10 Reasons Smart People Are Bad With Money

22:59A lot of folks out there, maybe you're a doctor, maybe your attorney, you feel as though you need the nicer vehicle to serve clients. You feel as though as a physician, all the other physicians in the parking lot are driving that brand new car. And so you need that brand new BMW as well to show you're on the same level as them. They buy the fancy house in the fancy neighborhood. You need to do the same thing because you worked hard to be a physician. And so you need to make sure you deserve these nicer things. But if you can forego a couple of those things early on and invest your dollars instead, you're going to plant the seeds that can grow to a massive massive tree.

23:32And in fact, one of the big things for folks who have to go through a lot of schooling, specifically when it comes to physicians, is they have a delayed start problem. Meaning a lot of people, when they graduate from college, maybe they're at 22 or 23, they can start investing right away because they have it money. They're making money and they can start investing their 401k or their Roth IRA. Whereas a lot of folks who are physicians or they have to go through a lot of schooling, they are delaying their start, which means they got to play catch up. You have to invest a lot more to play catch up when it comes to this.

24:00And so I want you to recognize that if you have a high income, this does not mean you have a high financial intelligence. You still have to build up your financial intelligence. Number four is they rationalize bad spending. So smart people are exceptionally good at justifying purchases. The$80 ,000 car is actually an investment so that I can make sure I serve as clients. And they build a case to buy whatever they actually are trying to buy. And so there was actually research done on this. So a study published in the Journal of Personality and Social Psychology found that people with higher cognitive ability were no better at resisting emotional spending impulses, but they were significantly better at justifying them afterwards.

24:40And psychologist Jonathan Haidt describes the mind as an elephant in a rider, where the elephant is your emotional instinctive self and the rider is your rational mind. The rider thinks you're steering, but when the elephant wants to go somewhere, the rider mostly just holds on and tells a story about why this direction was the plan all along. And research at Northwestern University found that the more intelligent that person was, the more elaborate and convincing their rationalization tended to be, making them harder to challenge, not easier. And so this is the thing that I think a lot of people do when it comes to their money is they rationalize their spending.

25:14They come up with a story and they come up with a reason why they are doing this, saying this was my plan all along and this is the reason why I do this. Listen, I do this all the time. I do this all the time when it comes to spending money on certain things. But here are some of the most common rationalizations that people come up with. My car is an investment in my personal brain. I see this time and time again. This is not one that I personally fall for, but I've seen so many people rationalize this to themselves. But instead, a car is not part of your personal brain. It reduces in value at about 20 % when you drive it off the lot if it's a brand new car.

25:47And it is not an investment. It is a purchase that you wanted to make and you're rationalizing it as something that you absolutely need. Number two, this is a big one. We're buying a house because real estate always goes up and renting is just throwing money away. This is one I have seen tons and tons of intelligent people state where it is absolutely not the case. It is absolutely not the way the world works. First, you need to run total cost of ownership when you buy a house. You need to understand where your dollars are going. But number two is that real estate does not always go up. And we're seeing that right now in areas like Austin, Texas, for example, where real estate was really, really high.

26:23All of a sudden, prices are coming down. And it's a very interesting concept that I think most people in this generation have not seen yet. But you got to understand, as prices start to shift, it does not go up forever. Another one, this vacation is needed for my mental health and productivity. Sure, time off is absolutely needed. Rest is absolutely needed. This$15 ,000 vacation may not be the actual answer to your problem. I need to look successful and attractive for my clients and for my partners. This is one a lot of people will overspend on things that are vain in order for them to be able to justify some of these experiences or purchases.

26:57Here's one I see all the time. We live only once and you can't take it with you. Sure. And in fact, I think you should invest more in experiences and time with people that you love. But this is dangerous as a daily financial philosophy. You need to make sure that you are intentional when you think about this and the way that you do this. And the big one is I work hard. I deserve this. I see people talk about this all the time. and you should reward yourself for working hard, but it also needs to be part of your financial plan. And I think that is a big, big one for most people because the I deserve it thing is what a lot of high earners will say.

