MI Rewind: Building Wealth, Stay Wealthy, and Retiring Early w/ Jeremy Schneider

22:08It usually is this weight lifted off their shoulders. And you only get there if you're purposeful about it. I know people in their 50s and 60s who still have massive debts. And every month, they're just stressed out by paying off the banks. They've been doing it for decades. But when they were 25, they spent two or three years on it. And at the age of 28, they had no student loans, and then for the rest of 28 to 60, they were using that money to build wealth, then they would be in this massively different situation. And that's why focus is so important, because if you do that, and you're doing six other things, none of them are going to get done.

22:42But if all you do on step three is pay off all the debt, then you can get rid of it. Step four, save an emergency fund, three to six months. So that one month of cash you had, make it at least three to six months, again, because being broke is expensive, and you want to get in a position where you're never, if you lose your job or there's a coronavirus or whatever, you're not going to be burning through your one month and then four weeks later, you're in trouble. Three to six months, and you can decide how big that is depending on if you have family and how employable you are and how risky your job is and things like that.

23:12Step number five is invest in tax-advantaged accounts. That's your Roth IRA, your 401k, maybe an SEP IRA, maybe a 403b. I'm speaking largely to American audiences here because across, you know, these are all American tax laws where the US government has decided to give us a tax break if we invest for our own future, so we're not broken or old and having to live on Social Security. And so basically figure out what those are to, for most people, the first step is the Roth IRA. And then if your company has a 401k, the 401k. And then after you've exhausted all those tax-advantaged retirement accounts, step six is just to invest more, whether that's in a regular brokerage account, buying investment real estate, stuff like that.

23:53And so once you're on step seven, then you're just plowing money away. And now you're starting to look at, okay, how early can I retire? Maybe it doesn't have to be 65. Maybe it could be 55 or 50 or 45. How many years of your life can you buy back? Let's take a quick break and hear from today's sponsors. Even Einstein had blind spots. That's why modern science is built on the idea of peer review. Investing may be more art than science, but that doesn't make peer feedback any less valuable. The tricky thing is finding qualified people who are interested and willing to help vet your investment ideas.

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24:58That's theinvestorspodcast.com slash intrinsic value community. Support for the show comes from public.com. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic option plays on the side. The point is you're engaged with your investments and public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus, industry-leading yields on your cash with no fees or minimums.

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26:55And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. All right, back to the show. I love all of those steps, but I want to go back to the debt piece for a second, because I've been recently reading a bit about Dave Ramsey and studying him a bit, and I don't necessarily see eye to eye with all of his strategies. And your debt strategy seems somewhat similar to him. So I want to talk to you about that a little bit. When you talk about paying off this debt quickly, what if someone has a loan, say an auto loan that's 1%, 1.5%, 2%, does it really make sense for them to pay off that debt rather than invest?

27:34Robert Leonard In my opinion, yes, because they don't have a math problem, they have a behavior problem. Not a problem. I mean, to come down on someone who bought a car on a loan. I bought a car on a loan once and I paid off and it cost me a bunch of money, but I was fine. Here's the thing. I've never met a rich person who's gone there by leveraging a depreciating asset. If you buy a car that's more money than you have, and you borrow money to buy it, and then the car plummets in value, that's not a recipe for getting rich. It's like a really good recipe for being broke, actually, because you're spending more money than you have.

28:06You're paying for that benefit. The thing that you buy goes down in value. It's just this magnifying combinatorial effect on staying broke. And when you don't pay off your car loan at 0%, 1%, 2%, whatever, you're just living in this fiction where you have money when you don't have money. And it causes you to continue to make bad decisions like borrow money to buy cars, right? Whereas if you pay off that car loan and you have no debt, next time you buy a car and you're looking at a new$35 ,000 Jeep or a perfectly good three-year-old$16 ,000 Toyota, you're like, huh, I don't want to spend. And maybe you have$35 ,000 in the bank at that point, and you've decided to buy things in cash.

28:47You're like, maybe I want to spend every penny to my name on a car. And so you buy a car that costs half as much, which is still a perfectly fine car. An$18 ,000 car is like a gorgeous car. I'm looking out the window right now, and I see 15 cars parked in my street. I don't know which ones are$18 ,000, which is$35 ,000. They all look fine. They all drive away every day. But when you get out of that mindset of living beyond your means and spending money you don't have, then you start to think about, okay, how am I going to build wealth? One of my big things is don't think about your monthly costs.

29:16Think about total costs. I think broke people are saying, okay, what's my monthly? What's my monthly? Can I afford? Can I afford? Can I afford? Rich people are thinking about what's this$30 ,000 going to do for me if I put it into a car that plummets in value? Or what's it going to do for me if I put it into an index fund that's going to double in value. And when you start thinking about that total cost, think long term down the road, you start to build more wealth. So yeah, I hate 0 % car loans. I think 0 % car loans are this big marketing gimmick that's torturing middle class people into being more broke because it's not 0%.

29:49It's just you're buying something you don't need. I'll give you a 0 % loan on some magic beans if you want that costs$50 ,000. You can pay me back over 20 years. I don't care. You're just giving me money. You're buying things that you don't need. And so on that same token, I don't like super some cars, just baked in the cost of the car anyway. Obviously, they're still making their money. It's not beating the car company. You're going to figure out some trick to put the car coming out of business. You're just buying something you didn't need instead of investing the money and building wealth for yourself.

30:14Yeah. I completely 110 % agree with the 0 % offers that you see. They just add that back into whatever the price is on top of it. So 100 % agree with that. For me personally, to be a little bit specific, I worked at a local credit union when I got the loan that I have for my car and rates were at 1.24 % at the time. And we already got half a percent off because we were employees. So I got 0.74 % on a pretty cheap car. It was like $18 ,000 car. So it wasn't a ton of money, but I can't get myself to pay that off because it's so low. And I think there might be some people that are in the audience that are listening that are in a similar position, maybe not as low of a rate, but maybe sub 2%.

