Podcast: The Financial Samurai – “Buy This, Not That: How To Spend Your Way To Wealth And Freedom”

Episode 67 of the NewRetirement podcast is an interview with Sam Dogen — a  popular OG FIRE blogger and author. Steve and Sam discuss Sam’s new book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. BTNT aims to help you achieve financial freedom sooner and it helps you tackle some of life’s biggest dilemmas in a rational way.

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Full Transcript of Steve Chen’s Interview with the Financial Samurai

Steve: Welcome to the NewRetirement Podcast. Today we’re going to be talking with Sam Dogen, a popular OG FIRE blogger and author. In 2009, Sam helped launch the modern day FIRE movement by starting Financial Samurai, one of the top independently owned personal finance websites with over 1 million organic page views a month. And we’re going to discuss Sam’s new book, Buy This, Not That: How to Spend Your Way to Wealth and Freedom. BTNT aims to help you achieve financial freedom sooner and it helps you tackle some of life’s biggest dilemmas in a rational way. So with that, Sam, welcome to our show. It’s great to have you join us.

Sam: Thanks so much for having me, and I know you could be doing other things, so I appreciate the support.

Steve: No, it’s awesome to get your time and there’s a lot of fans of your work in our community. I actually asked some folks in advance, said that we’re going to be talking with you and got some questions from them, and a lot of folks raised their hand and said they love your work and had been fans for a long time. So, as we get started, I was reading your book and I had a chuckle when I read this passage about your time in Ed Goldman in 1999, where you wrote, “So I came up an escape plan like Andy Dufresne from The Shawshank Redemption. I knew I would have to crawl through a tunnel of excrement to achieve freedom, but unlike Andy who was trapped in a prison for 19 years until he escaped at 58, my plan was to escape by age 40.” So I was just curious, how old were you when you wrote that? How far into your career were you, or when you were thinking that?

Sam: I thought about it the very first month at Goldman in 1999. And the reason why is because I had to get into the office at 5:30 AM, and for someone who dropped calculus because it was too early at 8:00 AM, it was a special type of torture getting in at 5:30 AM under the fluorescent lights. And then I had to stay back after 7:00 PM and sometimes until 10:00 PM because my boss was a workaholic and I had to connect with my colleagues in Asia. So Asia markets started up at 6:00 PM, 7:00 PM, and so it was a never ending work schedule at Goldman and at Credit Suisse.

Steve: Yeah, that’s crazy. I mean, when I was reading about your background and how you came to FIRE, you talked a lot about this was your dream job, right? So you had worked your whole life and I saw you went through seven months of interviews, six rounds and like 55 interviews to get that job, but then almost immediately you realized, “Hey, this isn’t necessarily the right thing for me.” Did that make you step back and really question a lot of decisions you had made up until that point?

Sam: Well, not so much. I just knew that I couldn’t last for decades in a career like my parents lasted. My parents worked in the government in the foreign service for 40 years and there was no way in hell at the age of 22 I could imagine working for longer than 20 years in this role because it was so stressful. I gained weight, I had plantar fasciitis, I had TMJ, suddenly I had crazy allergies. And so it was just I could feel my body wilting away, and also my mind. It was just so much pressure every single day, every single month and quarter, that the positive about having a really difficult job early on is that it forces you to think of alternative escape plans, right? It forces you to save and invest so that one day and when you can no longer take it anymore, you have options to escape.

Steve: As you went to leave Goldman, did you have any… One thing that a lot of people in our audience have is a one more year syndrome where they’re not sure that they should quit or basically really feel a strong sense that they should work one more year because they’re making a lot of money and they think it’ll be safer. Did that happen to you? Or were you confident like, “I can just step away.”?

Sam: Well, so after two years at Goldman in New York City, I went to San Francisco with Credit Suisse and I lasted for 11 years. And so the one more year syndrome perhaps began for me in 2011. So 2008, 2009 was the global financial crisis, I was losing a ton of money, a lot of colleagues were getting let go. I mean, it was scary times to be in the finance industry. And so in 2010, I was like, “Whoa, what’s the point of working in finance?” Because we were the bad guys. Even if you had nothing to do with mortgages, you were the bad guy, public enemy number one. Your pay was coming down, the correlation with your performance and pay was breaking. It didn’t really matter how well you did because you always had to subsidize a money losing department. And so for me, I had one more year syndrome for maybe a year, maybe a year.

Sam: But in 2011, 2 years after I started Financial Samurai, I came up with another plan. And that plan was to try to negotiate a severance, because when you work in finance, a lot of your comp, your year-end bonus, the more senior you are, the bigger the percentage goes towards deferred comp that pays out over three years. And so if I left, I would’ve left over one year’s worth of pay, which was a lot of money. It was multiple six figures on the table and so I just couldn’t. I needed one more year to figure it out and I couldn’t escape because it was golden handcuffs.