27:26They say this because they worked really hard and they're making more money. When in reality, a lot of people out there are working hard and just because you were earning a higher income doesn't mean you always are gonna deserve it. Now, I want you to treat yourself. I want you to spend more on some of this stuff, but at the same time, if it's at the detriment to your financial future, we wanna make sure that we are prioritizing our financial future before everything else. Number five is they underestimate lifestyle creep. So lifestyle creep, which is also lifestyle inflation, is the gradual increase in spending as your income increases.

27:57So you can think about this when you buy a house. So for example, maybe your household income is$80 ,000 per year. So you buy a starting home. And when you buy that starter home, maybe it's a 1200 square foot starter home. It's a three bedroom, two bath, and you are happy as a clam in that starter home. But then all of a sudden, your household gets a couple of raises. Maybe you get a couple of raises. Maybe your spouse gets a couple of raises. And now you're making more money. And you have this extra money on hand. So you upgrade your house again, all the way up to where your income is. And you have this second house.

28:26And maybe it's a 2 ,500 square foot house. You added a little over 1 ,000 square feet to the house, another bedroom, another bathroom. And so you are happy as a clam in that house. But then all of a sudden, you get some more raises. You get promoted or your business is doing well. And so you upgrade your house again. And you upgrade it all the way up to the level of your income. So you're spending as much as you're making. And so because of this, now you have this really big house. It's 4 ,000 square feet. It's got all these different rooms. You only are in five of the different rooms throughout time.

28:54You're only in the kitchen, your bedroom, and the living room, but you got all these extra rooms just in case. And so this is something where we see time and time again with high earners where they continuously just keep upgrading their lifestyle to the level of their income. And this is what lifestyle inflation is. Now, I want you to note this right now. Some lifestyle inflation is good, which is why we talk about taking that 50 % and investing it towards your future. But some lifestyle inflation and over lifestyle inflation is what most people do, especially in the United States of America. Most people are overinflating their lifestyle.

29:24And so when you do this, this can be a really, really big problem. In fact, psychologists call this the hedonic treadmill, meaning you are just increasing the amount that you're spending over and over again and you were on this treadmill forever. People call this the rat race. You can hear this in Rich Dad, Poor Dad. He calls this the rat race where you just continue to run the race. You continue to go deeper into debt. You continue to stay on his hamster wheel in order to feel like you're fulfilled. But instead, this is an empty way to think about your life. This is an empty way to think about money.

29:54This is an empty way to live your entire life. Instead, you need to make sure that you are investing a portion of your income every single month. The most common areas for this is housing is number one. Most people will upgrade their house or they'll rent a nicer apartment or they'll continue to keep upgrading every time they make more money. Cars are a huge one for this. This is why when you drive through middle-class neighborhoods and you see two very fancy cars in the driveway, you know that those people are on that hamster wheel. They are running that rat race because they have two fancy cars in the middle class neighborhood.

30:27Now, not always, but almost 100 % of the time, that is what's happening. Three is food. A lot of people will start to eat out more or they'll buy more in groceries. And this is one we see over and over again. Four is travel. Travel is one where people will keep upgrading the luxury of their travel every single time they make more money. Five is kids activities. And for those of you out there who have kids, you know how expensive it is to do all these different kids activities. And so this is one we see time and time again. And then subscriptions and services. So things that are going to make your life more convenient or subscriptions or things that we've seen as lifestyle inflation increase more and more.

31:01Now, listen, some of this is good. I want you to be able to spend more on all of these things, but making sure that you take care of retirement is a big, big piece of that. Oh, and one big other one for high earners is clothing. So designer brands, things like that. Those are areas where I see a lot of this happen. Now, this can be catastrophic if you increase in all these areas, but you don't take care of your retirement because as your income increases, this can be an area where you get really trapped. And if you don't have anything saved or you don't have anything invested for your future, you can be on this treadmill forever.

31:32You're working your butt off, but do you really want to work your butt off for the rest of your life? That is the big question. And so you need to make sure that you have this golden rule of raises. You need to make sure that you have a rule in place that every single time you get a raise, you decide how much you're going to allocate. For some people, we tell you to start that 50-50 rule. For some of you, maybe you want to save 70 % for your future and 30 % can be spent. Maybe you want to spend 90 % on your future and 10 % is going to be saved. But we tell you to start at 50-50 just so you can feel it out and see exactly where you want to land.

