Clint Murphy 00:03
Welcome to the pursuit of learning podcast. I’m your host, Clint Murphy. My goal is for each of us to grow personally, professionally, and financially, one conversation at a time. To do that, we will have conversations with subject matter experts across a variety of modalities. My job as your host, will be to dig out those golden nuggets of wisdom that will facilitate our growth. Join me on this pursuit. Money is one of the favorite things that I love to talk about what you could probably tell listening to the show today I had the pleasure to talk to Sam Dogen, author of The Financial Samurai, one of the most widely read financial independence blogs on the internet. We go into all things money on this show and talk about his book Buy This, Not That: How to Spend Your Way to Wealth and Freedom. If money is as important to you as it is to me, this is a show that you are not going to want to miss. Good morning Financial Samurai. Can you give our listeners a brief overview of your story path? And what brings us to a conversation on your book Buy This Not That today. Good morning,

Sam Dogen 01:40
I started Financial Samurai in July 2009. Right during the bottom of the global financial crisis. And we could be heading back there, but maybe maybe not. I started the site because I wanted to figure out something else to do after 13 years, well, at that time, 10 years in finance. I was kind of getting bored, I was worried about getting laid off. And it just wasn’t, the finance industry just wasn’t in my heart anymore. So I wanted to do something else. And I wanted to connect with other people who were also going through difficult financial times. And now over 13 years later, I’m still doing it.

Clint Murphy 02:16
And what you write about on Financial Samurai is financial literacy and financial freedom. The challenge being financial freedom means something different to all of us. Can you share what your definition is, and why you think this is such an important concept for every listener?

Sam Dogen 02:35
Well, I think financial freedom means generating enough passive income or semi passive income to cover your basic living expenses. Everybody has different levels of living expenses. But you know, once you got your basics covered food, clothing, shelter, education for your children, if you have any, take care of your parents, if you have any, you’re good to go. You can then take risks, to do more things, to do what you want. And essentially, you know, we all have a certain level of time here on this earth. We don’t know how long and one of the reasons why I wanted to achieve financial independence sooner rather than later was so that just in case, something were to happen to me, I would be able to hedge, get out and live the life that I want. So I wouldn’t have to live and look back with regret.

Clint Murphy 03:16
Love it. And there are a couple of terms in there. We’ll dive right into and educate the listener so the rest of the conversation makes sense to them. You talked about passive income. For the listeners who don’t know what that is, what is passive income, and what are some of your favorite ways two or three ways to generate passive income.

Sam Dogen 03:36
Passive income is just income you can make without having to do any work. Wouldn’t that be nice? Right? I think the best split is between about 70% passive, 30% active because you always want to do something purposeful that generates money because it feels rewarding. It feels meaningful, but the passive income examples include investing in dividend stocks, investing in rental properties, investing. What else anything from bonds, municipal bonds, CDs, anything that generates income passively. And the way I look at it, is there’s different levels of passive income. Some of the stuff like owning physical rental properties is semi passive, because something will always break. There will always be tenant issues, turnover, but you could generate more income than let’s say, buying an S&P 500 index which only generates let’s say a 1.8% yield. Whereas your rental property yield could be like 7, 8, 10%.

Clint Murphy 04:34
And so when it comes to real estate, you have a bit of a different take than what a lot of investors write about with real estate. You’re very big on the heartland of America. Can you share some of your thoughts on why that may be the area of real estate that appreciates more than the traditional? Let’s call it coastal or blue states that have traditionally been knee high appreciation, real estate cities.

Sam Dogen 05:04
Well, the thesis, I wrote about it in 2016. And the idea is that thanks to technology, more people will disperse across the country, find lower cost areas to live. And then the coastal cities will see a slow dispersion of those people. And it was going well, and then the pandemic hit right in 2020. And there was a huge acceleration of dispersion into the heartland, the Sunbelt, lower cost areas, because why does San Francisco, New York City, Boston, Washington, DC, Los Angeles need to have a monopoly on technology, finance, and media, right. And so the pandemic has really accelerated that. And I think that’s going to continue, because it’s already you know, putting the genie back in the bottle working from home is here to stay forever, at least in a hybrid form. And I think people are going to just gradually want to arbitrage the opportunity to save money, live in a less crowded area, and then slowly build more friends in these new areas, start families, it’s going to be a multi generational thing. And that’s why I think I want to invest in that. This is probably like a 30 decade trend of investing in Heartland real estate. Because I think a lot of times, we investors look at the minutia too much. You know, once we buy this, buy, sell that, this stock that stock, but I think you got it, instead, invest in trends, focus on big, sweeping long term trends. Just get on that bus, and then the direction will be good, then you’re gonna be good as well.

Clint Murphy 06:33
You’re talking a bit there about your diving into the analysis paralysis that we tend to have as investors, and you have a general rule of thumb that tells us when we should act on a decision without having all the information, can you talk a bit about that, Sam, and how much of the information do you have to have before you pull the trigger,

Sam Dogen 06:53
I have a 70/30 decision making framework, you can say it’s a philosophy, where if you believe there’s a 70% chance or greater, that the decision you’re going to make is the right one, go for it, go for it with 100% conviction, while having the humility and understanding knowing that maybe 30% of the time, you’re gonna get it wrong. But so long as you don’t die, so long was not catastrophic, you’re going to learn from your mistakes, and get better. So I use the 70/30 philosophy, everything from investing, to whether to get married, to starting a new job, to go into school. If you think about life, there’s no 100% certainties or anything, but if you wait for 100% certainty to make a decision, a lot of things are going to pass you by. And then you’re going to look back with regret. And regret is something that I really, really don’t like.