Sam: But finally in 2012 I was able to have a conversation with my HR manager and with my boss and say, “Hey, I hired a junior to work with me, I’ve ramped him along for the past year. I’m thinking about doing something new. Could I get all my deferred compensation? Could you guys lay me off with a severance and I’ll transition out over the next two to three months, make sure it’s a seamless transition so there will be no downtime? And in turn, you would give me my severance and I could just be free. And I promise you, I won’t go to a competitor,” because that’s one of the biggest worries companies have. “Okay, we’re going to lay you off and give you a severance and you’re going to go to the competitor? No, no, no, no.” So I just said, “Look, guys, I’m out of here. I’m done with finance.” And so after about a month of negotiation, they said, “Okay, I think this will work.” And that was my catalyst to break free.

Steve: And did you also have more confidence because, was Financial Samurai starting to ramp up and produce more income for you?

Sam: Well, the main confidence I had was because I had built a rental property portfolio and a dividend stock portfolio and that generated about $80,000 a year in passive investment income. And the other thing going for me was that my wife, who was three years younger than me, was working. So I told her, “Look, can I get out first? And if nothing blows up, we’re still good, in three years, you too can retire early at the age of 34 and be free to join me. But before then, let me try to test drive first one leg out and figure things out.” And then so she’s like, “Yeah, sounds good. It’s equality, right? You leave at 34, I leave at 34.” And then I had Financial Samurai, which was so fun to write and to connect. And I was generating some money here and there, but I saw its potential to be able to generate some supplemental retirement income.

Steve: That’s awesome. It is kind of amazing that you worked… I mean, I know you worked super hard, but for 13 years, and then you could step away and have built enough reliable income that your wife could also step away after probably 13 years and you have a kid and make it work.

Sam: It was a journey, though. It’s a journey. It’s not… So think about it this way, 13 years doesn’t sound like too long now that I’m older, I’m 45. But if you’re working, let’s say 60 hours a week, so 50% more than the average person, then 13 years is like 20 years of work if you think about it that way, right? And I was working 60 plus hours a week, every single week, not a lot of vacations. And then I worked on my side hustle, Financial Samurai, after the 60 hours a week. And I also went to business school part-time, which was like 20 hours a week for three years. So I basically tried to stack it all in together, work harder while I was younger while I still had the energy, because I know that as you get older, health issues, energy, your interests change. And so I was like, “Okay, I better step it up so I can live better in the last 60% of my life.”

Steve: That’s an interesting analysis. It’d be interesting to look at someone’s total time spent working. So like what you said, yeah, so if you work the equivalent of whatever, 20, 25 years, because you’re also doing your side hustle in a much more compressed timeframe, does that end up being better? Maybe it does end up being better because you’re also capturing the returns of saving more and having that capital be investing and working alongside you. So I haven’t seen that kind of analysis.

Sam: The work is very inefficient. When you go into the office, I would be able to get… I think everybody agrees now that the work from home is more popular, but I would get my work done in like four hours, but I’d have to twiddle my thumbs for 12 hours. And I think most people realize they can get eight hours work done in three or four hours. And so if you can leave, if you can really maximize that time, then you’re going to be more efficient, you’re probably going to get paid and promoted quicker and better.

Sam: And the best thing is if you believe in yourself… And you’ll start believing in yourself more after you gain more work experience and more savings and investments, right? So I figured after 13 years I believed in myself strong enough to leave work, not piggyback off their reputation, and try to build something on my own. And that’s actually something that’s really rewarding, to make a dollar with your own two hands because it’s like, “Well, if you didn’t do it, then it wouldn’t have happened.” So I think making $1 on your own is like maybe making three to $5 at a day job.

Steve: Did you have a strong sense of yourself as an entrepreneur from the beginning of your career or during your life?

Sam: I always wanted to be an entrepreneur. When I was in middle school in Kuala Lumpur, Malaysia, I would go to these random parties that my friends hosted and they would have huge houses, nice pools, views of the city, and I asked them, “What do your parents do?” And all of them said they were entrepreneurs. One had a chicken farm, chicken egg farm in the south, one had the Yeo’s drink, which is this popular drink in a carton box in Malaysia. And they all were entrepreneurs. And our house was fine, it was government housing. It’s not like it was bad, it was fine, but the real wealth was from the entrepreneurs.

Sam: But my problem was, I didn’t have the courage when I was 22, when I graduated, to be entrepreneurial because I didn’t know what I was doing. I was given an opportunity to go to an eyeglass parts factory and try to be one of the managers in Shenzhen, China back in 1999, which would’ve been amazing. My Chinese would be really great right now, I’d have all these stories, different people. But inevitably or not inevitably, I actually got that job at Goldman Sachs and you can’t turn that job down, after so many rounds, so many interviews, you know that’s your set spot if you just stick with it. So I pushed off entrepreneurship for 13 years and then I said… Well, actually not for 13 years, for 10 years because I started Financial Samurai in 2009, and then I just went from there.

Steve: Do you think your children will end up being entrepreneurial?

Sam: I think they will because I will teach them how to leverage the internet, how to build a brand, how to communicate written and verbal, and just compare and contrast a day job and an entrepreneurial job and see how that works. Because I definitely plan to teach them everything I know until they leave the nest and try to be on their own because I think the world is really, really a brutal place, it’s ultra competitive. Only the strong survive, so I better teach them as much as possible.