32:03Let's jump to break and we'll be right back. Workplace chaos. You know the feeling. Deadlines are stacking up, emails are flying, and then someone on your team gives notice. That's when you think this is a job for sponsored jobs. When you need the right hire fast, Indeed Sponsored Jobs helps your post stand out and reach quality candidates. Instead of hoping the right people see your listing, sponsored jobs boosts it in search results so you can match with candidates who meet your specific criteria, like skills, certifications, or locations, and you only pay for results. And here's something wild.

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37:03They feel as though it's not enough, or they feel as though this is what everyone else is doing, so it can't be the optimal route to take. But the research shows that this is actually the approach that you need to make sure that you are taking in order to get ahead with your money. There's a famous study that was done to introduce the Save More Tomorrow program, a system where employees automatically increase their savings rate with every single raise. And participants who used it more than tripled their savings rate over four years just by automatically slightly increasing their savings rate every single time they got raises without ever actively having to think about it.

37:36And the boring automation beat active management decisively. Now, here's the thing about this is because they were just saving a portion automatically, they didn't have to think about it. They never got to see those dollars and they didn't have to make the decision. This is what allowed them to outperform dramatically. And research from Vanguard found that investor behavior, specifically sticking to a simple plan without tinkering, accounted for roughly 3 % of additional annual returns compared to investors who actively manage their portfolios. They called it advisors alpha, but it applies equally to self-discipline.

38:07And 3 % annually compounded over 30 years is the difference between comfortable retirement and generational wealth. And I want you to really make sure that you understand this because that 3 % is a drastic differential for you and you really need to note this. Another study found that cognitive load, which is the mental effort required to make decisions, significantly depletes willpower and follow-through. And complex financial systems that require constant attention and active decisions fail, not because they're wrong, but because they're exhausting. We only have so much brain power to use when it comes to cognitive load.

38:41And I don't want you to focus on your income increasing with that brain power, not on all these different complex financial decisions. And so smart people avoid the basics because a number of different reasons. Number one is their ego is threatened. Your ego is threatened every single time that you try to avoid the basics, because the basics are really the way to build wealth. The basics are the real way that you get rich. And most people just will not take that on. Two is novelty seeking, where high intelligence individuals tend to score higher on novelty seeking traits, where the brain gets a dopamine hit from new information, they enjoy that new information.

39:13They feel as though they need to use this and they need to take action on it. In addition, there's the complexity bias, meaning a lot of smart people have a documented tendency to trust complex solutions over the simple ones. If you're someone who feels as though you are of high intelligence, I need you to recognize this, is that you're going to always think that the more complex situation is actually the better situation. And they delay gratification in the wrong direction. So high achievers are usually are very good at delaying gratifications in their career. They're really good at making sure because there's a clear path ahead.

39:43They can see what's ahead of them because they grind through school. They put in the hours that they need to do. They make sure that they are putting in time for the long-term goal. But when it comes to financial fundamentals, they want it to happen now. And so they try to skip the specific fundamentals that really help you build wealth. The tracking spending, the building that fully funded emergency fund, paying off high interest debt before you get the ball rolling when it comes to investing, reviewing insurance coverage annually, just making the money moves that we talk about all the time in this podcast.

40:12Those are the types of things that they ignore because it's really important. Or even doing things like making sure you protect your finances online. We see this time and time again where smart people are like, no, that's never going to happen to me. And I'm telling you right now that if you do not protect your finances online, it is going to be one of the most important things that you do. But I'm telling you right now, if you don't protect your finances online, it is going to be one of the most important things that you miss. And especially if you are someone out there who is making good money or you are smart and you are out there and you don't have your personal information removed online, this is one of the most important things that you can do because you are a target.

40:47And I want you to make sure that you do this. So there are data brokers out there who have your personal information. And if you Google your name or you Google your address in quotations, all of a sudden you're going to see all this information pop up. Well, you need to get that personal information removed from the internet from those data brokers because there are not many laws out there stopping them from giving your information to the highest bidder. And in the AI era, you need to avoid this as much as possible because scams are getting better and better and better. And so to avoid these financial scams, you need to use a service like DeleteMe.

