Why You’ll Never Get Rich From a Paycheck (Ft. $1B Fund Manager)

0:00Morgan Housel is a partner at the Collaborative fund and the author of the bestselling book The Psychology of Money which has sold over 4 million copies worldwide. This is one of the best-selling financial books of all time. I started writing by accident. It was never part of the plan. Hi, I'm Morgan Housel. Welcome to The Burnouts. How do you set your budget? Are you sitting down like every year and being like, okay, you know, you have two kids. This is how much we're going to spend on the kids this year. Are you doing it every month? How should someone who's, particularly because we're all in New York, rent is expensive, food is expensive, everything in this city is expensive.

0:30How often are you thinking about budgeting and how often do you check it? We've always been such high savers. There's always been such a gap between what we make and what we spend. My wife and I really don't have that much of an ongoing budget. But since we save so much, it's like there's so much white space between what we make and what we spend that it's never been. I think we buy everything that we want. But the truth is we just don't want that much relative to what we make. So it's never been that much of an issue. When I was younger or if you're in a tighter position, like, yes, you should really figure it out every month.

0:59This is rent. This is restaurants. This is groceries. Whatever it might be, laying it out. And if you're not, the speed in which that can catch up to you in a bad way can really take people off guard. And so I think if you're not doing that for two or three years, you're eventually going to have a moment one day where you're finally going to open up the credit card statement and be like, holy, where did this come from? So it'll eventually catch up with you. So I think the tighter your budget is, the more you need to be micromanaging it down to the penny. Say, for example, you are someone who has never traditionally thought about their relationship with money.

1:28They've been bad at budgeting. They're overspending. They listen to this podcast, hopefully, and they realize they need to change. What are the first steps that you would advise? I think, again, just being so cognizant of what is coming in and going out, that seems so basic. But how much are you earning and how much are you spending is the most basic but the most overlooked part of what people are doing. And if you were to just check, just open up your bank account on your phone once a day for five seconds, every morning, do it. If you do that every day for a couple of months, you will be in a 10 times better position of what you're doing because you're eventually going to see, oh, my paycheck was this much.

2:00And I spent almost the same amount on these things that I don't even get any pleasure out of. I didn't know I was spending this much on all these subscriptions that I don't even use. Like if you're just more cognizant of it every day, that's the first step to doing it. Like auditing and subtracting? Just going in and checking, just checking your bank account. Oh, like this came out of my checking account yesterday. I don't even know that I had that subscription. I don't even know. Like I'm not anti-spending in the slightest. And everyone has their thing. Some people like going out. Some people like traveling.

2:28This is not to say, like teaching money is never going to work if you're giving someone a lecture and you're just going to say, you're just coming down hard on them and say, you can't have fun anymore. That's not going to work. And so everyone has their thing that they should be spending money on because it genuinely makes them happy. But I think most people who are not cognizant of what's coming in and going out are probably spending a ton of money on things that give them no pleasure whatsoever. And they're out of sight, out of mind. They're not checking their credit card statement, so they don't even know.

2:53They're spending money on things that doesn't make them happy and they don't care because they don't, they're not even aware of what they're doing. So just becoming more aware. So like I've always been kind of maniacal about it. And I could tell you down to the dollar how much is in this account and that account. I don't think you have to be that hyper aware about it, but just having a broadened understanding, just like again with diet, you don't have to count every single calorie, but you should know whether you're eating 2000 or 7000 calories per day. Like if you should have some basic idea of what's coming in and what's going out.

3:25So your kids are six and nine years old. What do you teach them about money? And what will be the first thing you teach them when they get to high school or college? Every parent who has more than one kid will say this. My kids have to be raised under the same roof by the same parents. Could not be more different. Raised by the same parents with the same values. And so it's hard to be like, what do I teach my son and my daughter? Because the answer would be like probably completely different things. I know even at this age, they're going to end up completely different. So it's hard to give universal advice on like what to teach them.

