Afford Anything - Banks Collapsing?! What’s Next? – Plus ENCORE episode with Financial Advisor Michael Kitces

Episode Date: May 4, 2023

#439: There are massive rapid changes unfurling in the financial world. This week’s biggest news: First Republic Bank collapsed; JP Morgan Chase acquired it. (As it happens, I was one of 12 people who was lucky enough to have dinner with Chase CEO Jamie Dimon exactly one week ago – just days before the acquisition. I tell that story around the 8-minute mark of today’s episode.) The Fed issued a 10th consecutive rate hike, raising interest rates another quarter of a percentage point. Inflation is still double the target rate. And public confidence in bedrock financial institutions, as measured by a regional banking index fund, is in the toilet. I talk about these issues for the first 18-ish minutes of the podcast, and then we switch to a replay of an interview that we held with acclaimed financial advisor Michael Kitces, which originally aired as Episode 64. Enjoy! The interview with Michael Kitces originally aired on February 13, 2017 https://affordanything.com/64-michael-kitces-mind-powerful-money/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

There are massive rapid changes happening in the financial world. First Republic Bank collapsed and JPMorgan Chase acquired it. The Fed raised interest rates by yet another quarter of a percentage point, the 10th consecutive rate hike, but they've hinted that there might not be an 11th. The jobs report is still strong despite the high-profile layoffs. Inflation is hovering around 4%, which is a huge improvement, but still double the target rate. And the market is as volatile as ever. What does all of this mean for you? How can we make sense of this cacophony, separate the noise from the signal, and understand what to do with this information?

We're going to chat about that today. Welcome to the Afford Anything Podcast. The show that understands you can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource you need to manage, your time, your focus, your energy. So, what matters most? and how do you make decisions accordingly? Those are the big picture questions that this podcast explores.

In today's episode, we're going to do something a little bit different than what we normally do. I'm recording this on Thursday, May 4th, 20203. We are going to talk about the current market, the current financial and economic environment. We're going to talk about that for the first 10 minutes. After that, we will replay an interview with acclaimed financial advisor, Michael Kitsis. Whether you're a long-time listener or new to the show, welcome. I'm your host, Paula Pant, and let's start by talking about the banking collapse. What are the key points you should know? And how does this affect you? Now, first of all, the collapse of First Republic Bank was the big story of the week. For those of you who are, or were, First Republic Bank customers, rest assured that your deposits are fine. You're effectively a JPMorgan Chase customer now. Second, although the First Republic collapse came on the heels of the breakdown of both Silicon Valley Bank and Signature Bank, the overall banking sector, particularly the big national banks, are stable. The weaknesses that we have seen in the

system have impacted regional banks, primarily the regional banks that serve high net worth individuals and companies based in high cost of living coastal cities. First Republic Bank had branches that were concentrated in high-cost coastal areas. Silicon Valley Bank obviously serves its namesake area, or it used to. Now, seeing these regional banks collapse has caused a crisis in public confidence. In particularly regional banks, there is an index called the KBW Index, which is essentially an index fund that tracks banking stocks. It includes 24 publicly traded banks, including regional banks. And that index fund right now is in the toilet. It suffered huge losses this week. It also, of course, dropped substantially in mid-March after Silicon Valley Bank collapsed.

And in addition to that index fund, there are, of course, stocks for specific individual banks that have dropped by as much as 20%. And so to the extent, and granted, the stock market does not necessarily reflect public opinion, but to the extent that we can use what's happening in the markets as a proxy for general sentiment, the KBW index would indicate that people are pretty shaken. And in addition to that, the net outflow of deposits from banks that started, again, in mid-March when Silicon Valley Bank collapsed, there's a net outflow. More people are shifting to money market funds. That's been the unexpected winner. Money-market funds have seen a boom, a huge inflow since all of this started.

Now, at the macro level, policymakers are going to have their. public debates about systematically what to do from here. Should the FDIC increase the stated amount that it covers? Should smaller regional banks in particular be held to the same set of regulations that the big banks are? What about shadow banks? Where do they fall into the picture? So at the macro level, you hear people talk about these questions. But at the individual level, you, what should you do? How do you protect and preserve your own? money in the face of all of this. Well, number one, rest assured that in all three of these banking collapses, depositors, people like you and me, have been protected. Number two, however, it is wise

to make sure that your deposits at any one given institution, or in any, especially in any single member account, stay under the $250,000. FDIC limit. Now, most people who are listening to this are like, yeah, great, thanks Paula. Why would I have $250,000 just sitting in a account? But if you are a small business owner, it's entirely likely that you would have more than that $250K,000, you would have uninsured deposits because as a small business owner, that's payroll. Those are your operating expenses. Likewise, if you're a real estate investor, maybe you did a cash out refi on one of your properties, and now you've got that money sitting in an account while you're trying to figure out which property you want to buy next.

So for many entrepreneurs, many investors, even small-scale mom and pop operations, it's entirely reasonable that you have deposits that are in excess of what the FDIC would insure. And I think if there is a takeaway from watching this, it's that if you are dealing with accounts that have such large numbers, it is probably a good idea to spread that money among different institutions. Not because I think that anything is going to happen. I think the worst of it is behind us for this chapter, but simply as a matter of diligence and protocol. But for anyone listening who is not an entrepreneur, is not a real estate investor, or maybe you've just started, you're in the initial phases of your side hustle, things haven't quite taken off yet. For anyone who's listening, who has accounts with fewer zeros at the end, there's no reason for anxiety. Now, one thing that's interesting about this banking collapse is that we're seeing more consolidation in the banking.

sector. We're seeing big banks get bigger. Under normal circumstances, regulations prohibit any one bank from holding more than 10% of the total number of deposits across the nation. But these are not normal circumstances. We've seen this happen before. We've seen this happen in 2008. In March 2008, J.P. Morgan Chase acquired Bear Stearns, which was one of the biggest global investment banks. Six months later, in September 2008, J.P. Morgan Chase, which is headed by Jamie Diamond, bought Washington Mutual, WAMU, which was the biggest Savings and Loan Association in the U.S. at the time. And similar to First Republic, WAMU was also seized by the FDIC. And so fast forward to last week, and I actually have a personal story about this.

So last Thursday, April 27, I was lucky enough to be one of 12 people who was invited to have dinner with Jamie Diamond, the chairman and CEO of J.P. Morgan Chase. So that was exactly one week ago. The 12 of us who were having dinner with him are the people associated with the business and economics journalism fellowship that I'm part of this year. It's called the Night Badget Fellowship at Columbia University. I'm limited in what I can tell you about that dinner, but I can say three things. one, I can tell you that for weeks prior to the dinner, we, meaning every single fellow fellow, you know, all of my fellow night badge at fellows, we took very seriously the task of thinking about what questions we wanted to ask. So that's one of three things I can tell you. The second is that I can tell you we had plenty of opportunity to ask whatever we wanted. And the third thing that I can tell you is that I was pleasantly surprised. And impressed by his openness and his frankness.

That dinner, and I posted photos from that dinner on Instagram. I'm on Instagram at Paula. Oh, it was in my Insta stories. Oh, no, it was on the post, too. Anyway, I'm on Instagram at Paula P.A-U-L-A. P-A-N-T. Follow me there. So that was Thursday.

And then two days later, the Wall Street Journal broke the story that J.P. Morgan Chase was expected to most likely win the bid for First Republic. That was first reported in the Wall Street Journal on Saturday. Then Sunday overnight, one of my fellow fellows was tracking this really closely. We have a WhatsApp group. And he posted at like 3 a.m. 4 a.m. to our WhatsApp group. He was basically posting in real time as the public information broke. That was when it became official that Chase acquired First Republic.

and that the face of banking will look different from here on out. But, you know, Jamie Diamond did a conference call with his investors on Monday that it was public. He made public remarks in which he said that this part of the crisis is over, meaning that the banking system is stable. And that doesn't necessarily mean that the U.S. economy as a whole is going to be rainbows and unicorns from here on out. In fact, in early April, he made public remarks warning about storm clouds ahead. But it does mean that for you, for me, for ordinary individuals, the bedrock of our ability to participate in the financial system is our confidence in institutions continuing to exist. And while we have seen three banks collapse, the indications point to the worst being over

and the banking sector as a whole being stable. It's funny that this even has to be a discussion because it is so foundational, so fundamental, it's something that we typically take for granted. You know when there is confidence in the banking system because nobody is talking about it. It is that taken for granted. It is that foundational. And it looks as though we can get back to not talking about it. So on that note, let's talk about one of the major factors that led to all of this, inflation and interest rate hikes.

