Afford Anything - Q&A: Gold vs. Stocks – and Why Inflation Panic Makes You Poor

Episode Date: August 19, 2025

#635: Arielle’s head is spinning from the seemingly contradictory advice she hears about the best investments to hedge against inflation and a possible recession. What’s she missing? Dave is curious about private investments after listening to a recent First Friday episode. What are they, and should he consider them for his portfolio? Abbey is stoked about the raise she negotiated for her first job out of school. But she’s worried about liability risk related to her new position. How does she protect herself?  Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it here For more information, visit the show notes at https://affordanything.com/episode635 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, how many years were you a financial advisor? 16. During those 16 years, was there ever a period of high inflation? No, not especially from the mid-90s into the late 2010s. No, not especially. Yeah, we had everything else happen. We had a tech wreck. We had a real estate meltdown, but luckily not high inflation.

9-11 at that time. Yeah, there was a lot that went on. But not inflation. So we're going to give you a whole new challenge today. we're going to tackle a question about how to invest in an inflationary environment. We're also going to talk about private investments. What are they and should they be pursued? And we're going to hear from a caller who originally called in back in 2021.

You and I disagreed on the answer that we gave her. So you and I gave her two totally different answers. And you were right. What? Oh, we got to do that one first. We got to do that one first. We're doing that one last show. Welcome to the Afford Anything Podcast, the show that knows you can afford anything, not everything.

This show covers five pillars, financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, I answer questions from you, and I do so with my buddy, the former financial planner, Joe Sal Cahai. What's up, Joe? You know, I was just thinking, Paula, that I should have listened more. to the amazing words my grandfather shared.

Which was what? I don't know. I wasn't listening. Ah. Well, listen to this. Our first question comes from Ariel. Hi, Paula and Joe. Ariel here.

I've heard you say in several recent episodes that because of our inflationary and potentially recession-headed financial environment, a lot of investors are flocking toward things like gold, art, or real estate, more stable, inflation-proof assets. I've also heard you mentioned a couple of times predatory investors, financial advisors, businesses that try to sell amateur investors on particular products. And specifically, you've mentioned people who are encouraging new investors or non-expert investors to pursue things like gold or bonds or other quote unquote inflation proof or inflation resistant assets. And it seems to me like you were discouraging people from falling prey to those kinds of

predatory practices. I'm a little bit confused because it seems like a lot of expert investors are headed in that direction and yet a lot of predatory practices are encouraging that direction. Would you mind clarifying what we're supposed to be thinking about in relation to gold, bonds, and other very stable assets? Thank you so much. I love your question. Thank you for asking it. Joe and I actually had a conversation before we started recording as to which question we would put first. We put yours first because I think there are a lot of

people listening who share the same question, especially if you're an amateur investor. How do you separate the wheat from the chaff? How do you understand what is legit versus what is predatory? And how do you make these decisions, not just in inflationary or recessionary environments, but in all environments, what are the foundational principles that you need to learn. So let's tackle this. Joe, I don't know how you want to begin. You and I did not talk in advance about how we were going to address this. Personally, I would like to start by establishing at a foundational level why gold and other tangible assets are generally good inflation hedges.

I want to establish that for the sake of everyone listening because it's helpful to understand not just what to do, but why people do it. So I'd like to explain the thinking behind why tangible assets tend to be good inflation hedges. And after that, broaden it out into a question about risk management and what percentage of your portfolio to put where and how to understand who to trust and who not to trust. What do you think, Joe? I think that sounds good. I know on stacking Benjamins, we have a headline segment and I've done some headlines around Wall Street. So I love the fact that we're going to tackle this because, frankly, Ariel, I don't remember us talking about. this at all. And it's a great topic. It's a great topic. Yeah. I've probably mentioned it on a couple of

first Friday episodes. Yeah. Yeah. I just don't remember you and I chatting together. But I think that's a great place to start about why, at least over the short run, right, during the spike of inflation, why something like gold or... Or real estate. Yeah. Yeah. Why any tangible asset is generally a good inflation hedge. So the way that I want you to think about this, and personally, I find it helpful, not to necessarily think about the United States, because globally, we have the world's reserve currency. And so there's a certain level of protection that we inherently get by virtue of the fact that we invest in U.S. dollars. But just to understand this at a conceptual level, I find it really helpful to think about a country like Argentina or Pakistan, a country that has a currency that is not a world reserve currency, a currency that could collapse without triggering a global meltdown. Because when you think in terms of that kind of currency, it's easier to imagine what would happen in the event of a currency collapse.

Zimbabwe, look at Zimbabwe in the enormous levels of inflation that they have had. And so if you think about an investor in Zimbabwe, in Argentina, in Pakistan, because of the fact that their currency is so rapidly declining that one unit of their currency today doesn't have the purchasing power that it had yesterday or a week ago or a month ago, right? A country where you can sit down for a cup of coffee. And by the time you're done drinking that cup of coffee, the currency that you're using is worth less than it was at the time you began drinking that cup of coffee, right? Countries where inflation is that bad, you can't put your faith in the underlying currency. And so in those types of situations, you don't want to have any of your assets in that underlying currency because that currency is just increasingly, increasingly turning into worthless pieces of paper.

Yeah, I think the goal at that point, Paula, has changed from, I want to grow my money to, I want to preserve what I have. Preserve and protect, exactly. In a situation like that where currency increasingly becomes more and more worthless, tangible assets like real estate or gold or copper or anything else that you can actually hold, that's the only thing that retains its value. In the case of real estate, for example, people will always need a place to live, and therefore real estate holds intrinsic value because of the function that it serves. In the case of gold, gold has a species historically. That was the original currency. Before fiat currency was developed, gold was historically what traders on camels crossing the Sahara used. gold was the original currency across civilizations thousands of years ago. And part of why people focus on gold as opposed to silver or any other metal is because if you have a bar of silver and you break it, there are little shards that come off, little flex that come

off. Every time that you break up a bar of silver, you lose a little bit of it. That doesn't happen with gold. The inherent qualities of the metal allow it to be divisible without losing any bits of it, which is why gold historically has been a better medium of exchange than, say, an alternative metal like silver, because you can divide that gold into smaller and smaller pieces as many times as you want, and you're not going to get little flakes that fleck off. So gold has metallurgic physical properties that make it better as a method of trade.

There's an interesting thing because of that that's happened over time. And I had this described to me a couple of years ago that throughout history, an amount of gold that would buy a nice outfit for a man or a woman was X, whether it's the year zero, the year, 1500, the year now. that same amount of gold is roughly what would buy a nice outfit or suit for a woman or man today. The person that was telling me about this said, so if I was getting into a time machine and I have no idea what currency is going to be 500 years in the future, I'm taking gold with me because regardless of the currency, I will be able to buy about the same amount of stuff in the future

that I can buy today. And it is remarkable when you follow the track of gold. Not the way it spikes over the short run. On a daily basis, gold is about eight times more volatile than the stock market. So it's very volatile on a daily basis. However, over long periods of time, that stability of gold to just hang on to and buy almost exactly the same amount of stuff is no mistake, Paula. And that makes sense in the context of the fact that over very long periods of time,

we're talking hundreds or thousands of years, civilizations rise and fall, right? The Ottoman Empire, the Ottoman Empire, civilizations rise and fall, yet gold stays constant. The United States has the most powerful currency in the world. And our country is not even 250 years old yet. Yeah. We just turned 249. It's funny. When you look at things in that context, just how young, Right. The what American experiment you've heard it called truly is. Now, bonds are interesting from a different standpoint. When people say that investors flock to bonds specifically, that is the treasury, not a high-yield corporate bond, but they're flocking to U.S. currency, almost for the same reason, Paula, because it's so stable versus other currencies over any inflationary period.