Steve: Yeah. Well, pro tip, I think you can teach your kids until about 13 or 14 and many times at that point they don’t want to hear it anymore until maybe their early twenties when we’re like, “Hey, maybe my parents actually knew something.” I’ve seen that in my life and I hear it from a lot of parents. Yeah, no, it’s awesome. I mean, for what’s worth, I had a strong sense of like, “I want to start a company,” when I was younger and this vision for my life about making a fortune and then giving it away. That was this high level idea I had made. But, yeah, I think it’s good to start and have a real job in the beginning, see what it’s like to work in a company with a good culture and other people. There’s so much you learn from just having a job, right? What goes into it and how businesses work.

Steve: But then, yeah, at some point, if you want to start a company, you just got to take the plunge and there’s never a great time. It is definitely easier pre-kids when the risk is you and maybe your spouse. It’s also good to have a spouse that’s working and has benefits and stuff like that. I see that a lot in FIRE as well, where you have semi FIRE people, one spouse is like, “I’m done,” but then they’ve got another person still working and healthcare and stuff.

Sam: No, I mean, I think it’s amazing that… I think men have fragile egos. So I’m seeing more and more men say they’re retired, versus being stay-at-home dads, which is an interesting transition because if it was a woman who stopped working and was a stay-at-home mom, there’s no way in hell she would say she’s retired. She would say she’s a stay-at-home parent, because taking care of children is like the toughest job you can have.

Steve: A hundred percent. Yeah. It’s good to do that kind of survey and just see how people present themselves. So let’s talk a little bit more about your FI stuff, and then we’ll get into your book. If you were to step back, what do you think the biggest and best decisions were on your journey here?

Sam: I think half the battle is showing up. I tell a story in the book, Buy This, Not That, how I showed up on a bus at 6:00 AM in Williamsburg to go to a career fair in Washington, DC. And I showed up, I was the only person on the bus. The bus driver and I, we waited for an hour and then he said, “Screw this. There’s nobody else showing up. Let me take you by car.” So he took me by bus to this shack in the woods in Virginia. He pulled out a black Lincoln Town Car and he said, “Get in. Let’s go.” And so he chauffeured me in a black Lincoln Town Car for two hours to the career fair. So just by showing up, I was able to have more opportunities.

Sam: And the other thing is just being consistent. You can fail due to… You’re just not smart enough. Your competition is just genius. They’ve got more connections. You got bad luck. But you cannot fail due to a lack of effort, because effort requires no skill. You don’t need any skill to work hard. You just need to work hard. So that consistency in showing up is just so huge.

Sam: You’ve also got to be humble. You got to be humble in knowing that when you start your first job, your first 5 to 10 years, you’re not going straight to the corner office. You’re learning and you better pay attention. You better show up before your boss. You better work after your boss. You better add value. Otherwise, you’re going to always be at risk and nobody’s going to pull for you as hard as the person who does that. And then eventually, you got to bet on yourself. If you want something unconventional, you’ve got to bet on yourself. Whether it’s your knowledge, your product, your skill, you’ve got to go for it, because the fear in your head is often way worse than reality.

Steve: Oh, I agree with all that. It’ll be interesting hearing as you raise your kids, are you able to instill those values in them? In an environment where we all want to do better than our parents, and clearly, you’re doing pretty well and so you can afford certain things maybe that you didn’t have growing up, and also shield them from some of the stuff that may have been less good for you.

Steve: But what it turns out, I think, in many cases is like… Where I live, a lot of folks came from very middle class backgrounds, and I think that background is what motivated them to work really hard in school, strive really hard in their careers or companies or whatever it is, and led to their success. They then have lots of money and they’re really taking maybe too good care of their kids, and like protecting them from all kinds of stuff and hedging all the risks out. And then the kids are like, “Oh, life is easy. I live in The Bay Area. It’s super awesome.” And they in turn, don’t have what it takes to make it in a, what I agree with, is a very increasingly competitive worldwide flat world.

Sam: Yeah. It’s a dilemma and I think the key is to take action. Don’t just tell your kids what to do, but actually to go pull the weeds. To see them painting the doors, scraping the old paint off your rental property, working out, exercising, waking up at 5:00 AM, writing, telling them what you’ve done. That’s actually one of the benefits is that… Let’s say you had a traditional job. Maybe you got to now lock yourself in the room for eight hours, or you have to go to an office. But actually, if you’re at home, you can just show them what you’re doing and they actually have a concept exactly how hard you’re working and what you’re doing.

Steve: Yeah. I think that’s true. I personally hope my kids will see me cranking away in the garage working on this business for a while, so I think they understand what goes into it. Any huge mistakes that you regret on your journey to financial independence?