That was the other news from this week, although it wasn't even big news because this has become de rigore at this point. But the Fed raised interest rates by another quarter of a percentage point. Now, the Fed tends to meet roughly once every six weeks. They generally meet around eight times a year. This is the 10th consecutive meeting at which they have raised the federal funds rate. And that, by the way, is one of the reasons that we're facing such turmoil in the banking sector because these rapid rate hikes had the effect of weakening bank balance sheets, which led to everything that we've just talked about for the last however many minutes.

The good news is that the rate hikes have put the brakes on inflation. It's now hovering around 4%. And that's a huge improvement from where we were a few months ago. But it is still double the target rate. So there's a possibility in the far future. And by far, I mean maybe in the fall in the winter. There's a possibility that there might be more rate hikes, depending on how inflation looks three months, six months, nine months down the road.

But the Fed has signaled that they might cool it for a while. They might not hike the federal funds rate for an 11th consecutive time. So for the time being at least, for the early summer, early to midsummer, we can anticipate interest rates staying relatively steady. So again, how do we apply that information? What should you do with that knowledge? Well, higher interest rates mean that the interest rate on everything from your credit card balance to your car loans to your mortgage is going to be higher. Of course, if you have a credit card balance, one of your top priorities should be crushing that as quickly as possible.

and that has nothing to do with what's happening with the Fed. That's just a universal. When it comes to your mortgage, though, the question gets a bit more interesting because there is a stronger argument to be made right now for getting an adjustable rate mortgage if you're in the market to buy a home or buy a rental property. For the last decade, when interest rates were low,

a fixed rate was hardly even questioned. It was, at least anecdotally, among the students in my rental property investing course, it was just assumed that you would lock in a fixed rate. These days, however, we need to get a spreadsheet involved, and we need to start making some assumptions, and testing some best-case, worst-case, and medium-case scenarios. I won't go too far down the rabbit hole on this fixed-versus-adjustable rate topic. Because that could be an entire episode in itself.

But I will say that if you opt for an adjustable rate, there are a few things you must know. First, you need to know how long your initial rate is locked in. Second, you need to know how often your rate will adjust. Third, you need to know how much your rate could adjust by during any singular adjustment. And you should know that in two forms. You should know that in terms of percentage points. And you should also know that in terms of what it means for your monthly bill. And then the fourth thing you should know is how bad can it get? What is the highest possible

rate that your adjustable rate mortgage could go to? And what does that mean for your monthly payment. And bear in mind, when you're asking the question, what does that mean for your monthly payment? Remember, your principal balance is not going to change. The adjustable rate changes the interest, but then there are also two other wild card variables, the property taxes that you pay, and the insurance that you pay. And both of those could go up and that could have significant consequences to your monthly payment as well. So you'll want to leave some margin of error there, because if in the worst case scenario, your adjustable rate mortgage hits the maximum that it is contractually allowed to reach, if that's going to create a principal

and interest payment amount that would put you on the brink, assuming steady taxes and insurance, well, then that's no good, because then all your county has to do, is hike the property taxes or hike the assessment on your property. And boom, now the bill is bigger than what you can handle. So the takeaway is that there is a stronger case to be made for adjustable rate mortgages, but you're going to want to spreadsheet the heck out of that possibility before you sign on the dotted line. All right. So that is a bit of a synopsis on what's happening right now. Again, I'm recording this on Thursday, May 4th, 2023. As I mentioned, I'm doing this fellowship at Columbia in business and econ journalism.

And it is currently finals week. My friend referred to it as deadline inferno. So I'm currently living in the middle of deadline inferno, final projects, final papers, lots of deadlines. So I'm sorry we couldn't record a fresh interview or a fresh Ask Paula and Joe episode as we normally do. And we've skipped having a bonus episode for both the month of April and the month of May of 2023. Typically, we do a first Friday bonus. But right now I have exactly 13 days between now and graduation. And it is a belly flop across the finish line running the gauntlet, powering through the inferno. Insert your favorite metaphor here. It's rough.

So for the rest of this episode, we are going to play an interview from our archives. This is an interview with Financial Advisor Michael Kitsis, in which he talks about the importance of investing in your human capital, which is precisely what I'm doing at this program here. So I hope you enjoy the episode. Michael Kitsis is brilliant. and one of the most respected financial advisors out there. And he was kind enough to speak to us back when we were a brand new show. We originally recorded this interview as episode 64. Can you believe that back when we were double digits?

So for the rest of the episode, we will play that. And we will return to our normal episode release schedule. We'll return to doing first Fridays again. And we will return to normalcy after I graduate, which is, as of the time that I'm recording this, exactly 13 days from now, assuming that I don't botch anything spectacularly in the next 13 days. Thank you for being part of this community. Enjoy this upcoming replay of our interview with Michael Kitsis. Come say hello to me on Instagram at Paula P-A-U-L-A, P-A-N-T.

And I will catch you in the next episode. Here is Financial Advisor Michael Kitsis discussing how your mind is more powerful than money. Enjoy. Hey, Michael. Hello, Paula. Good to be here. Oh, thank you for coming on the show. My pleasure.

Thanks for having me over. I wanted to chat with you, your blog, Nerds Eye View. I love how deep you go into a lot of topics. And there's so much there that we could talk about. but I actually wanted to talk to you about something that you've written about that I think isn't discussed enough. And it's the concept of human capital. Human capital. Human capital.

It sounds kind of like a strange sort of thing. What do you do with human capital? So for the listeners, can you define what that means? The idea of human capital is the easiest way to define it is sort of contrast it with our money. So in economic terms, our money is our money is our money. our financial capital. So we might categorize our financial capital, our investment accounts, our bank accounts, our cash, our retirement accounts, like all of these different things that are financial instruments, you know, they have economic value because the monetary system says they does.

That's what we define as our financial capital. And it's pretty straightforward. Like, we can make a balance sheet and figure out what we've got and add up all the different accounts. So the idea of human capital is to say, really, there's actually a second mechanism that most of have for earning and generating money. Number one is our financial capital. I can invest and get interest and dividends and capital gains and all that. And the alternative is I can work. I can literally go out and do things as long as I'm physically capable. And that ability to earn, that earnings power is what the economics world dubs human capital. So the idea like I can generate income. I can generate cash flow myself in two ways. Number one,

one is I put my financial capital to work by investing. And number two is that I put my human capital to work by working, by literally engaging in activities that earn and generate income. So would human capital be the equivalent of trading time for money? You know, I earn X per hour or I earn X per year? Yeah, in the purest sense. And the economic side of it, that's basically how they quantify it. So you might say, okay, your human capital is in the simplest way. okay, I make $50,000 a year and I'm going to be working for the next 30 years. And so there's about a $1.5 million pile of money there that is earnings that I haven't earned yet, but I'm physically capable of going out and earning cumulatively over the coming years. And that's actually a really, really big pile of money. And that's part of what leads to some really interesting strategies around how to plan for and maximize your finances. Because as soon as you sit down and look at that way and see, okay, so, I'm, you know, 20-something years old and just getting going on my career and just got a really nice raise and, you know, now I'm making $40,000 or $50,000. That's an awesome number.