Clint Murphy 07:45
So you work from a regret minimization method. Do you do any visualizations to say, here’s Sam at 70, for example, writing a letter back to me, telling me what he regrets? Or do you have any other exercises that you do to minimize the regrets that you may have in life down the road?

Sam Dogen 08:04
Oh, yeah, as a writer, you know, I write three posts a week on Financial Samurai. It’s been every week since July 2009, without fail. And it really makes me think about past, present, future subjects every single week. And I make sure to be very intentional with what I’m writing about. Because if I miss something, because life is busy, life is crazy. I don’t want to, a year from now, do my review, review year end review article, right and say, oh, man, I didn’t do that. I didn’t check off what I wanted to do. And then I’d regret it. So yeah, regret, it’s it’s such an interesting fuel for me, because I know that there’s like self inflicted regret, and the sense that you just didn’t study hard or you didn’t, you know, look around the corner before getting eaten by a bear, you know, things like that. You could have done things to protect yourself. And then there are like, exogenous regrets where you just can’t help the variables. But you can pre mortem plan, where if something bad happens, there’s like three steps you can take to try to ameliorate the situation.

Clint Murphy 09:04
And so if you’re writing three times a week, and you’re doing a year end review, it gives you the benefit that you can’t simply be a pontificater. This is what I think’s going to happen with the market. I think real estate in the heartland is where the prices are going to go up. I think this this and this, then in the year in review, what did I do for my investments? Oh, I didn’t do any of the things I told you I thought would happen. And I regret that they actually did happen over the course of three to five years. So it’s such a great tool, actually, in hindsight to push yourself to do the things that you write about. that you talk about. that you say, which is one of the reasons I look forward to getting to a newsletter. And when you talked about having a decision making framework that presses go on decisions when you have 70% likelihood of success. One of the things that you talk about is using probabilistic thinking in order to get you there. And if I look at most of life, when you have a conversation with someone, and you’re asking a question at work with, hey, what happens in these situations, you almost always get an answer like it depends. You rarely get an answer that says, well, on average, this is the outcome that you can expect, which is tends to be how I work in life. I like to work on averages. I don’t know if I’ve gone as far as probabilistic on those averages of just on average, what is the situation? For our listeners, what is probabilistic thinking? And how can we change our ability to think in probabilities so that we can improve our decision making frameworks?

Sam Dogen 10:46
It’s a tough question, no easy answer. But step one is to understand your baseline. What is the historical average, for example, let’s say the stock market, S&P 500, the historical average we know is about 10% annual returns, dividends are reinvested. So if that’s the average or since, you know, for 90 plus years, we know that’s the baseline, and then once you know the baseline, then you can start thinking about probabilities, with returns above and below the return averages based on the various variables we see at hand, for example, early 2020 to 2022, we saw valuations at top 5% levels, right? And so we say, well, maybe the probability of beating a 10% return this year, is probably going to be below 50%. Because the valuations are so high and the Fed is hiking rates, and you don’t want to fight the Fed, right? So there are no, you don’t have a certainty on your probability of let’s say, 70%, or you believe 80%. But what happens is that you train your mind to get close to a realistic probability percentage to get congruent with your thinking and your actions. And you do this by actually taking action, making bets, where when you win, you you get the reward. And when you lose, you feel the pain, but you figure out what you did wrong. So it’s a constant awareness. It’s a constant congruency of thinking and action that you have to undertake. Because one of the dangerous things about investing or going through life is this thing called Dunning Kruger effect, where you believe you’re something when you’re really not, it’s a funny thing where you believe you’re better than you really are. And so you have to really get aligned to who you really are. To be able to live a better life, make more money, have more friends, build your business, have a more fulfilling life in general.

Clint Murphy 12:36
The Dunning Kruger effect is one of my favorites. And I think there’s also the stat that roughly 80 to 90% of drivers think they’re better than the average driver. So when you start to think about that in life, it applies to everything. And when you talk about the bets, do you do that in all areas of your life, for example, with my finance team, different interest rates here than in the US, but for example, we’ll do regularly hey, let’s have a bet on where we think the Fed rates going to be in two years,

Sam Dogen 13:08
All the time. It’s called prop betting. So we bet on everything. When I work in Finance, we bet on Tiger Woods or the field in the Masters, right? For example. So you take everybody else or target with, we bet on hum, whether our intern can eat $25 worth of Taco Bell within one hour and not puke, right? Like that was like a prop bet like 20 years ago, these are prop bets that we make all the time, like who’s going to win the dog show? How many humpback whales will you see during your excursion to see those whales? How long will your friends be, you know, married or have that girlfriend? Who will win that game? You know that basketball game. So if you think in these kinds of bets, you make these bets, and you will see an outcome. Right? And then once you see that outcome, you’ve got to be very careful. Like did you win that be because of the reasons you outlined? Because you believed? Or was it because of some totally different reason. Now, if you confuse those reasons, it’s very dangerous, because then you might make bigger bets on similar types of bets in the future. And you might get them wrong because of the wrong reasons. And so it’s a constant self awareness of who you are, how you think, and the actions you take. And the great thing about finance, it’s pretty meritocratic, right? Basically anybody with a laptop and $100 can now invest. And so you will see over time, did you make the right decision or the wrong decision? And that’s one of the reasons why I like finance so much. I mean, almost anybody can invest.

