The Compound and Friends - The Trick That Allows You To Spend Money Without Feeling Guilty (with Michael and Nick Maggiulli)

Episode Date: December 11, 2019

Nick Maggiulli is the data scientist at Ritholtz Wealth Management and author of the Of Dollars and Data blog. He tells Michael Batnick about a simple trick he uses to avoid feeling guilty while spending money. Michael talks about how he funds his Liftoff account at the same time as he makes a large purchase. You can have a Liftoff account too, follow the link below - there's no minimum to get started! http://liftoffinvest.com Read "How to Spend Money" by Nick here: https://ofdollarsanddata.com/how-to-spend-money/ 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Live from the Compound. My name is Michael Bannock. I am sitting here with data scientists for Ritholtz Wealth Management, Nick Maggiuli. Hello, Michael. How are you doing? We're going to teach you how to spend money without feeling guilty. Stick around. We'll get into it in a minute. So, Nick, before we talk about how to spend money, and this is in honor of a really good blog post that you wrote. That's the genesis of this conversation. Why do we think the mainstream media, for lack of a better word, leads with making people feel guilty about spending money? I think that whole genre is based on like, oh, the reason you're not rich is because you're spending too much money.

And so it always keeps this like, oh, it's attainable only if you do all these things. So you have to guilt trip people for everything they do with how they spend money. You eat at Starbucks. You buy a nice pair of shoes. You go out to a nice dinner. There's always that opportunity cost in the back of your mind that's like you shouldn't be spending this money. You should be saving and investing so you can get rich. And that's the only way you're going to do it.

When do we think that started and why? I don't know. I would love to do the history of that, like when that started happening. But there's been this guilt trip thing that's been going on. So it used to be if you invested $10,000 in Amazon at the IPO. Yeah. And then it morphed somehow into if you stopped drinking lattes. Yeah.

Those are both – yeah, they're both on the same realm of like the same spectrum of ridiculousness. They're just different in completely different ways. One is like you have to get super lucky with Amazon. The other one is like you're moving yourself to this state where if you, especially if you like coffee, like I don't like coffee, so I don't really care, but some people love coffee and they need it every day. So both just terrible advice. Yeah. Yeah. I agree. But let's talk about like first just mathematically, why is that such nonsense? Like if you don't spend a dollar a day on coffee? Well, I mean, if you can get like some massive return, not spending a dollar a day and

then getting your 20% a year, you're going to, you actually can become a millionaire from something like that. But if you're getting, you know, 6% a year, which is like probably a more, you know, reasonable rate, rate of return, that $1 a day is not going to make a dent in your, in your long term wealth. But the more important piece is like that dollar a day can actually increase your earnings potential more than the dollar you put in. So if you spend that dollar or whatever, let's say five bucks a day on Starbucks, if that increases your earnings power by more than five dollars a day on average because you're more productive, you have better income, you feel better, all that type of stuff that increases

productivity, I'd argue that that's actually a net positive for you. Even though you're spending five bucks, you could be earning 10, 20, 50, hundreds more over the course of your life. All right. So let's transition away from the nonsense guilt into a productive way, a realistic way to save money. So talk about your spending rule. Where was the genesis of this and how do you implement it in your life? So I'd heard of this rule kind of before, but I started thinking about, like, I think the framing of it wasn't right.

Like there was someone say, oh, if you can't save 2x for something, then you can't actually do anything. Then you can't actually buy, you can't afford it. And I was like, well, what if you just framed it as like every time I started thinking about this, like every time I go to buy something expensive, so I buy it. So the example I gave was like, if you buy a $400 pair of shoes, um, you should also take the same amount of money. So doubles another $400 and put it into the stock market and put it into your investment portfolio and diversify it in some way. And the reason I came up with that was like, I needed something mentally to not be like, oh my gosh, I spend those $400. Like, no, just do it. And you're also investing in yourself, or you're also giving money to charity. There's some other, that other money you can use in some

way that gets rid of that guilt. So it's funny because we started talking about how like the media will guilt people into spending money and make them feel guilty about spending money on lattes. This is a different sort of guilt where if you spend $400 on a pair of shoes, it's a luxury item. I don't really need it. So a way to overcome that is to actually do something productive to match that money into either a charity or your own investment account. Yeah, it's whatever's going on in your personal life. Obviously, if you think your investment accounts are fine, you don't need that, then you can put a charity or your own investment account. Yeah. It's whatever's going on in your personal life. Obviously, if you think your investment accounts are fine, you don't need that, then you can put a charity. Or if you want to do something maybe once a year, you do something

for charity or whatever it is, there's different ways of doing this. Where do you draw the line? Like, so 400 pairs of shoes is clearly a luxury item. What about a $150 steak dinner? How do you know when to do this? That's the great question. That's going to be based on income. I can't say, like, if you're making a million bucks a year. Just for you. For me, I would say like usually if I do anything that's like probably over $100, I'll try to do that. I mean, that's like, you know, if I get something on Amazon once, but it's usually it's after a couple hundred dollars, definitely like a big purchase, I'll start doing that. But what about travel?

So let's say that you're taking a flight to see your family and the plane ticket is 500 bucks. I would assume that's sort of out of balance. That's different. Yeah, especially it depends what the travel, if it's a splurge too, if it's like, oh, I don't really need this. I think that's also the mental account. You know what, maybe a good way to trigger this is, do you feel some sort of guilt for spending the money?

Obviously you don't feel guilty spending money to buy a plane ticket to see your family. Yes, yes. Right? So I incorporated this into my life recently. I bought Apple AirPod Pros. They were $285. So I went into our Liftoff platform, which is powered by Betterment,

and I put $285. Why did I do it? AirPods. I returned the AirPods for various reasons, left the money in the account. So now, boom, free money. Yeah. So wait, now I guess in theory, you have that like kind of saved up goodwill, which you can go spend that $285 elsewhere. And then you're like, yeah, that's kind of, that's another way to look at it as well. So any other tips or techniques? I mean, I think this is tremendous. Anybody can incorporate this into their life. Anything else you got? Yeah. I think about just think about like your long-term, I said, and then I talked about this in the post happiness versus fulfillment. So like, there's a lot of things that can make us happy, but you want to say like, is this going to

add to my fulfillment in the longterm? Is this something that we use a lot? So when you think about your purchases, I try to think about like, is this, could this lead to my long-term fulfillment? So even buying someone would say, you know, buying something really fancy, like a fancy suit or something may not be worth it. But as I said, if you do that because it's going to help your career in some way, that's going to allow you to accomplish things that you never could have accomplished before, then I could argue that that would be a good investment. So obviously that's different for everybody. Yeah, yeah.

You have to think about yourself. You have to really figure out what you want in your life. And that's where you should spend your money to maximize those things. That's a personal type of thing. So what do we call this? The two-time spending? The 2X rule. I call it the 2X rule. Not the majority rule? No, no. It's math. It's just math. If you can afford a $400 pair of shoes, you can afford to pay yourself $400 to benefit your future. Let us know if you have any other spending tips. Hit the subscribe, and we will talk to you next time.