But when you sit down and say, okay, so you've really got two assets right now. You've got your financial capital, which frankly may or may not even be positive, depending on how much student loan debt you came out with, trying to build that up to be positive, get some emergency savings, get some retirement savings going. And then you've got this human capital side that's really actually the equivalent of probably a one. or two million dollar asset on your personal balance sheet. It's just this giant pile of untapped potential, literally the years you have not gone and worked and earned the money to generate the return with your human capital yet. So I want to lead this conversation down two different paths. One path will assume that a person wants to retire at a traditional age, which I would define as 62 or older. And then the second path, I'd like to talk about people who want to retire

after only spending, you know, a total of maybe 10, 15, 20 years in the workforce. Sure. So I'd like to approach both of them, but I don't want to conflate the two as we talk, particularly as we're defining concepts. Well, you know, ironically in this framework, they, I would actually view them really similarly. They're just different points along a similar spectrum. So, you know, if you envision, like, you just graduated from school, you're full of

potential, you've got an immense amount of human capital, all the years you're going to be working going forward that you haven't earned yet, but it's coming. And then your financial capital, which pretty much starts at zero, because unless you inherited or got money by some other means, like, you don't have any yet. You got lots of earning potential, no actual financial capital yet. Right. So that's the picture for most recent college graduates. Right. And, you know, we're just hoping we get to start the financial capital number at zero and maybe not a negative number. Once we start moving forward from there, every year we earn, essentially we're turning human capital into financial capital. I do the work. I get some checks. Now I got to decide what to

do with my checks. And in the simplest sense, I have two choices. Option one, I spend it. Option one, I save it so that I can spend it later. And that's sort of the essence of retirement savings. So if you envision yourself as I've got this giant pile of human capital, as I work over time, I'm going to convert it into some combination of money I spend now and money I'm going to save so that I can spend later, then really almost all forms of retirement ultimately just come down to that spectrum of saving and spending, how much of as you turn your human capital into income, how much of it is going to go into each bucket, how much is going to go into the current spending bucket, and how much of it is going to go into the basically

future spending bucket, i.e. savings for future retirement. And so then it gets pretty straightforward. The more you're willing to shift towards the save bucket and the less you put towards the spend bucket, the more you can build up the financial capital to the point where you reach that moment of financial independence, where all of a sudden you say, I don't actually need to work and earn any income anymore because I've got enough financial capital to pay all my bills. I don't need my human capital. And so I'm literally just going to walk away from it.

I'm going to walk away from the job. I'm going to stop earning. Don't need the money anymore. And that's where, you know, most financial advice, at least that I've read, the dominant conversation seems to be about how to handle your financial capital. But the thing that I find really interesting in the conversation that I think we're not having enough is as you are making investments, do you direct those investments towards optimizing your financial capital as it works for you in what we will just broadly call the market? And I mean that in a very broad sense, as your capital is working for you. in the way in which it does, whether that's real estate or the stock market or bonds or a gold bunker that you've built underground, whatever it is. Whatever it is. Amen.

We invest in a wide variety of ways. So broadly speaking, I would just refer to that as the market for this conversation. This is getting to be a long question. Most of the conversation that we have is around how to allocate that financial capital. But you've often talked about whether or not that money could be better served investing in human capital. All right. So when you look at your earnings power as this giant pile of money for all the cumulative years that you're going to earn, there's a couple of interesting things that happen. The first is you realize it's really darn big. Again, even like making $30 or $40,000 a year for the next 30 years is actually like a million dollar pile of money. Now, the bad news is when you add up all your spending cumulatively for 30 years, it's an ungodly large amount of spending. as well. So these things kind of offset each other and you still have to get back to what do you save and what do you spend and what do you save. But here's the interesting effect

that crops up. So if you look at this and say, right, I'm making, my goal is to work for 30 years and I'm going to make, I'm making $50,000 a year right now because I just got that good promotion at work. And you multiply it out. That's basically a $1.5 million pool of money for any of the engineers out there technically you calculate this with a inflation adjusted and discount it back for real rates of return. So inflation adjusted, there would be some adjustment where there would be some further adjustments, but just trying to keep this relatively simple. Yeah. Imagine it is 30 years of $50,000 a year is is $1.5 million. Right. So we tend to spend a lot of time saying like, hey, if I can save a couple percent on my income and like I can save

$5,000. And if I, you grow that $5,000, if it grows at 8 percent, I, I increased my net worth by $400. And, you know, you can save $5,000. And, you know, you'll grow that $5,000. And, you'll grow that, you'll grow that, you, you'll grow that, you, compounded out over 30 years. That's actually a really big number. Returns compounding for a long time really add up. But the interesting effect that crops up is to say, well, what would happen if to my human capital, if instead of putting my money into a Roth IRA, I went out and took some kind of training class that got me a raise or another promotion of work. So like instead of putting a couple thousand dollars into my Roth IRA to get that lifetime tax free growth, I put the couple thousand dollars into a class for myself and next year I managed to get a 10% raise.

So if I do that, it might not feel very good in the short term. I spend a couple thousand dollars to get a raise that's worth a couple thousand dollars. And at the end of the year, I'm like basically still treading water. But if you think of it in terms of your human capital, so if I was going to work for 30 years and make 50 grand and I can figure out how to work for 30 years and make 55 grand, that's actually a hundred and fifty thousand dollars. of additional cumulative income I can generate over the next 30 years. Now all of a sudden spending a couple thousand dollars on classes or courses or certification or whatever it is in your industry or chosen career.

It's not just, hey, I spent a couple thousand dollars and I got a raise for a couple thousand dollars. I spent a couple hundred thousand dollars. And I increased the cumulative value of my human capital by like a hundred grand. I got a 20 to one return on investing in myself. Right. And it seems like if you planned on a. retiring early, you could just run the same equation with a different multiplier. So I now have a

$5,000 raise. I plan on staying in the workforce for 10 more years. Therefore, that $5,000 raise is worth $50,000. And if it costs me $3,000 to get it, then that's an amazing return. Right. And so the moving levers for retirement almost across the board, we kind of come back to the same couple of things. there's the one that we talk about a lot, even including those that are kind of really active in the, in the extreme early retirement movement, which is very heavily focused around the saving versus the spending. So, you know, if every year I work and I earn my income, I can overgeneralizing a little, I get to divide in two buckets, spend now or spend later. If I want to retire early, I need to make the spend later bucket really big. And if I'm going to make the spend later bucket really big, I need to put a lot of money. towards the spend later bucket every year, which means I have to constrain my current lifestyle, so I live very frugally and I try to minimize my expenses. And there's a whole other discussion around just minimalist living in general and whether it makes us happy or not.

But just from the kind of the math of retirement end, as I'm earning, if I want to retire earlier, I have to spend less so that I can build the financial bucket up faster, which actually works for me twice. A, the less I spend, the more my financial bucket builds up. And the less I spend, the less cashful I actually have to replace once I stop working because if my lifestyle expenses are more moderate, I don't need to as much human capital to support it now. And I won't need as much financial capital support it later. So you kind of win twice by managing your expenses down. But all the discussion is around the saving versus spending. How do you manage your expenses and minimize your expenses so that you can save more to retire early. And I find very few people

spend much time talking about, well, you know, if you just try to go out and find a way to earn a little bit more, reinvest it in yourself to get more income or more of a raise, you can actually still propel yourself to retirement or even early retirement even faster because it actually still moves the needle so dramatically when you add up your cumulative earnings power, even in an early retirement scenario. But so here is the literally the million dollar question. When you are spending money on investing in yourself, when you're spending money on building that human capital, how do you know that you're making a good investment? I mean, if you're buying VTSAX, you know exactly what you're getting. You know you're going to do as well or as poorly as the overall economy. But what about when you take a class, I mean, or you try to develop a new skill? How do you evaluate that? It's a good question. The purest sense is just, does this give me a path to being able to earn more down the road? And the challenge to me in this is some of us have careers or some of us land in jobs and professions that just lay this out a little bit more clearly than others. No real rhyme or reason to it is just how it turns out. So there are some industries out there. If I'm in the computer industry and I want to climb up a little bit more, I got to go get some more certifications. learn more programming languages or systems management administration or whatever it is in the

particular subfield you're in in computers and technology. And that's your path forward. If you're in management, you've got a slightly different trajectory. It might be learning project management skills or becoming, I think it's a CMP for project management. Maybe it's going back to grad school and actually getting an MBA. When you get into some other careers, it's unfortunately a little a little bit less vague there's not as much of a clear clear cut career path forward and you have to forge your way forward a little bit more and and kind of find the path as it goes that was certainly you know i went through a version of that myself because the the irony is even in the world of financial advising which is my my world of my career there's there's actually

very little that defines a clear career track the irony in the world of financial advising is that our entry standards are very, very low because you pretty much just have to get a license to be a salesperson. And everything above and beyond that is all purely voluntary. There's no guarantee that when I go get a certified financial planner designation that I was going to make more money as a financial advisor, except kind of the general belief that holds relatively true across most careers, which is if you upgrade your skills and you know more than most others, there's usually a path to more dollars that's attached to it at some point.

And while there are probably exceptions to that rule and almost anywhere where you can come up with a scenario where someone is very well educated yet somehow manages to self-sabotage or self-destruct themselves down to not getting promotions, even then it's often because they somehow did something to themselves that blew up their ability to get the promotion, invest in themselves and getting more education or certifications or training or whatever it is in your career, still is pretty much the path forward for almost. almost anyone, almost anywhere I find. This actually leads me to two follow-up questions. The first is, how can you evaluate if it's better to direct your human capital investments towards your primary career versus some sort of secondary side business or side hustle, as we like to call it? To me, the biggest driver there is simply what are the prospects in the career or the industry that you're in?