Right. And to unpack that a little bit, a bond fundamentally is a debt. So if you buy a bond, you are the lender and the bond issuer is the borrower. When you think of buying a bond, think of fundamentally you're making a loan. If you are going to be the lender and you are going to make a loan to someone or something, who do you want to lend money to? You want to lend money. If your goal is preservation of capital, you want to lend money to the entity that is most likely to pay you back. And that entity is the federal United States. Because what's the most stable entity out there? It's this nation. It's the federal U.S. I'm not saying this will ever happen. But it would be more likely for a state to default on a loan than it would be for the entire Fed to default on a loan. And it would be more likely for a different country to default on a loan, then it would be for the U.S. to do so. If the U.S. ever got into a situation where we defaulted on our loans, the whole world would

collapse. I think a great way to think about bonds is to think about your own credit rating. Because as an individual, why do we want to have a high credit score? One of a high credit score, so people will loan us money at a lower interest rate and maybe even for a longer period of time. So there's less risk if I have an 850 credit score, 830 credit score than somebody with a 450 credit score. Somebody who has a sub 500 credit score is going to pay interest through the nose because the borrower has no idea if they're getting that money back or not. So it's the same thing when you're on the other side.

If you want to loan money to people, if you want to maybe get a high rate of return, risk it on putting money. if you want to grow it, maybe risk it on people with a 500 credit score that you think are going to repay you. In an inflationary environment where you're worried about your ability to just hold on to your money, you're going to loan it to people with a phenomenal credit score who've paid it back reliably over and over and over. And that's why people loan money to the U.S. government in this case. Exactly. And just to highlight the difference, you know, if the state of Illinois were to default on its loans, I'm not saying that will happen, but if it did. That would be terrible. It would certainly be terrible for the citizens of Illinois, but it wouldn't

trigger a global meltdown. By contrast, if the U.S. were to ever default, it would trigger a complete global meltdown. We would all have much, much, much bigger problems on our hands. In a risky environment, in a recessionary environment or an inflationary environment, when you're looking for safety, you know that the last bastion of safety is the first. full faith in credit of the United States Treasury, because that is the last stronghold that we have. I think real estate, though, is slightly different. Go on. Or do you think it's the same mechanism?

I believe it's the same mechanism. Unless you're in an environment with overbuilding, unless you're in an environment in which supply exceeds demand, real estate holds its value and tends to go up at a minimum with inflation over time. The only exceptions are A, situations of overbuilding or B, situations of population decline. Yeah, and I guess that's why I think that it's a little different is because there are so many regional and local factors that also factor into that decision around real estate that, to me, it isn't as clear cut. There's often a lot of stuff going on in not just a block, but in the real estate market that kind of clouds the waters. Plus, you know, real estate for me is closer to a long-term solution, but I think we're going there next. So we can maybe save what I'm thinking for later. But I do think that gold is very clear cut.

It's this beautiful store of value over long, long, long periods of time. Bonds, very easy. You're loaning money to people with very high credit, so it preserve your money. These are solutions to preserve your cash. I'd even just say treasuries. Treasuries. Yeah, we shouldn't even say bonds. Yeah, treasuries.

Now, I want to address Ariel's direct question, though, which is about predatory practices, because there are a lot of entities out there, unfortunately, that prey on people's fears. They know that this is a time of high anxiety. People are worried about inflation. I've talked on the first Friday episodes about consumer sentiment and how study after study shows that consumers are very pessimistic about upcoming inflation. The University of Michigan has great data on that. And so because. There are so many worries right now about recession, about inflation, about our economic future. There are a lot of entities that prey on those fears and that lead with product rather than with education and that try to sell you a product as a solution. And so they will say, buy all of this gold, but the gold that they're selling has huge fees associated with it, huge markups. They're not providing adequate education in terms of what percentage of your portfolio should be in gold versus in other assets. They're not providing education in terms of fee structure, how to look at fees, how to think about fees, what's appropriate,

what's not. They are simply pushing a highly marked up high fee product at you. And they're using marketing language that's based around fear in order to do so. And I think the key here is, as humans, we are very good at parsing what we're told. We're not great at filling in the blanks, meaning if someone is purposefully leaving something out, it's a game of hide and seek, right? It isn't often what they're saying. It's what they're not saying. And what they are saying is, are you afraid the stock market will go down or the economy

is going to suffer? what if you got into an asset that performs really well during that time frame? All you got to do is invest in our X, Y, Z. What they're not saying is, here are the fees. What they're not saying is how this performs during regular times, the other, frankly, 99.9% of the time, except this horrible Black Swan event. They're not talking about the long-term asset. There's so many things that they're leaving out.

Just leading with, are you worried about this and this? So they're not lying, Paula. They are not lying. But the huge amounts of information they're leaving out is absolutely criminal. It's horrible. Those products actually, believe it or not, don't even bother me as much as some of the Wall Street solutions I've seen lately. And we've done headline episodes about, and these are these market neutral products. So in this case, they give you so much information that you don't understand.

Ah, that is actually a hardball negotiating tactic. It's called the information snowstorm. Yes. We are going to buy these positions, but we're going to add options to the position that make sure that if they go sideways, that it doesn't go sideways. And so it's market neutral. The market goes up, you win. The market goes down. You win. The bad news is not only is it market neutral, it's neutered your ability to get any type of return. And again, the fee. The fee is, that it takes just to implement these strategies that they have, they might not be, quote, ripping you off by charging you an excessive amount. It just cost a lot of money and it's very active to do what they're doing. And for that reason, the fees skyrocket. You can't grow your

investments. And that's difficult. And I think the third one is the insurance industry loves a downturn story. This is my favorite of all the pitches. And this one, is a rip-off. This one's a complete rip-off. What if I could tell you there's a product that participates in the gains of the stock market, you can get a portion of the upside and none of the downside? What if you could be in the stock market but not lose money? Wouldn't that be great? The answer is, hell yeah, that would be great. That's what an equity index annuity does. And again, it's not what they're saying. It's what they're not saying. So the percentage of the upmarket that you get has been cut so small that after you look at downturn years where you get

a zero rate of return matched with upturn years where your maximum is maybe six or seven percent, you end up with a very reliable three and a half to four percent rate of return over time. Why would I be in a product that I can't get out of for 10 years, 20 years sometimes? they have these huge surrender costs, why would I be in a product that returns 4% over a 20-year period of time just so that I can avoid the short-term pain of avoiding stock market losses? That is the insurance company doing what they do well, which is protecting you from your ability to make money. Right.

At that stage, if you're really that worried about it, you'd be better off investing in tips, Treasury, inflation protected securities because there you've got the inflation protection. In fact, TIPS actually protects you in both inflationary and deflationary markets. If you're truly worried about capital preservation. Yeah, but can we go into what's wrong with all these strategies? Yeah. I had a mentor a long time ago. Tell me there's a short-term and obvious solution and then there's the long-term and not-so-obvious solution. And whenever you can avoid that short-term and obvious and look for the long-term and not-so-obvious. The long-term and not-so-obvious solution to this is if you begin with the end of mind,

if you start with the goal and you work backward and you know what the time frame is, invest in an investment that has the highest probability of doing well over that timeframe versus investing in things that cure the bumps in the road along the way. if you just look at that time frame and work from there. Because the problem that we have, if you don't do that, let's say that you've got a 20-year goal and you invest in gold over the short run because you're worried about asset preservation over the short run. The problem is you have to be right twice.

And humans have a very, very, very horrible track record, just an abysmal track record. If you look at research that Fidelity's done around their clients, that Schwab has done around their clients, they've taken these large groups of people and they see when people trade, when they buy and when they sell. And we have this uncanny knack for buying the thing we should be selling and selling the thing we should be buying. We are very good at that. So if you don't play that game at all, then you don't have to play the Be Right twice game. Because we're horrible being right once. Even if I nail it that, you know what, today inflation is going to be a problem. So I'm going to take all my long-term assets that are great for a 20-year time frame.

And I'm going to trade that volatility for something that's not volatile during that time, gold or treasuries. And I buy this. Okay, I called it. When am I going to get out of it? Because the key for my goal, if I know what my goal is, my goal is a simple equation. I need to save so much money and I need to get so much return to get the goal. In gold and in treasuries, I'm not going to get the return. I'm going to get the asset preservation, but I'm not going to get the return.

So at some point, I've got to turn it on for most of us that need growth. So we don't have to save dollar for dollar to reach our goal. If we need that growth, which I think 99.9% of our audience needs, I can't stay in gold and I can't stay in treasuries and make it. I mean, imagine, Paula, if you're living on $80,000 today, and you want to live on, let's say, $60,000 in retirement. And you plan on retiring for 30 years. And you're going to invest in something that just keeps up with inflation. You have to live on $80,000 and save another $60,000.

