:11
personal finance they're all just
00:02:13
rehashing the same exact thing it was a
00:02:16
great point because yes personal finance
00:02:18
is simple in fact I don't even think
00:02:21
there are eight rules there are just
00:02:23
three the first one spend less than you
00:02:26
earn the second then you should save
00:02:30
invest the difference and then the third
00:02:32
rule create safety nets and we'll get
00:02:35
into what those are really that's it
00:02:37
just three rules that's personal finance
00:02:39
in its simplest form even simple books
00:02:43
out there like the index card which is
00:02:46
premised on nine rules that fit on an
00:02:48
index card they really all play off the
00:02:51
three rules so here's an example you
00:02:53
know the nine rules of the index card
00:02:55
are Rule Number One max out your 401K or
00:02:59
equivalent employee contribution okay
00:03:01
that's my second rule rule number four
00:03:04
of the index card save 20% of your money
00:03:07
great that's my first rule spend less
00:03:09
than you earn so basically everything's
00:03:12
a derivative of either spend less than
00:03:13
you earn invest and save the difference
00:03:16
or create safety nets pretty much every
00:03:19
piece of personal finance advice fits
00:03:22
nicely into one of those three rules so
00:03:24
then why is there all of this content
00:03:26
all these blogs all these books all
00:03:28
these podcasts
00:03:30
there are many reasons why we should all
00:03:31
be learning about better personal
00:03:33
finance principles so I'm going to go
00:03:35
through a few of those for example the
00:03:37
8020 principle so even if three rules my
00:03:40
three rules alone can complete say 80%
00:03:43
of someone's personal finance repertoire
00:03:46
we need more details to fill in the
00:03:48
remaining 20% that's a good reason for
00:03:50
you to read blogs books or listen to
00:03:53
podcasts the next reason the devil's in
00:03:55
the details so how can I spend less
00:03:59
money how can I earn more how should I
00:04:02
invest what's a good insurance premium
00:04:05
or a good insurance policy that's the
00:04:07
real pudding of personal finance and it
00:04:10
needs more explanation than three Simple
00:04:12
Rules good personal finance content
00:04:14
Dives deep into those
00:04:17
details next peeling back the onion you
00:04:20
know Shrek the ogre he famously quipped
00:04:23
ogres are like onions we've got layers
00:04:26
personal finance is no different every
00:04:28
rule in personal Finance has many layers
00:04:30
to it it's subdivided there are
00:04:32
exceptions
00:04:34
explanations and those deserve someone
00:04:37
out there to explain what's going on the
00:04:40
next reason there are differences at the
00:04:42
margins so assuming we agree on the
00:04:45
basics of personal finance there's still
00:04:47
plenty of room for disagreement out at
00:04:50
the margins and lots of personal finance
00:04:52
content lives in that space should you
00:04:55
aim to save 10% of your income 20% 30%
00:04:59
what's a low interest rate what's a high
00:05:02
interest rate how detailed should your
00:05:05
budget be that might be the narcissism
00:05:08
of small differences if you're not
00:05:09
familiar with that it's this idea from
00:05:11
Sigman Freud that says people tend to
00:05:13
have very big arguments about very small
00:05:15
differences of opinion and maybe a lot
00:05:18
of that is going on in personal finance
00:05:20
but I do think it's important to get
00:05:22
into the Nuance get into the margins and
00:05:25
understand the details of these rules
00:05:27
that we're talking about okay a big one
00:05:30
coming up here behavioral shortcomings
00:05:33
even if you can boil down personal
00:05:35
finance to three rules or nine rules or
00:05:38
20 rules whatever the number it is
00:05:40
people still need discipline and
00:05:42
consistency to follow those rules more
00:05:44
and more personal finance content these
00:05:46
days focuses on behavioral Finance
00:05:50
pointing out the all to human
00:05:51
shortcomings that prevent us from
00:05:53
reaching our financial goals the next
00:05:56
reason different voices so there's a
00:05:58
reason guys why Morgan howel is famous
00:06:01
if you haven't heard of him he's the
00:06:03
best known Current financial writer and
00:06:06
there's a reason why he's well-known and
00:06:09
I'm not he's a better writer than me or
00:06:12
at the very least he's got a much
00:06:13
different and more appreciated voice
00:06:16
than me so different voices bring new
00:06:19
life to Old rules and that helps people
00:06:22
learn so a big reason why I love writing
00:06:25
on the best interest I love talking into
00:06:27
this microphone it's not that I'm
00:06:28
inventing new content but it's that I've
00:06:31
got multiple thousands of people who
00:06:33
appreciate my unique voice bringing New
00:06:36
Life to Old personal finance rules the
00:06:40
next idea reinforcement one of my
00:06:43
personal finance friends just passed
00:06:45
100,000 followers on Twitter he focuses
00:06:48
his tweets every single tweet on five
00:06:51
different statements or five different
00:06:54
personal finance ideas that's it every
00:06:57
tweet he sends is a variation on one of
00:06:59
those five ideas while that kind of
00:07:03
content definitely gets stale it also
00:07:05
serves to reinforce his followers
00:07:08