Clint Murphy 14:33
And so we’re gonna go back to your very early in the beginning, because we’re talking about financial freedom. And you mentioned the concept of financial independence. So taking it a level deeper, and what I’m talking about there is the FIRE movement, which is a concept tied to financial freedom. And I’ve got a three part question for you on this one, Sam, which drives a lot of the reason we’re here today and the conversation we’re having for those listeners who don’t know what is FIRE how do we know when we’ve achieved it? And can you differentiate between the different types of FIRE we have lean FIRE, fat FIRE and barista FIRE as an example.

Sam Dogen 15:11
So the FIRE stands for financial independence retire early, you know your FIRE when your passive investment income covers your basic living expenses. Fat FIRE is a more, I would say luxurious way to retire early. Lean Fire as a more lean and frugal way to retire early. Barista FIRE a FIRE where you’re not quite there yet, so you’re taking on like a barista type, lower paying job, but has healthcare benefits, because in the United States, healthcare is very expensive. And then there’s another term called Coast FIRE, which I just wrote about recently. And it’s about coasting your way to traditional retirement, because you’ve invested enough at your age where the value of your investments will compound to a sustainable amount once you retire at 60. Which, to me just sounds like you’re a regular working individual who’s just investing and saving for the future.

Clint Murphy 16:06
Now, I don’t know if you’ve heard recently, some people are throwing around this one called the hell FIRE, which is you’ve hit your target that’s so high, that you’ve gone beyond fat FIRE, you can do whatever you want, wherever you want, whenever you want, and you’re going to be in good shape. So maybe a nice target to shoot for. When you were talking earlier and you talked about having that purpose, having that meaning and having that 30% active income versus 70% passive income. And I look at what you’re doing with Financial Samurai, and you’ve written about selling versus not selling, why you want to keep it, having an asset for your family, for your children. So you’re pursuing a purpose there. And when I look at my long term path, very similar, retire from the day job, from working for other people, but have all of my other things that I’m doing and passive income behind the scenes helping if I need it. That doesn’t necessarily to me tie into the FIRE piece. And that’s what I’ve always wondered, I’ve always called it a pivot. How do you define what you did, because I don’t think you’d think that you fit in one of those FIREs either. Because as you were saying in the book, when you look at what you’re doing with writing the book with Financial Samurai, that’s a pretty hefty hobby, if you will, with a lot of remuneration. So how do you view that Sam?

Sam Dogen 17:32
Yeah so, I don’t think the end goal is to retire and do nothing is to retire and do something else that you enjoy, that doesn’t give you much pressure, but gives you a lot of joy and purpose. And so when I retired from finance after 13 years in 2012, I was 34 years old, I was burned out, I didn’t want to do it anymore. I walked away from six figure income. And I wanted to just travel and see the world and write on a deck on a cruise ship in the Mediterranean. And actually, that’s exactly what we did and we saw like 20 countries. And it was great. But after a while, just get a little bit boring. There’s only so many churches you can see, so many tennis matches you can play. And so I wanted a little bit more purpose. And so in 2015, I encouraged my wife who was three years younger than me, she also retired early, to negotiate a severance. I said after three years when you’re 35, because I left when I was almost 35. If things are okay, then just join me, join me on this adventure because life’s too short to just keep on grinding at some job you didn’t like and she didn’t like her job either. And so she left. And it was us two as a team where we could do whatever we want. But after a year of doing whatever we want, we decided you know what, let’s focus more on Financial Samurai, because it’s helping people with their personal finances. It’s giving them the courage to do what they want. It’s giving them some insights into real life things that we experience all the time, because we write from firsthand experience. We’re not hiring freelance writers to write SEO optimized articles, we’re just writing about life. And let’s just focus on that and see where it goes. And so for me, Financial Samurai is a great purpose for me, because it’s read by about a million readers a month organically. We don’t do much marketing or anything. And there’s all these people who email and reach out and ask for help. And it’s really rewarding to help these people. And also when our kid, our first son was born in 2017, we said, well, we actually have more of a purpose now to be grounded and to share our stories, podcast, writing so that one day he might grow up and learn from us. And we also have a purpose of using this platform to teach him about small business marketing, PR, finances, investing because what a wonderful educational opportunity to use a small business to teach your children growing up and so all these things you know, it’s interesting, life evolves tremendously after you retire, like maybe it’s like life starts after you retire because you actually start really wanting to do what you want to do.

Clint Murphy 20:02
And Sam, does your wife then play a role with you in Financial Samurai on the team?

Sam Dogen 20:08
Yeah so she edits, probably 30% of my posts, my father edits 70% of my posts, it’s a great way for me to connect with my father on a weekly basis. He’s 74 years old, and we talk constantly, he always needle me on some grammatical error and typos, nonstop. And I think that gives them joy. And so I let him do that. So he’s happy, criticizing me, which is fine. That’s what parents do and talk about the book, you know, we work on collaborating on book idea for Buy This Not That. So it’s just like a wonderful thing for us to do because he’s retired as well. So even though he gets annoyed at some of my writing style, and he wants to put in his way of writing, it gives him something to do. And I think that helps him wake up every single morning, often times, and have a purpose.