And again, some people just have a lot more upside. to where they are than others. You know, if you're sitting in a dead-end job somewhere saying, working at a company that isn't growing, saying I just, I don't see a path forward to making any more money or doing better where I am. So, you know, hint number one, the writing should be on the wall. You need to leave and move on at some point. And then option number two becomes, all right, are you going to try to move forward in this

career or profession or industry that you're in? Or do you want to go out and try to get this going with a side hustle on your own? That distinction, I think some of it is just look around at the options in your industry, go online and search for career tracks and what the income potential is for the next tier up and whatever your industry is. If you're a marketing associate, what's the opportunity to be a marketing manager and see what your income potential is. And the alternative is if that really feels dead end, if you don't see the upside opportunity

there, then I think side hustle start coming to the table. And the irony for so many people is that a lot of the problem, lot of side hustles turn into careers later. Even for what I do today, I started out in the world of financial advising and just started doing a little bit of blogging and writing and speaking on the side because it was essentially a side hustle for me. I thought it was interesting and I just I liked nerding out on stuff and sharing it with other people and did that slow and steadily as a side hustle for literally probably three or four years and saw it slowly and steadily build to the point where after I was in about four years, I said, you know, I actually want to make this my

primary. And I can flip the career switch and said, all right, I'm going to be primarily a writer and speaker and I'm going to dial back how much time I spend in an advisory firm. And now probably almost 10 years since I made that switch, that's still kind of the balance. So the first almost 10 years in my career is primarily a financial advisor that did writing and speaking on the side. And now I'm primarily a writer and speaker and educator. And I still do financial advising on the side. And I'm still a partner back to an advisory firm. But that's now well under half of the time of what I do because the side hustle became the main gig. And was that because it was more lucrative or because you enjoyed it more or a bit of both? Honestly, it started out that it was just, it was more interesting. And I feel like

I'm like bashing my original job and career. It wasn't that the old one was uninteresting. It was just that it was more interesting. It spoke to me more directly. I just, I felt more energized. I felt more excited to getting up in the morning, uh, doing that kind of work. What ultimately happened and I can say this, there's no academic empirical analysis for this. It's just what I see live working with clients as an advisor. There is an effect that happens where when you actually find work that you enjoy doing where you're excited to get up out of bed in the morning to do it, all the math starts to change. It ended out being by far more lucrative than any of the prior work that I was doing and financial advising even actually has a pretty good income potential.

It ended out being far more impactful financially as well, simply because once you really get engaged in the work that you're doing, you tend to like doing it, want to do more of it. And it turns out usually if you're that engaged, you tend to get pretty good at it. And if you tend to get pretty good at it, that ends out making more income potential as well. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware.

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Would it be fair to say that a major part of their selection criteria for do I spend this $5,000 investing in, you know, earning more at my primary job versus building a side hustle? Would it be fair to say that the best answer would be go where your interest is? Or go, I don't, I hate to use the word passion so overused. Yeah, I know there's sort of a, I feel the same way. I feel like we sort of overshot the world of pursue your passions, the point now where I feel like we maybe convinced a few people to become passionate paupers because they just followed a passion down a road that really genuinely had no business potential. But I think at a minimum, it is pursuing your interests.

It's pursuing things that you're passionate about and enjoy. I'm always even a little bit wary of people that come and say like, this is my, this is my passion. Because again, just having sat across from so many clients who go down this road for so many years, like, first of all, we rarely even really know what our passion is going to be when we're young. We think we know what the thing is. Then we get down the road and find that we may or may not like it. I imagine a lot of listeners here either for themselves or a good friend that they know, you know someone that went to college is absolutely convinced that they were going to pursue this particular major that was their passion in air quotes.

And now they're a couple years out of college and they're doing work that has nothing to do with what they studied in college. Right. Like, you know, we thought it was our passion. Then we went and did it for a while. We're like, yeah, this actually isn't really doing it for me. And that's okay. That's okay to make those changes.

It just means don't make the stakes so high for yourself. I have to find today the thing I'm going to do that's going to be awesome and amazing for the next 30 years. Find a thing that you can do that will make you slightly more excited to get out of bed next month. Keep the stakes low. Because if you find something that's positive and starts building you in a positive direction, the more energized you get, the more you tend to take the steps to keep moving yourself forward. And I've watched that kind of formula play out for people. over and over again over the years. Right. So let's say that you, and I'm asking this question,

because I know there are a lot of nerds who love to analyze the returns that they are getting on every dollar that they've put in. So, you know, let's say that you invest, I don't know, $5,000 a year into starting small online businesses or taking classes, taking some online classes. you know, you invest this money into developing a side hustle or a side business that you're interested in. And that kind of leads you on a sideways meandering path, you know, that might go from A to B to C to D to E. And ultimately, maybe in the long run, you end up better than you were before. But you had a lot of diversions along the way. Is there any way to evaluate the ROI on the money that you spent? Or is it all just part of the narrative?

Yeah, there's a blend. I think a lot of it is just realistically as part of the narrative. But I think there are a couple of things that you can do to at least to try to protect yourself from not unwittingly digging a bigger hole and kind of going down this journey and pursuing the narrative. So step one to that is it is about investing yourself and kind of upgrading your opportunities, it doesn't mean you need to do this giant, like, go big or go home. Like, hey, I heard on this podcast that I should invest myself, so I'm going to quit my job and go back to school and get a master's degree and spend three years earning no money and hope that I earn that back again five or six years from now. Like, you don't have to make the stakes quite that

high for yourself. You know, when I look at a lot of folks that I interact with, even within our field, you know, one of the number ones that I end out telling people when they're coming out of school is go take a writing class. Not like creative ring. How to write emails that make you sound intelligent when you communicate with people. And I know that's kind of hurtful for some folks that like their shorthand emails and their quick notes. But if you want to climb a ladder in the business world in most places, the reality is first impressions do matter. And in a digital world now for so many people, your first impression is an email that you send out or some kind of written communication. And if it's sloppy and poorly punctuated and bad spelling and all

that, it sets a poor impression for people. And again, I can only imagine a couple of folks that are probably screaming at the podcast right now as they're listening to it. But just having watch people play this out as someone who actually is a business owner of multiple businesses that screens way more resumes than I frankly wish to screen. It's a factual reality. When you're applying for a job with a whole bunch of other people that are applying for a job, the sad truth is the person who's got to make a hiring decision and has 57 resumes and has to at least get it down to like a dozen that's workable,

are looking for pretty much any reasonable excuse to call. the initial resumes and badly written cover letter that uses terrible grammar and punctuation and says, you know, hire me. I have great attention to detail. Like, if your attention to detail isn't good enough to actually put that much work into a cover letter you sent me, I'm probably not going to give you an interview. And it sucks and it's unfair and it's life and its reality. And so, you know, to me, the starting point is things like that. What can we do to improve writing skills? What can we do to improve basic public speaking skills? I'm a huge fan of telling people, go try out toastmasters. Basically, well, you know, it started with like teaching

people how to do toasts, you know, at a party, but essentially it teaches you how to do public speaking and promptu public speaking skills. Oh, that's why they're called toastmasters. I'd always wondered that. Yeah, yeah, like, you know, it's the wedding. Yeah, like a wedding toast. Oh, I'd just, thought they were really into carbs. I don't know. Yeah, well, that would be taking them downhill these days. Atkins almost put them under. Again, it's one of those things. Like, you don't get a lot of opportunities necessarily in life to make big impacts that can change your trajectory. If, you know, you're the one in a moment that's able to actually stand up and move some problem forward in your job or your career, that can be a seminal pivot for you. And most people,

are terrified to step up to the challenge because we hate public speaking. We hate public speaking. I mean, there was a survey I'd seen because I do a lot of professional speaking, so we love to circulate these jokes. There was some survey that someone had done that we are actually more afraid of public speaking than we are of death, which basically means I'd rather be in the casket than giving the eulogy. Right, right. That's how terrified we are of it. And so Toastmasters is just a group that's built to help you get over these fears. It's a whole bunch of folks. You know, you teach and learn how to give imprompt, small impromptive speeches in front of small groups. Everybody else in the room is just as terrified as you. So you're all there together to support