Sam: Oh yeah, so many mistakes. First mistake was, first job out of college thinking I knew more than I did and not being helpful enough. Being a little too arrogant, to not just reach out and say, “Hey, what can I do for you guys?” Because after two years, I didn’t have an opportunity to continue at Goldman. So I was able to forecast that by finding a new job at Credit Suisse in San Francisco, six months before them telling me, “Oh, okay, that’s it for the two year analyst program.” So I didn’t do a good enough job being a good colleague. I was probably just too big in my head just thinking, “I can’t believe I have this job. I’m in New York city,” and all that.

Sam: That was a career limiting move. So I learned from that and I ended up staying at Credit Suisse for 11 years, and I was able to get promoted and paid quite quickly relatively, to VP at 27, director at 30. And then, I topped out. I had one year evaluation to try to get to managing director. I didn’t make it. Most people don’t make it. I would’ve been 33 as a managing director. That’d been really young, but I said, “You know what? I tried, and that’s it. I’m out of here. That’s good enough.” Because I won’t regret not having tried.

Sam: But my other mistakes were extrapolating my income and my wealth projections during a bull market. So in 2007, I made a good amount of money. I thought, “Huh, I just got promoted. I’m going to make more and more money over the next 10 years.” And of course, the bottom fell out in 2008, 2009. And then of course, I decided to buy a vacation property in 2007, which I didn’t need. So that was a terrible financial move that taught me, “Don’t extrapolate good times too far into the future. Maybe extrapolate one year into the future, but have your base case, bull case and bear case scenarios.”

Steve: Yeah. I think that’s hard for a lot of people to get right. Ben Carlson, from A Wealth of Common Sense. He pointed some data, ones that said, if you look at people’s careers very often, there are a couple of years where people make an exceptional amount of money. I’ve seen this in my career too. So say you’re making like 150,000, and then one year, you make 300,000. People start to think that’s going to continue when in fact, that might happen once or twice in your career, but then you’re going to kind of revert to the mean. So I think it’s a common mistake.

Steve: But also, I think it’s great that how you’re framing it up like the optimistic, expected, and then, pessimistic case. We really try to do that in our platform, and I think a lot of people don’t think this way, but that’s really how you should think and hope for the best, plan for the worst.

Steve: So here’s another question. What do you think a lot of people get wrong about the path to financial independence?

Sam: So I think people are a little too rigid on their path to financial independence. The key common example is the 4% rule that was devised in the 1990s when the 10 year bond yield. The risk free rate of return was at 5.5 to 6%. So of course, you could withdraw at a 4% rate if you could get a guaranteed 5.5 to 6% return. And so the rigidity of that is quite shocking to the people trying to achieve financial independence. So they say, “The inverse of 4% is 25x times your expenses.” Boom, you’re done. But the reality, as a practitioner who actually left his day job behind in 2012 at 34, is that you cannot be rigid in your financial planning. You’ve got to be dynamic.

Sam: Dynamic in your thought, dynamic in your withdrawal rate, in your idea of generating supplemental retirement income. For me, I thought $80,000 a year was totally fine. Middle class lifestyle in San Francisco for myself. And when my wife left at 34, in 2015, I said, “Okay, let’s try to go for 150,000. We got a buffer, we can save.” And then we said, “Well, you know what? Let’s have children.” So in 2017, we had a child and we said, “Wow. Our health insurance plan is now 2000 a month. Totally unsubsidized. Preschool, tuition or childcare costs 2000 a month. So this is post-tax expenses. I think we need more.” And so it’s important to keep an open mind that… Okay. 80,000 was not enough, because your life changes all the time. So be open to change, be open to different perspectives. What I see is a lot of rigidity in thought. I don’t know what it is about…

Sam: If you’re working and you’re like, “This is what it’s going to be.” No, no, no. It’s best to try to be open minded and listen to people who are actually practitioners in the fire, because one of the biggest ironies… The biggest ironies I see is that, there are retirement researchers with PhDs who have great salaries, nice pensions, pontificating about what retirement needs will be and what it will be like. “Hey, if I had a nice six figure job with a pension, I can write all day about what retirement might be like,” but you won’t know until you know. So please keep an open mind folks.

Steve: Yep. A hundred percent. I think it’s very easy to be an academic talking about what’s possible and where the market’s going and all this stuff, and when you’re living it and having to manage these risks day to day, it’s real. Before we jump into your book, as I zoom back and talk to you, it’s like, okay, you worked really hard till you’re 21 to position yourself. You got this dream wall street career for 13 years, so you’re 34. 11 years later, you’re 45, and you’ve been financially independent doing this for 11 years, but you also might live 45 more years or more. And that seems, one, incredible if you make it work. It seems like you will, but it’s daunting as well.

Sam: I think what’s more daunting is to live a life full of regret. I think the daunting-ness helps you figure things out. The anxiety, the worry, the stumbling blocks, the failures, makes you figure things out. You will figure things out. I hope I have 40 decent years left to live. But the thing is, look, when you leave your day job early… And earlier you leave it, the more energy, the more passion you have to do something else. So you have to create financial buffers for your financial buffers. And so my financial buffers are rental property, dividend portfolio, Financial Samurai, and my ability to generate supplemental income. I can do some consulting or whatnot. So if you are continuously active, you’re learning, you’re networking, you’re always going to have some type of opportunity to generate some type of money. And you have the ability to cut your expenses as well.