Clint Murphy 21:01
And I think what you’re going to love about being a father is, you get to have prop bets with your children. And as an example, when I’m going at everything in a bit of a reverse order to you, or maybe in a similar order, in that I’m building out social media following to drive the podcast, which will drive the newsletter. And so we’ll have family bets about, hey, where’s the social media following going to be in six months, and it’s fun when your children consistently prop bet you low, but then you have a shift in you talked about this is because you’re showing them a path and I was talking to my oldest son, he’s 14, now, Sam, and I said, this was only two or three days ago, I said, Hey, you know, what do you want to do when you grow up? Like you got to start planning your future, work backwards, so that you can get there. And we talk about that all the time. And I was pushing him a little actually, it was yesterday, now that I think about it. And he threw out, well, maybe I’ll do what you do dad with online writing and creation. And I thought, wow, like, I’d never thought only a year into this, that because I started last August, roughly, that he would see that as an avenue for him to take. So when you talk about that, and laying that foundation for your children, they’re going to grow up seeing that their whole life. And so they’ll see that they have a path other than the traditional path that we’re all taught. So I think you’re absolutely going to love that journey. Now, I’m going to flip a little bone to pick on this next one, because it’s very hard to do as a Canadian. And so when we look at the traditional way we look at FIRE, and a lot of people will say, Well, 4% rule, you just need 25x your expenses, you tweak that one on me and say, Hey, you should aim for a percentage of your gross income. The challenge being here, for every dollar I earn now, I pay 53% of it and tax. So when I try to base anything off of my gross income, it becomes absolutely insanely challenging. And I look at that number and I get the number you had and my heart starts to beat fast. And I say, Holy cow, I thought I was going to be ready at 47 I’m not going to be ready to deal till 62. So why gross income? And does it change if someone’s in a high tax jurisdiction versus versus a low tax,

Sam Dogen 23:31
The tax thing doesn’t change, just makes it harder or easier. So the idea of having a target of 20 times your net worth target of 20 times your average gross income to achieve financial independence, ultimately, is because it is an offensive way to generate wealth, most of us will generate more money over time. And when you generate more money over time, using a multiple of income, gross income forces you to continue to save at a certain saving rate and invest, no matter how much you make. Because we all know people who make millions of dollars who end up broke or wonder where all their money went 10 years ago, or 10 years later, actually, in terms of saving 25 your expenses. Yeah, it’s inverse of the 4% rule, which is outdated for sure. Since it was invented in the 1990s. Times have changed, obviously. And if you do expenses, basically you can cheat your way to financial independence. Let’s say you’re making you know, you can live off $40,000 a year. So you’re like, Okay, if I get to a million dollars, I’m financially independent. But let’s say you don’t want to work out one day, you know, like, you don’t want to go to the gym, you don’t want to save, you don’t want to invest, you don’t want to build your side hustle. So you’re like, I’m gonna cut my expenses to $20,000 and then oh, I only need you know, whatever it is $500,000 now, and now I’m financially independent. That’s cheating. You just slash expenses to the bare bones and you say, Wow, I’m good. And then when you do that, you might cheat yourself. Ultimately. Now maybe you are really happy living on bare bones but when you use a target multiple based off your gross income, you just can’t cheat. You can’t cheat your way to financial independence. When you’re making more, you’re forced to save and invest more. When you’re making less, okay, yeah, it’s just a percentage, right? So that is the different mindset that I have versus literally, I would say, 99% of the personal finance community talking about this. And the irony is also a lot of people who write about retirement or just giving it up are not retired, right, you have PhD retirement researchers talking about what you need in retirement. What I’m telling people is man, what you think you need is different from what you actually need. Because it’s very different to just press the escape hatch. And, you know, walk away from a nice pension, a steady paycheck. Well, how you feel in retirement will be very different from how you think you will feel.

Clint Murphy 25:47
And when you look at most of the financial independence community, it seems to me that they tend to focus on the Lean FIRE in the cut, cut, cut more than they do on the fat FIRE and earn and invest. Is that your perception? Or am I misconstruing what I see?

Sam Dogen 26:12
Well, I think that’s true. And one of the reasons why, and I was wondering why that was, it’s true. And I was wondering why this was, as I was writing Buy This Not That, it’s very hard to write intelligently, entertainingly about personal finance, right? If you want to write about investing, and building a business, you have to be an experienced investor, and an experienced entrepreneur, you just can’t wing it. Otherwise, people will not find you credible at all. However, it’s very easy to talk about saving and budgeting, anybody can talk about saving and budgeting. And most people aren’t, they don’t they don’t come from finance backgrounds, or they didn’t get their MBA, where it’s just it’s interesting that way, right. And so you write what you know, and you write what you know, with a lot of hopefully, heart and experience. And so if most people don’t come from a finance background, they’re going to gradually talk about the saving and budgeting portion of it, right. And so that was my challenge to write something that talked more about income generation, entrepreneurship and the offensive part of building wealth. But it’s also very difficult, because since most people don’t do that, it’s harder to digest, right? You might be lost one day. So it’s a real tough balance as a writer, a personal finance writer, to tell stories that make sense to help with the investment reasoning and entrepreneurship reasoning.

Clint Murphy 27:29
Okay, and so the other thing we talked about there, I mean, we talked about using a certain percentage of your income, we talked about the 4% rule. For the listeners who don’t know why we’re talking about those two things. What are we looking at, you and I, when we’re saying how much assets do I need to drive a certain amount of income? What’s the purpose of that formula? And how can the person at home ,backwards do the math so they know what they’re looking at?

Sam Dogen 27:57
So the purpose of the formula is to figure out how much capital you need. So you can retire and not have to worry too much about money that will last you for the rest of your life.

Clint Murphy 28:08
And do you include principal residence, not principal residence, liquid assets, not liquid? What’s your preference for the person at home when they’re doing this calculation, and they’re looking at their net worth statement. And listener, Please tell Sam and I you at least know your net worth. And you know what your assets are, your liabilities and you have some spreadsheets and trackers?