each other and get through it. And I've seen people where ultimately it was, it was transformative to their business success and their career trajectory because they were, they just became better able to speak up in meetings that ultimately got them noticed by their by their boss, which ultimately got them moving forward. And, you know, their whole, their whole career trajectory and financial capital was dramatically updated by what at the end of the day was just hanging out with toastmasters and figuring out how to get more comfortable in speeches. And I, I think it's like a hundred bucks a year to join. Might even be cheaper than that. So a lot of what I'm talking about how we upgrade our skills. I mean, the reality is spending $100 to join Toastmasters

and a couple hundred dollars to take a writing class and maybe a couple hundred dollars to learn advanced Excel skills. We're not talking about $50,000 tuition bills. We're talking about a couple hundred dollars here and a couple hundred dollars. They are at the most, but not trying to figure out just how do we save it and add another couple hundred dollars to our Roth IRA so it's going to grow tax-free for the next 30 years. It's how do we apply this money in a way that gives us more upside potential, more bonus potential, more promotion potential? Because the realities, it becomes very uneven. Like, I don't know which of those $100 or $300 investments in yourself is going to be the one that pays off. But all you need is one of them ever to give you a $5,000 or $10,000 raise. And it's

worth a couple hundred thousand dollars over your lifetime and will pay for itself literally a hundred times over. You know, I think that's where a lot of people get stopped up is not knowing exactly, you know, is this going to pay off. And again, like, the higher we make the stakes for ourselves, the more terrifying it becomes, I think justifiably so, because at some point ramp it up, it's a lot of money. So start smaller scale. You don't have to be that intensive out of the gate. Writing classes, Toastmasters Republic speaking, word or Excel, whatever it is, you know, whatever office application it is that's relevant in your in your job and career. Even that kind of stuff can be a path forward for making more dollars and moving up and lifting that human capital up.

There's a lot of chatter about, you know, the idea of freeing yourself from domestic tasks so that you can focus on career development, on educating your, on building an education for yourself, on building a side hustle. How do you evaluate that? I look at it in a similar way, and I'm one of those people that over the years has basically become obsessed with finding any way to let go of small tasks and things that just free my mind a little. So I wrote a article on the blog a couple months ago. It was basically why I'll spend $100 on a tech tool that saves me a minute a day, truly.

And why would you? Here's basically how it boils down to me is saving a minute a day is for, five minutes a week, is 20 minutes a month, is about four hours a year. So at four hours a year, and that's a half a day of cumulative productivity. So as long as I've got work that pays me more than about $25 an hour, I am technically making money every time I spend $100 bucks on something that saves me a minute a day. While that's hard to quantify off of like the first one minute thing, the cumulative impact is where it really starts to add up. So you, in practice, I probably spend one or two thousand dollars a year on a wide range of little one-off

technology tools, you know, Dropbox Pro and Evernote and some social media tools because I do a lot of that for my business. And you just, one thing after another, most of which are individually fairly small scale. But when you start adding them all up and it's like, wow, I'm saving 10 or 20 or 30 minutes a day of all these little things that each of which took a trivial minute or two, but added up. like half an hour a day is a lot of time. That's a couple hours a week. That's a day or two a month.

That's a week or two a year. And also like that's the difference between whether I can find the time to take an extended vacation with my family or not comes down to, did I spend a little bit of money on little miscellaneous tools that saved me a minute or two here and there? Because it really does add up over time. And, you know, likewise, in part because we also are a family with three small children. And me and Amazon Prime, we're tight. Amazon visits our house probably at least five days a week, occasionally six. Usually we managed to have one day where we accidentally failed to order something that also arrives from Amazon.

And it just comes down to, you know, life is crazy and there's so much stuff going on between work and family and kids and all the rest that if I can save a little bit of time by, you know, getting something delivered and not needing to go out to the store to pick something up. and that saves me a couple of minutes that I can spend with my kids. Like, that's an easy no-brainer trade-off to me. And again, I find that when you don't focus on your human capital and your earning potential first, everything about the money coming into your household feels scarce. It feels, you know, it's a limited pie. We can only carve up the pie. And so, all of a sudden, it's like, well, why would you spend a couple of dollars doing that

when you could just do it yourself and save the money because we could say we could literally save the money or do something else with it. And again, the way that I look at it is what can I do to generate more return on my time to generate more value on my human capital because the numbers are actually so much bigger on the human capital. You know, like the first time I, well, you know, for our world, it pretty much was getting my CFP certification. You know, I went and got my CFP certification. That's certified financial planner? certified financial planner and use that to get me a new job that got me a $10,000 promotion when I switched firms to a job I could have only gotten with my CFP.

And at the point I got my $10,000 raise with my CFP, I still remember my basic personal commitment to myself was, you know, all that discussion we have about whether the like the Starbucks habit is worth it. I said, screw it. I'm never going to care about that again. Yeah. Because once you do a $10,000 raise for the next 30 years, all this, and granted, I don't even have that hardcore of a Starbucks habit. Like a daily Starbucks habit still does not add up to that much when you move the needle that much on your human capital.

It might feel like a big number and it often is a big number if you just look at it from the perspective of the money that comes in. But if you focus that you can also move the needle on how much is coming in in the first place, it takes the focus off a lot of the spending minutia. and puts it frankly where I think it belongs, which is what you're earning and what you're doing to earn more in the first place. And so even in terms of how we live our lifestyle, you know, there's basically three things I actually sweat. I care about. How much I'm earning, what we're doing originally to build my salary. Now it's really to build my businesses because I kind of did the morph from employee to entrepreneur over the time. But, you know, what's happening with our income and what can we do to reinvest in ourselves to earn more. What are we spending on the house?

Because the house is a really big line item. Do you mean mortgage or do you mean like decorating? What do you mean by spending on the house? Mortgage slash rent. You know, whatever you're kind of put the roof over my head. So what's the fixed costs you mean? Of your budget. Yep. Yeah. And what do we spend on a car? Mm-hmm. Because they're giant line items. And once you do a pretty good job on the income, the car and the house, and basically make the car on the house reasonable to the income, a lot of the rest of it starts to melt away. I don't sweat spending $50 here or $100 there because for the first 10 years of my career, my total combined rent plus car payments was hovered between 6 and 8% of my income because I bought a cheap old beat up car and drove it to its grave

and never had a car payment. And even at the point I was making some pretty good money, I split an apartment with two of my buddies through the entire decade of my 20s so that I could just save and bank the money, which eventually became the cushion I used when I switched to make my side hustle my full-time business and then ultimately became the down payment on the house where I'm raising my family. And so when you start with the big items, incoming human capital number one, and then the big two expenditures, house or shelter and car, if you do well on those, what you'll find is the stress around a lot of the other stuff really starts to melt away. We'll come back to the show in just a second. But first, with the emphasis on human capital and earning and boosting your earnings potential in whichever way you choose to do so, whether it's through advancing in your primary career, building a side hustle or whatever, The one point where I keep getting hung up is that then, to me, it becomes hard to justify not working. Because if you value your time at X per hour, then every hour that you're taking a shower is costing you, you know, it's an expensive shower. Yeah, I'll admit.

I mean, it does, when you do this well, it does become a challenge from the other end. If you actually get really, really good at monetizing your time and you get your time up to a pretty valuable point, it becomes very difficult to actually figure out when and how to say yes or say no to things or when to cut it off. And the irony is the more the income potential climbs, the more your time per hour climbs, however, you sort of carve up the value of your time, the time, the harder it gets to say no to things because just the dollars get bigger. I mean, at some point it's like, well, I didn't really want to do this. But hey, I could spend a couple hours on it over the weekend. And it's a material amount of money from my household, so I kind of want to do that.

Right. And it can become a slippery slope for people. Right, right. You're struggling to figure out when you ultimately say no. You know, I talk about it and with some of the folks that I work with is saying, what's the filter you use to decide whether you're going to keep doing work or take that next client or do that next thing? in the early stages, the filter usually is money. Like, is this a bigger client, a better opportunity, a gig that can pay me more,

you know, whatever that side hustle thing looks like. And, you know, as long as this is a bigger opportunity than some of the other ones, then I'm going to say it's worthwhile. And you can keep inching up the threshold. I'm not going to take any gigs that pay me at least unless I make at least $20 an hour, $30 an hour, $50 an hour, $100 an hour. And you just keep moving the needle up. eventually the challenge becomes if it goes well, there are lots of opportunities coming in.