30:52Can I ask what your balance is on that car loan right now? 10 ,000 maybe. Robert Leonard Let me ask you this. I'll ask you a question. What if I, I'm a computer engineer, what if I hacked into your bank account right now, and I paid off that loan for you? So I assume that it sounds from me talking, you've got either stock or assets or whatever. So I paid it off for you. And so your assets went down by 10 ,000, your debt is 100 % cleared. Would you go to the bank tomorrow and borrow$10 ,000 at 0.74 interest and go invest it in the stock market? Robert Leonard Yes. Okay. You're grinning when you said it.

31:28Because I would. I would. Personally. I know that's probably not the Dave Ramsey answer, but I would. No, I mean, honestly, I'm not Dave Ramsey. I actually think he's a little bit overboard, but I think he's doing it for a reason, which is trying to make a point. But would you borrow$2 million at 0.74 % interest and go put it in the market? Yes. At that low of a rate, I would take as much money as I possibly could get my hands on, and I would invest it. Because over the long term, I can invest that money and make more than 0.74%. Robert Leonard But what if the market drops by 20 % and now your net worth is negative$200 ,000 because you're basically bankrupt at that point?

32:03Robert Leonard It depends if there's margin calls. If there's margin calls, then I would be very different. But if it was just a straight loan and I had that money and I could just invest it, I would because I think the spread is there. And that's exactly the point that I have is I think I can get probably maybe 10 % on average in the market right over the next 40 years. So for me to pay off less than 1%, it just kind of mathematically doesn't make sense. I see the psychological point that you say, and I agree 100%. I never want to carload again. But for me, it's just that mathematical, I'm an analytical guy, a numbers guy.

32:32So when I see that spread, it's hard for me. I mean, I still don't think that borrowing money to buy cars is a way to actually make money because the car is going down by more than 10%. But also, there are a lot of people who got very wealthy by buying investment real estate, and they don't buy in cash, they buy with mortgages, because they use that leverage to amplify their gains. And I think your answer is okay, by the way. I don't think you're going to get significantly more wealthy based on that 10 ,000 just paying off a little more slowly. I think it's going to be basically rounding error relative to your net worth down the road.

33:04And so my answer to you on that would be, I think there's just like a psychological thing that just feels better to not be making a car payment. When you pay that off today, and then you're not making that payment anymore, you can take all those payments you were making and invest those payments. So the difference isn't whether you invest it now or you invest it a few years from now when the loan's paid off. It's not really mathematically that much in your favor, even assuming that you do get your 10%. In the case of the bad thing happening and the market crashes and the bank wants their money back, you could be pinched.

33:31Because I definitely have met people also who have borrowed a bunch of money. They borrowed a bunch of money in 06 to 07. They put 10 % down on a bunch of million-dollar real estate. Million-dollar real estate went down by 25 % and then they were bankrupt. And I literally was talking to one guy who did that and his wife left him because he was bankrupt. And so that$10 ,000 is just a shade of gray towards that. But like I said, if you do things carefully and wisely and you're not going overboard with how much money you're borrowing, you're not over-leveraged and all that stuff, I think that it's not a crazy thing to do.

34:00I wouldn't say that's totally bad. I'm not dogmatic about Dave Ramsey's. But I do think that more people than not are just looking for an use to buy a fancy car and say, oh, well, since it's such a low interest rate, I'm better off. But not if you're spending more money on the car. Your car is$18 ,000. If they bought a$30 ,000 car at the same interest rate, you're still$12 ,000 broker because you just wasted on the car. It doesn't matter what the rate is. That's the point. I completely agree with that. It was an affordable car. And so like you said,$10 ,000,$18 ,000 even in the grand scheme of things really isn't going to be a huge deal.

34:33But when you start getting$30 ,000,$35 ,000,$40 ,000 cars, that's when I think it gets to be impactful. And like you said, it's the asset so much, not as necessarily even the debt or the rate, because maybe if it's on real estate, that's not as bad. It's generally an appreciating asset with cashflow, things like that. But a car, it's depreciating, it's not doing anything for you. So yeah, I think it's the asset that is a big component of that too. So we recently had Rick Ferry from the Boglehead community here on the show back on episode 24. And similar to what he talked about, you have seven rules for smart investing.

35:04And the first rule is to develop a workable plan. How does someone go about developing a plan? And why is it so important to have a plan when investing? So I'm a big Bogle head, if you're listening and you don't know what that means. Jack Bogle is the founder of Vanguard, who actually recently passed away, I think, at the beginning of this year. 2020 is pad year. And he basically popularized and brought to market the first index fund. And an index fund is basically a very simple, low-cost way to buy an entire market of stocks. And he was very opinionated about basically individual investors are getting killed by the financial services industry.

35:43And you look at financial advisors and money market managers and mutual fund managers and hedge fund managers and all these people who work in money and just are taking money off the top for their own fees. And then whatever's left investing back in the market, he says that is basically what's crippling the individual investor. And if you can remove those fees by just directly buying the stock market, then you'll be better off. So that's basically what the Bogleheads do. And yeah, my rules of investing are largely borrowed and simplified from the Bogleheads rules of investing. I don't mean to say those are unique, but yeah, rule number one is to develop a workable plan.

