AAR69 - Behind the Curtain - How Money Actually Moves

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2:23good day everyone and welcome back but anyway my name is evan rate and we are here to help you make sustainable financial changes without breaking a sweat and please welcome back the one and only ready for his round of applause andrew say there good morning andrew uh you're lying bro because actually there are several andrew say thers and i get linkedin connections and dms about the other andrew say they're surprisingly often that is actually hilarious do you know what those other andrew say there's do i do well one of the one i get the dms about yeah it's funny because we're like both in finance but oh that that's actually rough yeah have you considered changing your name for branding reasons i like the name i like the name i like your name are you the one and only evan rate i think so but i actually don't know the answer to that for sure.

3:15I really don't think anybody else has at least my last name spelled the same. Right. And I think if there were more Evans, the more people would know how to pronounce my name, which I will tell you once again, just another quick Evans story or people screwing up my name, Evans story. I had a coworker who I've worked with for many, many years who was basically adding a comment to something, some like work instructions at work saying that I had said something i'd signed off on something and he spelled my name even i don't i don't know what to do anymore man there's nothing there's nothing left i need to wear a name tag or to get a tattoo on my forehead or something i need working with me and emailing me and whatever is not enough to remind people what my name is i love it's like official document too that's awesome it is an official document which is not good not ideal maybe my name is bad to be working with official documents because people are just going to screw it up and now they're not even official documents anymore i don't know anyways moving on uh so today like i mentioned in the uh in the intro there we want to cover a lot of the hidden mechanisms behind some of your finances the reality is that we don't really handle our money directly nowadays but pretty much unless you're handling cash you're not handling it directly.

4:34You're trusting and believing platforms to do it for you. And we're not here to tell you, oh, platforms are misleading. You don't put your money on platforms. That's not the goal of this. The goal is really just that pretty much everybody along the way who touches your money, touches your data, touches anything related to you, wants to earn money off of you. That's how that business that's doing whatever they're doing is staying in business, is earning money somehow off of you. And so today we want to learn the ways that they are earning money, because that'll allow you to make more informed decisions, allow you to take less risk on things, allow you to understand the pros and cons of things, as well as just kind of build that, that mindset and that point of view so that when you go to handle something, when you go to work with a financial company, whatever it is, any company out there, you kind of have a frame of reference for understanding what might be going on and trying to position yourself in the best way possible.

5:29So we're going to go ahead and start that off with credit cards, something that people, you know, including us discuss a good bit about kind of how they function in general. But again, a lot of the times not framing it around the underlying business aspects of it. So with credit cards up front, using a credit card is essentially borrowing money and paying it off is paying off that loan. It's essentially a short-term loan, just like any other loan out there. And because it's so short-term is why the interest rate is so crazy high is because they want you to pay it off super duper quick. That's really the goal for them, or at least pay most of it off super duper quick.

6:04And where they make a lot of money off of you, most of their money really is off of interest rates. They also make money in a couple other places. They make them off of transaction fees. So basically every time you go use a credit card somewhere, could be physical, could be online whatever there's a transaction fee associated with that and that fee is paid by the business directly off of that transaction but a lot of businesses or vendors i should really say that you're purchasing something from they will pretty much always tack that on the price in one way or another they're not looking to you know eat that cost themselves if the transaction fee goes up they're going to put up their prices by the same amount and it may not be very large per transaction but it all adds up and then there's also annual fees that you can pay for many many credit card accounts out there and for both of these they're really not in your control and so i would say just do everything you can to avoid the annual fees and the transaction fees are just something you can't really avoid so that's why it's not as big of a focus here as the interest the interest is really the big thing that we have control to avoid and that is the the sort of the section of that credit card business that we have control over and that's a section that we want to avoid as much as possible and the last thing about their business model is they want to make spending as painless as humanly possible they want to make it look easy they want to make it they want to give you you know credit limits that make it really easy to spend thousands and thousands of dollars in one fell swoop and not even really think twice about it because that is within your credit limit and they just want to make it all very easy process and for that we want to just actually spend based on what you have.

