← The Money with Katie Show
The Money with Katie Show
The Powerful 0.01% Spending Rule, Making Career Shifts, & When to Adjust Your Asset Allocation
00:46:27
Nick Maggiulli returns to the show.
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- [00:00]
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- [00:32]
Nick Maggiulli
The assumption is that your wealth is throwing off.01% per day and if you compound that over 365 days, that's about 3.7% per year, which is even more conservative than the 4% rule. And the idea behind the 0.01% rule? It's just that, hey, when this occasional expense comes up, you can just pay for it because it's trivial. You don't have to think about it. That marginal decision, that's what I want to attack. I want to say when is it okay for this particular thing? And I'm like, oh, I'm at the grocery store. Can I get cage free eggs instead of standard eggs? Oh, but that's $2 more. Well, if your net worth is $20,000 or more, then like have at it.
- [01:15]
Katie Gatti
Nick Maggiulli is the best selling author of the book Just Keep Buying, the COO of the New York City investment firm Ritholtz Wealth Management, the blogger behind the popular of Dollars and Data, and finally, and most importantly, a friend of mine. Nick is one of the few classic personal finance writers or so called finfluencers whose robust advice and insights I still will revisit regularly and will read his personal finance stuff every week when he publishes something. His new book, the Wealth Ladder, introduces a critical philosophy to financial advice that it's not one size fits all and that your strategies should vary significantly. They should change depending on where you are on that ladder. Someone who's focused on working up from their $0 mark to their first $10,000 in savings should prioritize where they're spending their energy and their focus very differently from someone who's trying to go from $100,000 to a million dollars. In other words, when you are taking financial advice from someone on the Internet, you have to make sure that it is for you. He breaks up the levels by factors of 10 so they become increasingly extreme as you go. His first range is from 0 to 10,000 and then 10,000 to 100,000 and then 100,000 to a million. You get the gist. The highest level that we're going to be discussing for our purposes today is his level four, which is $1 million to $10 million. That's like the range that we're going to top out at. In his book. He goes further, but I don't think that that's relevant for our audience today. Nick is one of the only writers that I know who places a really big emphasis, as I do, on making long term spending decisions according to your wealth and living beneath your assets rather than just focusing on your income alone. So I'm excited to talk to him today about some of his guiding principles that can make things like tough decisions about your career and making big changes in how you're working and spending your time to maybe changes in consumption habits that you've been weighing and even more generally, just time management maybe feel a little bit clearer. He's really good at quantified heuristics and I think you'll see what I mean shortly. Well, Nick, welcome back to the Money with Katie show. I am so happy that our data daddy has returned to us once again.
- [03:52]
Nick Maggiulli
Thank you for having me back on again. I truly appreciate it. I'm married now. I'm married now, so things, that's the only. That's the big lifestyle update for me. But everything's great. Data husband.
- [04:03]
Katie Gatti
Well, I know that this is far from the point of the new book, but I do want to talk to you about your first three years of writing of dollars and data, because you started your blog in 20 while working in litigation consulting as a data analyst. Kind of a switch up. Tell us about the first three years.
- [04:23]
Nick Maggiulli
Yeah, so I was working in litigation consulting, doing data work and building my skills. But on the side I was like, hey, I want to write about personal finance and investing. And that first year was like really tough. I know you can probably attest to this when you first start putting content out there and you don't have an audience. Like, people think, well, oh, if your content's not good, someone's going to be like, oh, your content sucks. Like, no, you're not going to hear anything. Like, the rejection is the sound of silence. People don't realize that, like, literally you're going to put something out there and then just nothing. Maybe one, like if that. And it's like your best friend or something, if they didn't even listen to it or read it or whatever. And so that was obviously very difficult. And like I went through a breakup during that period. So there was a lot of, like, questioning, was this the right decision? This caused all these other issues in my life. And so I'm like, you know what? I'm gonna stick with this. And it late in the year, I started to get more confidence because I met some other bloggers who had done this, and they're like, yeah, you got to keep going, man. Your stuff's good. And so that really helped me that first year. And then after that, it was much easier. Like, once I kind of had other people I looked up to, like Morgan Housel saying, dude, I love your work. And I was like, what the heck? Like, I didn't even know you read my work.
- [05:27]
Katie Gatti
That's so cool.
- [05:28]
Nick Maggiulli
That's crazy when that happens when you have someone, like, that's how you can really influence someone's career. And I try to do that as much as I can. If I find someone who has like a great blog on their new, I try and promote them as much as I can. And I've done that for a handful of people over the years. So, yeah, the first three years, yeah, I didn't make any money on it, was just writing about it because I loved it and it. It was fun and, you know, it was much easier because I had more confidence. I eventually got into wealth management, so I actually changed jobs in my whole career because of that, and then eventually started monetizing. And then I've written two books now, so that's just been quite a journey. It's been almost nine years now, but if you write a blog post once a week for almost nine years, you'll get decently good at it.