beliefs and we know that confirmation
00:07:10
bias is a powerful stimulant well it's
00:07:12
not my preferred cup of tea I understand
00:07:15
the content strategy and clearly his
00:07:18
audience appreciates it so yes personal
00:07:21
finance is simple but there's a reason
00:07:24
why books blogs podcasts why they're all
00:07:26
thriving there's a reason why a few
00:07:28
thousand of are listening to this so
00:07:30
like Morgan howel I write about things
00:07:33
that I find interesting and I trust that
00:07:35
some of you will find it interesting too
00:07:37
and as long as that's the case I'll keep
00:07:39
coming
00:07:40
[Music]
00:07:49
back so let's apply a simple but not
00:07:52
easy idea to the biggest rule in
00:07:55
Personal Finance in fact I call it the
00:07:57
golden rule of personal finance and
00:07:59
there's a cool side note here this
00:08:01
article about the golden rule of
00:08:03
personal finance it's proof of this
00:08:05
interesting theory in content creation
00:08:07
the theory is that nobody ever knows
00:08:09
when something is going to go viral so I
00:08:12
wrote this post pretty quickly I think I
00:08:14
wrote it back in November I thought it
00:08:16
was pretty basic I just published it
00:08:18
sent it out into the universe and
00:08:20
figured it's something on my mind I'll
00:08:22
I'll see how it does next thing you know
00:08:24
it got shared on a few popular websites
00:08:26
and social media platforms and it had
00:08:29
over 50,000 people read it in a twoe
00:08:31
stretch so that's pretty cool okay the
00:08:35
golden rule of personal finance now
00:08:36
we're not going to start on finance
00:08:38
we're going to start with the Leaning
00:08:39
Tower of Pisa the Leaning Tower of Pisa
00:08:41
has a foundational problem it's 186 ft
00:08:44
tall it weighs
00:08:46
14,500 tons but its foundation is built
00:08:50
only 10 ft deep and it's built into silt
00:08:53
and Clay about 5 years after its
00:08:55
construction this was around the year
00:08:57
1178 ad D the foundation of the Leaning
00:09:01
Tower shifted and the tower quite
00:09:04
famously it leaned oops now every
00:09:07
building needs a strong foundation and
00:09:10
that rule it applies to all buildings of
00:09:12
all sizes at all locations it's truly a
00:09:16
fundamental foundational rule of
00:09:19
structural engineering and that brings
00:09:21
us to a golden rule of personal finance
00:09:23
one that applies to all people at all
00:09:26
levels of income and that rule is spend
00:09:29
less than you earn okay now it's time to
00:09:32
shut off the podcast I get it you get it
00:09:35
we all know this rule I know you think
00:09:38
you know what I'm talking about but in
00:09:40
my ever Growing Experience in personal
00:09:42
finance most people think they know this
00:09:45
idea but have not truly internalized it
00:09:49
it's a foundational rule we too often
00:09:51
ignore you know we know the stories of
00:09:53
former athletes or Hollywood stars who
00:09:56
end up filing for bankruptcy and we
00:09:58
think how is that possible well it's
00:10:01
simple they spent more than they earned
00:10:04
and then we think to ourselves but
00:10:05
surely someone with 100 million dollars
00:10:07
should be able to not spend all their
00:10:10
money right I get it but overspending
00:10:14
Behavior it's the classic slippery slope
00:10:17
just as buildings of all sizes see
00:10:19
foundational issues people across the
00:10:21
wealth Spectrum all across the wealth
00:10:24
spectrum they struggle with
00:10:26
overspending I have a friend of a friend
00:10:29
who played division one football and
00:10:31
eventually made it to the NFL he
00:10:32
actually retired within the last couple
00:10:34
years but his family growing up was dirt
00:10:37
poor very rural and poor and he wrote
00:10:40
this admission that I thought was very
00:10:42
profound so I'm going to start it with
00:10:44
an open quote and I'll end it with an
00:10:46
end quote when I'm done quote we were so
00:10:49
poor there was never much money but the
00:10:52
money that was there it always quickly
00:10:55
disappeared you got used to this idea
00:10:57
that money is scarce and never sticks
00:10:58
around around so whenever I got money as
00:11:00
a kid it was like spend it now or you
00:11:03
might not get another chance to spend it
00:11:05
boom and I had this big list of things I
00:11:07
wanted to spend money on it's like the
00:11:09
perfect storm so now I just want to
00:11:11
spend everything save nothing I don't
00:11:14
trust saving because I've never actually
00:11:16
seen it work end quote so here's a guy
00:11:19
making millions of dollars but his
00:11:21
financial Foundation was only inches
00:11:24
deep not nearly strong enough to support
00:11:26
such a large income and our brains
00:11:29
just like in this example of the NFL
00:11:31
player our brains often work against us
00:11:34
this is a foundational lesson from
00:11:36
behavioral economics we criticize others
00:11:39
for overspending but we find ways to
00:11:41
justify our own similar Behavior we say
00:11:44
if I earned another 20% Then I'd start
00:11:47
saving more money but when that 20%
00:11:49
raise comes we buy clothes that are 20%
00:11:53
softer or buy houses that are 20% bigger
00:11:55
or meals that are 20% more organic the
00:11:59
slope remains slippery all the way down
00:12:02
if you're a global touring music star