Sam Dogen 28:27
Yeah, so net worth, yeah, you can include your primary residence, if you want, you should because you can borrow from it, you can sell it to get extract the equity. So ideally, you have capital that generates income, because even say 4% is a withdrawal rate, or a return. So if you have $1,000,000, 4 percent is $40,000. Can you live off $40,000 or not? So the way you want to do it is you calculate your true budget, like a baseline budget and a realistic budget over the past three months, you annualize it to get your annual figure and you divide it by a rate of return could be 3%, 4%, 5%, I wouldn’t divide it by more than five or 6%. Because that gets too aggressive. You don’t want to be too aggressive in your assumptions in retirement, because if you lose money, you’re just older, right? You have less health, less energy, you don’t want to go back to work. So you want to be relatively conservative, you want to divide your annual expenses by about three to 5%. So if your expenses, let’s say is $50,000, take $50,000 divided by let’s say zero, this is more aggressive 0.05, right, 5%. And so it’s like, okay, you need $1 million, right? So the idea is, how much capital do you need to generate, so you’d never have to work again, and it’s pretty basic, but again, I turn it around and try to encourage people to shoot for multiple income. So if you make $100,000, try to shoot and it’s in the book, but there’s multiples by age, you want to get to, you know, 3x your gross income by age 30, let’s say 10x by age 40, but if you don’t get there, it’s okay. Like, if you’re like you suddenly read the book and you’re 40, you’re like, I’m not there, that’s fine. What you want to do is use it as motivation. Because just like a personal trainer, you know, he or she can be extremely ripped, makes you try to get the most out of you so that you will be better versus if you had not taken that personal trainer.

Clint Murphy 30:17
Exactly. So earlier, you talked about the fact that you think one of the reasons we should go to a multiple of our income is because the safe withdrawal with safe withdrawal rate is outdated. And you suggest a Financial Samurai safe withdrawal rate, why the modification? And what should we be thinking about, especially now as we’re having such large movements? Or swings, if you will, because I think if we both did a prop that we would suggest two years from now, we think rates will be lower than they are today. Now, how does all that impact safe withdrawal rate in for our listeners.

Sam Dogen 30:59
So the safe withdrawal rate is the 10 year bond yield. Well, I use the US bond yield, it can be a Canadian bond yield, whatever yield that is sovereign, that won’t default. Right. And so here in the United States, the 10 year bond yield is about 4.2%. So you can invest all your money and earn a 4.2% risk free return for the next every year for 10 years. And so every risk asset is based off the risk free rate of return, you would not invest in any other risk asset, if you didn’t believe it would generate a premium over the 10 year bond yield or the risk free rate of return. Why bother taking risk if you can earn risk free rate at 4%? Right 4.2%. Why bother investing in stocks, real estate, whatnot. And so what I’ve discovered is the irony of a bear market as the Fed hikes rates aggressively is that it’s easier to generate more passive income in this bear market. Because rates are going up, right we it’s easier to generate more income from Treasury bonds, it’s easier to generate more income from dividend yielding stocks because corporations have to pay a higher payout dividend payout to stay competitive with the government bond yields Otherwise, they wouldn’t be able to attract any capital. And so you know, this 4% rule, the risk free rate, they’re all intertwined. And so you have to discover what your risk tolerance is, your true risk tolerance, and then invest accordingly. And the way I’ve encouraged people to think about their risk tolerance is to think about how much of their time they’re willing to sacrifice to make up for potential losses in their portfolio, the more time you’re willing to sacrifice to make up for losses, the higher your risk tolerance For me, at 45 years old, with two young kids in their formidable years, I guess, you would say I have very low risk tolerance, I don’t want to risk much of anything, I’m not willing to spend more than six months of my life trying to make back my losses. So I think a moderate to conservative investor, but some maybe you’re like 25 years old, and you’re like I got my whole future and career, I’m willing to work 30 more years, you might be willing to sacrifice three years of your life, to make up your potential losses. So you have a high risk tolerance,

Clint Murphy 33:06
Okay. And so I’m going to pivot in a different direction and throw a quote at you from the book. And then I’d love your feedback on it. The quote is, “given everything in life is a gamble. How quickly you achieve financial independence depends on how much work you put in, how much you save, and how much risk you take.” Can you talk a bit about the importance of all three components there, Sam, for our listeners, who may, as we talked about with financial independence, they may only be focusing on how much they save, not on the other two?

Sam Dogen 33:41
Well, yeah, the more risk you take, the more potential reward and the more potential losses. And what I’ve found is that we don’t take as many risks as we probably should in our 20s, and maybe 30s. And as a result, we tend to lead very average lifestyles. And that’s just normal. If you take average risk, you’ll probably receive average reward. All the wealthiest people in the world are entrepreneurs, because they took a lot of risks, they probably had a lot of help, and they had a lot of luck. And so that luck component is actually the untalked about component we should probably mention, because you want to put yourself in the right place. You want to have good work ethic, you know, I’m talking to you at 6:30am on a Tuesday morning, and then I’m gonna write and I’m gonna take my kids to school. So be consistent with that work ethic, invest accordingly, based on your risk tolerance. And that’s the beauty of Buy this Not That, the book is that it gives you a framework for how much risk you should take by age, because it’s very important because you know, once that time goes, those opportunities will pass you by and then that luck component because if you recognize if you are able to generate outsized luck, and maybe it’s because you’re lucky enough to listen to this podcast or read a book that helps propel you forward, you should cherish that luck and try to keep it as long as possible. For me, I’ve tried to look at how the lucky things in my life has transpired and tried to translate that luck into real assets that will hopefully last for longer than my luck will last. And so that is, let’s say funny money gains in the stock market or cryptocurrency or whatever, like these funny money things that just, you know, you don’t really deserve those rewards, you were just lucky to invest in them, and then you sell them and you translated it into a real asset, like property, like art, something that’s going to last. That’s always been my philosophy, because I’ve always felt I’ve been very, very lucky. And so I want to create something that will last for much longer.