7:42That's really the simplest, you know, frame of reference to use for everything. There's a lot of other techniques out there. We've discussed some in the past of the kind of mindset to go into spending, maybe waiting a little bit before you spend a ton or, you know, only spending X amount at a time or something. There's many techniques out there, but they really all just land on trying to only spend based on the money you have. So if you only have$200 worth of discretionary spending left this month, only spend$200 on your credit card and don't even think about spending anything past that and pay off their credit card as fast as humanly possible.

8:16Just pay it off once it shows up on the balance sheet at the end of the week, whatever, and never carry a balance. And if you avoid annual fees and never carry a balance, basically the only way the credit card company is making money off of you is through the transaction fees. And again, that is not even a direct fee to you. That's a fee through any vendors that you're purchasing through. And so you are basically losing them money. Essentially, if everybody did what you were doing, then they would have to really shift their business model and really turn everything around to continue turning a profit.

8:46And so that's how we know that we at that point have stacked the deck in our favor. And we've put ourselves in the position to be earning money off of the business through the credit card rewards and access to the security that they give you and yada yada. And that the business themselves, the credit card company, is just just bleeding money for having you. And that's the position we want to put ourselves in. yeah it's amazing like how much they make off of us and this can be very eye-opening just to know that this is how it works and there's ways you can beat the system so to say uh i do have a question for you do you do you use your your phone when you buy stuff yes i do i do i don't know about you but like the whole ding like that actually yeah i like that like i want to do more of that like every time i use it actually i do completely understand what you mean by that it's a very satisfying sound and like the whole you know uh if you're using apple pay for example like directly on the phone or whatever not tap to pay the whole like double click and vibration that it gives you and everything it's just a very tactile enjoyable experience to go through like i i know i mean this is something they've talked about for years of like there there's been studies that you like people will just spend more if they're using a credit card versus using cash for the more frictionless nature of it you're just organically going to spend more i'd be curious if there's studies now on like the psychological effect of this new way of using your phone which in the grand scheme of things isn't that old right right i definitely think there is i mean just anecdotally for me the number of times that i've made i've never done it for a large purchase but for a small purchase at least you know like a drink or something at you know at a checkout or whatever that i probably wouldn't have gotten otherwise but it's like oh all i have to do is pull out my phone you know pull this out of the little fridge or whatever double click the power button and put it up against the terminal and i'm done it's such a frictionless process that i've definitely purchased several dozens of things over my lifetime that i genuinely would not have purchased if it weren't accessible um and and you know it all depends on uh on the balance of things so like if those little purchases don't hurt you and you enjoy having those things and doesn't have to be a bad thing but that frictionlessness definitely not a word uh is definitely a slippery slope and can be dangerous for purchasing things other things more expensive things or putting you over the limit or whatever that you didn't need just because it was such a such an easy and enjoyable thing to do yeah absolutely uh last thing like touch on here you said avoid annual fees what what is the i don't have any cards i have annual fees so you know i just i look at that and i'm like well duh like why why why are people signing up for those and is there ever a time more than that's a good night a good idea so people are pretty much always signing up for annual fees for like american express is the big one that comes to mind for me um pretty much all i think all but don't quote me on that of their cards require annual fees and basically they bill it as you pay an annual fee and you're going to get a more premium experience and you're going to get much higher rewards you know oh look at all these different things that you get and that's when they usually tack on things like you know 40 bucks every single month for uber eats and you know uh 100 bucks every month towards flights from these these carriers and like tack on all these other things and when you do the math and add it all up it's like holy crap i pay 150 bucks a year in annual fees and i get like over a thousand bucks in rewards but two things to that number one pretty much nobody ever actually uses enough of the rewards to outweigh the annual fee It's just very difficult to do partially because of the second point, which is that to, to accrue all of those, you would almost certainly have to have to be spending outside of your normal spending to achieve them.