- [06:08]
Katie Gatti
You did it essentially for free for three years. The first three years was just investment. You write about spending 10 hours on each blog post, so 1500 hours of writing for free before you turned on ads and made any money off of it. But I love this because you found your golden intersection. You found what you're good at, what you're interested in, and what people will pay you for. But that paid for part can really take a while. Looking back at that, having written two books about this topic, how do you weigh those various components of good at interested in it and paid for differently depending on where someone is on the wealth ladder?
- [06:53]
Nick Maggiulli
Yeah. So in general, especially if you're lower on the wealth ladder. So for most people starting out, you have to get paid like you need to survive. There's no debate there. So you have to weight that almost like to the maximum. Of course, it would be great if you could also follow your interest and also be good at something. But as you kind of build wealth, you can see how you have more freedom to do other things. You can say, hey, I can do this other thing. So for example, I had a full time job and I started doing this on the side. Not because necessarily I had wealth, I was still doing that job. It was more like, oh, I can use my free time to do this. But God forbid something happened where I lost that job, I would still have this thing. It wasn't really making money yet. But then once it started making money, I now have that option where if I absolutely had to, God forbid something happened to the firm, I could sustain myself off of this for the time being. And so I think it's just thinking about like where you are in your life, what do you want to do? And like what are the other types of things you can do. It's easy to talk about this in a vacuum. Content is one of those things that's like, it's out there and people can do it. And it has lots of scale possibilities, right? You can, we're going to record this conversation right now and thousands of people are going to listen to it. We don't have to go and hang out with those people individually for them to hear this, right? So that's kind of the cool thing. Like the Internet has allowed for this type of stuff. And so I think whether you want to do something on the Internet because it can scale or you want to just find a different career, find something more interested in, a lot of times you kind of need a little bit of that safety financially before you can get there.
- [08:20]
Katie Gatti
We will get to the rest of this conversation with Nick after a quick break. One of the best money moves I made stopped trying to figure everything out alone. As I made progress and got closer to my overall goal, I started to second guess whether I was missing anything. Like, was I as on track as I thought was, were my investment allocations appropriate? For me, this is the plague of the self taught personal finance nerd. Does it sound familiar? Then I worked with Domain Money's certified financial planners and I got the peace of mind that I needed. They led me through a strategic restructuring of my asset allocation, my cash cushion. And they even helped me pinpoint the perfect timing for an eventual home purchase. And it turned out it was actually later than I thought. What I love is that they don't give cookie cutter advice. They actually look at what you're trying to achieve, then they optimize everything around that. Plus they use a flat fee Structure, you know exactly what you're paying right out of the gate. Ready to stop guessing and start winning with your money. See what the experience is like for yourself by booking a free strategy session. To see if Domain Money is a good fit, head to moneywithkatie.com domain money to book your session. That's moneywithkatie.com domainmoney I'm a real client of Domain Money via Money with Katie. I receive compensation and have an incentive to promote Domain Money. See important disclosures at DMNMNY co X what I've been spending a lot of time thinking about now is just how there can be psychological hang ups that are self imposed. I actually don't think you have to have as much wealth as one might assume before you make a pivot of that kind. And you did write about this recently actually in your blog. This difference between financial freedom and financial independence. And I think for so long I was very trained on financial independence as being the one and only goal. And now that I'm coming up on that point imminently, I do sort of look back and think I probably could have started taking bigger risks a lot sooner. Like I would not have had to get to the point of never needing to work again before I started taking bigger swings or taking bigger risks.
- [10:58]
Nick Maggiulli
Yeah. I think it's also hard to know that in the moment, like looking back, it's like, oh, things turned out okay, like I could have been fine. But when you're in the moment, you're like, I have no. There's so much fear and uncertainty and stuff. And like we make decisions based on the information we have, but no idea you're gonna be a successful podcast or write a book. Like all these things that eventually happen. Maybe you thought that might happen, but now you actually did it right. You're like, oh, wow, it actually came through. I sold a bunch of books. You don't know that when you start. That's the scary part, right?
- [11:27]
Katie Gatti
Yeah. We had a guest on a couple weeks back, Jonathan Grimm. He has a really interesting perspective on personal finance and retirement. It coalesced so well with what we talked to him about this idea of financial freedom versus financial independence where he basically was like, how would you be thinking about your career differently if you knew that you were going to work forever? Like, what would make you excited to never have to stop? So we know that you're always good for a statistic. You lay out that 39% of households in the US have less than $100,000 in wealth. The middle 43% have somewhere between $100,001 million. And the remaining top 18% have more than a million dollars, with slightly fewer than 2% of all Americans or like about 1 in 10 of that upper group clocking in at 10 million or more. It's really like quite an exponential curve at the end there. And in the book, you assign a class level to each group. You put the 39% of households in the lower or working class distinction. You define the 40 as the middle class, and then that remaining 16% with between a million and 10 million as upper middle class, with only the remaining 2% as upper class or super rich. And when I read that, I was like, I feel like people are going to give Nick shit for this, for saying that someone with $8 million is upper middle class. Have you gotten pushback on this? I'm really curious about the thought process here, given how kind of small that upper echelon is and what your main takeaway was when you were parsing that aggregate population wide data about wealth distribution in America.