Right. You can't do it. The average person just can't do it. You need your money to grow. You need compounding interest. So this ability to be right twice is why, even when I don't think it is predatory. I don't think every person selling gold is predatory. I don't think every person selling you on treasuries is predatory.

I do think the annuity industry is predatory. I do think some of these Wall Street, quote, solutions to be market neutral or predatory because they prey on fear, not on what you really need to do. But if you begin with the end goal and you go, where do I need to be? Over 20 years, you're going to do a combination of real estate and stocks. And real estate gets you there, not because of the physical. real estate, which is why it's stable over the short run, but it's because of the return of your ability to use leverage, number one, and number two, your ability to have a renter in that house.

That notches up the return to about the same 10% return that you get in the stock market. The stock market is actually interesting, Paula, because from where I sit, if you truly want to beat inflation and we're going to do long term and not so obvious, what do we do? We invest in the things that create the inflation because the creators of these companies, like Coach is selling handbags, the people at Coach don't go, oh man, these tariffs, the price of our goods are up. Guess we can't make profits anymore. Right.

They're going to figure out a way to either make their distribution system more efficient or to make the product seem better so that you accept a price increase. And guess what? if I own that company, I then get a bump up in my share price, which reflects the company's ability to weather the storm. And if the company can't weather the storm, I mean, the beauty of an index fund is that naturally, the companies that fail get cycled out and the ones that succeed get cycled in. Yeah, self-cleaning.

So you don't have to play the short-term game of, I think, this company's going to win. You play the long-term game going, I think there's going to be 500 companies that weather this storm. Right. And if you do, you invest in the S&P 500. Heck, you know, total stock market index, whatever. You invest in that. It cleans itself to always be the companies that are responding. And over the longer period, you're beating inflation.

The bad news is you're going to feel the hurt more on the short end. So, Joe, then, let's say that Ariel has some type of short-term goal. Let's say that she wants to have money. If it's three years, she should probably stay in cash or cash equivalence. Let's say that there's a goal that she's investing for that is between six to eight years out. Yeah, seven. That's funny. I was going to say seven. Yeah, let's say seven. How would she or anyone else listening invest for a seven year goal, a goal on a seven year time frame? I would still not use gold because of gold's ability to get volatile in a hurry. I mean, gold can get

volatile. I just don't go to your gold for that reason. The treasury market, though, really becomes a nice stabilizer for that goal. So I invest in a combination of very low risk, very large, company stocks. If you're thinking about the Dow Jones Utility Index, Dow Jones Value Index, something that has a lower standard deviation than the stock market itself, coupled with treasuries, I think then you're able to much better mitigate the volatility on a seven-year goal while still preserving your ability to possibly create some upside. This is where you'll a lot of financial planners will recommend a much heavier bond allocation in a portfolio. And not just in this case, not just treasuries, given seven years, there are some very safe companies that I can loan

money to, right? So some investment grade corporate bonds, I can also put in that portfolio over a seven year time frame. I can also use agencies, which you know how much, Paul, I like agencies. Something like a Ginny May over a seven-year time frame looks a lot better than a treasury over a seven-year time frame. I still have the implicit government backing, but I get a little spike because I don't have the explicit backing that a treasury has in a Jenny May. Spreading out the amount of bonds that you use, you can do with a seven-year time frame to spike up your rate of return. and you also put those in at a higher level so that you're able to put maybe a few low-risk stock indexes in the portfolio to mitigate against the potential black swan event, you know, where everything goes to hell right as you need the money.

As I'm thinking through it, what I would do, Ariel hasn't even said that she has a seven-year goal. I'm just kind of using this as a hypothetical. But what I would do if I had a goal at a seven-year time frame, and let's say I wanted, I don't know, $100,000 or $200,000, right? It's a significant amount of money. Something bigger than you want $15,000 so you can buy a car in cash or $20,000 so you can buy a car in cash. Let's say you want $150,000 to put as a big down payment on a house, and you want to do that seven years from now. If I were to pursue a goal like that, the first thing that I would do is I would open a taxable brokerage account that is separate from all of my other accounts.

so that I could see the asset allocation inside just this one account. You don't technically have to do that. I just think it makes it easier. Yeah, I like your ability then to track your milestones toward reaching that goal. Right. There is that mental bucketing where you know this specific account that I have opened at Fidelity or Schwab. This particular account is earmarked for just this particular goal and it all has a seven-year time frame. And then as the years go by, a six year, a five year, a four year, a three year. And then once a year, you can then asset allocate according to how much time is left in that time frame. And yeah, to your point, Joe, that would be a mix of a little bit of S&P 500 or VTSAX or total stock market, I should say.

It'd be a little bit of that and a lot of bonds, tips. Tips, I would have a heavy tips allocation. And some Ginnie Mae's. You're more of a Ginny May fan than I am, but you know, you could sprinkle a few in there. I'm a big fan, big fan. Let's talk about this. Every investment strategy has risks. Your goal when you are investing is not to find. I think this is the mistake, Ariel, that a lot of amateur investors make. And this is what these companies prey on is your goal. And I'm not talking about you. I'm talking about us as investors is to find the ironclad. It's going to work no matter what investment strategy. There is no such thing. I've been doing this for. Over 30 years. There is no investment strategy without risk. The risk that we are talking about today is a risk that we call horizon risk. And that is that the investment horizon that gold helps with, if you're a growth-oriented

investor, which if you're talking about being goal-oriented is almost always the case. We need our assets to grow to get the goals that we want. If we're a growth-oriented investor, gold just doesn't do it. And so if I hold it long-term, I end up deteriorating my ability to get the goal. Now, there's horizon risk on the other side. If you invest in stocks, which do play nicely with inflation over long periods of time because of what we talked about earlier, that these companies create the inflation that we're trying to beat.

So if you can't beat it, join it. Go buy some stocks and you're on board the inflation train in a positive way. If that horizon changes and you all of a sudden need the money during that downturn and you thought it was 20 year money, well, now, Paula, you've got a real problem. Every investment has a time horizon risk. If you start with that risk, which we don't hear people talk about, I think enough. If we start with that risk, what happens to my time horizon changes? And we work from the time horizon that we're trying to have the money solve. I think we're going to be a much more prudent investor.

And I want to close this out by going back to Ariel's root question of essentially who do I trust. In the world of financial advisors, I advocate only talking to somebody who has a fiduciary duty to you at all times. Joe and I disagree on this, but ideally, I would say a fee-only advisor. We'll save that debate for another day. But certainly you would want somebody with a fiduciary duty. But outside of the world of financial advisors, when you're encountering, TikToks, Instagrams, articles, podcasts, when you're encountering financial media and financial education, I would tend to prioritize, A, anybody with the heart of a teacher, anybody who takes

the time to explain not just the what, but the why, they shouldn't be telling you what to do. They should be showing you how to come up with the conclusions on your own. their aim should be thinking about how to think rather than being prescriptive in their advice. The thing over my career that always drove me crazy was when someone would ask me a question, they go, well, my advisor said to do this. I don't understand why. What do you think? Should I do that?

And I'm like, well, the bigger problem is you don't understand why to do that. Because clearly they had a reason and we need to get at the heart of what it is. and if your advisor's not making you smarter, how are they truly an advisor? Like, remember, if you're positioned as the CEO of your financial company, your advisor's job is to make you a better CEO. How does somebody giving you a prescription without telling you how it's going to help the company truly help you? It doesn't. It doesn't.

Because the second that something changes or something goes wrong, you've no idea how to fix it, how to do the thing. Thank you, Ariel, for the question. I hope that gave you some good insight and some reassurance around how to invest in an inflationary or recessionary time, both for the medium term and for the long term. I've got a great idea, Paula. What's that? How about if we keep talking about investments and some really strange investments with our next call? We should. And that's coming up right after this.

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That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Our next call comes from Dave. Hey, Paula and Joe. I was just listening to Paula's first Friday episode where she was talking about accredited investors and investing in private markets, private investments. I was just curious, what are private investments that we should be looking at? I don't really recall hearing a whole lot of those come up on the podcasts. Typically, we just talk about efficient frontier or real estate or ETFs or mutual funds.

