Podcast #836: Data-Backed Answers to Personal Finance Controversies

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Brett McKay: Brett McKay here, and welcome to another edition of The Art of Manliness podcast. Dip your toes in the world of personal finance and you can find plenty of questions that are the subject of endless debate. How much of your income should you save? Is it okay to take on debt? Which is better, renting a home or owning one? When it comes to the stock market, should you buy the dip? On his blog, Of Dollars And Data, my guest cuts through the personal finance noise by finding answers based on numbers rather than conjecture and then converting this research into advice the average person can understand. His name is Nick Maggiulli and is the Chief Operating Officer and data scientist at Ritholtz Wealth Management, as well as the author of Just Keep Buying: Proven Ways to Save Money and Build Your Wealth. Today in the show, Nick explains what the data says about how you should approach the questions I’ve already mentioned. He also shares how to spend your money without feeling guilty by using the 2x rule, the three criteria you should meet before you consider buying a home, the best way to approach the idea of dollar cost averaging and more. Win a conversation with the right mindset to adopt in our volatile economy. After the show’s over, check our show notes today AOM.is/financeanswers.

Alright. Nick Maggiulli, welcome to the show.

Nick Maggiulli: Thanks for having me on.

Brett McKay: So you are the Chief Operating Officer of Ritholtz Wealth Management and you got a new book out called Just Keep Buying: Proven Ways to Save Money and Build Wealth. And this is where you just use a lot of data to show people how to manage or think about their money at different parts of their financial life. But you got an interesting background because you didn’t start off your career in wealth management. How did you get involved with wealth management and personal finance?

Nick Maggiulli: Yeah, so I originally started in litigation consulting, which is a little different from management consulting because it’s backward-looking and very analytical, while management consulting is very forward-looking, trying to improve a business, etcetera. But basically how I got into wealth management was I was like, “Hey, I’m gonna start blogging, I like personal finance and investing, I’m gonna start writing about it,” in the beginning of 2017. It was like a side hustle type thing. I wasn’t really making money on it for… At the beginning. And I met a lot of people through Twitter, just through promoting the blog, and some of those people, I actually went out to a conference in late 2017. Met some of these people in real life who actually had a wealth management firm, and that’s how they kinda brought in leads, was through content marketing. And we hit it off really well. And next thing you know, six months after that in mid 2018, I joined a wealth management firm, which I’m still at today, Ritholtz. So that’s been a fun journey, just doing that, how you can take a side hustle and now, it’s kind of my main hustle too. It’s that they’re both very correlated in that way, so it’s been a very fun journey.

Brett McKay: Well, what’s been your approach to financial writing, ’cause you have a blog, it’s called Of Dollars and Data, so you use a lot of data, so what kind of data are you looking at to help just regular people inform their personal finance decisions?

Nick Maggiulli: A lot of the data I’m using is market data. I’m trying to see like, okay, for example, US stock returns or international stock returns, and just analyzing it in a lot of different ways. Whether we’re doing a timing question, like how often should you be buying. Should you buy the dip? These types of questions that people have. There’s a lot of data there, there’s also data from the Bureau of Labor Statistics, like in consumer expenditures, how people are spending money. All those types of questions, there’s just data out there that you can dig into and just answer questions and see if a lot of the beliefs we have are true or not, and I think in the book, in Just Keep Buying, I basically took my greatest hits of stuff I’ve been writing over the last five years and just put it all into one place and said, “Hey, here’s what people think is true, and here’s what the data says, and here’s what I’ve found.” I think that that’s been really helpful just to kind of go through a lot of our core beliefs in personal finance and investing, and debunk the ones that I don’t think are real.

Brett McKay: So let’s talk about some of these principles and these greatest hits you write about in Just Keep Buying. The first principle you talk about is… It’s kind of in your face, it’s… Saving is for the poor. Investing is for the rich. What do you mean by that? And how are you defining poor and rich?

Nick Maggiulli: Well, in this case, when I say poor, I mean it on both an absolute level and a relative level. So when I say absolute, like if you truly just don’t have any money. You’re below the poverty line. But also for someone who’s like, let’s say late teens, early 20s, maybe they’re starting to work for the first time. I would consider them poor, relative to their future selves. Assuming they’re gonna save and invest diligently, etcetera. And so when I say poor, I’m saying… The issue, I really realized all this… When I was 23 years old, I spent so much time trying to pick my asset allocation, overanalyzing my investments, but at the time when I was 23, I only had a $1000 to my name. So even if I got a 10% return… What’s the math on that? $100 in a year? And yet at the same time, I was going out and blowing $100 by going to dinner or going, getting drinks, Uber home, all that stuff, and there goes $100 like that. So my investment return for an entire year, I could have spent in one night easily when I was living in San Francisco at the time.

So I think when I say saving’s for the poor, it’s like, what do you need to focus on when you’re 23 years old or 22? We’re just kind of getting into the job market, or you don’t have a lot of money, you need to focus on your savings. You need to focus on earning more income so you can actually save money. Spending all this time trying to over-engineer your investment portfolio is mostly wasted time for someone. I’m not saying you shouldn’t learn about it. I think knowledge is always helpful. But I know people that spend so much time trying to analyze the markets, this and that, and it’s like, “Bro, you have $10,000 to invest.” Even if you could get a 10% alpha, that’s $1000, and how many hours did you spend to get that $1000. You probably would have been better off working at McDonalds in the side job. And when you actually analyze the number of hours people put in for something, just to try and get extra return, it’s ridiculous. So I think that’s where that phrase comes from, ’cause when you’re poor and you have a lot of money, you really need to focus on your savings, and then once you actually build up an estate, you have a lot of money or considerable amount of money, then you can start really focusing on your investment.