3:52One thing that I always say is you don't need to sit them down and teach them because whether you know it or not, they're paying attention. Every single time you say, we can't afford this, or, oh, we're definitely going to buy this, or the neighbor's house is bigger. Every single remark that you make about money, they're making a mental model of it. And one example I've used before is like, there's so much evidence that your political beliefs are inherited heavily from your father in particular. And most people's fathers did not sit them down and say, this is why we vote this way, but you pick it up through osmosis over the years.

4:24Every single remark that your parents make or what they're watching on TV, you're making a little mental model of it. And kids are so observant and they're forming all these. So you don't need to teach your kids about money. They're paying attention whether you know it or not. And so the best you can do is just leading by example and recognize that what works for you and your spouse might not be what they want. And I think a lot of people will rebel against their parents financially. My parents did this and spent this and I don't want to do it whatsoever. Probably because their parents were like shoving it down their throats that this is the right way to save.

4:56You should do this. You should spend this much, save this month this much. Maybe that was right for me. I was a terrified 19 year old. Maybe hopefully my son is not going to be. So maybe he doesn't need to save and invest like I did when I was 19 because hopefully he's going to be in a better mental spot than I was at that age. Just recognizing how different people are makes giving advice on what to teach them so difficult. What about the concept though of no risk, no reward? It was really interesting. We just did a podcast with someone who was saying that they only had basically one month left to understand whether or not they could afford their apartment.

5:28They put everything on the line and they were able to take a bet on themselves and it paid off. And it was the reason why they were able to have their career. With this mentality of like no risk, no reward, how do you decide what risks are worth it and what risks are too much? There's a great quote from Daniel Kahneman, who was a psychologist who won the Nobel Prize in economics. He died last year. And he was like, the best definition of risk is understanding your sense of future regret. It's understanding, like, imagining yourself 30 years from now or 50 years from now and saying, what would I regret?

6:00Jeff Bezos tells us a great story that when he started Amazon, I think it was in 94, he used the same framework. He was like, I imagined myself on my deathbed. And I knew that if I started Amazon and it failed, I would not regret that. But if I didn't start it, I would absolutely regret not trying. He was like, it was the easiest decision in the world. Like, I know I'm going to regret not trying. I have to do this. And I think everyone, the thing is, most people do not have a good sense of their future regret. Most people don't really understand what they're going to look back at regret on. There's a great book called Lessons for Living, and it's written by this gerontologist named Carl Pillemer.

6:34And he interviewed, I think, a thousand elderly Americans. Most of them were 80 to 100 years old. And in the book, he just said, tell me about your life. Like, give me some life advice. You've experienced more life than anyone. Tell me what you know. And there's a section of the book about money. And he said that of the thousand people that he interviewed about money, not a single one of them looking back at their life when they're 90 years old said, I wish I worked harder. Not a single one of them said, I wish I made more money. Not a single one of them said, I wish I spent more money and bought a bigger house.

7:02Virtually every single one of them said, I wish I spent more time with my family. I wish I was nicer to my friends. I wish I forgave people more often. So it's interesting. The people who actually do have a good sense of their regret looking back at life, none of them wish they worked harder. None of them wish they made more money. All of them wish they spent more time with their family. All of them wish they were nicer to people. So it's like, I remember reading that and being like, look, if risk is understanding what I'm going to regret, none of them regret not making more money. All of them regret not spending time with their family.

7:33Like it's so obvious where I should be putting my time now. Also, one thing we never teach people, particularly women, you talk a lot about this. We now have almost equal men and women in terms of how much we're invested within the stock market. Women didn't gain access to credit cards to what, like 1980 was the first time that women - It was wild, yeah. It's nuts. But 2 % of VC capital is invested in women's businesses. I think one thing we really don't teach people is salary is taken away by taxes. If you're in New York, 45 to 50 % of your salary, if you're making over a certain amount, is going to be gone.