36:16And that's like, again, kind of a scary thing. It's like, what is a plan? And like, is it going to, do I need to go to a lawyer and I have to get it notarized? A plan could be like Word document with six bullet points or something like that, that are numbered. You're like, number one, pay off my debt. Number two, invest in a Roth IRA. Number three, buy used cars or whatever it is for your situation, whether it's saving for a house or if you have kids and you want to invest for a college. But just write it down and write down the numbers and the order in which you do things and what you're planning to invest in.

36:44And it can really be as simple as six bullets on a Word document. And I think once you put that plan in place, it just removes this scary, not sure what I'm supposed to do thing. And you can always just go back and say, hey, we're about to spend$2 ,000 on a trip. Can we afford it? And you're like, well, the plan says put 500 bucks a month every month into a Roth IRA. We shouldn't go on that trip until we follow the plan. And I think once you have that plan, and you can take that plan, if you invest 500 bucks a month, you get 7 % return over 40 years, you can go put it into an online growth calculator, retirement calculator, and just see where you are.

37:17And you're like, okay, if I do this plan, I will be rich. It's that simple. And then the next 40 years or 30 years or whatever your plan dictates. You just do what it says. And so, yeah, it doesn't need to be super complicated. I kind of detail my plan in those six rules like we talked about a minute ago. I mean, yours can be a little bit different based on your situation, but just be purposeful about what you want your money to be doing. If you're interested in learning more about the Bogleheads and that strategy, I would recommend going back to listen to episode 24 with Rick Ferry. It's one of our most downloaded episodes ever.

37:47A lot of people have really liked that episode, so I definitely recommend you go back and check that out. But yeah, I agree. I mean, If you follow the plan, then you have 30 or 40 years to take that$2 ,000 vacation really whenever you want, and you have plenty of time to do that later. Rules two and three are never bear too much or too little risk, and never try to time the market and don't chase past performance. I lump these two rules together because I think people will often try and take on extra risk to make up for past poor performance. How can someone know if they're taking on too much or too little risk, why shouldn't investors try to time the market?

38:25Too little risk, first of all, is when you're not investing. So for example, if you are saving for retirement and you take all your money and you put it into cash under your mattress, nature of inflation and the nature of missing out on the opportunity of growing that money is devastating. And so if you save 500 bucks a month for 40 years, you might have like 100, I think it might be$200 ,000 or so. But then at retirement, 200 ,000 bucks ain't enough to live on for the next 20 or 30 or 40 years, right? But if you invest that money, you might have two million bucks. Too little risk is basically being afraid to get into the market.

38:58And that's things like, even though we're in the midst of this coronavirus thing, and there's economic disaster, people are like, oh, I'm going to get my money out and save it. You're bearing too little risk. Because right now, you need to bear the risk. You need to have the money in the market. You need to believe that the market is full of profit producing companies and innovating and everything else. And then it's going to come back to you eventually, even if it's not over the next six months or 18 months or whatever. Bearing too much risk is going swinging the pendulum the other way, which is saying, I only have 500 bucks, I need to turn it to 50 ,000 bucks by the end of this year, how do I 100x my money in a year?

39:35And so you start day trading Bitcoin, or you get into some sort of scam because you're frantic or whatever. And that's too much risk. Because if you put all bucks all into some new cryptocurrency, that cryptocurrency could go down by 90 % or go down to zero and never come back because we don't know the future of cryptocurrency. Because that's too much risk. Timing the market, I kind of talked about a little bit too, and you lumped it together too, which is like, you shouldn't be jumping in and out of the market based on what you think the market's going to do because you don't know. We don't know the future, but what we do know is that over long periods of time, the market goes up.

40:08And so the answer to these things is just to diversify by broad market index funds. This is my strategy, the Boglehead strategy, which is to buy broad market index funds and invest early and often. So you invested this January high, you invest this March low, but over the next, whether it's this January, we call it high, but there's only 20 % higher than it is now. We call it now low, but over 20 years, it's going to be five or 10x what it is. And the 20 % difference today is going to be irrelevant. So rule number four says to keep costs low and use index funds when possible. How do fees impact investment returns over the long term?

40:45So yeah, fees are kind of like the silent killer of investing. And so if you go by, and before Jack Bogle, this whole thing is kind of about Bogle has a typical mutual. So a mutual fund is when you put money into a fund with a bunch of other people and you buy a share of that fund and there's a smart mutual fund manager who picks and chooses stocks for you. But then because that guy, it's his job and he needs to pay rent and get a salary and everything, he charges a fee of the assets under management. And before Jack Bogle, those fees were often 1%, 2%, 3%, which doesn't sound terrible. So if you have 100 bucks in there, he takes a dollar, like what's the big deal?

41:20But if you just look at a 1 % fee over the course of a 40-year investment, it can erode half of the eventual investment, right? So if you're putting like 500 bucks a month away for 40 years, and it grows to$2 million, if you're paying a 1 % fee on that, it's$1 million. It's like crippling. The cumulative effect of that fee is just devastating. And that was kind of like Jack Bogle's whole mission, which is there's this huge financial services community, which is offering to be a helper to you and help you with your money, but take a large fee for it. And if you can basically not pay those large fees and invest in index fund, which is just to invest basically directly in the market with a very limited fee, then you have that$2 million instead of$1 million.

41:59Both those numbers sound very big, By the way, if you're 25 years old and you only have a thousand bucks, you're like, I'll take a million or two million either way. But when you're 65 and you're looking at, okay, I'm not going to have an income for the next 30 years and I want to own a home, you might spend a million bucks on a home if you live in San Diego and you might still want the other million bucks to buy food with. So you don't want your money to be cut in half due to those fees. Robert Leonard A lot of people listening to the show like picking individual stocks. That's what we're known for here at The Investor's Podcast, asked, but a lot also like index fund investing.