That’s where every little percentage makes a difference ’cause let’s imagine on $10 million. Imagine at 10 million bucks, a 1% difference. It’s pretty significant versus a 1% difference on a $1000 is nothing, right? So that’s kind of the main takeaway there.

Brett McKay: Gotcha. And when you say saving, like you need to save your money, you’re not saying just put it in a bank account. You’re gonna be investing it, but you’re just not focused on allocation and market… All this weird stuff with… You can do with investing.

Nick Maggiulli: Yeah, yeah, so I apologize. When I say saving’s for the rich; like, you need to save that money, and of course, you have to invest it; like, that’s the premise of the book is like, you’re always investing your money. It’s just you need to focus more on how much you can actually save and invest early on before you start over-optimizing every single thing in your investment portfolio. So I’m not saying allocation doesn’t matter at all; that would be silly, but it’s just like, you don’t need to spend all the hours I spent trying to supercharge my investments when you don’t have a lot of money. Like now that I’m 32, it matters a lot more than when I was 23, right?

Brett McKay: Right.

Nick Maggiulli: So that’s kinda the main takeaway. And the easiest way to… You know, I talk about this in the book in the first chapter, and I think it’s one of the most valuable chapters in there, is just like, think about how much you can save in the next year, if that’s some amount. Let’s say you could save, I don’t know, $5000 in the next year. Okay, well, how much can your investments earn you in the next year? Let’s say you took a… You know, a fair less… You’re gonna get a 5% return. If you had 10,000 bucks, that’s $500, right? So $5000, you could say, versus your investments earn you 500 bucks. Which one’s bigger? The 5000’s bigger. So you need to focus on that, and you need to keep building that, and in reinvesting that money until the investments can earn you as much or more than what you could save yourself. And so you’ll see by the time you’re 40, 50, your investments, if you do this properly, should be able to earn you more than you can save in a year, and that’s how you know you’ve done the game properly, and that’s when you start to really, really focus on your investments once they’re much older and have a lot more wealth.

Brett McKay: Yeah, that’s that crossover point. I remember when I was… Your Money or Your Life. I remember reading that book had a big impact on how I approach finances. And there’s that one point is like, if your… The money you make from… I mean, I guess in Your Money or Your Life, they focused on CDs, which you probably shouldn’t do anymore these days, but if your money… If your CDs were earning more than your income, then you were good.

Nick Maggiulli: Yeah, exactly. So that’s one way you could look at it. I agree, the CDs thing is not really a thing anymore, but… Yeah, I completely agree.

Brett McKay: Yeah, CD ladders; I remember I had a CD ladder in high school. I thought it was… I thought it was savvy. So let’s talk about how much you should save, ’cause I’ve heard all sorts of numbers. I remember when I was a teenager, I had this mentor. And I remember we were driving in a car to some place, and he said, “Brett, if you do these two things, you’re gonna be okay. If you set aside 10% of your money for giving, and then 20% for yourself, save.” And I listened, and I was like, “Oh yeah, this sounds… ” So I’ve done that. What does the data actually say? Like, what’s the appropriate amount to save? Is it 10%? 20%, 30… What is it?

Nick Maggiulli: Let’s see… In the book… I don’t really like giving specific answers to this, because the issue is, our incomes are a lot more variable today than they were when I think a lot of the savings advice was first created. You have to imagine, like… Go back to the 1950s. There’s a one-income household, right? It’s very stable, pension… A lot more stability, so saving was something that was just like, “Oh, I’ll just save 10% of every paycheck, or 20%,” so that’s why a lot of the savings rules kinda came out that way. But now today, we usually have two income earners. We now have side hustles; like, income’s not… Is far more variable, like let’s say if you were an Uber driver or something, like, your income’s gonna vary every time you go out, right? So because incomes varies so much more today, and there’s a lot of data showing this, it’s really hard to say like, “Always save the same amount,” because given different costs and different income, how can you save the same amount every month? It’s just like… It would be very difficult; you’d have to cut back or you’d have to do all sorts of stuff. So my philosophy is just save what you can. And so what that means is the real focus, you should really focus on just building your income over time, and obviously spending what you want to live a comfortable lifestyle, and then anything beyond that is what you save.

Now of course, you’re like, “Well, Nick, I can just keep spending more and more and more.” Of course you can do that, but the point isn’t to lifestyle creep yourself into having no savings, it’s just to be like, “Okay, I need this to live my life and live comfortably,” and then beyond that, you need to build your income. That’s, like… I think it’s the way to… You can… This is the lowest stress way to save money, and also, the data supports it, because there’s no one right savings rule. And the example I give in the book… When I was living in Boston, I had a 40% savings rate after tax savings rate; very high. As soon as I moved to New York, I didn’t have any more roommates, so my rent went up. And also, I took a slight pay cut when I first moved here, so my savings rate went from 40% after tax to 4% after tax. Now I could have done 20% each year, but I’d have been under-saving in Boston, and then I would have been living a really rough lifestyle in New York by trying to save 20% when I didn’t really have money to, you know? So I think there’s times when it’s okay to save more than you might necessarily need to save, and there’s times when you can save less because you’re getting a higher cost or something at the time. So those are the things I would try to focus on.

Brett McKay: Yeah. And you also highlight research that says when you’re save… Like, if you feel like you have to save 20% but it’s not possible, that’s what causes a lot of stress in your… From your money.

Nick Maggiulli: Yeah, and so some people will say, “Well, just take that 20% of your paycheck right away,” and okay, you can do that, but that doesn’t change the fact that, like… What if you don’t have money? Are you gonna go into credit card debt now to do that? I mean, you see the problem? It doesn’t work that way. Savings always have to… I know people say pay yourself first, but realistically, you have to pay yourself last, like at the end. Even though I agree that pay yourself first is a better idea if you can live off the rest of the budget, but in the event where your costs are too high, or for example, inflation’s going up… You know, you used to go, and it used to cost X dollars to fill up your tank. Now it costs X times 10, or times 1.1, 10% higher. So it’s like, what are you gonna do? Well, I paid myself first and I don’t have any extra money to fill up my tank now, right? You see the problem with that. So that’s why you have to save last.