8:01Salary is not the real way to build wealth. It's investing over time and compounding interest there. But there's also this concept of equity that can grow over time. And if you're starting a business and you have equity in that and that grows, you're actually not going to get taxed on the same rate if you have capital gains there. That's a huge, huge important thing that we don't teach enough women is go out there, pitch your company. Guess what? If you raise money and your company completely fails, guess what? You're going to get a way higher starting salary at a big tech company like Google or if you've actually started something because people love failed founders.

8:30They love to hire failed founders. It's their favorite thing. Also, So if you're a founder and you're actually capable of raising money, you can pay yourself a good salary too. And even if that equity doesn't grow, you'll be able to have another landing place to go because you'll now be connected within that environment. There is a way to do finance and there's a way to do career with even less risk. And if you make money from it, actually, you're just not going to be taxed at the same rate. Right, right. I think I agree with everything you said. I do think, though, it changes throughout your life cycle.

8:59So if your career implodes at 24 when you're not married and don't have kids, that's probably not that big a deal. If you're 48 and you're putting two kids through college and your career implodes, that is an absolute catastrophe. And so it differs throughout your life cycle, which is also why a lot of long-term planning in finance is difficult. Because what you want at 22 and what is an appropriate risk at 22 is not the same at 48 or 58 or 68. It's going to change all throughout your life. So it's difficult to make like sometimes long-term plans in your 20s because you're going to be a completely different person when you're older.

9:34There's a thing in psychology called the end of history illusion, which means everyone understands how much they've changed in the past. You're a different person than you were 15 years ago. Everybody is. You have different values, different views, but most people think that they'll be the same person 15 years from now. Like you're very aware of how much you changed in the past, but most people think your views and values going forward will be stable and they won't. You'll be a very different person 15 years from now, as will I, everybody will. And because of that, like, it's hard to know, like what one, one takeaway from what I said, from what you just said, I think it's very true.

10:05I agree with every word of it for people in their, in their twenties. Absolutely. If you're, if you're putting, if you're 50 and putting your kids through college, that can be a disastrous mindset. So it's like, I've learned this about myself. I want different things now than I did 10 or 15 years ago. And again, when I, when I, when I had kids, every, all of my views and goals changed instantly. And that'll probably change 20 years from now. I'll have different goals 20 years from now. And I think, I almost hope that I'll look back in 20 years at things that I wrote in the book and be like, that was true when I wrote the book, but it's not true for me anymore.

10:40I've learned things. Now you look back and you're like, that isn't true for me anymore? I don't know. I mean, I wrote most of it, you know, five years ago. It wasn't that long ago that I wrote it. So I don't know if I have many yet. I finished writing it like the week that COVID hit was when I like turned it in. I'm like, I'm done with this, which economically at the time, like a lot of the book is about like unknown, unforeseen risks. And so like, if I had written it a year later, I probably would have written more about unforeseen risks that you don't see coming. So, so much of what is written in the book is about unforeseen risks.

11:15And like, we can sit here all day and plan in our personal lives and in the economy, like here's the biggest risks in my business, in my personal life for your business. We can list them all out. Guaranteed that if you look back five years from now, the biggest actual risk is something that you weren't thinking about. It's always like that. And so the biggest news stories for like the world over the last 25 years were 9-11, the financial crisis, COVID. And the common denominator of all those is that like nobody saw them coming until they actually happened. And so, and that's true for people's personal lives as well.

11:46So I think that's one, I don't know if I'd change much in the book, but it was such a stark reminder that like we can pretend to plan what's going to happen in the future. You plan, God laughs is a quote. It's always like that. And I think all of history is like all of history is like the study of surprises. It's a study of big events that virtually nobody saw coming and how they impacted society. And of course, it's going to be like that going forward.

12:19Obviously, as you advance through your career, if you make the right moves, if you save the amount of money you need to, then you're going to be in a situation where you're rich, you have money. When do you know when enough is enough? David Morgan There's no amount of wealth that is, there's no such thing as an objective measure of wealth. Everything is just relative to somebody else. And it's always the case. And if you live in America and you have$1 ,000 in your checking account, the majority of the world will look at you as rich. Even if you don't feel that way. If you live in New York, you don't, if you live in New York, you might feel positively broke.