They're all coming in at that number. And it gets really hard to figure out how you're going to say no. You have to find new filters to figure out what are you going to say yes to and what are you going to say no to. What are some of the filters that either you've used or that you know other people have used? So come out at it a couple of different ways. I've ended out developing a few filters for what I use and screened by. Number one is just does it move the business forward in the grand scheme of things? There's a fascinating book I highly recommend called Essentialism by Greg McKeown. Yeah. And a fantastic book.

The idea of it is for people that are successful and even for whole businesses that are successful, often the thing that makes them successful is they find a thing they do, that they do very well, They do it a whole bunch. They build a reputation for doing it really well. And it turns into a successful career or income or business. The more successful that you become, the more people start to notice and the more people that start to notice that the more opportunities come to you. The challenges, the opportunities come in is if you're not careful about what you say yes to

and what you say no to, eventually all this stuff is coming in and you actually lose the focus that made you successful in the first place. And so, you know, Greg has a number of fantastic sayings in the book, but one that for a long time has resonated with me is that the difference between successful people and very successful people is that very successful people are better at saying no. And it's a really kind of interesting encounter intuitive phenomenon, but it really is a dynamic that happens when if you're successful, if you can get that snowball starting to roll down the hill, you know, the challenge of snowballs turn into giant avalanches is that what starts out really focus eventually just gobbles up anything in its path and becomes unmanageable. And you lose the focus that made you successful in the first place. So for me, one of the big filters is just, it does this still ultimately stick towards the core of what I'm doing? And the core of what I'm doing is, you know, my focus is primarily working with financial advisors and trying to help them be more successful in their businesses and help more of their clients with better solutions. And so I do very, very little that does not directly fit that.

And anything that's going to go outside of that, I mean, I literally give myself an allowance of, you know, I would. will do one or two unrelated things every month of, you know, maybe it's an outside engagement or an outside podcast or something of that nature. And beyond that, I'm just going to say no, because it's not part of the core focus. The second filter for me, frankly, once I got married and had kids, was, you know, I'm just going to push that weekends or more sacred time for me when I was single and on my own. Then even the early years when my wife and I were married, but there were no kids yet and our lives and worlds were much more flexible. Like, you know, hey, if there's a gig opportunity that's on the weekend, like, whatever, I'll travel, maybe it's to a cool city,

it's fine. Now that we've got kids, you know, for me, one of the filters just, hey, this is a cool engagement and a great opportunity. I love to work with you, but I'm sorry, I just, I don't, I don't travel for engagements on Saturday. It's family time for me. You know, they become kind of arbitrary lines because the reality is at some point if that success flywheel starts, it's rolling, you have to come up some ways to introduce constraints, even if they're arbitrary, or the business can start to consume you or your career can start to consume you. And I'm sure almost everyone can think of people they know where their businesses or jobs started to consume them. One other direction I'd maybe encourage people to think about as well as, as you look at

some of these dynamics of how do we move down the path towards financial independence, kind of recognizing this balance between human capital and our earning ability and then what we spend and what we save. The other area that I probably see people get in trouble with the most is the phenomenon called lifestyle creep. Yes. So this effect that if you're successful, you do reinvest in yourself, you get that job, you get that raise, you get that something that moves you forward.

and you say like, wow, I'm feeling less stressed about my money. Things are going a little better. I saved a little more last year. You know, I'm going to reward Numero uno here a little, and I'm going to do something nice for myself. And not that it's bad to do something nice for yourself. It's actually very healthy to do something nice for yourself. But the trouble that people get into is that they don't just do something for themselves

that's a nice one-time thing. They do something for themselves that permanently changes their lifestyle in a way that makes it harder to move forward in the future. Just the reality of how we seem to be hardwired, we have a couple of sort of problematic forces that hiss at the same time. Number one is that we're very, very quick to adjust and adapt to our current circumstances. So, you know, the new house seems amazing. And then after a year or two, it's just another house that I got to repair and deal with it. The new car seems amazing. I love the new car smell. But then the next X years, I'm going to own it. It's just the car I drive around and,

loses its newness and specialness. And we do this across the board from the cars we buy to the computers and technology toys we buy and almost everything in between. And the problem that crops up for people is they make what amount to permanent lifestyle decisions. And in the near term, it's, you know, they feel happy and elated and it's kind of neat to have a new thing. But relatively quickly, the joy of the new thing wears off and the only thing that's left is the cost of it that you have to bear for a long time. Because the second cruel thing, thing that goes with this is while we adapt very quickly to the upside, you know, things get better, but then we lift up our standard of living and then it's just our standard of living. It's not a

new thing anymore. Most of us horrifically hate going backwards. We hate feeling like we're going backwards. We hate losing and giving anything up. You know, I may have gotten relatively bored with it, but if you take it away, then I'm going to be pissed. So, you know, we get ourselves into trouble. And I see this all over the place. It's, you know, I got a raise and then I go and get a fancy new apartment. And it's really cool to have the new apartment. It's really fun to socialize in. But now you're actually not any closer to financial independence than you were before because you lifted your expenses up by as much or more than you lifted your savings up. And now you're not actually making any progress. And I watch so many people dig a hole for themselves. One of the biggest

problems we actually see are our firm does actually a lot of work with people who are retiring or kind of the final five to 10 year stretch before retirement. And one of the biggest pinch that we commonly see for most of them is they have all sorts of regrets about the lifestyle, the things that crept up into their lifestyle through, I find particularly their 30s and 40s, because that tends to be when some of our biggest income raises and career advancements come. And so those are sort of the big opportunity moments where we can make these decisions because we get stuck in these traps. You know, the car feels cool when I buy it, but the new feeling wears off. But the car payments keep going for five years. And, you know, the big new mortgage, the new house feels

really cool for the first year or two, but the big mortgage is going to be with you for 30. And people get themselves into trouble with allowing their lifestyle to creep upwards. And sometimes we don't even realize we're doing it. It's, you know, it's the time that you finally decide you're going to stop mowing the lawn. You're going to have someone else mow the lawn for you. And the first time you pay someone else to mow your lawn for most people is like the last time they ever want to mow their own lawn. And then you get stuck. It's like it's not just, hey, I'm going to have someone come out and mow my lawn for a couple boxes. It's no, no, you're going to have someone come out and mow your lawn for the next 30 years because once you do it, you almost never go backwards.

So that is really where the crux of my question lies. Because with a McMansion or a fancy car, it's easy to see that that has no value on your earning potential. But with something like, say, mowing the lawn, cleaning your house, you know, ways in which you trade money for time, Those do have an impact, or at least arguably do have an impact on your ability to earn. They do. It kind of goes back to that human capital investing in yourself piece of it. You know, Amazon Prime, another good example. And that to me is basically the distinction.

Like, are you buying time for pleasure or are you buying time for business and earnings? And I think there's a difference between the two. And not to say that buying time for your business is good and buying time for yourself as bad, because frankly, a lot of the research now that's coming forth on how to spend money in ways that makes you happy. One of the biggest ways you can actually spend money that makes you happy is spending it in ways that give you time. It's actually spending money on time is much better correlated to happiness than spending

money on objects and things. But I think the crux of that question really comes back to what is the purpose of how you're how you're spending the money on time. Is it for pleasure or is it for business and work and earnings potential? But I mean, you yourself said the reason we'll use Amazon Prime as an example, you know, the reason that you'd pay for an Amazon Prime account and then also not even bother shopping around, just, you know, buy the item on Amazon without looking at, without price comparing, you know, toothpaste across five different stores is because you would rather spend that time with your kids, which is pleasure and not business.