13:00So it's like Uber Eats to me is always the best example for it. You want to eat out dinner, then usually you'd be eating out and it'd be$10 if you just went and purchased it. Instead, now you're like, well, I have the$40 a month on Uber Eats. So instead, I'm going to order Uber Eats and it's going to be$30 through Uber Eats because of all delivery and fees and higher prices and yada yada. But you feel like you're getting it for free because you're using Uber Eats. but in the end you just end up spending way way more money than you would have otherwise and spending money in ways that you wouldn't have otherwise just because you have it accessible to you or same for same for a flight you decide well i have this flight i need to use it and so i'm going to go take a flight that's still going to cost you a bunch of money elsewhere that and it's a flight you wouldn't have taken otherwise because you didn't have access to it but really yeah it all boils down to pay an annual fee and you're going to get all these other rewards and benefits that you wouldn't get otherwise because it's just not as premium of a card otherwise.

14:00But like I mentioned, it pretty much never, I don't want to say never, but pretty much never balances out that you're actually going to end up gaining more than the annual fee is going to cost you. And that annual fee is going on indefinitely. And so you're left in a sticky situation of either, you still, you have to, you know, 10 years in the future, you have to continue building your lifestyle around the benefits that that company is giving you on and on and on to actually earn your money back. Or you have to cancel this credit card, which isn't good for your credit history because ideally you want to leave cards open forever.

14:34You never really want to close a credit card. But you're going to be forced to unless you want to keep paying that$150 a year. And so you kind of just sign yourself up for this long-term ball and chain that might be good for a year or two potentially, but past that is just going to be a pain in the neck. That's crazy. Yeah, that's not a good deal. No, it's pretty much never a good deal. And it's flashy and it's exciting or whatever. And the benefits always look really good. But again, and if we talk about the business aspect of it, they're only able to expect to give you that much. If they're offering you, you know, a thousand bucks plus worth of benefits as a business or as a person looking at the business, You have to understand they are not actually expecting you to earn a thousand bucks off of them and you only pay them one fifty.

15:24If that were very achievable, then they wouldn't be offering it because they would just be losing way, way too much money on it. They're only able to offer you that much because of how many people are clearly losing money off of this trade. And to think that you're going to be, you know, an exception and you're going to manage to play the whole game perfectly is just way too unlikely to take a bet on. yeah that's a bit uh a bit demoralizing but that's okay stay away from the credit cards traps right yeah yeah there's a lot of traps out there what's the next trap next trap we're gonna have uh andrew dive into because he is much better to talk about this than i am but stocks we have stocks uh stock market of course specifically so why don't you give a little rundown on how that how that whole business model works out and how we can stack the deck in our favor.

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18:15Download my ebook for free at stockmarketpdf.com. Yeah, cool. So stock market place where shares are bought and sold. These shares are part ownership stakes in a business. Some of the ways that companies benefit from having their shares out there, the big one is, it's like access to their own, I don't want to say credit, but it's a cost of capital game. And so by having your shares publicly traded, companies can use that to raise capital. They can do it in a lot of creative ways too. They can do a mix of debt and shares, so convertibles. They can just straight up offer shares. Obviously, when you IPO, you're offering shares.

19:07And then there's also the benefits of we're seeing more and more as companies get more and more digital and technologically forward. A lot of engineers and things like that get paid the stock-based compensation, management stock-based compensation. So if a company can make their share price go higher, that gives them better access to talent. And just a lot of good things happen for companies in the stock market when they have their shares public and those shares do well. Now, when we're buying and selling these shares, we're buying and selling with other individuals. It could be hedge funds. It could be mutual funds.

19:51It could be index funds. And there's actually, I'm surprised now more and more and more how much of the trading is automated and how much we're just buying and selling from algorithms. The number of ETFs just continues to explode. And so there's a lot of systematic buying and selling. And it seems like that's just only going to continue even with now we have AI. So, you know, in the future, we're all going to be buying and selling shares from algorithms and AIs and all of that. But companies also, again, they can issue shares, they can sell shares. A lot of companies are doing the opposite. They're buying back shares because that's a good way to provide value for their shareholders.

20:37And then just along the buying and selling value chain, there's so many different pieces that they provide good services. The plumbing of buying and selling shares is important, and that needs to be frictionless, just like credit cards. And so there are people, middle companies in the middle who will take their slices. And we need to be cognizant of that because that can be a detriment to us if we're buying and selling shares. So, I mean, it could be a whole nother episode, but there's payment for order flow. So even though technically we're not paying commissions for buying and selling shares, because that has all changed now, there's still other ways that buying and selling can kind of be expensive for you.