Clint Murphy 35:30
And when you look at that conversion, is there a certain amount of your assets that you say, Hey, I’m gonna put it in funny money, I’m gonna put it in some moonshots. And if I’m successful, then I’m going to take it out, bring it back down to that percentage that I originally had for my allocation. And I’m going to put that into long term assets that generate new passive income.

Sam Dogen 35:56
I’m always investing about 10% in riskier assets, 10% of my investments, riskier assets, like anything speculative, because there’s always a unicorn out there, there’s always opportunities. And if I lose all my money in the 10%, it’s okay, I still have 90%, I’ll be fine. But if I make 10 bagger, or more, it makes a difference. There’s always some opportunity out there, you just have to look.

Clint Murphy 36:18
And I’m going to take you in another direction, another quote from the book, because this one, I think, is something we need to spend a fair amount of time on with our listeners, because it’s probably the biggest thing that stops people from reaching financial independence. And that is, “people don’t want to hear this. But the truth is, most of us get into debt, because we want to live a lifestyle we don’t yet deserve.” So you and I are going to anger some people with a conversation on that. But I think it is very needed. Because what we’re seeing a lot of today, and I think this is only gotten worse, and I always refer to it as the Kardashian era. Not because I have anything against the Kardashians, they’ve done an absolutely phenomenal job at what they’ve done. The problem is it’s created this world where we all compare our lifestyle to their lifestyle, and think, Well, I need to buy X or I need to buy Y or I need to buy Z instead of saying, Hey, I’m in a way better spot than I was, at any point in my life. I don’t actually need anything. And so what does that look like for you? And why that line? And what do you talk to people about in that way?

Sam Dogen 37:32
Well, debt is something that’s interesting. There’s good debt, and there’s bad debt. Good debt is generally debt where you can buy an asset that historically appreciates over time, right. And so you can think about real estate, generally good debt, if you don’t go overboard, I have a 30/30/3 home buying rule, for example, in the book that I share, about how much real estate you should buy. Bad debt is consumer debt, revolving consumer debt, credit card debt, the average interest rate credit card interest rate here in the United States is about 18%. Now, that return is greater than the average compound return of the wealthiest investor in the world, Warren Buffett. So why would you try to borrow at an average 18% or maybe even higher rate of return to buy something, you don’t need to enrich a credit card company that returns greater than someone worth $100 billion. So getting right with debt is about getting right with what you think you deserve. And so I have always believed that if I am a C student, I deserve a C lifestyle, I didn’t put in the work to get a B or an A to deserve that lifestyle. So until I can put in that work, until I can save and invest and learn. I’m not going to live that lifestyle. It’s about congruency. So again, if you’re incongruent with the way you spend money, the amount of money you earn, then it’s gonna lead to financial ruin. And so what I want to encourage people to do is to not get into consumer debt, because you’re making someone else rich, to be debt free, or to invest wisely to get yourself rich and be congruent with the way you act and think.

Clint Murphy 39:04
So until we can afford to buy something, don’t buy it. So for example, a big screen TV, look, do you need it? Can you pay in cash? Can you pay off the credit card, if you’re gonna put it on it? Is that the type of thinking that you use in your everyday life that you think our listeners and your readers should be following?

Sam Dogen 39:22
Absolutely. Don’t buy anything with revolving credit card debt. That’s the clearest message I can give here. Let me give you an example. A car. Here, at least the United States, a lot of people love cars. And I think therefore cars are probably one of the biggest drags on building wealth for most Americans. The average car price is like 48,000 US dollars. Now, that is crazy, because the median household income is about $75,000. Households, so two people, sometimes one person, sometimes so after tax, the average or median American is spending like 80% of their after tax household income on a new car, and so I have a 1/10 rule for car buying, which states that don’t spend more than 10% of your annual gross income on the cost of car. So if you make $100,000, limit your purchase price of cars $10,000. If you want to buy a $70,000 luxury automobile, go ahead and make $700,000. Go for it. And then people will get mad and say, well, I’m not going to make $700,000. And I say, Well, don’t buy a $70,000 car then. So it’s a way of motivating you to make more money to tether your desires, your unnecessary desires. If you want that unnecessary thing, go make more money. And if you still always tether that offensive mindset to what you want to buy that you don’t need, you’re gonna be alright. It’s the people who say, I want to buy the $70,000 fancy automobile, who makes $50,000, maybe even only $100,000, maybe even only $200,000, we’re gonna get in trouble because they’re going to have to take on debt, or they’re going to have to sell some assets to buy something that’s going to depreciate in value. So really be congruent, be logical with your spending, only buy things you deserve. And you deserve things based on the amount of money and the work ethic you put in

Clint Murphy 41:18
So much to talk about on that one. And Sam, with your children, when they’re in school, you’re going to start to have this conversation, which you may already have because of Financial Samurai, but they’ll talk about friends in their class and they’ll say, oh, little Timmy is so rich, because he has this phone and his dad drives this car. And then you start to have the conversations of well, you don’t actually know if Timmy is rich, his parents may just be stressed out before they go to bed because they have so much debt to afford a lifestyle that looks like they’re rich in that to your $50,000 salary, $70,000 car example, something you mentioned twice in that one was this concept of income tethering, which I thought was an interesting way to gamify how we’re saving to tie it to what we’re spending, can you educate the listeners on what you mean by income tethering, and what we’re looking to do with little examples on our spend throughout our saving journey?