- [13:04]
Nick Maggiulli
So I did actually get some pushback, but not too much. Actually yesterday, just yesterday, I tweeted a image from the book and I said, these are the new economic classes in the US based on net worth, not income. And it actually went super Viral. I got 2 million engagements on. I got 6,000 likes.
- [13:20]
Katie Gatti
Oh my gosh.
- [13:22]
Nick Maggiulli
But I did get pushback and I think the pushback is fair. Right, because you're right, $8 million, it's very location dependent. I tried to make these buckets location agnostic, like no matter where you are, you would definitely be upper class by the time you have 10 million. But you're right, you have $5 million. You're in like rural Alabama. You're upper class, you can basically do what you want. You can fly private. You're living somewhat like that more upper class life because your costs are so low. Right. So I could see that. But if you want to be location agnostic, like I could be upper middle class anywhere, then I think, you know, level four has to be one to 10. And then upper class is 10 to 100 in this case. Right. And of course it's arbitrary. People are going to push back and that's fine. But I want to come up with a framework that's like better than anything else we had. You can nitpick and say, oh no, I think upper middle class is 1 million to 7 million. I can do that. And maybe it is slightly more accurate. But there's a trade off between accuracy and memorability. And marketing and sharing an idea. And I think if I made this super accurate, I think we lose all those other things which are maybe more important, which no one's going to hear about this idea if it's like super complex and not easy to spread. If you say, hey, I created this levels framework which is logarithmic, it's just a 10x jump from each one and the data actually fits pretty nicely. You know, there's like roughly 20% in level one, roughly 20% in level two. Right. Like just by chance the data fit nicely. And so because of that I was like, I can put this forth and say, hey, this is a decent framework to think about this. It's not perfect. There are course issues we have to think through, like location and things like that. But at the end of the day I'm trying to come up with a new framework to look at money. And something I think is very helpful. And I think in general, most people in the US with 1 to 10 live very similar lifestyles. Don't get me wrong, the person with 10 is very different, the person with 1, but the person with like 4 and the person with 6 live probably an identical lifestyle despite a 2 million dollar difference. Like that $2 million could be at one property, a few properties, it could be like, oh, I pay for my, my children's education expenses, but they're not living a different lifestyle. Those people have recognizable lifestyles. I think once you get past 10, it's when it starts becoming like you have your own private driver, you go to a private airplane, like everything is different. I think once you start to get in the 10 plus range.
- [15:37]
Katie Gatti
I see. I was just curious because it jumped out at me and I was like, I bet you he's going to get catch some flack for this. But I think when you put it in that context, the other thing that is occurring to me now as we're talking about this is just the difference that age makes. Like a 60 year old with $2 million is in a very different position than a 30 year old with $2 million. It's hard to accommodate or account for all of those factors in a way that I think would be satisfactory to everybody. But I think that I understand what you're doing here with that log scale of 10.
- [16:14]
Nick Maggiulli
Yeah. So I agree with the age thing because of age. Like the older you are, the more time you've had to save money, so it's more likely you're going to have more wealth. And you see that clearly in the data at the same time, the person who's 30, they can't just say, okay, I'm never going to work again with 2 million and they're going to be fine. Like the person with 60 at 2 million and the person with 30. The person with 60 has more options than the person with 30. Assuming the person with 30 doesn't want to work anymore. Right. Because now your 2 million has to last 60 years instead of just 30 years.
- [16:41]
Katie Gatti
I think the big distinction is that at 30, with that much money, you still probably are going to have, especially if you're about to have children, you still are going to have to be doing something to generate income, but you probably wouldn't have to really be saving very much. You can probably coast from a retirement savings standpoint.
- [17:00]
Nick Maggiulli
Yeah, you don't. That's what I'm saying. You can probably coast fire for sure. Right. Which is you're talking about like, you know, we talked about earlier, like, well, work's going to change and everyone's just going to work till 60 and then stop. Like, I do think coast fire as an idea is going to take off.
- [17:12]
Katie Gatti
That can be book number three for you.
- [17:13]
Nick Maggiulli
Yeah, yeah. But I really think that's the future where it's like, hey, I save up enough where I'm going to have like my retirement taken care of and then I just got to take care of my current expenses until I get to retirement. And that allows you to take your foot off the gas, allows you to go and have a different job, all those types of things.
- [17:29]
Katie Gatti
There's a couple things in your philosophy that I found really useful and that I have been revisiting a lot actually since I read the book. So you have some. Something called the 01% rule, which is really your way of guiding people to see their net worth as a more valuable indicator of how much they should feel free to spend as opposed to just looking at income. And this is similar in nature to my like, don't live beyond your assets framework that I have in chapter three of Rich Girl Nation. So I was like, oh, this is fun to see it rendered in this way. So from a sense of scale, I understood it in theory that like, if you have a hundred $thousand dollars, a $10 differ price is ultimately going to be meaningless to you. So anything beneath that really isn't worth your time to stress about. But I was curious, like, okay, well, how often can you blow off that $10 price difference? Because theoretically, if you're doing this a hundred times a week, well, now it's going to start to matter. But you had a pretty elegant explanation for how this.01% rule fits into regular spending. So can you walk us through that?