41:19Now, DeleteMe will remove your personal information from those data brokers. They will reach out and save you dozens and dozens and dozens of hours of time just by getting your personal information removed. I've been using DeleteMe for a very long time. I got it from my family, and it is a very important component of a great financial plan. So making sure you have this protection plan and using DeleteMe is imperative. If you want to get 20 % off DeleteMe, just go to joindeliteme.com slash PFP20, and you can get 20 % off there. That's joindeliteme.com slash PFP20. All right, number seven is they are overconfident.

41:52So a lot of smart people tend to be overconfident when it comes to finance. They tend to be overconfident in their abilities, and they tend to be overconfident in what they think they know. And this is an area where there's a ton of research surrounding this that I want to go through. So the foundational research on overconfidence comes from a number of different cognitive biases. The studies consisted showed that when people were asked to make predictions and rate their confidence, their confidence levels dramatically exceeded their accuracy rates. Whereas all this is stating is they have found that a number of people who were overconfident in a specific area thought they could do something specific and they weren't as accurate as they originally thought they would be.

42:28A landmark study done by James Monitor surveyed 300 professional fund managers and asked if they believed their performance was above average. 74 % said yes. And statistically, only 50 % can be above average. So the overconfidence wasn't concentrated among the worst performers. It was spread out uniformly. And this is one of those things that we see time and time again. So what are some specific ways that people are overconfident when it comes to finances? Number one is concentrated stock positions. Now, I see this time and time again with people who are Bitcoin investors, maybe someone who is really interested in gold where they overweight and they are overconfident in one specific asset class.

43:06I see this with real estate investors a lot, and they put way too much in one specific asset class instead of diversifying the way that they are investing their dollars. This, my friends, is an area where you need to recognize that you are overconfident in some of these positions. If you are too heavily weighted in one specific area, having a diversified portfolio is obviously proven long-term to be the best route for most people to take. And so I want you to think through step-by-step, if you are over-concentrated, how you're thinking about this. Number two is timing the market. A lot of people who are overconfident time the market, and they think they know way more than everyone else.

43:41And so they tie a day trade, or they try to time when the market is going to go down, or when it's going to go up. And they use the phrase all the time, the market is just too high right now. I'm going to wait. If you ever say that, just know you have no idea what you're talking about because nobody has a crystal ball to know what is happening in the future. And so you cannot think that you know when the market is going to go up or when the market is going to go down. They also underestimate risk. Risk is one of those areas where if you're over-concentrated or you're taking on too much risk, then you are putting yourself in a much more negative financial situation.

44:13And so you need to make sure that you avoid that. Number eight is the optimize for income. instead of net worth. Now, a lot of people who don't have a financial education think that income is what makes you rich. It's not. Net worth is what makes you rich. In fact, net worth is your overall scorecard. This is where the biggest impact is going to be when it comes to building wealth. You need to make sure that you are tracking your net worth. So a study from the Federal Reserve's survey of consumer finances consistently shows that income and net worth diverge dramatically among high earners. And the top 20 % earners hold a disproportionately small share of net worth relative to their income.

44:49This, if you are a high earner, is a huge problem. This we see time and time again. And research from wealth management firm Spectrum Group found that a significant portion of high income households, those earning$250 ,000 or more, had net worths that would be considered modest relative to their lifetime earnings. And I don't want this to happen to you because this is really just a behavioral problem. And so let's talk through some of these. First is if you chase the next raise instead of increasing your savings rate, this is going to be the thing where if that next raise means that you're just going to spend it, it is not worth your time and energy to go chase that.

45:21Number two is if you neglect tax efficiency. A lot of people out there who are high-enders don't understand their tax situation or they don't have someone in their corner who is helping them with their taxes. You need to make sure that you have someone who is a tax strategist who is helping you through this process. Number three is they ignore the expense side of the equation entirely. So in business, every smart operator knows that profit is revenue minus costs. But if you ignore the expense side of the equation and you overspend in your own lifestyle, you need to make sure that you're not doing that.