Brett McKay: Okay. So save what you can. Don’t stress out about it, okay. I think that’s really useful for a lot of people. So in the personal finance world, you see debate about which is the best way to build wealth. What are the two basic ways to do that and which do you advocate emphasizing?

Nick Maggiulli: If you’re trying to save more, there’s two options you really have. You either cut your spending, you spend less money, or you raise your income. Now cutting your spending, the issue is this has limits, and I’ve just… I’ve looked into the data, as I talked about earlier, about Bureau of Labor statistics; there’s something called the consumer expenditure survey. And basically, if you look at the households in the bottom 20% or the bottom 40%, there’s just not much to cut. I’ll say here’s how much they spend on rent, here’s how much they spend on food, here’s how much they spend on transportation. Where do you cut? And there’s not a lot of money they’re spending. They’re not really spending that much. They’re not being extravagant. So it’s like, they can’t cut. Once you’re at that level, there’s just a minimum level of spending you need to have to just survive. So the only way out, the only way to kind of save more that’s sustainable is to raise your income, and that’s… The data shows that… I mean, the highest…

The most positive correlated thing with savings rate is income. Those with higher incomes have higher savings rate. It’s so clear in the data. It’s been clear over time. We have data going back to the 1930s that show that, show like even people with more wealth tend to have higher savings rate. People with more income tend to have higher savings rate. I know this seems very obvious, you’re like, “Oh, obviously, if I had way more income, I could save more,” but then why is there this huge contingent of people in the personal finance community still talking about cutting spending? Don’t get me wrong, you can do that, but it’s a short-term solution, and it’s not viable long-term. It’s just… And it’s also far more stressful to always be thinking about every single dollar you’re spending and beating yourself up. It’s not a, I think a mentally healthy way to live.

Brett McKay: Yeah, I think people… The financial advice goes to that, because it’s easy, right? It’s easier to be like, “Well, I’ll just cut Netflix.” I can do that right away and see it when… As opposed to like, “Well, how can I figure out how to make more money?”

Nick Maggiulli: I agree, it’s far harder, but that’s… I mean, this is about sustainability. This is like, if you wanna build something that’s sustainable, takes a long time. I’ve been blogging for over five years now, and I didn’t make really any money for the first three years. I had some Amazon affiliate links. I made like $1000 a year, considering I’m spending 10 hours a week, you know, I was 25, and I’m making $2 an hour for the first three years. And then I started running ads, ’cause then my audience got big enough. Now I make more than that, so it’s obviously been helpful. But that’s an example of like, yeah, it can take a long time, but it can work. And I know there’s far better monetization opportunities than starting a blog. I think I did [chuckle] one of the worst ones out there, if I’m being honest. So just getting a side hustle, things like that, that’s how you can grow your income, teach people, tutoring. There’s all sorts of different things people can do, and especially with the gig economy where you can make extra money, find a skill that you really… Or some expertise you have and sell that. There’s a lot of ways to grow your income, but ultimately, all that income should be used to buy income-producing assets, and those things are gonna start paying you. That’s like stocks, real estate, index funds, things of that sort, that’ll pay you over time. That’s kind of the main goal, I think, of all of this.

Brett McKay: Alright, so find ways to increase your income, ’cause that’ll allow you to save more, because you can save more, you’ll eventually get to that crossover point where your money is working for you.

Nick Maggiulli: Yeah, or it’s always working for you from the very beginning, but yeah, at some point, it’s gonna be… Ideally, in a good year… Let’s imagine like this, in a good year, your investment portfolio should earn you more than you could save in a year, right? You can imagine… Let’s go back to the $10 million person, they have $10 million, a 10% return is a million dollars. Do you know anyone that could save a million dollars after tax in a year? That’s very, very difficult. You have to have a very, very high paying job to do that, right? So… But getting to 10 million is obviously gonna be difficult as well, but you see the problem once you have that wealth, or you see the issue once you have that wealth, it’s much easier to build more wealth, so the keys to get there and just build it over time.

Brett McKay: Yeah, this reminds me, we’ve had Remi sitting on the podcast. And he has this rubric I really like, it’s like instead of thinking about $5 questions, think about $5000 questions. Figure out how you can make $5000 more by taking a side hustle or asking for a raise, instead of thinking about, “Well, if I cut $5 a day from my spending… ” That’s not gonna give you very much.

Nick Maggiulli: Yeah, completely. Ryan is thinking about the big things. And a lot of this is surprising too. When I first started the blog, I wasn’t thinking about any $10,000 questions whatsoever, I was just writing and just doing it ’cause I love it. So I think a lot of times, you have to follow your interest, ’cause I can tell you, “Hey, go do this thing because it’s gonna make you more money,” and like unless you love it or you love the money so much, it’s gonna be really difficult to keep doing that thing, you know? So that’s what I would say, is like, find something that really follow your interests, and if you can find a way to monetize that in some way, whether that’s teaching people or selling a product or something like that, that’s the way to go. And I think it’s… And with the internet economy, it’s so much easier today. Like even places like Gumroad, you can sell digital products to anybody, right? And obviously distribution is the hard part, how do you find people, but that’s why I use Twitter, Reddit, things like that, that can help find people that are like-minded, that might like your products.

Brett McKay: Well, let’s go back to this idea of a lot of personal finance advice out there is about basically making you feel bad about spending money. Everyone’s, where like the avocado toast meme that’s been going on for a couple of years now. But you have a system that allows you to spend money on what you want, what will give you fulfillment and meaning, while at the same time saving. So what is… It’s called the 2x rule. Can you walk us through the 2x rule?