- [18:37]
Nick Maggiulli
Yeah. So the assumption is that your wealth is throwing off 0.01% per day. And if you do that, compound that over 365 days, that's about 3.7% per year, which is even more conservative than the 4% rule. And the idea behind the 0.01% rule or the 1 10,000th rule, there's a lot of ways you can call it, but the idea here isn't that you should spend this every day. It's just that, hey, when this occasional expense comes up, you can just pay for it because it's trivial. You don't have to think about it like it's just a trivial expense, right? And so I think that's where I want to get people's heads into. Because every time when someone's like, can I afford this thing? Like this unit of thing, that marginal decision, that's what I want to attack. I want to say, when is it okay for this particular thing? And I'm like, oh, I made the grocery store. Can I get cage free eggs instead of standard eggs? Oh, but that's $2 more. Well, you know, if your net worth is $20,000 or more, then have at it. That's my thinking, right? It's like something of that sort. Everyone's purchasing on the margin. There's not people in level one who are like at the Ferrari dealership saying, I don't know if I can afford this. They obviously know they can't afford it, but they might be at a grocery store and say, can I afford this thing or can I afford my latte? Right? And so obviously you spend based on your income because wealth alone is not enough, especially for those starting out. However, over time, I like this rule because it allows your lifestyle to creep a little bit, but only after you've built wealth, which is like the ultimate goal. I think if you had to pick between, oh, I want someone to end their life with, like, more wealth or more income, I think you'd pick wealth because that's something. It's a stock. You can pass it on to the next generation. You can do things with it. Income's great, but it's very fickle. And so my goal here is to be like, hey, let's find a way to allow people to spend more money over time, but only after they've been financially disciplined. And that's using wealth. And I also agree with you. I Think you're the only other person that says like, spend based on wealth. I don't think I know another person in the space really talks about this idea. Most people talk about spending based on income and different rules. Oh, you have to pay yourself first. Like all these different things, save rates.
- [20:42]
Katie Gatti
And yeah, yeah, I came to this on kind of out of necessity where I went from being a below median earner to a high earner and in a relatively short amount of time, like just a couple of years, and that explosion in access to just cash flow on a monthly basis, I didn't really know what to do with it. And I was like, I feel like if somebody just looked at my income, they'd be like, oh, you could spend a lot more. Like you're really living beneath your means. But at that point in time, I hadn't been earning a lot of money for long enough to really accumulate very much. My net worth and my income were actually kind of comparable. And I was like, okay, I don't feel like I can safely scale up. So I was really looking for some sort of formula that would give me a sense for what was a reasonable amount to indulge. And so that was what led me to kind of look for that, like, okay, how can I balance like 4%? Rule of like the progress I've already made with the income that I have now. Because I also, I don't love this idea that I think is very pervasive, particularly in the harder core personal finance circles of all lifestyle creep should be avoided or that you should constantly be living at the same level that you were in your 20s. Well, yeah, that's a great way to build wealth, but it's kind of self defeating. Like, well, I want to enjoy the success that I have at least a little bit. Like I want to responsibly enjoy the progress that I have made. And I think that that's, that's really important for keeping people going and having maintained and sustained motivation. So when I was reading through this, it sounds like, okay, if you're getting 3.7% growth per year after inflation, as you've noted, this is exceedingly conservative. Your wealth is growing by 0.01% per day, which means theoretically speaking, you could spend 0.01% of your wealth daily in excess of your income and you would still not be reducing your long term wealth because the growth is replacing the spending. I think that that could get out of hand really quickly. But I do love the idea of this highly personalizable little metric that you can Tap into if you are still kind of operating in the framework of. Which is kind of how I felt where like I used to make 60,000 and then when I was making 250,000, I was still kind of judging my spending decisions as If I made 60 because I hadn't scaled up at all. Really.
- [23:12]
Nick Maggiulli
Yeah, no, exactly. And you're completely right, like with the lifestyle creep stuff. I don't think there's a lot of other people that are like, yeah, you should have some lifestyle creep. And I completely support that. It's a great way to build wealth, but it's a terrible way to live. Right? Like to never creep, especially if you're working hard. What's the point of money? If we really abstract all this stuff away with investing, at least we're giving up current consumption to have future higher, ideally higher consumption in the future. Now, whether that's by us or our heirs or by we want to donate to someone in some other cause. Like, there's a lot of ways this can be done. But that's the whole premise. Like, why are we doing this? Why do we have the stock market and all this? Because people want to consume more in the future. The ironic part is most of them don't. They die with lots of money and they don't actually consume most of their wealth. I just agree with you completely on this issue. And I. There's not many people where I've heard argue this and that's why I think we align so well on, on some of these things.
- [24:05]
Katie Gatti
Just you have the statistic handy. What percentage of retirees die with more money than they retired with?