21:30And so we need to be cognizant of that. There's also expense ratios, which go into if you're buying an ETF or mutual fund, hedge funds, of course, there's fees that are involved in that. And what's especially dangerous about fees in the stock market is that they happen under the surface. And so we don't always realize that we're getting charged for this unless we're reading the legal terms, the fine print, all of that. And who wants to do that? the other part of that is even if the fees seem small at the beginning, the whole point of building wealth through the stock market is through compound interest.

22:16And so what starts off as a small fee compounds into a really big fee. And it's not so much that you're paying bigger and bigger fees. It's that, man, if you could have held onto that little bit of a fee, it could have grown into such a bigger amount over time. So it's good for us to be cognizant of it and try to figure out what are some ways we can position ourselves, which are very practical and are things that a lot of people talk about, ourselves included. But it's important to, I think, know that because of the plumbing of the financial markets, that's part of the reason why you behave in certain ways.

22:56Anything kind of come off the that for you on how we can avoid some of the fees that I just discussed. The expense ratios is definitely a big thing for me. I think it's, it's very easy to, you know, maybe see a fund or something like that advertised online, or maybe you just go to your brokerage and you kind of just sort by, you know, who's, who's had the highest return of these funds over the past 10 years or something. And you can stumble across a, an actively managed fund that will have a noticeable fee on there that can be like a one to three percent even um of your ownership it can be very very high and they have returned they've had a great return over the past 10 years or something but if you factor in that one to three percent fee then suddenly it becomes the same or even worse than some more passively managed funds out there so like andrew mentioned there are funds out there that are actively managed meaning there's actual people behind it or maybe nowadays ai who knows how they're running it, but actual people behind it making decisions of how to manage it and moving things in and out as they see fit.

23:58Or you can have passively managed funds, which is what most funds out there, especially index funds are. They just automatically through an algorithm, move things in and out of the fund again, automatically. So there's very little overhead going into it. And so the fees are much lower. For example, I know 0.3 % is common for a lot of the big index funds. So it's a very, very small amount of money. And again, make sure to factor in if you look up a fund and it looks really great. Most brokerages will display the expense ratio fairly easily, or if you have to Google it potentially, find that out and try to factor that in.

24:35One question I wanted to ask you, you mentioned it kind of quickly, is how a few years ago, maybe not a few years ago, maybe five to 10 plus years ago, transaction fees, broker fees, commission fees whatever were prevalent and just normal that was the expected way that if you made a trade you were going to pay a fee on that trade and now that's that's pretty much gone away um how obviously businesses still have to make money somehow so do you know how the businesses that used to be like the brokers for example used to be making money off of the fees how are they making that money nowadays how did they kind of shift their business bottle to continue making money without those transaction fees.

25:19Yeah, I mean, in a way, it's a little bit above my pay grade. There's a lot of controversy, and we saw it during the whole GameStop fiasco. But if you look at the financial statements of Robinhood, for example, they drive a significant portion in payment for order flow. And so how that revenue stream turns into revenue streams for other companies is one of those kind of more gray areas. And so I don't know enough about, you know, with anything that can be manipulated for fraud, not fraud, but in a way where value is being extracted from people in a way that's not good for society. there's a great book called Wall Street Meat like M-E-A-T that goes into some of the plumbing that happens not just with like retail brokerages that we see but like you know the banks that are involved in all of this and it's actually kind of a depressing book

26:31there's a good hero in the book he's definitely improved the system, at least pushed to make a change. But it still wasn't clear to me when I finished the book if this has been resolved or not. It is a little bit sickening this idea that I'm not saying anything that isn't understood by people, but if a lot of us are getting nickel and dimed and people are making billions of dollars off of that, that's never a good thing. So there are ways that practically as investors, we can not maybe completely shield ourselves from what's going on, but greatly minimize the effects of this where it's not costing us huge amounts personally.