Nick Maggiulli: Yeah, so any time you wanna splurge on something, the 2x rule is basically just like, let’s say you wanna buy a nice pair of dress shoes, right? It’s $400 pair dress shoes. If you consider that a splurge, you would save $400 for the dress shoes, and then you’d save another $400, so 800 in total, 2x, and you take that other 400 and you can invest it in income-producing assets, such as S&P 500 or international stocks or REIT ETF, Real Estate Investment Trust, things like that that’ll earn you income. So if you ever feel that guilt of splurging, this is a way to offset that. And you don’t have to just invest, you can also donate that money too, if you don’t wanna invest. There’s a lot of different ways you can do this. It’s just a simple rule to get over spending guilt, ’cause a lot of times, we guilt ourselves into spending on ourselves just kind of silly. That’s why we work for this money, anyways, or we work so hard for it. Why not spend it on ourselves at times? But because we guilt ourselves so much, I think that’s a simple way to get over that.

But in addition, I think just, people always talk about, “Oh, I wanna maximize my happiness.” I don’t think that’s actually… That’s a decent rule, but I think a better rule is maximizing fulfillment, and I think the difference… A very simple example can show you the difference, I would say if you’re into like rock climbing or mountain climbing, things like that, like climbing Mount Everest is probably a very fulfilling experience. I would say it’s probably not a happy experience. Based on my understanding of those people that go up there and the oxygen deprivation, how physically difficult it is to do that, I would not say you’re in a happy state while you’re there, but I would say it’s a fulfilling thing to go through that journey. So I think that’s the thing to think about, is like, “What’s gonna fulfill me in the long run?” And then spend money on those categories, versus like, “Oh well, this is just gonna bring me happiness,” right? I think they can be correlated, but they’re not always the same. I think just to figure those out, that’s kind of the hard part.

Brett McKay: Yeah, this is another way you can find… Okay, we’ve kind of been knocking… Looking ways to cut spending. But I think that’s a useful rubric. Just focus spending your money on the things that actually bring you fulfillment and then cut spending on the stuff that like, “Man, this just… It might give me a little happiness and fun momentarily, but it really doesn’t do much for me in the long term.” So for me, I don’t really spend a lot of money on clothes. It’s like I’m not a clothes hound. I’m not much of a foodie, so I’m not big into like restaurants, but what I love to spend my money on is workout equipment and books, and I’m okay with that. But I’m sure… For another person it might be, well, they love buying clothes, and it gives it a lot of fulfillment. Well okay, do that instead of spending money on, I don’t know, workout equipment, if that doesn’t bring you joy.

Nick Maggiulli: Yeah, I think that’s another thing too, is we try and say, “Well, the data shows this.” Like… The data is helpful for a lot of things, but there are times when it’s just not gonna be accurate. For example, there’s… You probably heard this before, it’s like, “Oh, people are much happier when they spend money on experiences over things,” I generally agree that’s true, but what happens if that’s only true for extroverts, let’s say. And if extroverts, they estimate extroverts are somewhere between 50 and 70% of the population, so if that’s true, and you ask most people what are they gonna like spending on? They’re gonna say extroverts, are probably gonna say experiences, but what about the introverts that are 30%, they may not like experience as much, they may like things like books or something else, right? I’m just coming up with categories, but you see the point like data’s good, it’s useful for figuring something out and exploring, but you really at the end of the day, have to define what experiences you want or what things you care about, and if that’s like fancy watches or fancy cars or whatever, that’s fine.

I don’t think you should let anyone guilt you for that, if you truly enjoy them, I think it’s just about figuring that out, that’s the hard part, right? Figuring out what you want, know thyself. And this goes back to the Greek ages.

Brett McKay: Right. Yeah, so figure out it’s important to line up you’re spending with your psychological profile, that’s another point you make in that chapter too.

Nick Maggiulli: Yeah, yeah, of course. That’s why I’m saying. There are certain people that… And we can get into this later, but just like even with debt, there are some people that are so debt averse, they don’t want any debt, not even mortgage debt, so they’d rather rent forever. And if that’s who you are, you just hate the feeling of having debt, then yeah, you gotta make sure that your stuff matches or you’re spending and your financial decisions, match your personality.

Brett McKay: We’re gonna take a quick break for a word from our sponsors. And now back to the show. So something I think a lot of younger people are worried about today, they’re in their 20s or their 30s, and they think, Man, I’ve gotta save so much for retirement, people are living longer these days… I might have 30 or 40 years where I’m not working at all, healthcare costs are going up, and so I’m afraid I’m not gonna have enough money when I’m old, but you point out data that says, Yeah, you’re probably gonna be okay. You probably don’t have to worry so much about it. So what do the numbers say there…

Nick Maggiulli: Yeah, so the first thing I just wanted to spell the Smith, everyone thinks that Social Security is gonna run out of money. Like, oh, we’re just gonna get zero. And I think there’s a lot of people, especially millennials, who believe that we’re not gonna get any money on social security, and if you actually look at the reports, like Social Security is definitely not gonna run out of money, even if the trust runs out. Future workers paying into the system, will be able to pay all benefits into at least 70%, so I think benefits will be reduced, they’ll probably raise the retirement age it’s the only way to make the system work. But to think you’re gonna get zero, I think is a little… It’s a little extreme, I just can’t imagine that unless like the US collapses but in that case, who cares about your investment portfolio honestly, you’re gonna need to like figure out a far more… Far bigger problems and… Worry about your retirement, right? So I think that’s the first thing. Just social security some social security will be there, so you really just need to save in excess of whatever your Social Security income is gonna be, and right now for Social Security is about $1500 a month, so it’s not a ton of money it’s 18 grand a year.