So maybe you could shed some lights. right. Thanks. Dave, thank you so much for the call. And I'm laughing, Paula, because Dave's 100% right. We haven't talked about any private placements. And from my perspective, Dave, there is one reason for that, and that is because you don't need to. Because you can get where you want to go for 99.9% of us,

for the goals that we have very reliably using the simple path. Oh, Joe, you and I are about to have very different. takes on his answer. Oh, well, I don't think for most of us we need. Now, are there cool opportunities there and are we going to go through them? Yes. Can you make a lot of money there? Yes. But I think, Paula, I think you would still agree that you can get where you want to go without putting money into private placements. Well, most people have to because most people aren't accredited investors. And the stupid, stupid system that we have shuts out anybody who's not an accredited investor. So, yes, You absolutely can and for most people must live your life without ever accessing private investments.

So let's go. What am I wrong about here? Because I think... Well, okay, so as I see it, once you have the foundational building blocks set, there is a difference between setting up what you need in order to reach the goal versus investing after you've hit the spot where you're like, you know what? my goals are funded. My goals are funded at 120% of where I need them to be, all of my goals. Retirement done. I'm, you know, I'm FI or I'm Coast FI. Any major big ticket item that I want during my reasonably foreseen lifetime done, you know, I've got money set aside for X and Y and Z. Once you've hit those goals and then you still have discretionary money that you want to invest,

I think that's where the fun of investing in private businesses really comes in. I'll give an example from my own life. There's an email service provider that I like to use that Joe, you and I both use. That email service provider is not publicly traded, but they accept private investments. The founder and CEO of that particular company reached out to me the last funding round, private funding round that they were doing, and said, hey, are you interested? in investing in our company. There's a website called Angel List.

They were on Angel List. He sent me the link. I took a look at all of their financials. I ultimately ended up passing on the deal, not because it was a bad deal, but because I wanted to preserve liquidity so that I could reinvest that money into afford anything.

But if I were not running afford anything, if I were not making additional investments into it, I should say, and I didn't have the need to preserve liquidity, I absolutely would have invested in that company. When you dig into, and I know you and I both just interviewed Nick Majuli and the wealth ladder, when you dig into Nick Majuli and the wealth ladder, and to be clear, Nick is not saying, don't do this thing before you get to Expot on the wealth ladder.

But he is saying it's a heck of a lot less dangerous if you start at this point. Did you see where he puts this on the wealth ladder? Yeah. So the concept of the wealth ladders, there are six levels. each level is a different order of magnitude. And so if you are level four, you have a net worth and investable assets that are between $1 million to $10 million. And it's really easy, everybody, because I know that it's a confusing concept at first,

but level one is zero to $10,000, and then just keep adding a zero. So it's $10,000, then $10 to $100 to $1,000 to $1 million to $10 million to $10 million, and then $10 million to $100,000. million is five. Right. But did you see where in practice the people who do this type of investing are? For the most part, they're investors with over $10 million. Levels four and five. There's some level four. But the big exposure is people with $10 million. Right. Well, so what Nick talks about in his construct of the wealth ladder is that once you get to a given level, it is challenging to get to the next level. It often takes an investment of many years, some many decades to get to the next level. And the strategies that you use, there are certain strategies

that are better fits for better levels. So if you are wealth level three, which I think a lot of people who are listening to this show, level three means that you have a net worth that is somewhere between 100,000 to a million. If you are level three, then everything that we talk about on this show, public markets investing, investing in VTSAX, coupled with starting a side hustle, coupled with negotiating for a raise at work, coupled with buying rental properties, that combination of habits is likely to get you from level three to level four. And just to walk through this, why that's important is because somebody who has over $10 million who negotiates a 2% raise at work or 5% raise at work isn't going to move the needle to go from

10 million to $100 million using the same strategy, which is one of the biggest strategies you can use when you're further down the wealth ladder. Right. Essentially, the question of what's going to move the needle changes. So if you are wealth level three, which means that you have a net worth that's between $100,000 to a million. At wealth level three, if you buy a rental property, and that rental property over the span of five years generates cash flow of 3,000 a year, so over five years, that's 15,000, and it also generates equity gains of 10,000 a year, so over five years, that's 50,000, right?

Then at the end of those five years, you have generated an additional $65,000 of wealth, as a result of owning that rental property. And if you have a net worth of $650,000 and you make another $65,000 in wealth, well, you've just increased your net worth by 10%. That's huge for something that you've done on the side in a couple of evenings and weekends that's relatively residual. Yeah. You're talking about the upside. I also think what I like about the whole wealth ladder analogy is the downside of some of these strategies and why you don't use them when you're further down. Because what I'm getting at is why is it so prevalent with $10 million and not people between $10,000 and $100,000? And I think the reason isn't even a credited investor status.

I think it's because the potential risk of this thing going sideways will so dramatically affect your ability to move up the wealth ladder if it goes sideways that the Jews, that the juice isn't worth the squeat, even though it could be huge. It could be absolutely huge. So you're talking about the risk of ruin. Absolutely. For the vast majority of this audience, it's a goal-oriented audience trying to reach a certain place. To your point, I think, in mine, because you said once you're past the goal, it can be fun. Sure, it can be fun. But why do most of the people that do it in Nick's book? Why do most of them have more than 10 million? Even if they are in the million to 10 million spot, most of them are over the 5 million

midpoint, right? I mean, you're going to see that as you get closer and closer to that 10 million spot, far fewer at a million, way, way, way more at 5, 6, 7, 8 million. But when you get to 10 million, it's a prevalent strategy that a lot of people with over $10 million use. Because at that point, to move the needle to go up and the downside doesn't wreck anything, doesn't have the huge impact anymore that it has for people lower down the wealth ladder, that this is a viable and a great strategy to go from $10 million to $100 million.

I think your upper band is too high, you know, because what you're essentially saying is once you're at wealth level five, then this is a viable strategy. I would argue once you're at wealth level four, I think it's good. I'm not saying it's viable. I'm saying based on the statistics in his book of who already does it, I'm not talking about what you should do. I'm talking about why is it most prevalent among those people. No way, he also says that people in wealth level four tend to have more of their assets tied up in businesses as opposed to public markets. That becomes increasingly prevalent as you move

into levels five and six, but even in wealth level four. Which is what I just said, in four, I think on the one million number, that number's not high. Yeah. I think when you parse that number, which by the way, Nick didn't do. But if you parse it, it's going to be the five to 10 million people where it's really picking up steam. But it's extremely prevalent when you get to that 10 million number. Like it becomes like the thing. So I think that you're 100% right. A million to 10 million. Okay, that's when it shows up. But 10 million, it really becomes a strategy. I think that's another reason why we don't talk about it here is because so many people are not at that $5, 10, $15, $10, $10, $10, $100,000, number. Right. But even if you're at one or two million, oftentimes, especially if you live a

relatively middle-class lifestyle, you have enough money in your retirement accounts. You have probably, your home is probably paid off. You've got sufficient money in your retirement accounts that you could have a perfectly normal middle-class retirement. And if you're satisfied with that and willing to take on some risks, then you could have one or two million in net worth and then have the ability to take some bigger risks without putting that base at risk. So if you're a million to two million dollar investor, let me tell you what the downside is. The biggest opportunity when you look at private investment products, often without knowing the right person or being someone that already has a reputation,

as an angel investor, you don't have access to the layup opportunities that those investors do. These businesses are run by people that have a track record of incredible success. They're connected with the right people to ensure the fact that this is, at the very least, going to be a business that is quickly cash flow positive, will get customers, will attract the right people, often at the million dollar to two million dollar range, we're introduced to companies that have already been turned away by those big investors. And so they're looking to you because they're riskier. What's interesting is often when you're a smaller investor, it's the least risky investments that are open to you because you're not a credit investor.

But when you hit the accredited investor button, the funnel flips. And generally speaking, the most risky accredited investments are the ones that you're shown and you are presented with. And it's purely because the biggest investors who want the investments that are sure to hit are funding those to the point that the creator, the founders don't need your money. And I'll give you a specific example. I'm seeing right now on Facebook, Facebook ads. I don't know if other people are being fed the same Facebook ad. I can invest in the re-creation of Chi-Chi's. The Mexican restaurant?

The old Mexican restaurant. Oh, I love that place. Me too. Wow. And guess what? They're feeding on that. And I have not read the offering. I have no idea about the projections that they have.