12:48but the majority of the world will look at you as very rich. There's a thing, you're probably a little bit too young for this, but it was around 2011 where there was a big pushback against the 1%. It was the Occupy Wall Street movement and it was a big nationwide pushback about like, there's a war against the 1 % of the richest, the 1 % richest. And I saw the study that that was so fascinating that to be in the top 1 % richest in the world, you need to earn$34 ,000 per year. that puts you in the top richest 1 % of the world. If you make$34 ,000 a year, you're in the richest 1 % of the world. But nobody in America who earns 34 grand a year feels rich.

13:24They feel completely broke and they're probably on food stamps. And so just the notion that all wealth is relative, I think is really important because when it comes to enough, if you are always judging yourself against other people, it's never gonna feel like it's enough. If you're always judging yourself relative, there's always gonna be somebody who is earning more money than you, getting richer faster than you. I think about this a lot for pro athletes because the minimum wage, if you're like a pro baseball player, is I think about$800 ,000 a year, which by any metric is a lot of money. Like if you're 22 making$800 ,000 a year, you are rich by any relative metric.

14:00But nobody, no pro baseball player who's earning$800 ,000 feels rich because there's people on their team who are making$30 million a year. So relative to everyone around you, you feel worse off. And so the first idea with enough is just realizing like that relativity game. If you're always comparing yourself to others, it's never going to feel like it's enough. That's always been true. But social media just like dumps gasoline on the fire because it used to be that you would compare yourself to your neighbors and your coworkers. Like how big is my house relative to my neighbors? But now with social media, it's just like a curated fake highlight reel of everyone's like supposed happiness, supposed wealth.

14:38And so I think it's generally true. It's never been easier to get rich than it is today. I think that's true. It's also never been easier to feel poor by comparison than it's ever been because of social media. I'll give you a perfect example. If you wanted to be a media person in the 1990s, you needed to A, move to Hollywood, B, find a producer, work your way in, do 10 ,000 different commercials before you finally got a role in the movie. Like it was such a long slog to get to become a star on TV versus Mr. Beast made a couple of videos. I think his first video was him counting to a hundred thousand was Mr.

15:16Beast's first video. Are you serious? And he did it. He started at one and counted to a hundred thousand. And so just, of course he's, he's an outlier, but there is more meritocracy than there used to be. There's more of just, if you are talented, you're going to get noticed. You're going to get followers. You're going to, then there's ever been before. So people can push back on that. But I think it's generally true that it's easier to get richer now than it's ever been. I think the outlier wealth is easier to achieve. But if you're just on the treadmill and you're going through the promotions and you're in a typical job, it's never been harder to become wealthy from like a traditional sense.

15:52I think that's true. I don't disagree with that. There's definitely a thing, though, that the definition of wealth has changed dramatically over time, that if this was the 1950s, if you lived, if you had four kids in a two bedroom house, that was 700 square feet and you don't have a garage, you don't have a porch, you own one car, you go camping for your vacation. You were like, we're crushing it. We're doing phenomenal. But if you are doing that in 2025, most people would be like, well, this is not, I've got four kids and a 700 square foot house. This is not cutting it whatsoever. The kind of lifestyle that would have made you feel rich 30 or 40 or 50 years ago would be considered poverty today.

16:28I think there's a lot of truth to that. The positive spin on that is like that's the definition of progress, is that now we live in a world where people expect to have great health care, great education, adequate housing and whatnot, where maybe our grandparents didn't by and large. That's the definition of progress. But it makes it so that even if there is progress in the world, that becomes your baseline, that becomes your floor for being happy. And if you're not exceeding it, then you're going to feel worse off. So maybe to reframe it, it's easier than ever to have like what used to be considered, what used to be considered rich than it's ever been before.