Steve: A hundred percent. All right. Well, let’s jump into your book, Buy This, Not That. So why’d you write the book?

Sam: Well, about 10 years ago, I tried to get a literary agent. Got rejected from all of them, and that meant my road to writing a book was over. And then in 2019, an acquisitions editor from Portfolio Penguin Random House contacted me and said, “Hey, do you want to write a book?” And I said, “No, I don’t want to write a book. I’ve got my own thing and I’m too busy being a parent.” But as I thought about it, I just did some research and I said, “Well, I don’t think a lot of people get to write a book with a big publisher and if I say no, I’m probably going to regret it 5 to 10 years down the road.” So I said, “Well, there’s an opportunity to write a book.”

Sam: And then when the pandemic hit, I said, “You know what? I better write this book, because I want to look back during the pandemic period and say, ‘You know what? I actually did something productive and it didn’t beat me up too bad.'” And so I said, “Okay, I’m going to write this book.” And I knew that there’s this whole other platform of readers out there who don’t read blogs or listen to podcasts, but who read books. And I said, “Well, that’s a great readership to approach and to reach out to.”

Sam: And I just think as someone with a finance background to write about personal finance was a hole that was needed, because in 2009, when I started Financial Samurai, there was nobody with a finance background to start a personal finance site. And now in 2022, it still is quite interesting that there aren’t that many people with finance backgrounds writing about personal finance. And it’s a really interesting… you would think it’d be obvious, but it’s not happening. So I felt, “Well, let’s fill this hole.” Fill this hole and write a book, not only from a practitioner’s point of view, but from the point of view of over 90 million people have come to Financial Samurai, and they’ve given me their thoughts and perspectives, so that those blind spots that we all have can be elucidated. And not only is it a book about helping you achieve financial freedom sooner, but it’s about helping you achieve financial freedom sooner, but it’s about tackling some of life’s biggest dilemmas that many of us will face, because at the end of the day, why do we have money? We have money so we can utilize it to live a better lifestyle.

Steve: That’s awesome. What’s your hope for the book? How would you measure success?

Sam: Oh, so here’s my one thing that kept me going during the pandemic, waking at 5:00 AM, writing for the book, writing on Financial Samurai. My measure of success is that both my kids can bring the book to show and tell class one day and say, “Hey. This is what my daddy does.” That’s it. That’s all I want. That’s all I want. That’s what kept me going for two and a half years. I just want my kids to be proud of the work that their father has done.

Steve: That’s awesome. Yeah. I think that’s a great answer and probably what’s really real. I know for a lot of writers, it’s like… I was talking to Jonathan Clements and he’s like, “Writers write because they want people to read it, not because they want to make a lot of money. They just want to have readers.” And he was the personal finance writer for the Wall Street Journal for 10 years. And he’s pretty well-known blogger.

Sam: I mean, that’s the thing. If you want to get rich, don’t write a traditionally published book. You have many more better things to do. But it just feels so good to produce something out there based off 13 years of writing on Financial Samurai. There’s over 2,500 articles and I wanted to put my best work in the book and really create a product with action plans and also something that just is relatable to as many people as possible, so that if I die tomorrow or hopefully not tomorrow but maybe 40 years from now, I can rest assured knowing I did everything possible to put that wisdom out there to help people, because this concept of financial independence early or just getting out and doing something different with your life is so worth it and it’s worth fighting for. It’s just worth fighting for.

Steve: I think that for a lot of folks that didn’t come up with a lot of money, they have this vision that it’s going to solve all these problems. And they’re so focused on generating this massive number that they don’t kind of think about what’s happening along the way. And ultimately when they get there… Yeah, same thing. I’ve met more and more people that have lots of money, are financially independent and it’s like, “Okay. Once you’re there. Okay. Great. I’m there.” It’s like if you go by, your dream is, “I want have a Porsche 911,” and you get your hands on a 911 or something and for a couple weeks, you’re psyched and then hedonic adaption kicks in and you’re like, “Okay. This is a car and it gets me around from place to place.”

Steve: I mean, you might get a little bit more pleasure from it, but it doesn’t solve all your problems. You still have the same issues. And the core thing is one healthcare problem trumps all the money in the world. So as you meet more people that have had that, you’re like, “Okay. What’s the point here?” So what do you want people to take away from the book? What are the top three lessons you’d like people to kind of walk away with?

Sam: Well, I think one of the lessons is you’ve got to believe that you deserve to be rich. There is literally trillions of dollars out there for the taking. People have blown up their companies as CEOs and gotten $100 million exit packages. There are NBA basketball players who make 40+ million a year who haven’t played a game all year. And not that it’s because they were injured or not. And so it’s really a mindset where one of the biggest pushbacks I’ve gotten are from people who say, “How can you negotiate a severance if you’re a good employee.” And I say, “How can you not negotiate a severance if you’re a good employee? You’re a great employee. They want you. They want seamless transition. They want you to be happy, because you provided five, 10 years of great service to them to help build their company. They want to take care of you.”