- [24:13]
Nick Maggiulli
I do remember a KITC study which was based on history. So it's like, hey, if you have a 6040 portfolio and you do that for 30 years, the 4% rule, the question is, what's the chance that you're going to be below your starting principal value? And then like, what's the chance you're going to be up 4x? And the answer is they're roughly the same. Damn, if we were retired today and you did. 4% rule in a 6040 for the next 30 years, you're equally as likely, at least according to history, you're equally as likely to end up with 4x your starting balance, as you were to end up below your starting balance. The typical median outcome was like 2 to 3x your balance while you're pulling money out, by the way.
- [24:52]
Katie Gatti
So crazy.
- [24:53]
Nick Maggiulli
Yeah, that's the nuts part.
- [24:54]
Katie Gatti
That's wild. So based on some research that we've done, about our community. I believe that the median money with Katie show listener is in the mid level three range. They have somewhere between 100,000 and a million dollars in savings, investments and home equity combined. So I want to talk about for level three people, what are the biggest areas of opportunity and the biggest risks? Because you write that at this point there's a bit of a dual truth on the table where more income is more important than more budgeting. If you're in this phase, however, not controlling your spending is a one way ticket back down the ladder. So you warn of a few things in particular that can be pretty tricky for this group. What are the big risks at this financial phase? How should priorities begin to shift in level three?
- [25:45]
Nick Maggiulli
Yeah, so in chapter 10 of the book, I talk about a particular data set that's called the panel study of income dynamics. And panel data just means you're following people over time or following subjects over time. And so with this data, I was able to look at someone's wealth at point A and then look at their wealth again in 10 years. Right. And so I can basically say, hey, let's look at all the people that are in level three today. I know they're in level three. And then what's the difference between the people that start in level three and get to level four versus the people that start in level three and stay in level three after a decade? And there were two big differences I found. The first one was the income of those that made it to level four was considerably higher. They had a higher income, so they were earning more money. But the other thing I found, which was probably more interesting, was that their spending between these two groups was nearly identical. The ones that stayed in level three did spend a little less, but not that much less. They spent almost as much as the people that made it to level four, despite the fact that they have not as high of an income. And so I think there is a little bit of keeping up with the Joneses, whether that's status, whether that's a nice home, and if you look at what types of the big ticket purchases, people probably get overextended on their home, maybe get a mortgage that's bigger than maybe what they need or what they can afford. And so on average, all these groups built wealth. Even those that stayed in level three, they did build wealth, they just didn't escape level three. But I did see that their spending was still quite high. And so that was something to note. So in terms of like opportunities in, in level three, it's like how Can I grow my income further? Right. And I think there's two big pillars here. One is investing, right? You got to keep investing. And over time that really can build wealth because that money starts throwing off income of its own. The other one is side hustles and things like that. I faced that when I was in level three. I had a decent job, I was making good money, and I just saw like these 3%, 4% raises for the rest of my career. And that was it. I was capped out. I was just going to follow the inflation and that was going to be it. Unless I got a PhD or an MBA or something. I said, I don't want to do that. So I was like, maybe I'll start writing. We'll see where it goes. I didn't know it was going to be monetized. I had no clue. But I had heard you can do stuff with content. I said, okay, we'll see. So that's how I did it. There's other side hustles, a lot of different options out there. And I talk about this in the book, but yeah, that's what I would say is like thinking about the income side. That's the opportunity. And then on the risk side, it really is a little bit of overspending. I think that can cause this also. You can. Your investments can go awry as well. I'm less worried about that. I'm guessing the median money with Katie Listener is not day trading, crypto and options and things like that. So I think that you guys are set.
- [28:21]
Katie Gatti
Well, I did. There was one line that I kept thinking about after I read it. You wrote, the most expensive thing some people own is their ego. I was like, oof, that is a killer. That's a bar.
- [28:33]
Nick Maggiulli
Honestly, I appreciate it.
- [28:37]
Katie Gatti
We'll get back to this conversation with Nick Magiulli right after this. While you're planning beach trips, barbecues and three day weekends this summer, your wireless bill shouldn't be simultaneously burning up your savings. Check out Mint Mobile to say bye bye to overpriced wireless plans. All plans come with high speed data and unlimited talk and text on the nation's largest 5G network. And right now you can get three months of unlimited service from Mint Mobile for 15 bucks a month. I love having Mint Mobile. I've had them for years and it's super high quality, really cheap, really straightforward. This year, skip breaking a sweat and breaking the bank and get this new customer offer and your 3 month unlimited wireless plan for just 15 bucks a month at mintmobile.commwk that's mintmobile.commwk upfront payment of $45 required equivalent to $15 per month limited time new customer offer for first 3 months only. Speeds may slow above 35gb on unlimited plan. Taxes and fees extra. See Mint Mobile for details.