I haven't looked into it. But I do know, Paula. The restaurant industry is very hard. But even then, if Chi-Chi's is going to Facebook ads to find money, I know it's because nobody wants it. Right. Yeah. If you are going to go the private investment route, don't follow Facebook ads. That's like calling a lawyer who advertises on a billboard, right?

If your lawyer advertises on a billboard, they're in the business of churning volume, not paying close attention. to any given particular client. If you're something that you're thinking about investing in is buying Facebook ads, again, they're in the business of just collecting a large volume of money from whoever is willing to give it to them. Those are not the investments that you want. What you want is something like what I described, where I know the CEO and founder of a given company, and that person sent me a personal text message and said,

hey, I was wondering if you would be interested in taking a look at our listing. We have all of the data on Angel list. Take a look at it and then let's have a phone call. And I should say, by no means, was this our first communication? This is somebody who I've known for 10 years. I have flown out to the city and state where this company is headquartered and have spent a lot of time with this company. I'm a user of their services. I've known the founder and the founding team for a decade. That is a situation in which you have a deep familiarity with the underlying company. And then you're still looking at the financials because that's part of the due diligence. But you also have that qualitative scuttlebut of having early mornings and late nights

that you've spent in the company headquarters. You've talked to, and not just talked to, but you have the phone numbers of 5, 6, 7, 8 of their employees. You haven't just had conversations about work with their employees. You've had conversations with their rank and file employees about sports, about skin care, about whatever, right? You know the company that well. There's a piece of this that I love, and I just want to parse what I love from what I don't love. The piece that I love is that you have seen why this company succeeds. You've seen the company operate. You're a customer and you now have access to their projections of how they're going to use your money to become bigger. The piece that I don't love is this. Founders and incubators on the other side of this argument are taught, are taught when you're first going after money and nobody knows who you are, the big angels don't know who you are. Your very first people you go to are friends and family.

And the reason is from friends and family, you will get better terms. You'll secure more money more easily without having to prove your track record. And also at Thanksgiving, they can't disown you. Like they can, but it's going to be tough. So if it goes Fubar, these people are still going to be related to you. So you'll get better terms. You'll get better outcomes by going with friends. They actively teach founders to go to friends.

family. But that's why you don't invest in a company that doesn't have a track record. Right. What I'm describing is a company that's, that has been established for a decade. But I wanted to make sure people heard that, Paula, because when you lead with, well, I know the person. No, I know the person and they've had a decades long track record. So when I say I'm looking at their financials, I'm not looking at their projections. I'm looking at the last 10 years of their financial history. But you also need to know what are they going to do with the next round of funding that's going to make it different than what it is today because the obvious question is why are we going after funding if it's working today? What is this going to change? How is it going to move the needle?

Because if all of a sudden you've diluted the investments of the people, because every round you get funding, you're diluting the people that were before you. Not in every case, but in most cases, you're diluting that. So if you're going to do that with another round of funding, how is this going to make everybody more money? So I need to look at both. I need to know where they've been. Like I said, I just want to parse what I love from what I don't love. What I love that you said is company with the track record, know the company, use the company. And then I look at what they've done. I also look at what they're going.

What I don't love. And this is where most of my clients started to fall into the trap when they brought the deal to me was, hey, my buddy has this phenomenal company he's creating. He is creating, meaning he hasn't created it yet. Why is your buddy coming to you for money? It's because friends and family are going to give you better terms. They're going to accept you. They're going to do all the stuff.

And your buddy also doesn't know where to turn to get, frankly, more reliable funding than the person that was my client that isn't an angel investor outside of money to their friend. And I could tell you, in my history, over 16 years, I was probably presented with, it was less than 20, but it was more than 10. So let's just say 15 of these deals. I think Paula, there were two where I told my client, this seems like a great use of money for you. This sounds absolutely phenomenal. And by the way, of those two, one was very successful. And my client did very, very well. And the other one was gone in about three and a half years.

The $50,000 investment was just gone. And you know what? The idea was amazing. It was self-propelled mowers. And so somebody that owned a lawn service could set up a lawmore on a lawn, could have 10 of these working at one time instead of some person on the back of a single lawmore, could have 10 of them going in a neighborhood, could go set them out. It'll mow most of the lawn. They just have to hire people for the trimming then. And then they go and they pick them up.

They had the technology. They were early to the technology. So even if the company wasn't successful, they could sell the technology. They knew all the customers. was a phenomenal deal. Three and a half years later, gone, just completely gone. Well, the issue with investing in a company that doesn't have a track record is sometimes you can have a great product, a great product idea. But so much of running a company is the operations piece. And if that basic operations piece, which is a lot harder than it sounds, especially for a

small business, if that piece isn't there, you can have the best product in the world. But if you're not a good operator, it's not going to matter. Well, here's the thing about this particular company. They not only had a great product, they had customers using the product, they were profitable. What they truly needed for this to become a wild success was they needed the bigger companies, which I won't name, but everybody knows these companies to buy them, which is often what the founder's looking for. and these companies for whatever reason that my clients never were privy to and that the founders could not discern never stepped up and said we want to buy the company we want to buy the technology it made so much sense it made so much sense from my perspective from my client's perspective

when i talked to the founders which i did on four or five different occasions from their perspective made a ton of sense the people on the other end just didn't do it paula so there were other things going on even outside of that. Even if you have the people that know the right people, the company that does the thing better than anybody else, you have all the things and that domino still doesn't hit. And the only reason I'm being a stickler about this is because I think people see it as like a next extension of I go from index funds to individual stocks to private placement. It's a wider, wider moat than that. And it's frustrating as all get out. So while it can be It's super fun to watch $50,000 that should have been a layup just seemed to me like the world's

greatest thing for reasons that are still beyond my comprehension, not make money and all the money goes by-bye is a real thing when you get to private placement. I would suggest if this is something that you're seriously considering. Take two aspirin and go to sleep. I would suggest get some experience as an entrepreneur first, run your own business. first because you will learn so much by virtue of doing that about what it takes to run a business and you will develop strong instincts and a very strong BS detector, but also a very strong, like, green flag detector. You'll see red and green both.

100%. You will develop much, much stronger business acumen and business instincts by virtue of being an entrepreneur. And that could mean starting something from scratch. It could mean buying an existing business. Cody Sanchez often talks about buying laundromats, buying very cash flow-centric, quote-unquote boring Main Street businesses, because that provides an incredible education, a much better education than anything you could get at business school. It's funny, Paula, because I was thinking about Cody, too. Cody's a great person to follow. If you're interested in entrepreneurship, buying businesses, how they work, what to look for. I like another guy, John Warlow,

he's been around a lot longer than Cody has. his brand is called Built to Sell. It's pronounced Warlow, but it looks like Warrillo. John Warlow, two great books to read on entrepreneurship, begin with the E-Mith and then read the goal. And I think even as an investor, if you've read the E-Mith and the goal, you've got a nice foundation for truly what makes a good business great,

how they operate from the beginning. And then, frankly, the classic book, Good to Great by Jim Collins, I think would probably be the third book that I'd read. The other thing that I would do, if you're serious about this and you want to meet those people, you know, I described the founder and CEO of the email service provider, who I know just by virtue of being one of the early clients of this company, if you want to meet other founders, if you live in a major city, there are going to be VC meetups and angel meetups. Like there are going to be investor meetups.

Go to meetup.com, go to your alumni network, look at local events that are in your city, and start going to these in-person face-to-face meetups and tap into the local private investor community. What you're going to hear going to these meetups, and what I like about that is you will see a volume of companies. Often especially when we're first starting out, we are pitched one company. and every founder, you're not going to start a company if you're not passionate that the world needs this. Right. So it is very easy to feed into the passion of the founder if you've never heard a founder's pitch before. You know, you look at the people on Shark Tank and you see how the sharks react to these pitches.

They've seen so many pitches that it's much easier to discard the founder's enthusiasm. to get to the root of how am I actually evaluating the opportunity and not the founder? And don't get me wrong. In some cases, the founder's enthusiasm or lack of enthusiasm, which you will rarely see, but the founder's ability to make sales where other people can't because they're such a good salesperson, can make or break a company. But I also want to learn how to have a good BS detector. And I think the only way to do that is to hear 50 pitches.