Sam: So it’s a complete mindset shift from, “Why not?” To, “Why not me?” I think that’s the biggest thing. And the other thing is, look, if the direction is correct, sooner or later, you will get there. And that’s a famous Chinese proverb. And the idea is that if you can get your education correct, if you can get your framework correct about your money, you will get there eventually, whether that’s financial independence, having a family, getting that job, whatever it is. But the problem is, I think too many people wing it. High school, college, 20s, 30s, they wing it in terms of their finances. They don’t have a guide with some actionable items, a framework that they can follow by age. And then they wake up 10 years, 15, 20 years later and say, “Where did all my money go? Where did all my money go?”

Sam: And so I want to try to use Buy This, Not That to help people use it as a guide, as a financial coach, where you might not get to the metrics that I’ve suggested, but you’re going to get much farther than if you just winged it with no guide. And so that’s why I really believe the value of the book will be massive. It’ll compound over time.

Steve: Well, let’s take a couple examples. So if you’re like you were, so you’re younger, you’ve got a couple kids and you’re trying to figure out housing and education and where to live and all that stuff, any key insights that you would suggest for those, that population.

Sam: Yeah. So for this population, you need to list out your goals and figure out how much those goals cost and reverse engineer those goals. You start with the goals in mind and you reverse engineer. Let’s say you are in the middle of America and the median home price is 450,000. You say, “Okay. I want a $450,000 home by the median first time home buying age of 32.” So you graduate college at 22. You got 10 years. How do you get to a 20% down payment on a $450,000 home? Well, that’s obviously $90,000 divided by 10 years. That’s how you’re going to get there. You got to figure out your goals in mind and work backwards to get there. That is really the key in terms of planning.

Sam: So it’s not just goals and planning. It’s surrounding yourself with people who are also with goals and who have plans, because whatever… Let’s say, I write something on… I wrote… Latest article on Financial Samurai is about building a deck. Maybe it’s totally irrelevant to most people, but it talks about floor plans and it talks about the type of amenities you want in a house that could actually trade for bigger premiums going forward given a lot of us are spending more time working from home and we want these amenities to make our home an oasis. So the idea is you might not give a damn about building a deck now, but it helps you when you’re reading and listening to financial related topics. It helps you think about things that you might never have thought about before to keep you on track towards your goals. Because if you’re not really totally emerged in the idea of financial independence, it’s really easy to lose track because it’s really easy to spend money on things that you don’t need that are going to depreciate in value.

Steve: Do you have a written financial plan and forecast? It sounds like you definitely have the forecast side where you kind of set out your investment policies and kind of the big milestones you’re trying to achieve.

Sam: Definitely. Definitely. I had plans for everything. I even had a net worth plan before having children, which was way overboard and I regret it now because it delayed me having children, but I had a net worth goal before having children. I had a net worth goal before leaving my day job. I had a passive income goal before leaving my day job. And I have passive income goals now for raising a family of four in expensive San Francisco. So yeah. But the thing is it might sound crazy, it might sound so methodical, but thinking is free. Planning is free. It’s like the best thing ever to plan. Why wouldn’t you post-mortem and pre-mortem the plans? While you’re in the hot tub or in the bath or in the shower, plan it out.

Steve: 100%. Well, I know there’s a quote we like to say. It’s like, “Plans are useless, but planning is indispensable.” That’s what Dwight Eisenhower said. And I think it’s very true. It’s like just thinking about it, spending the time, forecasting what you want to get done and then thinking about how you did against those goals and it forces you… And also writing is core, because it makes you organize your thoughts, put it down. You’re making a commitment to yourself and to your audience by saying, “Hey. This is what I’m trying to get done.” So there’s all these mechanics that are built into those two parts of it. That’s cool. So let’s go to the other end of kind of the age spectrum and maybe wealth spectrum. So if you have folks that are… Our audience, they’re kind of 50+. They’ve got their mass affluence, approaching retirement and a lot of them are concerned about taxes. Do you have any insights for folks that are thinking about how to reduce their… Just be more tax efficient?

Sam: Yeah. So besides taking advantage of your tax advantage accounts, the best way to be more tax efficient is to start a business, whether it’s your LLC, sole proprietor. You start a business because the idea is to figure out something you want to do with your business. It can just be consulting. It doesn’t have to be a money making business. It can be a money flat business. It can be a money losing business for the first two years before the IRS gets on you. But the idea is to figure out what kind of expenses you have that your business would use anyway to fund your business and lifestyle. So for example, if you have a business, you’re required to have a director meeting. I think it’s at least once a year. So you can have the director meeting in your basement with water and nothing or you can have your director meeting in Hawaii at the Kahala Resort and you do some team building boondoggling with your consultants and contractors.

Sam: And that expense, I mean, how are you going to have your director meeting in Hawaii without flying there? So that’s an expense that potentially… I’m not a CPA, obviously talk to your tax accountant, CPA, but those are some expenses that you can run off on your business income. Obviously other things include your internet, your phone, your laptop, a lot of things that are required to run your business and look normal. And so that’s number one tip, I think, is to figure out a business. Not only will you help reduce your expenses, but you’ll figure out something to do that could bring a lot of joy and meaning into your life.