27:23So a big one, and I would say this is like, let's say you're buying like$1 ,000 or$10 ,000 or higher of stock at the time is using a limit order. I like to use limit orders because if you use a market order, you're basically telling the brokerage. Again, this part's not like nefarious, but you're just saying, hey, buy me at the market. I just want these shares as fast as possible. That's what you're saying when you're doing the market order. And so depending on how liquid the stock is that you're buying, how big or small it is, and also just how the market is moving at any given point in time and how much money you are putting into the market at that point in time.

28:06You could be paying...

28:12Who knows? Every instance is different, but you could be paying more than you really should for a number of shares. Whereas if you put a limit order, depending on how above or below the actual market price you want to go, putting a limit order, you might maybe wait a few minutes or maybe you're willing to wait a couple hours for a better deal. it's never guaranteed that you get a better deal because the market can always move against you but this is one way to systematically if you're always doing this every time you put in a good chunk of money you can kind of systematically reduce the the expensiveness of like being impatient and wanting to get in the market ASAP that's one way to do it another way is just like don't day trade we say constantly on the podcast like this is not a good strategy.

29:06But if you're day trading, you are going against this beast of Wall Street that they have ways that they make money along this chain. And so you're just not only trying to do something that's very hard in day trading, if not impossible, you're also on the other side of a system that needs to generate revenue for the plumbing. So you can just buy and hold and And that eliminates a big chunk of paying up for the privilege to play in the stock market. And then the last thing, which is, I think you kind of touched on, but maybe overpaying for financial advice. Especially if you're like, Evan and I are in the building stage.

29:55We're in the wealth building stage. So index funds or picking your own stocks, if that's your thing. you don't need a financial advisor to take 1 % of your fees to do that. I love the idea of financial advisors. And I think there's a lot of great benefits for it, especially if you're close to retirement. But if you're in the wealth building stage and you're, you're comfortable enough to learn on your own and, and understand why index funds are good investment, then you're really just paying up for whatever psychological benefit you're getting to having a financial advisor. And it's not necessarily needed if you're willing to lace up your bootstraps and figure out how this all works.

30:42So again, just trying to save everybody some money, trying to optimize our finances a little bit better. And those are all some ways you can do that. Yeah. Yeah. I know when we talk about this, you know, less than a percent, 1%, 3%, it doesn't sound very large and it's not, but what it is is two things like andrew mentioned it all compounds over time just in reverse so instead of earning an additional one percent that piles up you're losing an additional one percent that piles down so to speak and just keeps you know taking more and more away from you so to speak uh in the long run not to mention that if you're stacking you know one percent financial advisor fee and a three percent uh fee for using an actively managed fund and maybe you're day trading you're paying additional taxes and fees on constantly trading or something suddenly you could be paying so many fees that you might as well have had your money sitting in something like a high old savings account in the background earning four or five percent because you're just genuinely losing that much off of your you know stock market returns or something these all stack on top of each other and at some point you're going to be losing so much you could be doing it a much much easier way um but but yeah i think that's all all good information thinking about You're about refreshing the carpet in your home?

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32:36The new PayPal app is like that, but for your money. Shop, pay, manage your account, and earn rewards all in one place. And with purchase protection on eligible items, biometric security, and pass keys, you're protected at every step. Download the new PayPal app to get started. See paypal.com slash protection terms. Okay, beautiful. we're going to go ahead and move on to the third topic which is about banks and savings accounts checking accounts whatever you want to uh want to lump into their banks in case you're not aware banks use the money that you have deposited into your accounts to generate interest for themselves that is that's probably not news to a lot of a lot of you uh listeners but i know that that when i heard that that was very big news for me of course it's all they're not doing anything nefarious It's all in the fine print.

33:24It's all legal. I'm not saying something that they're doing wrong per se. But that was a big learning and pivot point for me to realize that that business was able to go out and generate a significant return for themselves. I mean, heck, even if, say, you put$1 ,000 in your Bank of America account, just random bank choice, and Bank of America takes your$1 ,000 and puts it in the stock market for the overall S &P 500 or something, they could be earning, on average, 8 % to 10 % off of your money passively, basically zero effort on their part, and you think your money's just sitting in the bank. And basically they just have to be ready to pay you back a thousand bucks if you ask really, really quickly.