And that's why you're going to those meetups is going to be so helpful. Because instead of hearing one, two, three pitches, you'll hear 50. And you go, yes, no, yes, no, yes, no, much, much easier. And often I'm not evaluating the founder's enthusiasm. I'm evaluating their competence. And their competences generally, if you make a rule of only investing in established companies, that competence is most evident through the track record that the company already has. What have they done for the last five years?

Yeah. What have they done for the last 10 years? Yeah. And again, Paula, as an experienced investor, knows to look through that. Right. I know when I worked with my clients, they often go, oh, my God, this woman has the most amazing product. Why?

Because she told me it was amazing. I mean, that wasn't what they said, but that was what I heard as their advisor was, oh, you should see your enthusiasm. Oh, my God. There's all these opportunities. Da, da, da, da, da. Well, you've got to be great at pitching your thing. That's the founder's first goal is to sell themselves and then sell the people

around them, that this is worth doing. doing. But I think, Paula, you're able to look past that because of the fact that you've seen a ton of pitches. Yeah, exactly. Yeah, you get inoculated to them after a while. You totally do. Yeah. Don't get me wrong. I get excited, but it doesn't affect my decision. I'm still like, oh, man, I just love your enthusiasm. I love how excited you are about this, but I'll pass. Right. I'm very much an advocate for investing in private businesses. And I think it provides a great opportunity for anybody who wants to diversify their portfolio of investments, just be aware of the lack of liquidity. That's the big piece that you really need to manage for.

I am shockingly, I know, because people can hear how enthusiastic I am, a lot less enthusiastic for the average person to go down that road. Buy or beware. Thank you, Dave, for the question. This is a great discussion. Joe, you know how you and I often disagree on answers? See, I like this because we just disagreed on the last one. So why don't we play somebody who might think that Joe might be... Might be correct. Yes, so our final question today comes from someone who called us in 2021 to ask a question.

Joe and I disagreed on the answer. Now, four years later, she's called back with an update. And Joe was right. We're going to hear the update up next. Our final question today comes from Abby. Hello, Paul and Joe. This is Abby calling with an update and a new question. You may remember my previous call in which I asked about where to invest money for graduate school.

In addition to exulting the greatness of spend drift during the call, you guys gave me some great solutions. My logic at the time was that since I could always take student loans, there wouldn't be a scenario where interest rates were high and the market was down. Turns out I was wrong. and that's exactly what happened. I did decide to take more of Paula's approach. I did invest the max in iBonds, so I put 10K in that and that ended up netting 1,000 by the time I started school. I also, on some advice from my dad, put 40,000 into QQQQ, which ended up netting me 12,000 prior to school. I had some other investments in a brokerage account that was 9,000 split between large cap, extended market and international, and that lost about $600 prior to the start.

to school. So I'm very lucky that Kukukw weathered the storm. But since then, for my last year of school, interest rates have increased to 9% for federal student loans. And so I decided to liquidate my 4-57, which had about 50,000 of it. That paid for my tuition for the last year. So I hope this is a lesson to everyone to listen to Joe. Now for my update, thanks to Paula and Joe talking a lot about negotiation recently. For my new job, I was able to negotiate an increase from 170 an hour to 190 an hour. In addition, I asked them to change the schedule to allow me to work two weeks on and two weeks off. And lastly, I asked for an increased signing bonus. They started at 15,000 and I negotiated to 60,000. I also asked for it to be due on signing, which will help with the expenses of graduation and

licensing. And if it matters, I will be taking a job in Washington State. I'm 26, and I have about 115,000 in student debt, 5 to 9%, 70,000 in a Roth, 50,000 in a 403B, and 10,000 in an HSA. Now for my new question, the current job I'm taking is actually going to be 1099, and I have several questions. What would be your advice to anyone starting a 1099 business? Do I need an accountant slash tax strategists and how do you go about choosing one. I will be working in the field of nurse anesthesia. And so I'm very worried about liability as a new graduate. Lastly, before I start my job, I just wanted to ask Paula, since I'll be backpacking in Nepal and be doing the three passes trail, do you have any travel advice in food recommendations for Nepal? Thanks. I love you both.

Okay, I got to say that was awesome and not the part where I was right, but just look at what she negotiated. Right. Look at what she created for herself. Incredible. The fact that you got such significant gains by negotiating and you got all of that from our free material from listening to the podcast. That is amazing. I mean, you're not even part of the course. You got that from our free stuff. That to me says so much about how much negotiating material. How much negotiating material we've put together and the power that it can have, I am so thrilled to hear that. You went from 170 an hour to 190 an hour and got a much bigger signing bonus. Like, wow. And negotiated the time. Right. I mean, often it's not about more money. It's about more time and working on your terms more

negotiating that, which people don't even think about negotiating. I thought was incredible. Yeah. That's amazing. You know, for the last couple of weeks, we've been doing, in-depth interviews with some of the students in the beta program of our negotiating course about what were their fears, their hesitations, what led them to want to enroll in a negotiating course? And the thing that we keep hearing over and over and over are people who say, you know what, I'm afraid of losing this opportunity. I'm afraid that if I ask for more, the whole opportunity is going to be taken away. And I don't want to risk jeopardizing what's already in front of me by virtue of asking for more. We've heard that time and time again over the

last couple of weeks. And so, Abby, the fact that you had the confidence to say, hey, thank you for this incredible job opportunity, but I'd like to ask for more. Wow. Just huge congratulations. I commend you for that. Can we talk before we address her question, just part of the outcome that she was able to create with QQQQ going up? Before we do this, out, let me just take a moment to describe to the audience her question in 2021. So she was a caller on episode 32. We're going to drop a link to it in the show notes. If you want to hear the original question. And how much we derailed it around spin drift? I know. I was listening to it. Abby, I actually felt bad. After I heard your question, I went back and I re-listened to your question

and our answer. That was when we were answering more questions per episode. So we were doing shorter answers with a higher volume of questions. Yeah, Joe, you and I, we each gave our respective answers and then completely went on a spin drift tangent. So I actually felt bad when I heard it. I was like, man, poor Abby. I think we shortchanged her first answer. And I'll apologize too, to the entire community because my whole goal there was just to derail Paul. No, but you gave her the correct advice. So for her original question, Abby's original question was, I've got this money. Should I keep it in investments? And if it goes up, I'll use the

investments to pay for school. And if it doesn't go up, if it goes down, I will take out student loans. And I said, I like the flexibility with that. Go for it. And Joe said, no, take the more conservative approach, pay cash for school. And Joe, you were correct. Well, and all I was doing was taking the CFP approach of, you know, we talked earlier in the show about time horizon, which is marry the time horizon and investments that suit the time horizon to the goal, which is what I want to explain to everybody, and Abby already knows this, but your dad recommending QQQQ in the eyes of a former financial planner

was a bet. Because over that short time frame, QQQ, which is investing in NASDAQ companies, largely technology, mid-sized, sometimes smaller companies, is an investment that is going to be, more volatile. And I think this brings up a key, you know, which is certified financial planners will often not tell you how to make more money because they're worried much more than you are about downside risk. And for two reasons. Number one, they see the Achilles heel happen more than you do

because they're working with a much larger group of people. So if I'm working with 100 families and I see it happen to one family, it doesn't happen with 99, those are results that I remember. and then I go, ooh, there's a, you know, there's a percent chance this could go the wrong way. So, CFPs for that reason, also the second reason is they don't want you to fire them. They want you to hold on to them. So they will often, for that reason, also not recommend a riskier approach. But if you want to make more money, there are two ways to do it. Number one is increase your standard deviation, which is what Abby's dad recommended doing.

QQQQ has a higher standard deviation. And that means in any period of time, it goes up more and it goes down more. And because of the fact that she hit the time over the short run where it went up more, standard deviation played in her favor. Had it gone the other way, Abby's call might have been not, I had to liquidate my 457, but I also had to take out even more debt because QQQ would have gone more negative than the rest of her investments went. And the rest of her investments went negative, but that one did. But if you want to make more money, and that is your primary goal, increasing standard deviation does that.