But still $1500 a month. That’s not nothing. So assume that’s index to inflation, assume we get that, so then how much you’re spending a month, you just need to save for that access there. So that’s one thing, and if you look at the data, there’s just so much data that retirees don’t spend down their wealth, and so they end up dying with inheritances, so like the average inheritance of someone in their 60s who dies is like 300,000 and someone in their 70s, it’s higher and someone in their 80s, it’s higher, it just keeps going up generally over time, and that was kind of shocking for me ’cause I’m like, Oh, you think old people are spending down their assets, they’re gonna run out of money, and it’s like… It doesn’t always happen, of course, it happens to some people, but most retirees end up dying with some wealth, and so I think that’s something to keep in mind there is people are like, Oh, I’m gonna probably run out of money, it’s like You probably won’t… ’cause you won’t even let yourself… That’s the thing too, is psychologically, a lot of people will just end up not selling down their principal, only one in seven retirees sells down their principal in a given year, which is kind of shocking, most of them just live off their investments fully. So…

If you have $100,000 a portfolio, and let’s say it’s giving you 10% a year, you might as well, just take that 10,000 plus their social security income, and they’re good and they won’t even touch the 100,000 and it’ll just stay there at 100 every single year, basically. So that’s kind of the way to think about it, but that’s kind of what I’ve seen in the data, and that’s why I don’t think people need to worry as much about how much they’re saving for retirement.

Brett McKay: Gotcha. Well, let’s talk about debts, you mentioned some people, they’re just very debt adverse, but what does the data say. Is all debt bad? And if it’s not like when is debt okay?

Nick Maggiulli: Well, debt isn’t good or bad, it’s how you use it, and there are certain circumstances. I think the main principle I have around debt is the people that are best served to use debt are people who don’t need it, which is kind of shocking if you think of how… I can give some extreme examples, but I think they illustrate the point. You would say Elon Musk at one point was the richest man in the world maybe he still is, I don’t know, I don’t do check it every day or whatever, but when he was the richest man in the world. Why would Elon Musk have debt? It’s like, That seems so crazy. He has all this money? Why would he need to borrow… Well, he just basically… He didn’t wanna sell his Tesla shares, so he basically used them as collateral and then borrowed from a bank, so in case something happened and he couldn’t make a payment on his debt, he could just give them some of his Tesla shares that he had as collateral. So that’s an example where he probably got a very, very low interest rate from a bank, and he was able to, as a result of that, not sell his Tesla shares, which are likely appreciating faster than his interest rate, and so because of all that type of stuff, he didn’t need debt, but he took it and used it properly.

I think that’s the same thing. There’s a great book out there called the value of debt in building wealth, and that really kind of changed my world view and looking at debt, now, of course, there are certain types of debt which aren’t favorable. Generally, credit card debt, I don’t agree people should have it, but there are cases where if you’re in a jam and you really don’t have a lot of cash that maybe you need to use that to get out of it, but as long as you know you’re gonna try and find ways to increase your income or maybe cut spending to get out of that hole. That’s important. I don’t want people to be spending frivolously, but there are cases where to be made you use credit card debt. I give an example in the book of these people who are called borrowed savers, for example, they might have a $500 credit card bill and $1000 on their bank account, you’re saying, Well, that makes no sense, like why wouldn’t they just pay off the $500 and just have $500 in cash in their bank and have no credit card debt. Well, the issue is, if they do that, they may not have enough liquidity to take care of an expense that may be $800 that they need to pay right now, and they can’t pay with the credit card, so that’s an example where someone may have just extra liquidity and they need the liquidity, and so they’re using a credit card to pay for that liquidity, so to speak.

So overall, I would say… The times used as when you can earn a higher return than what you’re borrowing at, that’s obvious in cases like… You know, if you can… A business or maybe student loans, depending on what you’re going into, I think that really matters in terms of how it’s gonna affect your life time earnings, but in addition to that, like mortgage that I think is… Most people are okay with as in it affect them psychologically, of all the types of debt out there, that debt really has the lowest psychological… Is it stress profile. So if you have mortgaged it, most people don’t really worry about it or stay up at night, “Oh my Gosh, my mortgage.” They don’t really worry about that. There are some that would, but most people don’t. So that’s just something to keep in mind.

Brett McKay: What kind of debt that keeps people up at night? Do we have any research on it?

Nick Maggiulli: It’s usually financial debt, so credit card debt, debt that’s owed to like friends and family, things like that, like personal debt that you take from people, ’cause it’s harming your social capital, and I think people really are very cognizant of their place in the social hierarchy and all that so that’s the type of debt you wanna try to avoid, that really does keep people up, generally debt of like mortgage doesn’t.

Brett McKay: Yeah.

Nick Maggiulli: So as any type of non-mortgage debt it can affect people. I don’t know how student loans, I actually don’t know the data on student loans in particular, but I just know like financial debt particularly. Credit card debt does stress people out, ’cause the rates are so high, right?

Brett McKay: Yeah, and imagine if you just take a loan from the mob, that will also keep you up at night.

Nick Maggiulli: Yeah, of course. Exactly.

Brett McKay: [laughter]

Nick Maggiulli: Those loan sharks will get a loan for sure.

Brett McKay: Yeah, right. Well, as you mentioned mortgage, let’s talk about one of the biggest financial decisions that a lot of people make, and that’s whether to buy a home or not, and this is another topic in the personal finance world where the debate gets heated, you see different opinions. So what is your take? What did the data say about buying or renting?

Nick Maggiulli: Yeah, so I think if this is… The two topics I dislike writing the most about are this topic here about real estate buying vs renting and taxes, and the reason why is because… Well, I’m trying to give general advice for something that’s so individual and specific to a specific region or area or a person, right? Like in the case of taxes, if you’re single or married, that changes things, right? How many kids you have? Do you have kids? That changes things, all sorts of where is your income coming from? That changes how you… What’s the optimal decision profile? The same thing is true with buying vs renting, so I do have some general principles I follow, but I think overall, I think it’s more of a personal decision and less of a financial decision, and so I know we want to talk about all the financial levers and all that, but I think mostly it’s more of a personal decision. It’s like, Are you ready to do this?