42:31And I personally was strictly an individual stock investor, but over the last couple of years, I've come to allocate a portion of my portfolio to index investing and also do some stock investing. So I'm curious how you see this. Is there room for individual stock picking and index funds in someone's portfolio, or do you recommend they just stick to strictly index funds? So I'm an index fund guy. I believe that buying and holding index funds is the most effective way to build wealth over time. I think they're broadly diversified. I think picking an individual stock is likely to add volatility to your portfolio without adding expected return because I basically believe that the market is efficient.

43:06And so if I go and choose a stock, there's just no way for any individual person to know whether or not that stock is more or less likely to outpace the rest of the market over time. And so I'm a strong believer in that. I think that's correct. I think that's right. I think it's mathematically basically provable. That said, the important thing, the big thing, the 99 % of the game is to invest. And so like I that if all you're doing is picking individual stocks, and you're just buying and holding stocks you like, and just randomly buying more and more stocks, and every month you're buying more stocks, you're going to be fine, right?

43:34I think more likely than not, the index fund will outpace you, but you're still going to be fine. And I also know that it is human nature to think and maybe believe that you can beat the market. It seems like a winnable game. It seems very winnable. You see all the clowns out there doing ridiculous stuff, like day trading beyond meet up to a zillion dollars a share and you know it's going to go down, so why not short sell it or whatever? Or Tesla's the future of the world or whatever. There's all these examples of things that just seem so obvious, especially in retrospect. Once you see it happen, you're like, oh yeah, I knew that was going to happen.

44:05I should bet on it next time. And so that said, I know that it's an itch a lot of people want to scratch, including myself. I've been there and I do own at least one individual stock right now. And so I basically have what I call the 90-10 rule with 90 % of your portfolio buy and hold index funds. You guarantee yourself your fair share of market growth with minimal fees. That means no matter what any individual stock does, you're going to guarantee yourself your fair share of all market growth with 90 % of your portfolio. So no matter how good or bad of a stock picker you are, you're retirementally fine.

44:35And then the other 10%, go nuts, whatever. I say with that 10%, give yourself permission to pick stock, to buy cryptocurrency, to day trade, to short things, whatever you want. I mean, I wouldn't go on margin, do anything that's going to cripple your 90%. But the point of that is to basically be a release valve on that itch that you want. If you want to go day trade, yeah, go do it with your 10%. And then you also basically get to figure out, am I the next Warren Buffett? If you're as smart as you think you are, your 10 % is going to far outpace your 90 % pretty quickly, right? That should be easy.

45:07And then you've solved it, right? And then your 90 % of your contributions might not only be 2 % of your portfolio because you're such an amazing day trader. And if that's true, then great, congratulations. like leave your 90%, just leave it, your 90 % of your contributions, just leave it there. But if you're not that smart, then at least you're still safe. And I don't mean to be too dismissive of that because my one individual stock I own actually is the company that I used to work for that bought my company and it's far outseated the stock market. And that has done great things for my personal portfolio, but I did keep it to a relatively small proportion of my portfolio.

45:41And so my index funds have done well, my one stock has done well. And so I'm glad to have had my lotto ticket, essentially. And I think it's good to have that lotto ticket, but you don't want to cripple your finances if it doesn't go well. Robert Leonard Yeah. I think the two big pieces that you mentioned are not crippling yourself with the rest of your portfolio if the individual stock picking goes wrong. And that's important to do. And you can do that by portfolio allocation and keeping that percentage small in comparison to your index funds. But I think it's also interesting and something I've learned is scratching that itch, like you said, was I I always thought that I had to have 100 % of my portfolio in individual stocks in order for me to get that itch scratched, if you will.

46:18But I've learned over the years, now I have 60 % of my portfolio, say, in individual stocks, 40 % in index funds. And I'm still feeling the same way as I did when I was at 100%. I still get that itch scratched, and I'm still being able to do something that I'm passionate about. And I bet I could probably bring that percentage down even more, flip it, maybe 40, 60, and probably still have that itch scratched. And who knows, in the future, maybe I will. But I think that's important for people to hear because just because you're allocating a smaller dollar amount in terms of your total portfolio doesn't mean you won't still scratch that same itch if you're passionate about it.

46:50I would argue there's also a feeling of security and happiness that goes along with that saying, if you have a bad day in the market, like a bad day with your individual stocks, you can at least be like, well, it ain't that bad. At least my index funds are still cranking away from me. And so I think that you can have the best of both worlds there. I have a 90-10 rule and you're obviously a guy that loves picking and choosing stocks. Like I said, if that's all you do and you're investing early and often, that's still a great thing. But I think as part of your plan, you can be like, hey, my plan is to put 50 % of my money in index funds every single month and 50 % in individual stocks and then check it every year or two and see how my two accounts are doing.

47:27Maybe you could have a Schwab account and a Fidelity account and Schwabs for day trading and Fidelity for index funds or whatever, and then just see which one's going up more. I think a lot of people don't really do that careful accounting of it. They tend to remember their winners and forget their losers. And they believe like, oh yeah, this one stock I had did great. They forget or don't talk about all the bad ones. And they haven't done a real careful accounting of, am I actually outpacing the market? For sure, you're making money, but making money isn't the bar you need to beat. You need to beat the market in order to have had it be a good choice.

47:56Robert Leonard Yeah. You're not investing in a vacuum. If you earn 5%, 10%, but the market earns 20%, you could have done a lot better. That opportunity cost is large. And it's funny you mentioned the two different accounts because that's exactly what I do because I have my personal 401k through my employer at Vanguard, and then I have my other investing that I do with Fidelity. And so what I've done is I had some jobs, luckily when I was in college, that had 401ks with great matches. I wasn't making a ton of money then, so the numbers are pretty small. But when I left those companies and I rolled those 401ks over into an IRA, I said, hey, this is the money I could use to invest in individual stocks.