Steve: Yeah. I think that’s a great insight and something that’s not widely advertised, but pretty much every small business owner realizes once they get going, if they’re successful, the US tax system greatly favors people who start companies, which is great. I mean, it’s good. Like, we want new companies getting formed, and they’re a huge driver of job creation, so I think that’s a cool insight. I want to jump to some user questions. Someone was asking about how much you retired with and how much you have now. I don’t know if you’re open to sharing this, but that was a question.

Sam: In 2012, I left my day job. I retired with $3 million, and a large portion of that was my primary residence, because I owned a home that was too large. That’s another mistake. I didn’t optimize my house for the number of occupants, because I expected to have a family within five, 10 years, and it didn’t happen. So another thing is just you don’t know what exactly is going to happen in the future. Then, so the $3 million compounded, because I basically invested… It was exposed to 95% of risk assets, like real estate and stocks, so it compounded with the growth of the S&P 500 over the following 10 years. You can do the math, but it’s obviously grown, so right now, a current estimated passive investment income is about $340,000, so the idea is… And this is going to be the third year where it’s over 300,000, so our goal, my goal specifically has been to try to generate over $300,000 a year in investment income, which is taxed more favorably than W2 income, so I can provide for my family of four, in San Francisco or in Honolulu. And so far, it’s working out.

Steve: Yeah. That’s incredible. I was talking with Doug Nordman, and he’s a military retirement person, and he retired like decades ago, and also Jayle Collins. Both of their asset pools have increased over time, so their safe withdrawal rate that they’re indexing on might have started at 4%, and now it’s getting to be less than 2%, so you’re in good company, where you’ve been growing your wealth base, and you can, if you want, lower your safe withdrawal rate, or you can, as you have been, dial up the income you’re producing from it.

Sam: I think it’s also important to recognize that I’m no genius at all. It’s just the bull market. Don’t confuse brains with a bull market, right? The only thing I did was asset allocate 95% of my net worth to risk assets that have fortunately done well since 2012. I mean, 2012 when I left was the start, the beginning of a bull run in stocks and in real estate, so from an asset allocation and investment point of view, I got really lucky. But from a career point of view, I was kind of a donkey, right? Because I left in 2012, and I didn’t ride the income upside, extra leverage in the finance business.

Steve: Are you changing your outlook and portfolio construction now that the economy and market seems so much more volatile?

Sam: I have about 30% of my net worth in public equities, 50% of my net worth in real estate, 10 to 15… 5% of my net worth in bonds, and about 10% of my net worth in private investments, like venture capital, venture debt. So since I left in 2012, what is the key thing that I’m missing? That’s active income, right? So now, I do have active income from Financial Samurai, but I’ve basically reinvested the vast majority of that into investments to generate passive income. Because I think anything, just online income, all that is just kind of funny money to me, right? I’m just writing, and if it makes money, great. If it doesn’t, I think the good times could end. But I’ve been really geared more of my net worth towards income generation, because I am afraid that a bear market or… I’m just afraid of going back to work.

Sam: You know, my kids are five-and-a-half and two-and-a-half, and this is the time to spend as much time with them until, when they’re 12, 14, they have their friends and they don’t want to spend time with you anymore, right? So I’m kind of petrified of losing my money in like some crypto or tech stock, and being forced to go back to work. It would be like the worst thing that could ever happen. Not the worst thing, but it would be like a traumatizing event for me, that I just can’t do it. So as a result, I’m relatively more conservative.

Steve: And can you kind of… Can you lay out the income production for each of those things, for the stocks? It sounds like you’ve got dividend-focused stocks, and then real estate, bonds, and then alternatives. I mean, that’s really how you’re thinking about it, right? How much it produces per year.

Sam: Yeah, so it’s relatively similar to my asset allocation. 50% of my passive income, probably 55, 60% comes from real estate, physical real estate and online real estate, so private real estate funds. I like Fundrise, for example. It’s a diversified fund that invests in single-family and multi-family homes in the heartland, because it helps me diversify from my expensive San Francisco, and Lake Tahoe, and Honolulu real estate portfolio. And then dividend stocks. So out of the 30%, 20% is index, and it generates dividend yield, and then 10%, unfortunately, is in higher beta, high-growth names in tech stocks, individual names that have gotten crushed in 2022, but they’ve done well for the past 10 years, so it’s a reminder, if you’re investing in growth stocks that don’t pay dividends, then you better figure out ways to take some profits along the way to capitalize on those future cash flows. Then bonds, 5%. It’s nothing really meaningful. And then the private investments, they basically pay distributions over a five- to 10-year period, the life of the funds.

Steve: So your bonds are producing 5%, your alts are… I’m just curious what the percentage… I’m really trying to understand what’s the expected return from each pool.