And I give three basic criteria I think you need to hit in order for you to consider owning vs renting, and the first one is, I think you need to be there for at least 10 years, and the reason I say that is transaction cost tend to be on average, around 6%, including everything, if you have to pay a realtor, closing costs, any of that type of stuff, when you add all that up, it’s usually about 6% of the price of the home and the real return on housing since like I don’t know, the early 1900s is something like 0.6% a year. It’s been much higher than that recently, but just through for most of history, homes have gone up by 0.6% a year, so 10 times 0.6 is 6%, that’s how you negate the transaction cost, so if you’re there for 10 years, the transaction cost should be negated out on average.

The second thing is you need to have a stable personal or a professional life, it’s really tough to buy a home as a single person and then, oh, you’re gonna get married and have kids and the home isn’t big enough for them and then you need to sell and pay the transaction costs again, so ideally, you wanna not pay transaction costs, so that’s another thing, so the personal life or a professional life. You don’t wanna go and, “Hey, I just got this really risky job or I’m like, maybe I’m about to start up and my income is gonna be very variable or something,” You don’t wanna take on a bunch of debt where you have to make payments every month and you have no idea of what your pay is gonna be that month, so I think that can also be risky. And lastly, you have to be able to afford it.

And what does afford it mean? We can go back and forth on that, but I think what they consider a qualified mortgage is a debt-to-income ratio that’s less than 43% so… If your monthly debt… Let’s say you make an income of $5,000 a month and your payment, that’s gross income, and your payment your mortgage is $2,000 a month, that’s 40%, right? $2000 over $5000 is 40% So as long as it’s below 43%, it’s qualified. So those are the three things, be there 10 years, stable, professional and personal life, and you can afford it, which is… That’s obviously harder to solve for, but their ways you can look at that, and I think if those things are there, then you should own over renting, otherwise, I would say, “Hey, maybe consider renting a little longer.”

Brett McKay: Right. All of the… Tell me about this approach that I’ve had towards owning a home, I’ve… So I know a lot of people think about buying a home as an investment It’s like, “Well, this is gonna be a store of wealth.” I’ve never really thought of my home as a part of my store of wealth, I bought a home, I treat it like… I’m buying a car or something, Just, this is… It gives me utility, but there’s also all this intangible value that I’d get from owning a house, it’s like where I can build a home and make memories for my kids and I can remodel it and do stuff that I want to it. I’m never really thinking about, well, when I’m 20 years from now, I’m gonna be able to sell this thing and pocket a bunch of change, is that a good way to think about… Should I be thinking of my home as an asset?

Nick Maggiulli: I mean, I agree with you that a lot of the home part is the societal thing, it’s a social thing, it’s the personal values and things you care about, which you mentioned here. I would not necessarily consider a home an investment in a traditional way, because it’s really… Like let’s say your home goes up 2x and value, the question is, Can you make anything off, can you eat that equity? And unless you sell that home and go to a much cheaper area, ’cause think about, if your home went up 2x, probably every other home in your neighborhood went up 2x, I’m assuming you wanna live there for some reason, you like where you live, then it’s like the only way you can cash out that is if you sell in one place and move to a much cheaper area, that’s the only way that it becomes an investment, you can cash out some of that equity, but most people generally live in the same areas, they don’t move too far away, so they’re never gonna be able to see that.

So I don’t like thinking about it as an investment, it can be an investment in certain circumstances, but usually It’ll just kinda keep pace with inflation, so over time, it should keep pace with inflation, which means it’s gonna be either passed down to someone else and they’re gonna really enjoy it and the investment, so it’s not really an investment for you, but it could be an investment for the next generation, your children. If you eventually pass, you pass on the home, and then they either keep it or sell it or whatever they do with it, so that’s where the investment part I think comes in.

Brett McKay: Gotcha. Well, let’s move to… We’ve talked about saving, we’ve talked about debt, we’ve talked about mortgages and big personal finance decisions that people have to make, but let’s talk about, Okay, we’re saving our money and we need to invest it. You’re saying when you’re first starting to save/invest, you shouldn’t spend a lot of time and bandwidth thinking about what’s my allocation? And there is like, I’m gonna maximize this. So what do you recommend for someone who’s just starting out, so either it’s a guy listening and they’re in their 20s, they’re just starting to work, they’ve opened up a 401k, how should they invest their money so they’re not having to actively tinker with it all the time?

Nick Maggiulli: Yeah, I think they should just be broadly diversified into income-producing assets, and so what does that mean? Income-producing assets, it’s a very… You know.

Vague term, but includes things like stocks, bonds, Real Estate, and there’s different ways you can do real estate, whether you’re owning an investment property or you’re buying real estate through like as I mentioned earlier, Real Estate Investment Trust, which you can get through an ETF index fund type thing. I can’t mention specifics… Takers for compliance reasons, but if you search S&P 500 index fund, you can find a very cheap option that will give you broadened access to… Diversified access to the US stock market, so I think that’s the simplest way. You buy those things, you buy them over time, you don’t worry about it, you spend more of your time focusing on your career and save more money, and then as you start to acquire more and more wealth, then you can kind of fine tune and say, “Hey, do I really need to… And you can start saying, “Hey, do I need something like art? Do I wanna have something like crypto? Do I wanna have something… And… Or you can start adding these other things, which may not be income-producing, but I think the bulk of your assets should be in income-producing. I’m not against crypto, I’m not against art…

I own both of those types… Those asset classes, but they represent a minority of my portfolio. So I’d have about 85% to 90% of my assets are what I would consider income-producing in my portfolio, and the other 10% are things like that aren’t income-producing which are crypto, art and I think a handful… I would also… I have some private investments in companies, but I consider… Because they’re like, seed, angel round, I don’t even consider those as income-producing, so I consider them as kind of like a lottery ticket type thing.