Find investments that historically wiggle more and you can make more money. The second, by the way, is to decrease the amount that you diversify. So we recommend an index fund because of the fact that with the S&P 500, you're buying 500 big companies. Even if one or two go poorly, you're so invested in so many different companies that it takes away a lot of that. potential downside. But if you want to really make money, just invest in Apple before it went up. Or just invest in Amazon. Like forget 500 companies. Just invest in Nvidia before it went up. This kind of links back to our previous answer about private investing. Investing in private companies. Right? It's a concentrated bet. Yeah. You will make a lot more money by decreasing your

diversification or you'll lose more. And by the way, on the far end, that is Las Vegas, right? I mean, if you follow that to its end, Paula, Vegas has the highest standard deviation. Well. And also, you have a concentration of a bet that's much bigger. Yes. But where the analogy breaks down is that the betting in Vegas is negative EV, negative expected value, meaning, let's say if you were to go to a roulette table and if you were to make bets consistently over the span of a year, right, if you were to play roulette every single day for a year or for five years or for 10 years,

over a long time horizon, that bet would be more likely to fail than it would be to succeed, which is what negative EV means. Yeah. And some friends of MySpace talk about positive EV with investing, because it is positive in stocks over the long term. One of my friends, his analogy is like you're walking uphill with a yo-yo. You're looking at the yo-yo over the short run, but over the long run, you're yo-yoing higher because you're yo-yoing uphill. Yeah, it does. But still, you can make a bunch of money on one bet in Las Vegas. You've increased your standard deviation by a ton, and you've

decreased your diversification by laying just one bet. Abby, when you mentioned QQQQQ and that it worked out, it was like, oh, thank God. Because that's, talk about something I would not have recommended in a million years was that type of a bet. So I'm super happy that it worked out. I do want to make a note here, a broader note for the sake of everyone listening, about how to judge the outcome of a decision. Because often we judge the outcome of decisions based on the result, when in fact the decision should be judged based on the soundness of the decision itself, not based on the result that followed. As an example, let's say you've got two people, person A and person B. person A goes speeding through a red light, but nothing bad happens. They don't get into an accident.

They don't get a ticket. And they reach their destination faster. Does that mean that speeding through a red light was a bad idea? Yes, it was still a bad idea despite the fact that nothing negative happened. In fact, despite the fact that it had a positive outcome in that they reached their destination faster, right? Despite the positive outcome, it was still a bad choice. person B, by contrast, is a very safe driver, wears their seatbelt, obeys all of the traffic laws, an absolute textbook, perfect driver, and yet they get into a collision.

Did person B make bad choices? No. Despite the fact that they had a negative outcome, the decision making was still sound. And so there's a distinction between the soundness of the decision itself versus the result. And we often, in the investing world, have a temptation to, judge our decision-making based on the results rather than based on the decision. And this is the methodology that going back to Las Vegas, poker players, professional poker players use to make sure that they're making better decisions because they're calibrating

the decision based on probability of a good outcome. Right. So even if they get what they call a bad beat, it's called a bad beat because all of the probability was in their favor and they just got beat, it'll happen sometimes. Right, exactly. In fact, I learned the concept of EV, negative EV, positive EV, from the world of poker because that is very much how you think. You know, you're thinking in bets, to paraphrase Annie Duke, you're thinking in terms of probabilistic reasoning. And the thing that you want to avoid is, and this links back to what we talked about earlier, as you're thinking probabilistically, the major downside to avoid is what's known as risk of ruin. so you don't want an outcome that is so calamitous that it takes you out of the game.

So objective number one is had your bets such that you stay in the game. And then objective number two is once you've secured that foundation and you're staying in the game, then you think probabilistically. Anyway, with all of that said... Now you're ready to answer a question? Let's talk 1099. You know what? This goes back to our very first question. trust the people who try to talk about thinking about how to think.

Trust the people who are more concerned with explaining the why and explaining the critical thinking behind decision making rather than somebody who simply is prescriptive and gives you a product. It says, hey, buy some gold. Yeah. 1099s. For people that don't know, 1099 income is income. And Abby, I love the way you phrase this question because he even phrased it. Now that I'm going to own my own company, the phrase that I, dislike hearing people say is so now I'm a 1099 employee. When you are 1099, you are not an

employee at all. You own your own company. And by the way, sometimes an entrepreneur who just wants to not pay FICA tax may even accidentally use that wording because they're hoping to have you as an employee, but using all kinds of ways to make it so. You actually own your own company so they are taxless. But truly, in this case, you said, now that I'm going to own my own business, which you do, what do I need to be aware of? In the business, you're going to have your business space.

You're going to have your business tools that you need to operate the business. By the way, that's different than your business uniform. For whatever reason, the IRS in most cases won't let you deduct or write off your uniform, but they will let you write off your tools. Look at your tools. look at the space that's dedicated for that business, any usage of vehicles to get to and from,

not your house, but from an office to another place. Because going from your home to an office is something we all share, but going from an office on the road to go do work at a client's place of business is something completely different and 100% business oriented. You need to track that. So there is a lot to know. But generally, those. three things are where you're diving into the expenses of is it or is it not a business expense? I think, Paula, that's where I start. Well, where my brain immediately went was retirement savings. So as a...

How can we make this work for us even more, which it does? Yeah, exactly. You got some kick-ass opportunities. Exactly. So you have the opportunity to open an I-401K or an I-Roth 401K, which is my favorite, We've had previous episodes in which we've gotten into the traditional versus Roth debate, so we won't rehash that on this one, but you can find that in our archives. My bias is towards the Roth.

And so as a 1099 business owner who has no employees, you have the opportunity to open an individual Roth 401K, which is great, because then you can make retirement contributions. It's fantastic. You know, you can make both the employee and the employer side of your, 401 contributions because you are your own employer. So your employer contributions that you make to yourself will be traditional, but your employee contributions if you open an I Roth 401K, I just as a shorthand for individual, an individual Roth 401K, also sometimes known as a solo Roth 401K, those terms are interchangeable. If you were to open a solo Roth 401K, your employee contributions

would be Roth. Then you get the best of both roads. You get the Roth. You get the Roth. You get the traditional. You get to make big contributions on both sides. I absolutely love it. Yeah. And the bad news that you'll be responsible for your own health care and choosing your own health care, finding that health care. People often say, Paula, I don't have the opportunity to have an HSA. Guess what? You get to choose. Right. Exactly. So you can choose an HSA compatible health plan. You have so much flexibility. Right. So many opportunities. But that brings up her question, Paula, of, you know, should I have an expert in that area? Paula talked about, My bias also is toward the Roth.

My bias also is always toward surrounding myself with really smart people. Let me tell you what I did. It doesn't make it right or wrong. Well, before I get there, why don't I define who you should look for and who you shouldn't? When it comes to professionals in the tax base, there are basically three routes you can go. You can go with someone who's called an enrolled agent. An enrolled agent is an expert at the tax forms. they've passed some IRS training and some testing to ensure that they're competent when it comes

to filling out the form. So they're an expert there. You don't want that person. A lot of people listening may want that person. You need somebody who specifically knows what can I deduct, what can I deduct, and how do I keep track as an entrepreneur? Well, I will say enrolled agents are often less expensive to work with than CPAs, which is very much where I assume that you're going next. So that's a big part of the draw. Well, it is. Before I get to CPAs, there are also people who are experts in taxation, which are tax attorneys.

Sometimes tax attorneys will say, hey, we work with entrepreneurs. We'll work with these people. The foundation of what a tax attorney does has generally nothing to do with what I think, Abby, that you're looking for. So again, I wouldn't look at a tax attorney. I would look at CPAs, certified public accountants, but any certified public accountant listening, maybe laughing right now because they're like, this field is way wider than you think that it is. So just because somebody says they're a CPA, there may be CPAs listening right now that

work for a company that spend all of their time just working in one little niche area that has nothing to do with what entrepreneurs do. So I want CPA, but I also want CPA whose focus is on entrepreneurship. But what I'm also looking for more, and this might surprise you, Paula, I'm also looking for somebody who knows bookkeeping, especially because you're starting out, knows bookkeeping more than I'm worried about their tax line by line entrepreneurship ability, because it truly is about what expenses should I be monitoring? What are the right systems or great systems so that I'm not spending all day on an Excel spreadsheet keeping track of my expenses. As an example, now for mileage, there's apps on your phone now where you can very quickly,

you go to a restaurant, you can snap a photo of the receipt and it automatically puts it in the right place. Some of these systems that a lot of these bookkeepers can teach you. And again, Paul, I like what you said earlier in the show. And it's funny how these start to connect again. Finding people that will teach you this will teach you better bookkeeping is phenomenal. For me, what I do is stacking Benjamin's. I've hired a service that I like that work specifically with entrepreneurs. I meet with my accountant once a month. Once a month.