17:00But it's also been easier than ever to have an inflated sense of what rich would be. I think one thing that's also interesting is thinking about gender equality within wealth. In my lifetime, we likely won't see women have the same amount of wealth as men do. You think about access to birth control. Like we've never seen a society industrialized without women having access to birth control. Like it just doesn't make sense. And investing in that or the government even giving people access to something like that, we know the economic return to that. You've done a ton of research for your book and you talk a lot about how in different cultures money is seen differently.

17:30Are there any things that stick out to you between genders and how we approach money? It's so different person to person. I think the differences between men are larger than the difference between men and women. There's such a vast range of what men will want and whatnot. I can just speak for myself. I've always just had this innate desire to be a provider. So long before I was a dad, I'm like, I got to save money for the family that I'm going to have in the future kind of thing. I think that's not rare, of course. I think lots of people have that and lots of lots of women have that, too. I think that a lot of men have that over women because I think there is an expectation we put on masculinity in society that like you need to be the provider.

18:07And I think that's why there's so much pushback when a woman in a relationship makes more. Yeah. Because there is that expectation and almost like this insecurity now of, oh, well, what if I don't provide? Yeah, no, it's it's it's it's it's huge. I think it's changed over time, too. Obviously, in the 1950s, it was very established. Like, the man goes out and works and earns a paycheck, and the woman is going to stay home and cook and clean and take care of the kids. It was a very established way to do it. And like every social trend, the pendulum swings way too far. I think back in the 50s, it got to the point where it was not women can stay home and take care of the kids.

18:42It was that's all you are capable of doing. That's the pendulum swinging way too far in the other direction. A lot of it started in World War II when so many young men were shipped overseas. And who was at home in the factories, building the tanks and the guns and working on the farms? It was the women who stayed home. And that was the first time when it was like, oh, they absolutely are as capable, if not better at a lot of these tasks than men were. And I think it's even shifted even more in the last 20 years when we've gone from an economy that was more geared towards physical labor and strength towards knowledge work.

19:15And there are so many of these instances where women are not only equally capable but better at it. There's a lot of that in investing where I think men are much more likely to want to swing for the fences, which can end up well. It can end up disastrous. It's likely to end up disastrous, whereas women are much more likely to be like, let's try to be average for an above average period of time. which is where wealth is actually gained. And so I think there's a lot in the behavioral side where women will actually end up doing better than men for a lot of these aspects. I think all of this perspective is really interesting for me because my parents came to the United States from Iran basically with nothing.

19:52So they were the definition of what I would consider the American dream of moving here, getting a good education, getting a middle-class job, saving, investing, and trying to provide a good life for their kids. I had a conversation with one of my friends recently where I was talking about this and saying how I wanted to leverage all that my parents had done to live my own version of the American dream to achieve an even higher level of success than they had. And it was really interesting because my friend told me that he felt that the American dream was dead and that it is no longer possible to do the thing that my parents were able to do of getting a good education, getting a good job, going up the treadmill and being able to have a really good life.

20:27And I'm curious for your perspective of what do you think about the state of the American dream? I was talking to someone the other day. Everyone teases Apple that whenever they come out with a new iPhone, they're like, it's the same phone as last year. You changed nothing. And a lot of people will say that's because Apple doesn't innovate anymore. I think a better explanation for it is like the iPhone 8 or whatever was so damn good, so perfect that it was very difficult to improve upon it. It was almost perfect. I think that can be some analogy for what's happened in America is that the standard of living in the 20th century improved so much in the United States.

20:59And it became so that virtually anyone who was willing to work hard could get an education, get a decent job, save some money, buy a house, have good health care, retire. Not everybody, but it became so much more accessible that it became hard to improve upon it. And a lot of things, what we consider decline these days, just like we would tease Apple for not innovating, is actually just like, no, we got so good that it's hard to improve. Whereas a lot of the improvement for our parents, our grandparents, our great-grandparents' generation was because the generation before them was in abject poverty.