Brett McKay: Yeah.

Nick Maggiulli: So that’s also in the non-income producing asset, but could become income-producing one day. So, someone who’s just starting, yeah, go… Just… You can just do some research on like, you know, broadly diversified index funds, there is not… There is not a better… They’re so cheap and they just… They work really well and they build wealth over time.

Brett McKay: Yeah, I think that most of the major investment firms that they have, they offer some sort of index fund that you can get. So focus on that, and then once you are getting that going, then you can do… Use a small percentage of your savings for that fun stuff. Cryptocurrency.

Nick Maggiulli: Mm-hmm.

Brett McKay: Art, etcetera.

Nick Maggiulli: Yeah, of course.

Brett McKay: Yeah. Well, let’s talk about the title of the book that’s called Just Keep Buying, and this is the idea that you should just constantly keep buying and investing in the market, you’re putting your money in income-producing assets. When I first saw this idea of just keep buying, I honestly thought of dollar cost averaging. For those who aren’t familiar with dollar cost averaging, can you explain the common conception of dollar cost averaging, and then I guess maybe how is Just Keep Buying similar and different from that common conception.

Nick Maggiulli: Yeah, so Just Keep Buying is basically dollar cost averaging, it just has the psychological motivation built in, and it’s also… To be honest, it’s catchy, [laughter] what’s dollar cost averaging. It’s fine, it has been there for a while, but Just Keep Buying is just a catchier phrase, I think it would be more eye-popping. But I think one of the issues with the term dollar cost averaging is there’s actually two definitions for it. So my understanding is the original definition, which I think got popularized by Ben Graham, Ben Graham who did securities analysis was the mentor to Warren Buffett. He said like, dollar cost averaging is when you’re just buying over time. So if you have a 401K every two weeks, you get paid, you’re buying… You’re taking some money and you’re buying into the market or whatever, you’re buying… Whatever basket of assets you’re buying into, you’re buying them over time, that’s the original definition of dollar cost averaging. At some point, the second definition came up, which is, imagine you sold a business or you got an inheritance, you have a big chunk of change, just say you have $100,000 to invest. Instead of putting that all into the market now, which people call a lumpsum investment, they say, Oh, you should dollar-cost average that investment and slowly average into the market over time.

I do not like that definition because think about it, it actually means the opposite of the first definition. The first definition of dollar cost averaging means investing as soon as you can with whatever money you have, investing now. The second definition, which is averaging in slowly into the market with a large amount of money, that’s the exact opposite of the other definition. So I think this is so confusing because you have the same phrase being used for two different definitions, and I’ve been on the war path to try and fix this for a long time, trying to tell people to stop using the second definition because that’s kind of a more… That’s a newer definition basically, but it’s not going to change, this will continue to cause confusion. So basically long story short, the good dollar cost averaging, Just Keep Buying… That is the good version of it, the bad version is the one that’s slowly averaged into the market over time because it’s sub-optimal. I show in the book why investing now is far better than averaging in as I call it. So that’s what I would say in terms of understanding dollar cost averaging.

The confusion that you’ll hear when you read… You might read a post that says lumpsum versus dollar cost averaging, that is the second definition, that’s not the definition that I’m using in there… Which is, I think true to history and true to… Of how it was invented or popularized, at least.

Brett McKay: Okay. Can you walk us through… I know you can get in the weeds with this stuff, ’cause I thought that was interesting, ’cause I’ve… When I’ve read about dollar cost averaging, I’ve always seen that second definition as right. Well, if you have… Let’s say you have $100,000 to invest, you inherited $100,000. Well, instead of investing it all at once, you wanna break that up throughout the year because one month the market might be up, and then in another month market might be down the market might be up the next month, and so overall you get your money in at different times. And so it will… Even out or average out, right? With lumpsum investing is like, well, if you invest your money when the market’s high and then it crashes, well, you just… You’ve just lost all that… Does it mean… And I think that’s what people think with dollar cost averaging. So why is that second approach to dollar cost averaging sub-optimal from the lump sum investing?

Nick Maggiulli: So it’s sub-optimal because the market tends to go up over time, and so I actually show in the book, I go through… I go through a bunch of different asset classes, I don’t just use US stocks, I do US stocks, I do gold, I do international stocks, I do Bitcoin even, and I show that if you were to average in, which is the second definition of dollar cost averaging, that underperforms a… Buying now, which is putting all the money in now Lumpsum. 80% of the time and the average under performance for every asset class, it varies, but for the US stocks about 5%. So let’s say, Brett, you and I got paid $100,000 beginning of this year, and I put all the money in in January and you slowly waited in. Now in 2022, you would have been better off because putting in January, the market obviously crashed, and so you would have been better off in that year. But now what if we’d done that in 2021 or 2020 or 2019 or 2018 and every single year before that basically, anyone who put all the money at the beginning of the year, would have won out.

And so if you actually run that throughout history, run this experiment across every year in history, 80% of the time, you’re better off by investing now.

And just think about the premise of investing. The reason you invest is because you want these assets to appreciate and go up. It’s kind of counterintuitive. It seems so silly to me to think like, “Oh, I’m investing ’cause I want this money to grow, but I’m also slowly investing because I think it’s gonna crash” It doesn’t really make sense. Like the premise of investing is you think the market’s gonna go up and it generally does go up. And so because of that increase, you’re generally better off putting the money in now. Now of course, in the small cases, in a handful of cases, 20% of the time when the market declines, right after you put it in, that’s unfortunate, but there’s also a psychological component here, which is like the only time when averaging in or this second form of dollar cost averaging outperforms lump sum is when the market’s falling.