- [29:53]
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- [30:27]
Katie Gatti
So I do want to spend a little bit of time on level four as well. You note that Level four. So to kind of ground us again in the, in our scale, net worth between 1 million and 10 million. That's a huge range, right? But that's the point at which your investment portfolio is likely to earn more than you are. That really jumped out at me. This is when it pays to spend more time ensuring your investments are in the right spot. One of my unexpected takeaways of that level four chapter was that maybe worrying too much about asset allocation before that point might not really be the best use of your time. I feel like I've had this conversation with people over the years where they're really nervous about getting every single percentage point of that allocation. Just, just totally locked in with like a $70,000 portfolio. And it's like, this really is not the best use of your time right now. I am curious though, if you can tell me a little bit more about what investment management at that phase might look like. Obviously you work for a wealth management firm. I am aware that that's the context we're having this conversation in. But that was something that jumped out to me that I was like, oh, I should maybe be like paying a little bit more attention to this. I kind of set this and forget it a long time ago. And now that I'm really thinking through these numbers, I'm like, yeah, actually a high return year is comparable. So what should we be paying attention to here?
- [31:54]
Nick Maggiulli
The thinking is that as your investment portfolio gets larger, the cost of the mistakes just get larger. And so a mistake on $100,000 portfolio, right? Let's say, oh, I made a slight mistake and maybe I underperformed the market by a few percentage points. Okay. On a 10% return, that's $10,000. Let's say you underperform by 2, 3%, that's 2 to 3 grand. It's not a big deal. Right?
- [32:15]
Katie Gatti
Yeah.
- [32:16]
Nick Maggiulli
On a million dollar portfolio that's now a 10x right now you're 10 to 20 grand off. Right. You can just see how because the portfolio value is larger or your net worth's larger and as a whole the mistakes are more costly. And I also think it makes sense why the financial advice industry does really try to target people with over a million dollars investable assets because it's where A the economics makes sense for the advisor but B it also makes sense for the client. If you don't have a lot of money, our advice isn't going to be as impactful and it's hard to run a business that way. And also there's not much we're going to give you that's going to impact your life as much as like raise your income or work on the personal finance side. Right. And so it makes sense why that naturally as it gets bigger people start to say oh my gosh, maybe I do need an advisor because I, I don't want to think about this or I'm not sure what to do with this stuff. And not everyone's going to want an advisor. And there's different types of people. Kits he's has some research on this as well, Michael Kitces and one of the things he shows is like there's basically like three groups of people out there and it's roughly like equally divided into three parts. So there's the, the people that do yourselfers, they're going to always do it themselves, are never going to pay someone for it ever. They'll read blogs, they'll do stuff to listen to podcasts, but they're not going to pay someone. There's the people that want to, they're called the delegators, they don't want to do any of it. They're like, I can't even think about this, this is not my area of expertise. I'm happy to pay like an AUM fee or a planning fee or hourly fee, whatever. And then there's a third group who doesn't want to pay the AUM fee, doesn't want the full on advisory relationship but really wants someone to kind of like just double check their work really. And so those are the people that are going to go on and maybe ask questions to podcasts that answer questions or they're maybe going to pay a financial planner to give them a one time plan or pay them hourly or something just through a, a very fixed Engagement. And so most of your listeners should fall in one of those buckets of like, oh, I do it myself, or, oh, I really want to delegate. And so thinking through that, especially in level four, that's where it starts to become more impactful.
- [34:12]
Katie Gatti
I'm definitely the third camp. I think I was really confident doing it myself up until that switchover point where I started to be like, okay, we're talking about some, like, actual money, ass money now. I should probably just make sure that everything that I assume I'm doing that's correct. Like, it's worth the money now to pay somebody a couple thousand dollars to check my work. I think that I'm having that same experience, personally speaking with now thinking that it might actually be time to, like, work with a cpa. I've always done all of my taxes myself, and now that I kind of have, like, multiple businesses in the mix and, like, royalties from a book, I'm going to be establishing myself in Colorado as a resident. So, like, we'll have state income tax for the first time since my husband is getting out of the Air Force. There's just a couple things where I'm like, yeah, I actually think that there comes a point where the peace of mind that a professional is looking at these things is worth spending the money on it. And I don't feel as stingy about these things anymore.
- [35:18]
Nick Maggiulli
Yeah, I agree completely. And when I think about this, like, I'm definitely more of the do it yourselfer. But in terms of the tax stuff, like, I have to pay people, because you're right. If you have an llc, you have a book paying royalties, this, that you're changing states, all this stuff, it gets so complex. And I know I'm not the expert on it. Do I want to sit and learn all the tax, the intricate tax law for New York, New Jersey, you know, my LLCs in Wyoming, like, do I want to learn all that? No, I don't want to do any of that. So I'm happy to pay that stuff. I do think that's also where the value add comes in, because at some point you're gonna be like, wow, I could have been doing that and saving how much a year and doing this. That's the example where those services do really pay for themselves at some point.