48:33And that's it. Everything else is going in my 401k and it's just going to continually buy ETFs or essentially mutual funds because that's what's available. So eventually, if my stock investing doesn't do good, the picking, that percentage of my portfolio is going to come down and the rest will continue to rise because I'm contributing to it every week. So that's kind of how I've done it. I think there's a lot of people listening to the audience that could do something similar if that's what interests them, because I know a lot people like picking individual stocks. Robert Leonard I love that. I think that it just goes to having a plan.

49:01I think when people don't have a plan, when they start second guessing themselves, they're like, a stock did really well. And so then they drain one account and they go all in and then that stock crashes. And that kind of thrashing I think is what's more likely to hurt you in the long run. But you said, hey, this is my day trading account. This is my stock picking account. This is my long-term investing account. I love it. Robert Leonard Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you.

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52:37That's theinvestorspodcast.com slash tip-finance. All right, back to the show. So going back to the list of rules, rules five, six, and seven are to minimize taxes, keep it simple, and stay the course. Walk us through how you should use these last three rules to round off someone's financial plan that we've been talking about so far? So minimizing taxes is basically just taking advantage of those retirement accounts when they're available, Roth IRA, 401k, 403b. Also, index funds are notoriously tax efficient. If you're buying and holding stocks, there's not a lot of capital gains getting kicked off as you buy and sell them.

53:19And so that's another way to minimize taxes, which also, again, if you're doing that very careful accounting of which one is actually doing better, index funds have that advantage for them too. And also to keep that in mind of if you are doing, if one is a buy and hold strategy and one account is a trading strategy, maybe do that trading inside of the tax advantage account. Like if you're trading inside of your Roth IRA, then none of those capital gains affect you because it's either tax-free or tax-deferred depending on which type of IRA it is. So yeah, minimize taxes. Keep it simple. Keep it simple and stay the course as is like my whole thing.

53:49Like literally, if you buy VT, the ETF VT, which is a world ETF, you do nothing else your whole life. You just buy VT every single month, you will be extraordinarily wealthy. And when people ask you at dinner parties when you're 50 and you've got a million bucks in the bank, oh, what was your secret? You're like, I just bought one thing. I'm an idiot. They're like, how did you know what thing it was? You're like, because it's the entire world stock market. My actual personal favorite way to invest is what's called the Target Date Index fund, which includes US index fund, international index fund, and a bond portion that increases as you age.

54:21So your audience is a younger audience. But when you're, sometimes I hear from a 65 or 70 year old, who is 90 % stocks, and then Coronavirus hits, and then they're like, I'm not sure I'm gonna be able to eat tomorrow. I was like, well, you shouldn't be 90 % stock at 70. So a targeted index fund does that for you automatically, just all your money in exactly one fund, you buy and hold for 40 years, and that's all you have to do. It's so simple. And And I basically think any more complexity you add to that is not likely to increase your wealth. It's more likely to hurt you than it is to help you, or at the very least, it increases volatility without increasing an expected return.

54:55And so if you want to go day trade or you want to go pick stocks, at least with a portion of it, take the guaranteed thing. Then rule seven is stay the course, which I think is just like one of the hardest ones because the last few months I've been getting a lot of questions. Unemployment's so crazy high right now, there's no way the market reflects that, or I know the virus is going to come back and be a second wave. or suddenly the bad thing happens and people want to change everything. When the plan all along was to account for market volatility, and we know stocks go up and down, we know the market goes up and down.

55:23But if you just keep investing every month and forget about all that, then you'll be fine. So remember, when things get weird, you just stay the course, keep doing the same thing. And then when you look five years from now, when we look back at 2020 and the market's way up, we'll be like, oh, see, it wasn't that bad. We're fine. Robert Leonard Yeah. We also just recently had JL Collins on the show who wrote The Simple Path the wealth. And he said the exact same thing you just said. He buys the... He buys VTSAX. Yeah. VTSAX. US total stock market. I was thinking what the index fund version was, VTO maybe?

55:51Oh, VTI is the ETF version. VTI, yeah. So he just recommends buying just VTSAX and that's it. And just leaving it and investing it forever and keeping things simple, just like you said. And I, growing up and I'm still young, I'm only 25, but I've been investing probably for 10 years or so. And I was not simple at all before. But now I'm really trying to simplify things more. I'm still going to pick individual stocks, but I love that simplicity component of it. I've been studying the 80-20 rule a lot, and I'm really trying to just simplify my portfolio, reduce some of the stress, and just go do other things.

56:23Robert Leonard I was you 14 years ago. I'm not that old. I'm 39. So I'm not an old man just yet. But when I was in college, I was picking individual stocks. I bought Oil Futures. I bought Sears Canada. There's a day where Sears Canada was at like 20 bucks a share. And then there was at eight bucks a share. Then there was at two bucks a share. I was like, all right, Sears Canada is going to be fine. I did a little bit of reading about it. I was like, it's beloved in Canada. It's not going anywhere. So I put all this money in Sears Canada. It went to zero. They went bankrupt. That lost all my money.

56:52So I've done my fair share of stupid things. And I experienced such a painful piece of knowledge that makes you all this money, which is the more simply you can make it, the more wealthy you're probably going to be. And all those things, like I said, I still own an individual stock. I only own one. The company used to work for. Or I still get the bug. I was like, oh, man, is the market... Even today, I wake up and I was like, hmm, the market went up a lot yesterday because of this vaccine that had good results. I don't really believe that's a lasting effect. I think that's just a short sell. And I didn't because I'm just too wise at this point for lack of a better word, I guess.