00:12:04
partying at the club you justify a
00:12:06
$10,000 bottle of champagne if you're
00:12:09
the heavyweight champion of the world
00:12:10
you justify owning a tiger we all
00:12:13
struggle to say enough no way you say I
00:12:18
just don't get it I'd never own a tiger
00:12:21
well you're not alone I don't get it
00:12:23
either I'm with you but a few weeks ago
00:12:25
Kelly and I my wife and I we spent
00:12:28
about1 $5 on a dinner for two pretty
00:12:31
nice treat right but a big part of the
00:12:34
US population would look at our dinner
00:12:36
and say no way I just don't get it $125
00:12:40
is a full week of groceries or a month
00:12:42
of gas I'd never spend that much on one
00:12:45
meal a smaller segment of the population
00:12:48
would say you call $125 a nice dinner
00:12:51
how quaint my point is overspending and
00:12:55
comparison they happen to all people at
00:12:57
all income levels
00:12:59
we all spend money we all judge others
00:13:02
on what they spend and most of all we
00:13:04
all look at people richer than us and
00:13:07
think if I were them I'd be all set
00:13:09
because I'd never spend money like they
00:13:12
do on that
00:13:13
thing getting back to foundational
00:13:16
fundamentals I don't care what people
00:13:18
spend money on meals cars Tigers
00:13:21
although I'm not sure there's an ethical
00:13:22
way to own a tiger because the key is
00:13:25
spending less than you earn preferably
00:13:28
spending Mone much less than you earn
00:13:30
personally I ensure I'm doing this
00:13:32
through my budget and through net worth
00:13:35
tracking in my experience most people
00:13:37
including myself at times we pay lip
00:13:40
service to the idea of spend less than
00:13:42
you earn don't worry you're only human
00:13:44
it happens to us but if you want to find
00:13:47
financial success you'll eventually have
00:13:49
to back up that lip service with real
00:13:51
action you'll need to dig deep and build
00:13:54
a financial Foundation that supports
00:13:56
your current and future life on the
00:13:59
spending front remind yourself of this
00:14:01
simple truth first advertisers convince
00:14:04
you that buying stuff will make you
00:14:06
happy and second actual psychological
00:14:10
research provides no such evidence that
00:14:12
it will make you happy in fact buying
00:14:15
more stuff might make you unhappy you
00:14:18
want to spend less remind yourself that
00:14:20
you've probably been brain hacked by
00:14:22
advertising I know I have you've been
00:14:25
brain hacked into thinking that more
00:14:26
spending equals more happiness
00:14:29
personally I don't like that I've been
00:14:31
brain hacked I resent it so out of spite
00:14:34
towards advertisers I actively fight my
00:14:36
impulse to spend and if you'll notice I
00:14:40
don't run ads on the best interest I
00:14:42
don't run ads here on the podcast and
00:14:45
one reason is because I don't want
00:14:48
advertisers to brain hack you into
00:14:51
spending more money than you need to
00:14:54
it's a struggle on the personal side
00:14:56
going back to my myself being brained
00:14:58
act I have to dig deep just like digging
00:15:00
a foundation but if you want to build a
00:15:03
strong financial life that's where it
00:15:05
starts a strong Foundation spend less
00:15:08
than you
00:15:09
[Music]
00:15:13
earn one more topic today guys on the
00:15:16
idea of simple and easy personal finance
00:15:19
this idea comes from an article I wrote
00:15:21
recently in January and it's called the
00:15:23
easiest money that investors ignore so
00:15:27
investing is about risk and reward we
00:15:30
know that when investors take more risk
00:15:32
they should demand more reward and one
00:15:35
such risk premium is the concept of ill
00:15:39
liquidity liquid assets are easily
00:15:41
converted to cash stocks are pretty
00:15:44
liquid you can buy or sell them five
00:15:46
days a week on the stock market but real
00:15:49
estate for example is not as liquid as
00:15:51
stocks are it takes weeks months
00:15:53
sometimes even years to finalize a real
00:15:56
estate deal if you own real estate and
00:15:58
you suddenly need to convert it into
00:16:00
cash you can't just do it at the snap of
00:16:02
a finger so investors in those types of
00:16:05
illiquid deals they're taking a risk by
00:16:08
locking up their money in a rigid
00:16:10
investment for an indeterminate time
00:16:12
period that extra risk necessitates a
00:16:15
larger reward this is the so-called
00:16:18
illiquidity premium more reward
00:16:21
compensates more risk it might surprise
00:16:24
you then that liquid assets those that
00:16:27
can be bought or sold quickly that
00:16:29
liquid assets have a major downside too
00:16:32
millions of investors have lost billions
00:16:34
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
00:16:48
so at the worst possible times it's why
00:16:51
Charlie Munger says quote when Warren
00:16:54
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
00:17:14
investments in a lifetime see Munger
00:17:17
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
00:17:42
not reopen it for 5 years end quote 5
00:17:46
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
00:17:55
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
00:19:14
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
00:19:31
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