- [35:56]
Katie Gatti
Every single year. I owe money on my taxes because I have W2 and 1099. And, you know, I've historically paid enough of my liability through the W2 paycheck deductions that I always end up owing money for the 1099 income, but it's not enough to trigger a penalty. And I think this past year was the first year where there was a penalty. And I mean, it's thousands of dollars. So I'm like, okay, well, yeah, this is probably a sign that, like, my attempt to do this on the cheap is now actually costing me more because I'm just having. I'm overpaying the IRS now. Anyway, I think regardless of what level someone is currently in, you have another guideline to help people assess new opportunities and potential career moves. Not thinking about the investment or the spending side of things as much as we're thinking about income and exertion. And how are you kind of quantifying big changes? Can you walk us through the 1% rule?
- [36:55]
Nick Maggiulli
Yeah. So the.01% rule is for spending, the 1% rule. Of course, this is a rough guideline. Everything should be based on how much time it takes you technically. Right. But let's just put time aside for now. And the question is, if you're looking at an income opportunity, if it's not going to eventually improve your net worth by 1%, then maybe you should reconsider. And it's not a hard, fast rule. It's just something to think about. So if you, let's say you're like, oh, someone wants to pay me to do this event somewhere, and if that thing's not going to even move your net worth by 1% or not even close to that, you're going to be like, why do I want to go do that? Like, why do I want to go speak somewhere? Or why do I want to take on this project? Right. And so I think thinking through that, and obviously that bar gets higher and higher over time, and I think that's that as it should, because then you're valuing your time more highly over time, which I think is a good thing. Now, that's only within the labor market setting. I don't think you should start thinking that way with your whole life because then you're going to start being like, well, I could play with my kids or I could go make this money, and I don't want to do that. You don't want to take this to the extreme. I think it gets.
- [37:58]
Katie Gatti
I appreciate that. Like, we're keeping it in this box.
- [38:01]
Nick Maggiulli
Yeah. When it's some, like, I'm paying you and this is a contractual relationship, that's when you use this rule. You do not use this rule to start evaluating everything, because then, next thing you know, you're not living your life anymore. And you're optimizing everything and it's just, it gets really bad. You could see how that spirals to the point where you don't do anything in your life anymore and you have someone cooking for you, cleaning for you, all this stuff. And I'm just like, it's too much that you need to experience life still and not just maximize every dollar.
- [38:26]
Katie Gatti
There was some viral reply to a Reddit post where someone was talking about essentially witnessing somebody go through that, where they took this optimization framework, applied it so wholeheartedly that before long they really did nothing that didn't make them money. And they became so one dimensional. Like the outsourcing everything to other people. The main takeaway from the reply was like it flattened this person's sense of their identity to the point that was pretty harmful. And I always think about that now. I actually stopped paying somebody to come clean. I paid a professional cleaning service for years. And when we downsized into this apartment, I was like, I actually kind of like cleaning. This is kind of part of my like wind down time. It like feels productive, but it's kind of mindless. And I can like listen to a podcast and yeah, if I'm applying an optimization framework of I could spend a couple hundred dollars to save this hour of my time. That might make quote unquote more sense, but that in some ways I think I was actually losing out on feeling like I had other purposes or was capable of doing other things than like sitting in front of a laptop.
- [39:39]
Nick Maggiulli
Yeah, I completely agree. I think that's exactly right. And what can happen when you start just optimal, like, oh, I really love cooking, but I could afford to do Uber Eats or something. I like cooking and I like the act of cooking. And yes, it's cheaper and that's great and all and but like that one hour I could write a blog post that would make me more money and I could hire someone. But like, at the end of the day, I enjoy that. I want to still have a life and not just be a money making machine or something like that. And I think that's for most people that just have a 9 to 5. Like if your work's very defined, but if you start doing a side hustle or something, this type of stuff can come up as like a tension. And I don't want that to kind of take over someone's life.
- [40:14]
Katie Gatti
I think you're absolutely right. And I think that that's why I value heuristics like these of the 1% rule, because I've pretty much all of my friends have side hustles and I actually can't think of a single one that only works 9 to 5 and isn't somehow scrapping of. I'm either trying to build a business on the side or I'm doing something just for extra money. Most people that I know at this phase of life, either out of necessity or out of desire, are doing something for money outside of a traditional 9 to 5 employment. And I do think that sometimes things are a little borderline where you're like, well, should I take this opportunity? Should I spend the time doing this? The money could be good. I that's why I like the 1%. You think about 1% of your net worth and you go, all right, if it's underneath that, maybe you still do it because you want to. But if things are borderline, it gives you a little, an extra check that you can run the decision making process through that might push you in one direction or the other when you're making those very basic day to day decisions about what you are committing to and how you're spending your time.
- [41:18]
Nick Maggiulli
Yep, I could not improve on that answer. So I agree completely.