57:25But yeah, the older I get, I was like, man, the reason people are broke ain't because they didn't day trade good enough. It's because they're just not keeping it simple and investing early enough. and not staying the course. And it's funny because JL mentioned the same thing. He said, look, I have the itch. He said, this is a secret of mine that I don't tell a lot of people, but I used to pick individual stocks when I was on my way to financial freedom. He said, everybody wants it, but now that I'm older, now that I'm wiser, learn from me, and I wish I had just done individual stocks. And I think that's one of the great things that we're doing here with the podcast.

57:57You're still within our millennial generation. So we can all learn from people like yourself and JL who have a little bit more experience than us and can say, hey, do this and just keep things simple and you'll do just fine. And you don't have to worry about all this other stress and things like that. Robert Leonard Thank you for calling me a millennial, by the way. I think depending on how you look it up, I barely made the cut. Robert Leonard Just in the cut, but yeah. Robert Leonard More in the 80s, just barely. Robert Leonard So when you're picking the index funds, how should someone decide between investing in a few select index funds, like the total stock market index fund you mentioned, or even an S &P 500 index fund, versus investing in a target retirement date fund like you talked about before?

58:39In my opinion, they should always invest in a target date index fund because inside of a target date index fund is a US stock index fund and is an international index fund. And so when you buy that target date index fund, I guess I should maybe give a little bit more background on that. So a target date index fund, they're always named after a year. And so you basically take your birth year, I was born in 1980, you add 65, that gives me 2045. five, and then you basically go buy the target date index fund from that year. I think it's always important to check the expense ratio on that target date index fund because there are target date funds that are named after a year that aren't index funds, and they can have very high expense ratios like 1 % or higher.

59:18The ones that I buy offered by Vanguard, Fidelity, and Schwab are 0.1 % or lower. So you just buy that target index fund. And I think that when you ask, should you buy, I always talk about the S &P 500 because it's like the most detailed and historical way to look at the performance of the US stock market. And so people who kind of briefly look at what I write are like, oh, I should be investing in the S &P 500, right? So no, you should, but only as part of a target date index fund, because I don't know in the future if the US is going to outperform international. I don't know when the volatility is going to hit.

59:52And so these target date index funds have all these rules, all baked into one at the super low cost. It's basically just like the most wise investing and And any alterations you do to that strategy, I think, are just going to add volatility without adding expected returns. Now, I want to go back to the brief conversation we had at the beginning of the show about cars, and then ultimately talk about living situations. So I saw a post on social media not too long ago that talked about how people say they can't afford to buy a car in cash, say a$25 ,000,$30 ,000 car, but they're willing to finance it for five, six, seven years at$400 a month and that way they can afford it.

1:00:29Why is that a bad way to think about purchasing vehicles? I think that's bananas. I think that it's that mindset, that monthly mindset where they just can afford the payment so they think they can afford the car and spending$30 ,000 a car all at once seems crazy to them, but you're still spending$30 ,000. You're actually spending more than$30 ,000 when you include the interest. And so, yeah, when you do the math, it's just so devastating when you look at the difference it's going to make over the course of time. I think I gave that example of my own car where I guess I should say, I think people are still living in this fiction where like, I got this email the other day from a girl who was broke.

1:01:03She had a terrible credit score. She was going to go buy an$18 ,000 car at 20 % interest because her score was so bad. And she's like, I have no other option. She's like, there are no cheap cars on me. I was like, what are you talking about? I promise you, name your city. I can go to Craigslist. I can go find a running car that's perfectly fine that fits for three or four or $5 ,000. I bought a camper van a few years ago for$4 ,000. That was like a baller camper van, and I drove it across the southwest US and drove into Mexico and was camping at overwings. There's$4 ,000. It drove fine. I think, again, people are scared.

1:01:38They don't know which car is going to be good and stuff, but don't go ruin your financial future because you don't want to spend two or three days looking through Craigslist and test driving a few cars because there are perfectly good cars out there for$3 ,000. The car that I drove that I bought for$3 ,000, I sold for$1 ,500 and it was still a great car. I was driving that every day for a year as a millionaire and some high school kid and it was his first car and he drove it away and it was great. And so I think you just need to get over the fact that you have to spend$20 ,000 on a car if you're broke.

1:02:06If you can afford and buy a car in cash, for sure. There's beautiful cars for$20 ,000. I drive a Mazda now, a Mazda CX-5. I think there's$32 ,000 new. I wrote a check for it. But yeah, if you can't afford it, don't make an excuse for yourself and say, I should go be buying this tens of thousands of dollar car if you can't afford it because you're just mortgaging your future. You're just signing yourself up for more indentured servitude to the banks for another five years after that. Just for a few years, just drive a beater. Who cares? Drive a beater and save up your 400 bucks a month and then go buy a$10 ,000 car in cash.

1:02:38And$10 ,000 cars are great. Those are ballers. So you should have no problem finding one of those. Similar to buying a new car, buying too much house is often considered a massive hindrance on wealth building, which is one of the many reasons why I recommend house hacking to a lot of people who are looking to buy their first house. How do you recommend someone goes about their living situation? Should they buy, rent, house hack, something else? This is one of my favorite things to talk about because it gets people super pissed off. I'm not entirely sure why. I think it's a combination of homeowners who made a terrible decision and are trying to justify it and realtors whose livelihood depends on selling homes to people who shouldn't be buying them.

1:03:17There's this myth out there in the world that the home you live in is the greatest investment you'll ever make. And it's just not true. For the only people who that's true for, it's the only investment they ever make. That's the only way your home will be the best investment you'll make is if it's the only investment you'll make. If you look historically, home prices, you look at the US home price index goes up about 4 % per year, whereas an index fund goes up about 10 % per year. And the difference between that is massive. It sounds like only 6%, but it's like millions of dollars at the end of your career, right?