Sam: There’s two ways to look at that, right? I’m looking at just mainly cash flow, to pay for life, so that is the expected return, $340,000 on my unrevealed net worth, right? So my expected returns, blended, I would say would be anywhere from 3 to 5%, so I try to keep the return hurdle low, so that I will be hopefully surprised on the upside and then not too disappointed on the downside. That’s a funny thing. I came up with the Financial Samurai Safe Withdrawal Rate rule. It’s not a rule, it’s a guide, and that basically states your safe withdrawal rate equals the 10-year bond yield times 80%. Let’s say the 10-year bond deal now is at 3%. The safe withdrawal rate in retirement is 2.4%. And I got smashed, smashed by non-retirees who were saying, “That’s so low. That’s impossible. I’m going to have to save 50X my expenses. What are you doing? Go to hell.” And it was just amazing. It was awesome feedback.

Sam: And how did I come to 80%? It’s because it’s kind of like a derivative thought, in that in the 1990s, when the 4% rule became popularized, the 10-year bond yields was at 5 to 6%, so 4% was 80% of that. So I extrapolated it, and to say, “Well, if you believe in that logic, then you must believe in this logic. Otherwise, you’re illogical,” and so if the benchmark is… So everything, all the risk assets are based off the risk-free rate plus an equity risk premium, and if you don’t know what that is, I can’t explain it now, but the point is that you would never invest in a risk asset unless it provided a greater expected return than the risk-free rate of return, which is the 10-year bond yield. So, I say 3 to 5% because, hey, the 10-year bond yield is at 3%. There’s 3%. And I have a 2% equity risk premium to 5%. There you go.

Steve: Yeah, it totally makes sense, and I think it’s a smarter answer than, “Oh, it’s 4%,” or it’s some 3.3%. It’s a dynamic number that reflects what’s happening in the overall economy, which can be indexed to what’s the 10-year running at.

Sam: The 10-year, it’s really the most important economic or financial indicator, because it reflects expectations about inflation, the economy, earnings growth, everything.

Steve: Any last comments you want to leave about your book or for our audience?

Sam: No, just thanks for having me. Buy This, Not That: How to Spend Your Way to Wealth and Freedom. It’s out July 19th, 2022, and I believe it’s going to be the best personal finance book out there. Obviously, I’m biased, but I’ve decided based on massive amounts of research, to provide a book that’ll give you that guide to make more optimal financial decisions in your life. And it’s not just about making more money. It really isn’t. It’s about making better decisions in some of life’s biggest dilemmas, right? Whether you want to have children young or late, whether you should join a startup or work at an established firm, whether you should get a divorce or stay together in a heartless marriage.

Sam: All these things, eventually we’re going to come face-to-face with these decisions, and the idea is to use a 70-30 framework that I have proposed people think about, and that says if you believe with a 70% probability or greater the decision is the correct one, you go and make it, while having the humility knowing that 30% of the time, you’re going to make the wrong decision, but unless it’s fatal, you’re going to learn from your mistakes, and get better, and make better decisions going forward. And over a course of a lifetime, if you have a two-to-one success-to-failure ratio, you’re going to do very, very well in your life.

Steve: Are you a poker player? Because I know you mentioned like expected value in your book, and then you said the word donkey, so…

Sam: I play a lot of poker, and when you’re working on the trading floor, you make tons and tons of prop bets. One of the fun prop bets we had was we had a junior guy, and he was willing, and we built a pool worth about $500, and to see if he could eat $25 of Taco Bell in one hour. This was 10 years ago, so $25 worth of Taco Bell is probably like $40 now, so he said, “Yeah, I’m down,” and of course, free food, free lunch, and make $500. That’s a win-win. But after about 37 minutes, he kind of hit a wall, and he went to the bathroom, and one of the rules was you couldn’t puke, so he went to the bathroom. He was there for like 10 minutes, and he said, “Guys, I just can’t do it,” so he got to about $22 worth of Taco Bell.

Sam: He could order whatever he wanted, so yes, I bet a lot, and the idea is every day, there’s something you can think about in terms of probabilities. And that’s one final, final piece of advice. I encourage everybody to think in probabilities, not absolutes, because if you start thinking in absolutes, you’re going to miss out on so many opportunities, and you’re going to let life pass you by.

Steve: 100%. Yeah, I’m actually, we had Annie Duke on, and she has a book, Thinking in Bets, that talks a lot about a lot of these ideas, and there are so many good lessons about how to make good decisions, and thinking in probabilities, not focusing on results but focusing on the process of how you think about things, and hopefully, that will lead to better results over time, just like what you’re presenting. All right, well this was awesome. We’ll point to your book, Buy This, Not That, and your site, Financial Samurai. Sam, really appreciate your time, so thanks for being on our show. For the audience, thank you for your time and listening. Hopefully, you found this useful. I encourage you to check out Sam’s site and book, and also our site at newretirement.com, on our Facebook group and community, and finally, the last thing would be any reviews of this podcast and also Sam’s book are very welcome, and hopefully you buy it and check it out. I’ve started reading it, and definitely a lot of great writing in it, and clearly lots of good stories and real-world experience, so with that, thank you, and have a great day.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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