- [41:22]
Katie Gatti
So your book expands to levels of wealth that are like nine figures and above. Like amounts of money that I like, can't even begin to wrap my head around. But I think there's an interesting 10 mention toward the end of the book when it comes to the relationship between the pursuit of wealth and the pursuit of happiness. And you summarize some of this happiness data. Well, if you're poor, more money will make you happier, probably. If you're happy, more money is probably gonna make you happier. But if you aren't poor and you aren't happy, more money won't do a thing. And I like the nuance there. You also acknowledge diminishing returns here and how little your life is impacted by money once you have enough of it. I do think about this a lot. I'm sure you think about it constantly, given your profession. I'm just curious how you reconcile that reality with the fact that some people who do have billions of dollars still seem hell bent on acquiring more and will go to great lengths to defend their ability to have and make millions of dollars. There's a conversation you include in the book with Charlie Munger. He basically was like reflecting on his life and kind of gave the answer that no one expects, which is, I could have had higher returns, I could have made more. And I was like, whoa, that's like not what I was expecting. This billionaire, 90 year old man to say it feels like attention to me. And I'm kind of curious like how you personally resolve that and think about that.
- [42:47]
Nick Maggiulli
How do I resolve it? The most expensive thing some people own is their ego. That's how I resolve it. That's it. Why do people go and do the things they do? It's not money. It's really not. It's only the competition of the money. It's not like the consumption. I don't think people with, oh, I have 20 billion, if I only had 30 billion, I could actually consume my, my right consumption basket. Like, absolutely not. At that level, it doesn't matter anymore. Like money is, is a tool to do other things. You can buy companies and do other things and really impact the world in a much bigger way. That is true. There's been, you know, 20 billion and 300 billion is quite big because you can do, you can impact the world and change the world in a big way. But I do think a lot of that is ego coming out. Right? Like, why do you want to do that? There's debates to be had and there's philosophical ideas here. But I do think some of it is like, oh, I think I should be the one doing this because I believe in my moral philosophy. And that's, I think, coming through in some way with some of these people.
- [43:45]
Katie Gatti
Okay, interesting. I wasn't expecting you to tie that back to ego, but I think you're spot on. I remember talking to our mutual friend Jack Raines about this a couple years ago where we were kind of discussing this idea of when money transitions from being like a material resource to just being a scoreboard. And how when it becomes a scoreboard, that's when you get into this kind of infinite. Like, no amount will ever feel like enough to you because you're asking it to do something that it was never meant to do. Like, you're never gonna achieve like a level of satisfaction with that.
- [44:17]
Nick Maggiulli
Yeah, I think that's a piece of it. I also think about who's actually the richest people in the planet right now. I think it's Gates and Buffett. And if you look at the Forbes list, it's gonna say Musk and Bezos and all these other people who have a higher wealth on paper, but they're not diversified. Like something happens to Tesla. Like you could very easily see Elon Musk's net worth like get cut in half. Even more than that drop below 100 billion. You could imagine something could happen to Tesla specifically that would cause that. I can't imagine a scenario where Buffett or Gates has their net worth cut in half. There's no scenario because they're so diversified. Bill Gates is the largest private landowner in the US for him to lose his wealth, like the US would have to. There'd be a nuclear war. These people are so diversified, like Buffets and the Gates are going to have. I know they're giving their money away at the foundations when they die, but, like, it's very interesting to think about that and ego. And I think they are playing a very different game than most of the billionaires because they've been able to diversify, which is really protected their wealth. And it's going to allow that to sustain much longer than I think a lot of the other very, very rich people. Super rich. I think in general, like, I do think it's partially ego. And at the end of the day, that's what. What happens, right? Where this plays out.
- [45:31]
Katie Gatti
What's next for you? You think you'll write more books?
- [45:34]
Nick Maggiulli
I have no clue. People have asked me that. I'm just thinking about this one right now. Right. It's like, imagine it's like just got married. Enjoying that. It's going through the promotion of this, and it's been fun to kind of hear everyone's different thoughts and their takes on it and what resonated with them and what didn't. And I really appreciate you having me on, Katie. We've been friends a long time, and it's great to, like, go back and forth with you intellectually on these ideas.
- [45:54]
Katie Gatti
Oh, thank you. I feel the same way. And it was a pleasure. Thank you for coming back. I think for the show art for this one, I'm gonna use the Polaroid of the selfie that you took with my parents at my book release. Have you seen this?
- [46:07]
Nick Maggiulli
I don't know if I have.
- [46:09]
Katie Gatti
So cute. There's like a stack of Polaroids after the party that think henna or somebody handed it to me, and one of it was like, you and my dad, like, holding the book. I was like, wow. If you would have showed me this five years ago, I would have never believed that this was real. If you would have showed this to 2020 Katie, she would have just spontaneously combusted me reading of Dollars and Data in my little apartment in Dallas, being like, 4% rule.
- [46:36]
Nick Maggiulli
I'm gonna have. I'm gonna have your book one day, and I'm gonna be holding with your dad at your book launch party. So funny.
- [46:43]
Katie Gatti
Wild. Well, thank you for joining me and congrats. On another successful book.
- [46:47]
Nick Maggiulli
Thank you. Thanks so much, Katie. Appreciate it.
- [46:56]
Katie Gatti
Our show is a production of Morning Brew and is produced by Hannah Velez and me, Katie Gattytasan with our audio engineering and our sound design from Nick Torres. Devin Emery is the president of Morning Brew and additional fact checking comes from Scott Wilson.