1:03:46But that 4 % ain't free because that 4%, you have to pay insurance. You have to pay property tax. You have to maintain that property if you want to sell it for that 4 % increase. You have to pay mortgage interest if you borrowed money to buy a house. And so I actually did a study that looked at if you bought a house in 1990, 30 years ago, and then you sold it today, the price of that home would be up about 30%. But then when you account for all the expenses you paid along that time, just to live in that house, you actually lose money. You lose money on your house. And people love to talk about how much money they made on a house because they sold it for more than they bought without talking about all the money they put into it during that time.

1:04:23As a company, you don't get to say like, oh, we profit a million dollars, but we spent$2 million. No, the profit only counts if you count your expenses. And so basically, the rent versus buy thing, when I talk about understanding the true cost of homeownership, people accuse me of saying homeownership is bad. And I'm not saying that. But what I am saying is to understand the true costs and to minimize the cost of living, whether you rent or buy. And so if you're paying a thousand bucks a month for rent, and then you move into a place that's a$3 ,000 mortgage, I guarantee you're going to be more broke for having made that move.

1:04:56The$2 ,000 extra in your house is just going to cost you so much money in all those fees I mentioned. And you mentioned house hacking, which is when you buy a duplex and you rent one half and you live in one half, or you buy a house and you rent out two rooms and you live in it. I love that because that's minimizing your cost of living. It's kind of turning your personal residence, your primary residence into an investment. And when I talk about the true cost of home ownership, I'm talking about your primary residence because it's not generating income. If you go buy an investment property where someone's paying you rent and there's positive cash flow and you're getting additional equity by paying down the mortgage every month, then that's great.

1:05:31That's a very different thing. But your primary residence is an expense. It just costs you money. And so my big thing is understand the true cost of homeownership. Don't just fall for this myth that it's always a good thing and everyone should be a homeowner. That's not necessarily true. And whether you rent or buy, minimize your cost, right? So if you're renting a$2 ,000 a month apartment or a$1 ,500 a month apartment, they're going to look about the same. You're going to go to your two friends. One guy's paying$2 ,000, one guy's paying$1 ,500. You're not going to think anything different than that person or whatever.

1:05:58But if the guy's investing the difference at$500 a month, that's a million bucks in retirement. And so same goes for buying a primary residence. If you're looking at a house that costs$300 ,000 or there's one for$250 ,000 and you invest that$50 ,000 extra and it doubles a few times, there's another half a million dollars every time. So even pretty modest differences like that can make a big difference over time. I had someone recently come to me and talk about their primary residence and they bought it for about$150 ,000. They're about to sell it for about$200 ,000. And so they're ecstatic because they're going to make$50 ,000 in profit.

1:06:32And I said to them, that's great. And then I said, let's dive into the numbers a little bit more. And I said, how much have you paid in mortgage payments over the last two years? They owned it for two years. And they paid about$35 ,000 in mortgage payments. I said, okay, so now your profit just went down by$35 ,000. So now it's$15 ,000. And the reason that that happens for someone listening, if you haven't had a mortgage or you really haven't looked into it is because if you make a$1 ,000 mortgage payment, only maybe$200 ,000 if that is going to principal and the rest is going to interest. So that's the way the amortization schedule works on a mortgage.

1:07:02So they really only made$15 ,000. And I said, okay, how much did you put down on that property? What was your closing cost? What was your down payment? They put$15 ,000 down. And I said, okay, so now you're break even. And that's not including any utilities. That's not including any upkeep on the property, adding anything else you did. So I said, really? Robert Leonard Leonard Leonard Leonard Leonard Leonard Leonard Leonard Leonard Leonard Leonard Property tax, exactly. So that's not making... You didn't make any money on this, really. And I felt bad bursting in their bubble, but that's the exact conversation that people need to be having, that's the way they need to think about it.

1:07:28And everybody, I tell that story because I want everybody listening to the show today to be educated when they're making these decisions. If you still make that decision because it's right for you, so be it. But at least understand that that's what you're doing. A house is basically a forced savings account because people are going to make their mortgage payment because they don't want to be foreclosed on and be homeless. And then when they see the fruits of that savings account two years or 20 years later, they're like, oh, look at all this money that I'm finally getting back, which is fine. But after expenses, you're actually losing money exactly like you just described.

1:07:59And worse than that, it's great to get money back. But worse than that, you're missing out on the opportunity cost of investing that money instead. So if you extrapolate that another 20 years and that person made$100 ,000 back, they're like, oh my God, I have$100 ,000. I'm so happy. But they'd have a million dollars if they were investing that instead. And so it is a crippling thing. And a lot of people say, well, renting is not good either. I was like, I didn't say renting was good. Renting costs money too. They both cost money. But I think the biggest thing I always see is people rent modestly and then buy extravagantly.

1:08:31They rent for$1 ,000 a month and they buy for$3 ,000 a month. It's just so typical because people, their castle is their kingdom or they're the king of their castle or whatever. And it's an investment and they want to make it their own and all this stuff. And that tripling of the cost of your living expenses is just going to cost us a huge amount of money and the opportunity cost of not investing the difference. And so if you do buy, consider what you would have been renting for instead. Robert Leonard Yeah. I think there's a psychological component to that because if you rent and you have your friends over, family over, you can just say, oh, it's a rental.

1:09:05It's just an apartment. Whereas if you own it and people are coming over, it's like, oh, this is my house. I own it. So there's that psychological or keep up with the Joneses. I drove a 99 Ford for six years and I dated girls. And like, I never had a girl not like that car. And if I did, I would have been like, you're going to choose whether you like me based on that I happen to drive a 99.4. And in fact, people probably like you more if you drive a shitty car because it makes them feel better about themselves. Like, whatever. You just got to get over that ego thing and say, hey, I'm going to...