Yeah. But I look at those decisions very deliberately. And in our household, like, we spend time actually thinking about when we're going to introduce some new expense, whether it's as directly related to time savings as that or not, when we're going to introduce any kind of regular expense that's going to be ongoing, it is actually a conversation, a conscious thought. Like, what am I doing this for? Why am I doing it? And do I want to saddle myself with this? forever because Lord knows after a couple of years of Amazon Prime delivery, like I have no tolerance to go to a store anymore. It's kind of bad. It's little unhealthy. Oh, it's great. I love it. I personally am very, very happy with it. Have you found Google Express, by the way? It's my new

obsession. No, we haven't looked at Google Express, but I am based in the D.C. area. So we are now getting two-hour delivery ramp-ups on Amazon Prime. And there's really nothing quite so special is just deciding one morning you want a thing and you know Amazon drops off of your house that afternoon. I figure within a couple of years we'll just hit a button on a phone and like a little drone will drop it on a helipad out by up behind the house. So I love it. I love the progress on it. But again, like we look at those things very deliberately about, okay, this is a thing we're going to introduce in our lives that once we do it, we're going to have trouble going back. So just make sure you actually want to put.

hold the trigger on that. And I found for us, I mean, it was a progression over time. You know, frankly, if I do the math of my income, the income per dollar hour is good enough that I can justify almost any of those tradeoffs at this point. I couldn't do that years ago, but I can now that my my income has grown. But the progression along the way that we were giving conscious thought to throughout was, is this a dollars for time thing or is this a dollars for object? And if it's dollars for time thing, am I doing it for myself or am I doing it for trading off business and work and earnings opportunity? And honestly, like early on, most of them were trading off for business opportunity time. You know, it was, hey, it would be nice if I didn't need to mow the

lawn so that I could actually spend time doing a little bit more client stuff because that's what brings the money in and puts food on the table and shoes for my children. Over time, that started to morph a little to the point where he said, okay, we've got kind of the work stuff figured out now that's going well. Now it becomes a question of trading time for sort of personal stuff for family time or the rest. But our starting point with that just recognizing those dynamics was, you know, be very careful about introducing expenses into your life that are recurring. That to me is probably the single biggest kind of warning slash takeaway for people to bear in mind. Spending money on time because you take a vacation, that's great. You can have a wonderful

time. Even lots of research that validates, it's a wonderful way to literally enjoy your money and find some happiness. But you take a vacation and then next year you'll see how things are going and decide whether or what kind of vacation you're going to want to take. That's very different from, I got a raise, I'm not taking a vacation. I got a raise. I'm going to go buy myself a new car where no matter what happens with your job and your income and the rest next year and the year after in the year after that. You can have the car payment. It's going to be sticking around. So number one, I think, is just giving thought to any, when you introduce new expenses into your life, be cognizant of that lifestyle creep effect that when you add them in, it's really

hard to subtract them later. So be cognizant about what you're spending on. And then likewise, be, be cognizant of just, why are you doing it? I mean, is it because you just want a thing? Is it because you are trying to save time for work? Is it because you're trying to save time for family or personal life? And I mean, any of those can be fine, at least in moderation. But just taking the pause even to ask the question about why you're doing it often helps to avoid some problems. Because a lot of the time, we just see these things out of impulse, and we don't even realize the trap we put ourselves in until after the fact, when we think about having to give up something that we don't want to give up. Okay. So unfortunately, I have to go fairly soon. But final question before we wrap up is let's say that you're making, you're faced with those decisions, right? So you're thinking about you've got $5,000 and you could either spend this money on a combination of buying more time for yourself via outsourcing some of your domestic household chores and errands slash, you know, taking classes. Like you can spend it on yourself that way. Or you can put it into.

a total stock market index fund. How do you make that comparison? I mean, particularly not given the ambiguity of the outcome. I guess that's what this whole conversation has been about. Yeah, I mean, some of it is. So I think there's a few ways that I look at that question. Number one is just, what's your time horizon? You know, the reality is if you're within five or even sometimes 10 years of retirement, unless you're on one amazing career, trajectory, like, you can only move the needle so much on your career and your earnings power over just a couple of years. So if your time horizon, only a couple of years until your retirement, I'd probably just stuff it into the retirement account and, you know, buy my total market

index and hope the market cooperates for a few more years. The longer your time horizon, the more the contributions towards human capital matter, because just literally, like, it's such a bigger number, right? When I've still got a couple of decades left to work, you know, my total total investment accounts are 20 grand, and my total human capital is worth $1.5 million. So, like, which one would you invest into? You know, you get, you make 10% on your 20 grand, you make $2,000. You make $10% on your $1.5 million. You make $150,000. Like, one of these has much better compounding potential. It's just literally the better investment opportunity. Now, where you go with it from there, I think depends a lot on the nature of the work and

the income earning opportunity you have. Things like, hey, I want to hire someone to do some domestic tasks so I can free up a little bit more time. My question for that immediately goes back to, if you're going to buy some time, I think you've got to have a pretty clear sense of where it's going. So if you're doing freelance work as a side gig and you're making X dollars an hour, like fantastic. If you got a side gig and you're making $30 an hour, technically anything you can let go of that costs you $25 an hour or less so that you can spend time doing the $30 an hour stuff, you are making money. You are minting money for yourself. every time you pay to delegate. And the higher your income lifts up, the more it pays to delegate.

If you can make $50 an hour, you should let go of anything that's $45 an hour or less. And you can keep moving the needle up. That works well if you've got some kind of freelance gig or business you own or hourly project, like something where you can actually trade your time for money that directly. Not everyone's in that position. If you're not, then frankly, I'm a little bit wary about telling people to trade time for money or money for time unless they just want to literally do it for their lifestyle because I can pretty much guarantee you if you do that trade, you're not going to want to go backwards. And if you do that trade without a sense of where you're going with it, you may just end out having a more expensive lifestyle and finding yourself in a deeper hole than you may be in

now. What if you are making that trade for a business that is not profitable yet, but you're hoping will be profitable in the future? Or if you're making that trade so that you could go back to school to pursue a graduate degree. You know, if you're making the trade because you're trying to get to one of those breakthroughs, I think it's a reasonable trade, again, with the caveat that, and I say this ironically as someone that's got two master's degrees, one of the last things I put on that list is going back to school for graduate degrees. Not that you don't get there at some point. Obviously, I literally did, and I can definitely say it was very rewarding for my long-term career. But it wasn't the first thing I went back for. You know, I graduated as an undergrad and I went and got a job. And then I got a

designation of my profession and I got another one and I got another one. Even when I ultimately went back to grad school, I went to grad school at night part time while I was working full time. So I did have to do a little bit of time for money kind of trades so that I could do grad school classes two nights a week for a long period of time. But, you know, I didn't walk away from full-time job to go into full-time grad school and do that kind of big time for money shift because, frankly, to me, that was a risky trade-off. You know, I was reasonably confident investing myself into the grad school program I was taking was going to be worthwhile. But that doesn't mean I want to go all in on it and risk coming out at the other end and not finding the income potential that I was expecting. So I deliberately

hedge my bets by keeping the job, keeping the day job. job doing the grad school at night, it took more than twice as long to get through it, but I had a steadier, less risky path going through it. And then ultimately at the end was able to find some new opportunities that move the career forward. You know, I'd start again with the smaller scale stuff, which is, can I join Toastmasters? Can I take a writing skills class? Can I, you know, beef up my Excel and PowerPoint and Microsoft Word skills or whatever it is that you use at your company or your business or your industry. I'd start with the smaller scale stuff.

I think we tend to, you know, I see a lot of people that go out and they try to buy a degree as a path to higher income. And it's not the degree that gets you the path to higher income. It's the skills. It's the training and experience. And frankly, it's the confidence that you end out getting when you know you're good at what you do because you tend to sell yourself better and get, negotiate better jobs and raises and gigs and all that stuff, whatever your business is,

when you've got that confidence. So if you approach it, don't approach it as I want to buy a degree to get a better job. Approach it as I want to buy some training to improve my skills to move down a better path. And just what you'll find is skills training is often actually much more reasonably priced than trying to buy degrees. And so I find it tends to be a more stable path and actually a less expensive one. Right, right, absolutely. Taking classes, taking classes on specific topics that you want to learn about is much cheaper. Yeah. Cheaper and less time and arguably more effective. Yeah. And the other thing just to note to it, you know, a lot of these changes, I mean, you may also just have to go through a period of time where

you got to buck up and put in a little more time for getting it done. You know, I've still seen people that are trying to make this transition are like, well, I'm really aggravated because, you know, I'm trying to take this training class to improve my job, but my boss won't give me Friday afternoons off to study. So I'd say, like, you're trying to get a better career for the next 20 or 30 years. Spend a couple Sundays. Put in the time yourself. I mean, if you do it forever, eventually, you're going to get grumpy about it because you're going to want your time back. But, you know, recognize that for some of these as well, like, it's okay to put in an extra sprint for a stage as well. Sometimes the big reinvestment you make isn't buying time. It's just

committing some time to try to get a breakthrough and move forward. Right. Absolutely. Well, thank you so much, Michael. My pleasure. I hope it's food for thought for people. We kind of ranged across a wide spectrum of financial and career topics. Yeah, I think this was excellent. Where can people find you if they'd like to know more about you? So you can find me in two places, kitsis.com, which is my own site and blog and kind of personal platform these days of the various businesses I'm involved with. And then I'm also a co-founder of a group called the XY Planning Network, which is actually a network of financial advisors specifically that work with folks in their 20s, 30s and 40s on these

kinds of issues. So, you know, most financial advisors out there sell products or they manage assets. Kind of our champion mission at XYPlying Network is we just do financial planning for a monthly subscription fee. No products, no asset minimums, none of that stuff. Just if you want some advice in coaching, we have a network of a couple hundred advisors around the country that do that. So Kitsis.com is the personal site, next white planning network. com is our advisor network.