45:52They take on lifestyle debt like we've been talking about and they undervalue passive income streams and all of these are really, really important. So the couple of things that you need to do is one, track your net worth. Two, track your savings rate. So your savings rate is a very important metric to understand when it comes to how much wealth you're actually building. 20 % is the minimum. If you're a high earner, I really want you at 25 % to 30%. And this is the area where you need to know exactly what that number is. If you don't know what that number is, start tracking it down. You want to optimize, optimize in these specific areas, your net worth and your savings rate.

46:24Those two, you need to know exactly what it is so that you can take those dollars and put them towards long-term investments. And then your passive income percentage could be another thing that you track if you are a really high earner and you're investing in different passive income assets and you're investing in a bunch of different passive income? Because really, your savings rate is the most powerful variable, especially for you high earners, making sure that you get it into income producing assets. That's what I really want you to do. Number nine is a lot of smart people are surrounded by other high income earners.

46:53So there are a lot of different studies you may have heard of keeping up with the Joneses, where people are trying to keep up with their neighbors or trying to keep up with the people that are around them. So smart, intelligent people run into a lot of different comparison pressures. So number one is neighborhood selection. So when income rises, people move into neighborhoods where their peers live. And when you move into these fancy neighborhoods, maybe some folks have a high disposable income. And so they spend a lot in different areas and you feel as though you need to keep up with them. Or maybe you go to a private school.

47:22Well, that is going to be a lot more high earners in that private school and they are going to have fancier cars. They're going to have the fancier houses. They're going to be spending more there. Professional social events. If you're a physician or an attorney and you go to those social events, you will see the restaurants your colleague suggests, the golf courses they choose, the conferences they attend. All of these can be a lot more expensive. There's the vacation comparison. Maybe your friend just went to Barbados and you feel as though you need to go on a fancy vacation with your family instead of just going up to your mom and dad's house up in Georgia.

47:49That is something where you need to recognize. And then there's the home renovation pressure. For the most part, home renovations are areas where you don't get that back. And so because of this, you need to recognize that that pressure is going to be part of the keeping up with the Joneses that you want to avoid as much possible. And the number 10, the last one is they use complexity as a defense mechanism. So personal finance is actually not that complicated. And when you can figure out the simple steps that you need in order to make sure that you get ahead, it really is this. It is spend less than you make, invest the difference, and avoid debt.

48:20If you do those three things, you will be way further ahead than everyone else. But instead, a lot of people are self-handicapping themselves. They are taking on more significant complexity than they need to. They're listening to advisors who are telling them to do all these complex things. They're listening to CPAs who are telling them to do all these complex things. But instead, in reality, there are simple steps that you can take in order to get ahead with your finances. And if you fall into the trap, I need to understand everything before I invest, or my financial situation is too unique for just standard advice, or I'm building a comprehensive financial plan.

48:55If you are using words like that to make sure that you are taking the right steps towards your financial situation, then you need to recognize that and simplify. Simplify, simplify, simplify. So for every single one of you out there who's trying to overcomplicate your situation, I want you to try to find the simplest path first and write down exactly what you're trying to do and then delete everything that you can that really is not necessary. And that's the way to find the simple path to will. That is the way to get there without having to overthink. And so these are the 10 reasons that smart people are bad with money.

49:28And if you are someone out there who is continuously doing this, continuously thinking that you can outsmart the market, continuously thinking that you are too good to do the basics, then I highly encourage you to reevaluate your thinking and get started today. Taking action today instead of overanalyzing is going to be the most impactful thing you do with your entire life. Now, if you want the exact step-by-step system, the 25-step system that we have, we have something called Master Money Academy, where we can help you reduce your stress and anxiety around money and give you the exact steps that you need in order to think about building wealth.

50:03And so I highly encourage each and every single one of you to join Master Money Academy. For podcast listeners, we have a seven-day free trial down below. and anytime you get stuck, you get to ask me live on the calls every single week. Listen, thank you so much for being here. We truly appreciate each and every single one of you and we will see you on the next episode.