Sam Dogen 42:20
Yeah, so the ultimate goal, if you want to achieve financial freedom, is to generate passive investment income. So the idea is, whatever thing you want, or whatever thing you need to spend on, tether it to an investment goal, so that you’re always motivated to save and invest. For example, let’s say something simple, like fancy date nights for a hundred dollars, with your wife, or your husband, or whoever, four times a week, so that’s $400 a month, that’s $4,800, a year in fancy date night dinners, right? Seems kind of reasonable. That’d be pretty good. So how much capital do you need to generate $4,800 to pay for your fancy date nights every single year at a 4% rate of return. So you take $4,800 divided by 4%, 0.04, and you got $120,000 in capital. So if you want to maintain that lifestyle, try to figure out a way to save and invest $120,000, it doesn’t have to generate 4% rate of return. But that’s the capital that could generate 4%, greater or more. So whatever thing you do, think about tethering that to your investments. And it’s tethering it, like same with the 1/10 rule for car buying, you want to buy $80,000 car, go make $800,000. If you’re okay with a $10,000 car, $100,000 is good, you’re okay with a $5,000 car, $50,000, pretty good for you. Tether it so that it always pushes you to earn and invest. So you stay honest, and you stay ahead of your consumption game.

Clint Murphy 43:52
Even as you’re talking about some of these rules, it starts to tie into this whole concept that you always hear of the rich get richer, the poor get poorer. And part of that being let’s say you’re making $500,000 a year and someone’s making 50. And you both buy the same $50,000 car, that person who’s making $500,000, they’ve met your 10% rule. And so that car doesn’t have a diminishing effect on their ability to save, invest, earn, whereas that person who’s making $50,000, that car payment now is going to deteriorate, their ability to save, invest and earn. And is that what drives most of our rules is to say, hey, before you make this decision, because if your goal is financial independence, we’ve got to rein in the spend and invest aggressively. So here’s the things you need to be thinking about. Here’s some ground rules for each of these areas that you need to target.

Sam Dogen 44:46
Absolutely. And I just want to say that if you don’t want to achieve financial independence by a certain age, it’s all good too. You can spend your way to do whatever you want. That’s the great thing about living in a free country. But you know in 5-10 years Here’s let’s say you hate your job and you find yourself very miserable and you don’t have as much money to provide you options, you have to be okay with that, you got to be okay to say, well over 10 years, I had a great amount of time I drove a fancy car, I went out, I traveled the world. And that’s a lot of value. And as a result, I don’t have as much money now. But you’ve got to be okay with that. And so long as you’re okay with not having that money that you could have had, then everything is good, it goes back to congruencey, be congruent with what you want, and how you act. And then no matter what you do, I think it’s going to be pretty fine.

Clint Murphy 45:33
And I always refer to that Sam as reconciling what you want with what you’re willing to do with simple example, being people who tell you they want to get promoted, they want a bigger title, they want more money, and they want greater work life balance. So you start to say, Well, wait a second, you want all these things, but you don’t want to work any harder than you’re already working. And so let’s jump there for a second, you’re talking to someone in their 20s and they say, Hey, eventually, I want to be where you are, Sam, what are some of the things you’re telling them about their careers, to get ahead, to be a high earner, to be able to have the optionality to press pause or stop or pivot when they’re in their 30s, or they’re in their early 40s?

Sam Dogen 46:20
Yeah, follow a framework and investing framework by age, it’s about percentages. It’s about consistency, diligently saving and investing as much as you can, by age. Following these targets that I have in Buy This, Not That, I wrote the book, if any, the sooner you can read by this not that, the better you will be financially, because you’re going to take action to help with your finances. There’s so much amazing literature, audio, video, things that you can do to help yourself because one of the key ways to save, “if I knew, then what I know now” things would be different is to just listen to the people who are where you want to be, or who’ve been through what you will probably go through. And so there’s really no reason. Yeah there’s reasons, but there’s so much opportunity for you to enrich your mind with these actions. Some key tenents include, if the amount of money you’re saving each month doesn’t hurt, you’re not saving enough. So the idea is, don’t wing it. Because if you wing it with your finances, you’re gonna wake up 5-10 years from now, regretting winging it, because you’ll wonder where your money went, it’s just kind of is like a leaky pipe. If you’re not intentional, it’ll just leak away. And you’ll wonder. So that’s one of my key tenents. And the other one is, if the direction is correct, sooner or later, you’ll get there. So you have the right principles, the right knowledge, the right understanding, man, if you follow those principles, you’re gonna get there sooner or later, you might not retire by 50 or 40. But whatever it is, sooner or later, you’re gonna get there.

Clint Murphy 47:47
And what about for their career? Sam? What are some ways that you suggest when you’re sitting down with someone and they’re just getting out of college? What are the top two or three things you tell them to focus on career wise to get to that high earner status?