And that’s the exact time when you’re least enthusiastic to put money to work. So imagine, let’s go back to February 2020 markets starting to crash. Let’s say you had a $100,000 to invest. I would’ve lump summed it. Someone else would’ve said, “Hey, I’m gonna start putting it in.” They start putting it in February 2020, March 2020 comes around. The market’s even lower. They may get scared and say, “You know what, I’m gonna wait until the dust settles.” Next thing you know, the market within six months, the market’s back at all time highs. So it’s one of those things where it’s very easy to say this in a vacuum, but once you to the only time that averaging in beats a lump sum investment is when the market’s crashing. And that’s the time when you’re not gonna wanna do it. I mean, as simple as that. So it, I just don’t think the data’s there and I don’t think the psychological motivation’s there either. So I say just lump sum and let the chips fall where they may.

Brett McKay: And I think some people might think, well, I’m gonna lump sum, but I’m gonna wait until like the market goes down. I’m gonna buy the dip.

Nick Maggiulli: Yes.

Brett McKay: Why is buying the dip a fools game?

Nick Maggiulli: With most income producing assets it’s a fools game because they tend to, it’s the same argument I just made. They tend to go up over time. So the issue is when you wait to buy a dip, you’re like, “Hey, I’m gonna wait for a big dip.” By the time that dip comes, the dip value was usually higher than where you could have originally purchased. And I’ll give you an example. I remember I wrote, I actually wrote the blog post called Just Keep Buying back in April, 2017, five years later, the book came out. That was coincidental by chance. Anyways, I wrote this post and people were like, “Oh, the markets are too expensive.” Back in April 2017 people are saying, markets are too expensive. I’m waiting until there’s a crash. Let’s say they waited and waited and waited. The big crash they got was in March, 2020.

They would’ve happened. But even if they had bought on the exact bottom, which of course is impossible to time, but let’s say they actually, they bought on the exact day of the bottom. They still would’ve bought prices that were 7% higher than if they had just bought back in April, 2017. So it’s a perfect example showing you like, you think you’re a genius, like, “Oh, I just bought this dip. I got this big discount.” But you don’t see all the mistakes you made by not buying previously. And so that’s a very extreme example. I literally took the bottom, which is like impossible all time, but let’s say you did time it. And I took this period, three or four years prior. And I show like, even if you had done that even better off just buying overtime. So that’s why buying the dip is a fools errand, ’cause most of the time the dip is still higher than where you could have bought originally most of the time. Of course there are exceptions to this rule. Like great depression’s a great example, but it just, those big dips are rare. They don’t happen that often. And they’re so rare because of that. They’re not that profitable. So you have to get lucky really the only time buy the dip works is when you get really lucky, that’s it.

Brett McKay: Well, I mean, here’s the question I have. Maybe this would be a great one to end on. So I mean, right now I’m feeling confused about what to do, like what’s going on with the economy, there’s inflation and then the market’s volatile and then people might be like, “Why should I buy a house now? Because you know, prices are expensive, but I’ve heard they’re crashing.” And so you hear all these contradictory advice on how to manage your money in this situation. I mean, how are you thinking about it? Like for someone who’s like confused, they’re reading all this stuff like, “Man, what do I, should I spend my money now because inflation might decrease the value of the money in my bank account?” Any advice for people who are feeling confused about what to do with their money in our current situation?

Nick Maggiulli: I mean, there’s this great phrase that goes, history doesn’t always repeat, but it often rhymes. And I think by understanding that this kind of stuff has happened before. I think the ’70s is a great example of this. It’s not exactly the same, but it’s very similar. And just understanding that like we’ve kind of gone through these types of periods before and we’re going to get through it and things will return to some normal, maybe not exactly 2% inflation in what we had in the 2010s, but maybe a lower inflation level, far more stability, things like that. I don’t know when that will happen. That may take a decade. It may take multiple decades, but these types of things will happen and they’ll pass. So I think the thing to realize is just like the more history you know, the more comfortable you feel with what happens in the present because these types of things, as I said, they don’t repeat, but they rhyme in a lot of ways.

And so you’ll see people tend to, you know, human behavior hasn’t changed that much, even though all the inputs are changing. Human behavior is pretty stable. So how people react to things has been stable over time. So I would say keep doing what you’re doing. Obviously, assuming you’re saving money, you’re investing all that type of stuff and stay the course. That’s the most important thing. You don’t wanna start panicking, making a bunch of changes here and cause yourself to go off course, that’s what’s most important. And then if you’re not where you wanna be, find ways to say, “Okay, what can I do over the next year, three years, five years, 10 years to kind of start moving in that direction?” And thinking about planning that out. And that’s, it’s not easy to do. Like I don’t say to perfectly plan your life. It’s very typical to plan your life. Just do what you can and, and see what happens.

Brett McKay: Fantastic. Well, Nick, this has been a great conversation. Where can people go to learn more about the book and your work?

Nick Maggiulli: Yeah. So you can find my book, Just Keep Buying at amazon.com. My website is ofdollarsanddata.com. And also if you wanna DM me on Twitter, my handles @dollarsanddata on all lowercase and on Instagram, it’s @Nick Maggiulli. I try to answer every DM I get. So feel free to send one if you have any questions or anything like that. Thank you.

Brett McKay: All right. Well, Nick Maggiulli, thanks for your time. It’s been a pleasure.

Nick Maggiulli: Appreciate it Brett. Thanks.

Brett McKay: My guest today is Nick Maggiulli. He’s the author of the book, Just Keep Buying it’s available on amazon.com and bookstores everywhere. You can find more information about his work at his website ofdollarsanddata.com. Also check out our show notes at AOM.is/finance answers. Refine links to resources, re delve deeper into this topic.

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