Because they do bookkeeping service for me as well. And so we make sure that the books for the last month are in place. Now, that's phenomenal for them because it makes it super easy when tax filing time happens because we went month by month by month. My taxes are ready to go. Like they're just naturally ready to go. What I like about it is a business owner is two things. Every month, my bookkeeper, aka accountant and I are also going through my expenses line by line and talking about what is deductible and what's not and how it works. Because I meet with her once a month, I learn very quickly, oh, I can do more of that. Oh, I shouldn't be doing that. And I'm looking at how I'm paying for stuff. As an example, my business credit. card changed because we looked at it every month and now I have a credit card that gives me

better points and I run everything now through the credit card where I didn't used to. Had I not met with her month by month, I wouldn't have picked up any of this stuff as a business owner. And the cool thing is I meet with her for 45 minutes once a month and guess what happens, Paula? I get all the lessons I need 45 minutes a month. It's over. Guess how much I think about it the rest of the month. I don't think about it at all.

I just do my job. So on the upfront, does it cost more? money for that approach. I pay $350 a month for that service. On the upfront, I know a lot of people going, oh my God, that's so expensive. You know how much money that saved me? Yeah. It is saved me so, so, so much money. So if I just looked at the fee, I would have totally never done it. When I look at the outcome of what a smart business owner I feel like I am because of that service, huge, huge, huge gains because of that. So I think there's this cost benefit that you want to look at with the person that you hire as well. Well, I mean, what you're describing, Joe, is an

investment. That is literally what an investment is. It is an application of money for which you get a greater return. You get greater value than the money that you've put down. For me, it's a fantastic investment. Now, for somebody who already has those systems, if Abby, you already have those systems, you already know what the deductions are that you can take. You already know a lot of this stuff. Maybe you don't need the month by month by month. For me, as a guy with ADD who loves podcasting and talking about money, but truly, when I look at a piece of paper or stack of paper, I go, oh, God. And my ADD immediately feels the complexity.

To have it compartmentalized with a person who's keeping me on task is phenomenal. And I would also say, even if Abby thinks that she has a. nailed down, there are a lot of unknown unknowns. And in that case, we've talked before with other afforders about maybe hiring somebody for an hour or two, just to get the knowledge. When I stage my house the first time, I just hired a stager, not to stage it for me, but to teach me how to stage it myself. And that was a phenomenal use of money. Like she taught me so much about staging in a short amount of time. And I paid far, far less than I would have paid a professional stager to just do it for me. Should we address also then the insurance question? Ah, yes, the liability question. Yeah.

I don't know the answer to this question because I don't know your field, Abby. But I do know there's a great phrase which is ask who, not how. And I love this phrase that I learned from a group called Strategic Coach and I may have talked about it here before because I learned this way too late in life, but it's so, so much better. Ask who not how means. when you have a question like this, ask who the person is that would know. And the cool thing is, is when you ask that versus how do I do it, you end up with someone who knows you, someone who knows the topic and can marry you to the right answer that reflects your learning style, maybe has a better chance of filling in the gaps in knowledge that you have. You learn it

faster, you learn it more directed, you get a great answer. So my answer to you is, who is the who that is already doing the business that you're going into, and that's the person you need to ask. What is my liability when I do this? And this may be the company that you're working with, right, that's bringing you on as a 1099 individual and say, hey, the other people you work with, what insurances do they have? Right. And you know that landscape better than I do.

I know in some cases you might not be able to ask that question because they may go, oh, you don't know anything or what I don't know. But you can ask them maybe for referrals of other people they work with who are doing the same thing. Get in touch with those people and say confidentially, who are you using for insurances and what insurances did you buy? I would think as an outsider, there's going to be a liability that passes on to you. I described for you, Paula, a situation with my house. It went bad.

My builder has insurance and they're fixing everything using my builder's insurance. the business of putting nurses to sleep. I don't think she's putting other nurses to sleep, Joe. Oh, that's not what she's doing. Also, that phrase is confusing because in human medicine being put to sleep as anesthesia, but in veterinary medicine being put to sleep as euthanasia. So that's such a confusing phrase. You've got to be very specific about how you use it.

Yeah. But there's got to be somebody else. You already know, Abby, there's other people that are doing this. That's your who. I would ask them for that piece. of advice. And so I think that also widens it again for the afford anything community. Instead of going into YouTube hell, ask, who do I know that might know this? Well, and I would imagine there are professional associations for your specific role. So I would look to

them. That's a great idea. Because they know that occupation. They know that field. They're going to have the expertise in that arena. We're already coming up with potential who's, Paula. Look at us. And we don't know anything about putting nurses to sleep. That's definitely not what they're doing. They're not euthanizing nurses. And Abby thought spin drift was bad.

Oh. I hate the expression put to sleep because of the change up between veterinary medicine and human medicine. Yeah. It is so confusing. Like your brain has to just re, you know. You're constantly going, wait, what? Yeah, exactly. Exactly.

I hate that that same phrase means two very different things in these very different contexts. It's utterly confusing. So for everyone, but specifically here for you, Abby, ask who. Who's your who? And I know you have several. I know you have them. Well, thank you, Abby, for the question. And also thank you for calling back with an update.

I love it when people do that. It's so much fun to hear what has happened, how everything unfolded. You know, people ask why you do something. It's the biggest joy. I was just talking to potential new podcasters online and was giving people. tips. And one of the things I said is the pure joy of podcasting is when you find out that people have had some success because they're part of the community. Yeah. It really, really makes this fun. Yeah. So thank you. Thank you for the love. And we love you too. So I guess it's when you're

thinking about a career, ask who, not how, and also ask why. Ask who and ask why. That's Simon Sinek right there, begin with why. Right. Well, thank you. To everyone listening, thank you for being an afforder. Thank you for being part of this community. Joe, where can people find you if they'd like to learn more? You can hear me when I'm not here over at the Stacking Benjamin Show every Monday, Wednesday, Friday, but for people listening specifically now, stacking Benjamins, we create a couple of guides. We're going to have five guides when it's all said and done.

But right now we have a tax time guide, and we also have a guide to HR benefits. On August 1st, we're letting our community know the price for the money. those is going up for a variety of reasons. But if you've heard me talk about our guides in the past, you buy the guide once. We update it every month. So as things change in your life, as the government changes the rule, as your company changes the rule, whether it's around taxes or around HR benefits, we're updating the guide every month to keep up with that. So if you change companies, you don't have to go buy the new one. You just buy this one. But the price is going up. So it's stacking benjamins.com slash guides if you want to find out more about the guide,

how they work, what they cost. So if you're listening right now, great. If you're listening after August 1st, well, you've got to listen to Paula's show when it comes out. That's the lesson. And we'll link to those guides in the show notes as well. Thanks again to everyone who is listening to this. If you enjoyed today's episode, please share this with the people in your life. Share this with friends, family, neighbors, coworkers. Share it with your dad who gave you the QQQQQ recommendation. Yes. Share it with all of the nurses at work who are definitely awake and alive.

Share it with your brother-in-law who wants to open a new restaurant and is coming to you for money. Share it with the email service provider who's also coming to you asking for money. I think that guy already knows. But yes. Share it with the annuity salesperson who's trying to. to rope you into that equity indexed annuity. Share it with the CEO of Angel list. There you go. Oh, share it with the rank and file of any company that you're looking at buying. Share it with the person you're going to ask, your who, about the insurance that you need to buy.

Share it with Simon Sinek. Share it with Cody Sanchez and John Warlow. Share it with the person who's trying to sell you gold. Share with the late night gold infomercial people. Share it with the nurse you're about to not put to sleep. Oh, I hate that phrase. But you're not going to do it. So just share it with her. Nobody wants to euthanize nurses. We didn't say that.

Share this with all of the people in your life. Including the spindrift distributor. Exactly. Because that is how you spread the message of F-W-I-R-E. Don't forget to subscribe to our newsletter, Afford Anything.com slash newsletter. Also open your favorite podcast playing app, hit the follow button, and while you're there, please leave us, ideally, a five-star review, if you could be so kind. Thank you again. I'm Paula Pan.

I'm Josal-Chi. And we'll meet you in the next episode.