Sam Dogen 48:04
Well, you’ve obviously got to do your research and be in the right field. But right fields aren’t all of it, right? Right fields to make more money. If you want to make more money, you want to be in industries that pay you the most money, those are banking, consulting, tech doctor, you know, big law, right. But once you get in there, you have to basically realize your cost center in the beginning. So if you’re a cost center, that means you’ve got to try to have to minimize how much you cost to them. And you got to add value, you got to learn. So if you’re not coming in first, you’re not leaving last, you’re not respecting your opportunity. Pay your dues. Ask what you can do for others, make your senior colleagues look fantastic. Because as your network becomes more senior and grows, they will pull you up with them. They really will. It’s interesting, because I’m 45 now and my friends who are in their 20s are now running firms, or they’re in very senior levels, right. And it’s amazing when they tell you, Oh, your network, your network, your network is your net worth or it’s very important. You don’t really care about that in your 20s just like let’s just get it done. But now it’s kind of almost like an unfair advantage at 45 years old, where most of my friends are in positions of power, because they’re 20 plus years experience. And so that network can help make life easier to get deals done. Say hey, can I get a recommendation for this school or fundraising or whatever, get on this podcast or show. it’s So the other thing is don’t neglect your network, learn how to develop a good personality and build true relationships.

Clint Murphy 49:39
Yeah, I have to echo that one. I often talk to people about the power of your network. And when you’re in your 20s you don’t think about it but the friends you make. If you start in investment banking, like you did or or here for me at a big four accounting firm, and you say Oh, well, these are the friends I’m going to make at this age. 25 years later, you look around your city and you say, oh, like all the major finance positions are filled by people that I went to school with or that I articled with, and how have they gotten to where they’ve gotten. But the ability to help you get a job to help you push your career forward is massive. It can’t be be understated. So when you’re talking to someone, then when a couple of the things that are hotly debated, should they pursue their passion, or follow the money? And the second one, join a tech startup or an established company? Where do you fall on these debates?

Sam Dogen 50:36
I think you gotta go follow the opportunity, follow the opportunity go where the opportunity takes you to the coldest part of Canada, during the middle of winter, you should go for that opportunity. Don’t think about and so opportunity, that means I would say 70-80% of that is the money and your ability to have a greater career. And then 20-30% is your passions. You can follow your passions on the side, on the weekends, from 7pm to midnight, if you want, but the opportunity, again, your cost center in your 20s and maybe your 30s. So it’s like go where the opportunity is greatest. Your second question on tech or established, I think that you want to go for the opportunity, that it’s very hard, go joining a startup, I would say 95% plus startups you join will not make you rich, in fact, they’ll make you poor, literally poor, like because you’re gonna get underpaid on your salary, and your stock options aren’t gonna be worth anything. So the thing you got to think about when you join a startup is how much are you learning, if you’re learning a lot, you’re taking a lot of responsibility, that is actually fantastic value. And so if you have that, then you can translate that into better opportunities in the future. But for the first five, six years, I think, join as reputable firm as possible, get your experience down. Because if you join a startup, when you’re 24-25, even if you get that equity and it becomes a homerun, it’s not going to be that much. But if you join a successful startup, when you’re 30-35 or older, you’re gonna get significant equity, even more experience. And if it does well, that’s going to be life changing money.

Clint Murphy 52:11
Well said. So I’m going to rewind on you because we talked about one area, but we didn’t necessarily talk about both aspects of it. A question you and I probably both get a lot is, hey, I’ve got a bunch of debt. But should I be investing? What do you usually throw at people on that one?

Sam Dogen 52:27
Yeah, so I’ve got debt and investment framework. And so long as you’re investing in paying down debt, you’re always winning, the framework says, take the interest rate on your debt, multiply by 10. And that is a percentage of your cash flow, you should use to pay down debt. So the interest rate on your debt is 7% times by 10, 70%. 70% of your cash flow, pay down debt 30% invest. So you’re always winning no matter where the market is, what the interest rate is. And that’s a really great framework that people can follow. It’s not biased. It’s based on logic. And if you follow that, over a 5-10 year period, you’re gonna do very well.

Clint Murphy 53:06
Awesome. And Sam, last question, as we wrap this up, and get you out of here, because you’ve popularized this so much, stealth wealth, what is it? And what are your top two things that we should be thinking about to make sure that we’re following?

Sam Dogen 53:18
Yes, stealth wealth is just to try to be more humble and live, just blend in with the masses, or actually live below what the masses perceive you to really have. Because the idea is, unfortunately, wealth can create envy, jealousy, and can make you a target. And so you want to just blend in so you can live your life as freely as possible. And that’s very consistent with actually the FIRE movement, to do what you want and live freely. Because if you’re famous, and you’re very wealthy, and people know it, your freedom goes away. And so stealth wealth. It’s also very consistent with buying a frugal car following the 1/10 rule to not tell anybody your home address, because they’re just gonna look it up and see what how much it’s valued, you know, to have two cars, if you could, or just have one car that’s a nice car and one’s a beater that you drive around in public, or to just have a beater driving around in public, because you don’t want to attract that attention. And you know, it’s very interesting nowadays, right? Like, are you trying to make yourself famous, for what, what is the end goal, the end goal is to just live the life that you want to live, you know, I just want to spend time with my children as much as possible before they turn 14, because then they’re gonna have their own friends and do what they want. Right? And so this is a moment that if I can be more off the grid, I think the better and it’s funny because, you know, I write a public blog, but that’s been my mantra.

Clint Murphy 54:44
A public blog talking about all of these topics, but yes, I love it. I love that idea. I’m a big proponent of it. And thank you for joining us on the pursuit of learning today. It was a pleasure talking to you about By this, Not that which more people need to read and start bringing into their daily lives. So thank you for joining me today, Sam.

Sam Dogen 55:03
All right. Thanks a lot, Clint.

Clint Murphy 55:05
Cheers. Cheers. Thank you for joining us on the pursuit of learning, make sure to hit the subscribe button and head over to our website, the pursuit of learning.com where you will find our show notes, transcripts and more. If you like what you see, sign up for our mailing list. Until next time, your host in learning Clint Murphy