And that pretty much consumes my world these days. Nice. And I will link to both of those in the show notes. All right. Awesome. Well, thank you very much. Thank you, Michael, for coming on to the show. Now, what are some of the key takeaways that we got from this?

Here are three that stood out to me. Number one, lifestyle inflation isn't necessarily bad per se, but it's better, if you are to inflate your lifestyle, it's better to use your money in a way that buys back your time. So ask yourself, are you trading a dollar for time or are you trading a dollar for an object? A couple of examples. If you decide to lifestyle inflate by paying for salon haircuts instead of just cutting your own hair or getting like the cheap $12 dollar super cut cut. That's something that's not going to give you any more time. In fact, it'll actually probably take away time because what you were doing before was probably faster. If you decide to inflate your lifestyle in terms of getting blowouts and pedicures or buying a fancy

car or a McMansion, all of those are lifestyle inflation examples in which you're not buying any time for yourself. You're just spending money. But lifestyle inflation in which you decide to start outsourcing certain tasks, mowing your lawn, cleaning your house, ordering things from Amazon Prime or Google Express. Those are ways in which you can inflate your lifestyle. Yet it's going to cost you more money, but it will bring you back time. Now, that doesn't necessarily mean that you should do it. It's just that these are different classes of lifestyle inflation and ought to be way differently. Basically, there's a certain point at which we should acknowledge that not all lifestyle inflation is created equal. And that trading a dollar for an hour

is very different, not literally a dollar, but you know what I mean. Trading dollars for hours is very different than trading dollars for objects. So that's one of the takeaways that I got from this conversation. By the way, quick pause here, because I want to kind of relate a few personal anecdotes. First of all, Google Express, I am not being paid to say this. I just found this. So I've been an avid Amazon Prime user for a while. I actually had to put myself on an Amazon Prime fast because I was overdoing it. But I'm back to Amazon Prime now and it's amazing because all of this stuff, the stuff that I would get in my car and drive to the store to buy now just comes to me.

So for example, I subscribe to protein powder on Amazon. So instead of having the drive to the store and buy protein powder, it comes to me as a monthly subscription so I don't even have to think about it. Anyway, Google Express, it's the same business model as Amazon Prime. You pay a flat rate. I think it's around $99 a year. And they'll send you stuff from a variety of stores, including, and this is the kicker, including Costco. So for a hundred bucks a year, I never have to physically go to Costco again.

I'm obviously going to be saving way more than four hours a year, just by virtue of not having to get into my car, drive to Costco. and run around that whole store trying to find pine nuts and bags of whole bean coffee. So yeah, there's my little rant, totally not being paid to say that. But anyway, the actual story that I wanted to relate before I became an unpaid Google spokesperson was that I personally have struggled a lot with this question of how to value your time, particularly in the context of when you are using your dollars to buy back your time, how do you generate a value for that? because if you were to simply state, for example, you might state, I make $50,000 per year.

And so if you work 40 hours a week times 50 weeks a year, that's 2,000 working hours per year. If you made $50,000 a year, then you would be making $25 an hour. But that type of math or that type of reasoning is a little bit flawed. Number one, because not all hours are created evenly. There are some hours in which you're focused and some in which you're not. There are some, if you're self-employed, there are billable hours versus non-billable hours. And so I've never really known how to value an hour, especially being self-employed. There are certain hours in which I'm, for that hour, literally making thousands of dollars.

And there are many, many, many other hours in which I'm working, making zero. And a variety of hours in between, depending on if I'm writing an artist, if I'm giving a speech, if I'm fuzzling around with my Twitter account, if I'm checking email, if I'm generally like kind of half-heartedly checking email, but sort of also staring into space. I mean, part of the difficulty in calculating the value of an hour comes from that. The other part of the difficulty, though, comes from the fact that there are 168 hours a week. And so if you were to say, my hour is worth $25 or $50 or $100, whatever it is, doesn't matter. If you were to say that my hour is worth X, then any hour that you're not working is, you know, biological extension, an hour in which you are paying the opportunity cost of not earning X. And so like I mentioned during the interview, that leads to some really weird logical like extremes, right? Because all right, if an hour is worth 40 bucks, then does that mean that the hour that I just

spent watching Westworld cost me $40? Or logically, does that mean that if it takes me seven hours to read a book, then the cost of reading that book was $280? Like, you see where this is going, right? Like, if you need to put some boundaries around your hours. And so it logically doesn't quite make sense to just issue a blanket statement that if an hour of your time is worth $40, then that applies evenly to all hours of your life. And it also logically doesn't make sense to state that if you hired somebody to mow your lawn and that saved you an hour and then you increased your workload by one hour that you have therefore arbitraged mowing your lawn. Because even if you are working for one additional hour, why does that one additional hour come

from the lawn mowing rather than say one fewer hour that you sleep or one fewer hour that you cook or just one fewer hour that you like kind of putts around generally like staring out the window and not really doing a whole lot. Even if you increased your workload by an extra hour a week, that hour could have come from anywhere. So logically, the trading dollars for hours never really made a whole lot of sense to me. And I struggled with this for a very long time. And the best answer that I have found so far came from the author Laura Vandercam. She was a guest on our show in episode 38. We'll link to that in the show notes.

But Laura's advice was first fill your schedule with all of the things that you cannot outsource, such as reading books, exercising, calling your mom, sleeping, showering. Those are all the things that you just can't outsource. So fill your schedule with that first. and then once you've completely filled your schedule with that, if you have any time remaining, then you can start putting in the things that are outsourceable. I loved that explanation because it removed this kind of false rationalization of equating time with money, which I think is not like mathematically and logically, it just doesn't work to try to make a linear one-to-one exchange between time and money.

And so by first filling your schedule with the things that you cannot outsource and then if and only if there's time remaining, adding in the things you can, that just seems like a much better framework. And it's one that doesn't drive me to, like, it doesn't drive me insane by taking me to the edge of logical extremes, which is where I was going when people were trying to give the argument of an hour of your time is worth X. So I went off on a bit of a tangent there, but that is all to say that there are things. three major takeaways that I got from this conversation with Michael Kitsis, the first of those three major takeaways is to think about whether you're trading a dollar for an hour versus whether you're trading a dollar for an object. And if you are going to inflate your lifestyle, ideally do it in such a way in which you're trading dollars for hours more so than objects. So that is chief takeaway number one. Takeaway number two that I got out of this interview was

to be very careful about recurring expenses. As Michael said, taking a vacation or taking a trip, traveling, is not a recurring expense. You do it once and you don't ever have to do it again. Versus getting a large mortgage, I mean, that's a recurring payment that you're going to have to make for the life of the mortgage. So be careful about any of those because you're locking your future into higher fixed costs. and the higher your fixed costs, the less freedom you have, the less flexibility that you have. So think very carefully before you start literally mortgaging your future. Chief takeaway number three that I got from our conversation. This came at the very end when he said, it's not the degree, it's the skills and the confidence.

So if you are going to invest in yourself by virtue of learning, don't necessarily fall into the dominant paradigm of thinking that education only comes from an institution that can grant you a diploma. Because certainly there are some careers in which you need a diploma. If you want to be a dentist, you're going to have to go through the requisite schooling. If you want to be a doctor, ditto. But for a lot of fields, you don't necessarily need a degree to be a writer or to be a business owner. You need skills and you need education and training that can help you get those skills. But that doesn't mean that you have to enroll in a master's program for that necessarily. Invest in yourself, but look for more cost-effective ways of doing it that, you know, more cost-effective than going into grad school.

And particularly if you have to go into a bunch of debt, to go into grad school. Again, you're putting a big recurring expense onto your future and be wary of that. So those are the three takeaways that I got from this. All of the websites and books and everything that we mentioned are going to be linked to in the show notes, which you can find at afford anything.com slash show notes. So check out the show notes while you're there, subscribe to getting regular updates of the show notes delivered to your inbox every Monday morning. And if you like this show, please do me a favor, head to iTunes and leave us a review. Thank you so much for listening.

My name is Paula Pan. This is the Afford Anything podcast. I'll catch you next week.