1:09:32How about instead of looking rich, how about being rich? That's what I prefer, right? Have that money be in the bank account. Then when you're 50 and you've retired and they're still slaving away to make their payment because they're house poor, it doesn't look like such a fancy house anymore. Yeah. It's such an ego and just perception type thing. And I think that's the hardest part about personal finance altogether. And so I want to ask, what is the biggest thing you know now that you wish you knew when you were just getting started? I thought about this a lot and I know the exact answer. It is, I wish I knew that Bitcoin would be six cents a coin in 2009.

1:10:07And then in 2018, it would be 18 ,000 a coin. Because if I knew that, I would be a Bitcoin billionaire. I'm kidding, of course. I mean, I wish I did know that because I would be rich. But the thing is, time only marches in one direction forward. And so going forward today, does that make Bitcoin a good investment? In my opinion, no, I don't think Bitcoin is going to do that again. I don't know. Obviously, I didn't know last time either, but definitely don't know this time. And so what I really wish I knew is just the value of simplicity and the value of early and often. And I did pretty well. I don't have some amazing rags to store.

1:10:39I did pay myself very little when I started my company and I had very little money, but I bought one car with a loan and paid it off. I had credit card debt for a few years and paid off. So I wasn't making horrific decisions, but I think that all the crazy stuff that floats on people's minds, if you can just boil it down to simplicity early and often, stay the course, that's what really matters and don't let all the complexity scare you too much. So I think learning from podcasts and all of the information that we talked about today, and even from books is great and a vital part of success, but it's really only half of the equation.

1:11:13I see the other half of the equation as equally important, if not more important, and that's taking action on what you learned. So after someone listens to this episode, what is the first thing they should go out and do to get started or improve their current wealth building journey? I don't know if I can give one answer for everyone, because I think There are people listening who are from like, there are people who have seven different investment accounts, and they're very sophisticated traders. And there are probably some people listening who don't have any investment accounts and don't even have a Roth IRA.

1:11:44And so I can't really give those two people the same advice. But I would say to focus on the step that you're on. And so if you have debt right now, if you have credit card debt, car loans, student loans, just focus on that. And if you don't have debt, open an investment account. And if you have an investment account, put more like whatever step you're on, focus and just focus on that one thing you're doing. And ignore everything else because if you focus on it in a year or two years or three years, sounds like a long time, but relative to your life, it's a very short time. That step is going to be done.

1:12:11You can put the debt behind you. You can get those accounts maxed out, whatever it is. And then you can move on and go to the next part of your financial career. And I think that that lack of focus is what causes people to thrash for decades instead of like getting it cleaned up now. And so whatever step it is, if you've never opened an account, if you've been open an account, if you have the debt, pay the debt. if you're investing, automate those investments, whatever it is, focus. And I guess if I had one other piece of advice is to calculate your net worth, get the spreadsheet out, know your net worth.

1:12:40Because I think most people don't do that. I'd say maybe 10 % or less of people actually know their net worth. So this applies to most people. Learn your net worth because if you don't know your net worth and if you don't track it over time, it's like playing a football game without knowing the score. And that's not a good way to do it. Is there a specific benchmark that someone should have for their net worth given their age? Or is it just so you know where you are so that can plan for the future? You can take your net worth and then the amount you have invested and then extrapolate that along with your monthly contributions, what you're likely to have in the future.

1:13:09You can see, are you on pace to be a millionaire by X year or whatever? But I think it's more about just knowing where you are. It's just about knowing the score. It's hard to play a football game or a basketball game if you can't look at the scoreboard because it affects your decision making. So if your net worth is negative$40 ,000 and you're putting five bucks a month away and going on lavish vacations, you need to change your decision-making because you're going to be in big trouble down the road. Whereas if your net worth is a million dollars at 30, and you're living on$10 ,000 a year in a cardboard box, maybe you can chill a little bit and go out to dinner.

1:13:41I think setting a strong foundation through personal finance is the key to becoming a successful investor, which is what we talk about most frequently here on the show. So I really enjoyed this conversation. I think it's important for everyone listening to the show to hear and learn more about these topics. I know a lot of people listening to the show, come to the show, come to the Investors Podcast because they're interested in investing in stocks and specifically individual stocks. And you guys know that I love that. I'm passionate about it. We love talking about it here on the show. But I think you need to take a lot of what Jeremy said and what I talked about today to heart and make sure you get a good foundation of personal finance first before you start worrying about those types of investments so that you can really be a successful investor and invest from a position of strength rather than having a weak foundation.

1:14:27So Jeremy, like I said, I love this conversation. For those that want to connect with you further, where's the best place for them to find you? Thanks. Yeah, I totally agree. And don't let perfect be the enemy of good, but also get started and just learn and keep learning and learn over time. And I think that you'll realize it's not that scary and it's not that hard of a thing to do. So yeah, most of the magic for me happens on Instagram at personalfinanceclub. I also have a Facebook and a YouTube by the same name and the website personalfinanceclub.com. I'm a pretty easy guy to find. My name is Jeremy Schneider.

1:14:59So come check out. You get a daily on your little Instagram feed. You get a daily dose of wise investment advice. I'll be sure to put a link to all of those different resources in the show notes. You guys can go connect with Jeremy there. Jeremy, thanks so much for coming on the show. Thanks, Robert. That was great. It's been a pleasure. All right, guys, that's all I had for this week's episode of Millennial Investing. I'll see you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only.

1:15:35Before making any decisions, consult a professional. This show is copyrighted by The Investor's Podcast Network. Written permissions must be granted before syndication or rebroadcasting.