How to Build Wealth on Less Than $60K a Year + Investing for Retirement Income (ft. Nick Maggiulli)

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1:41Scott Galloway:Welcome to PropGM Personal Finance, a special episode where we're joined by Nick Majuli, the Chief Operating Officer for Ritholtz Wealth Management and author of the blog of Dollars and Data. Together, we'll discuss how to build wealth at every stage of life, from saving on a modest income to investing for retirement to navigating today's housing market. Nick, ready to get into it? Yeah, let's do it. All right, question number one. Our first question comes from a listener who texted the Office Hours hotline. Everyone talks about how to be rich, but no one talks about how to be poor. How would you save for retirement if making under$60 ,000 a year?

2:14Scott Galloway:How would you structure your debt payments like student loans, credit, and mortgage? Nick, thoughts? I think the first thing you got to do is make sure you're making the minimum payments. I think you don't make those and you start getting late fees, all those types of things. So as long as your minimum payments are taken care of, you have your emergency fund. So the first two things after that, you rank order everything from highest to lowest return, or you can say highest interest rate to lowest interest rate. And then every extra dollar after your minimum payment, you then put into the highest return thing.

2:46So credit cards, 18 to 24 % is where you're getting charged on that, right? Every dollar you pay off your credit card debt, you're basically earning an 18 to 24 % guaranteed return. There's no place you're going to get a guaranteed return of 18 to 24%, right? So you're going to attack your credit cards first, then you're probably going to go down the line, and you're going to find, oh, my student loans are 8%. My mortgage is, I don't know, 7%, six and a half right now, right? In the markets today. So it's like you start going down the list, you pay off your credit card debt, then you attack your student loans, then you attack your mortgage.

3:19In terms of retirement savings, I say conservatively a diversified portfolio should get 5 % a year. So that's it. Of the ones listed, that's the bottom of the list, right? So if I were going through, I would be attacking all the debt stuff. And then I do the retirement savings at the end. So that's how I look at it is like return per dollar invested. And I think you have to attack the higher interest rate things first before you start going down the chain.

3:42Scott Galloway:Yeah, that just makes a lot of sense. And the only couple of wrinkles I would add is also see if there's a way to elegantly refinance some of that debt to lower interest rates, whether it's some institutions like SoFi, if you go to a quote unquote, or went to an elite institution, will refinance your student debt at a lower interest rate. Are the ways to transfer your credit card balance and lower interest rates, refire mortgage, like how do you bring your interest rate costs down? But Nick's absolutely right that the best investment is getting rid of debt that's at a rate that you probably can't match in the markets.

4:18Scott Galloway:The only thing I would add is once you get your debt under control, there is some good debt. I would argue that a decent mortgage, that's good debt. It's tax deductible. It's fairly low interest usually. Usually you can do better in the market. but once you get sort of manageable debt and it's mostly just your mortgage payment and maybe an auto loan if it's decent interest rate try and figure out a way to have automated savings or automated investing that's tax advantaged almost every state and country has some sort of tax advantage savings or investment vehicle you can take advantage of and the key is never to see it or never touch it and that is have it taken right out of your paycheck such that you're not tempted like 98 % of it to spend or increase your standard of living to whatever it is that comes through your hands.

5:05Scott Galloway:But on the whole, I agree that the lesson, the key lesson here, what Nick said is attack your debt. That's the best investment you can make. All right. Question number two. Hi, Scott. My name is Scott Tu. I'm calling from El Paso, Texas. My wife and I are in our early 60s. We run a micro small business out of our house. We own our house. Our business has almost zero overhead and a small recurring revenue stream that pays our bills and a bit more. And we have about 1 million liquid net worth in addition to our house. For quite some time now, we felt that this market is overvalued. At our age and with our concerns about the market, we're wondering how we might deploy a chunk of our net worth to produce more stable, regular recurring income, plus some reliable appreciation.

6:00Thank you for what you do, Scott. You're a good example for us all. You do well and you do good. I would like to follow your lead. Thank you, Scott. Thank you.

6:09Scott Galloway:Nick, thoughts? I think they're in a great situation. The fact that they have a business with, as I said, low overhead that basically covers their expenses. all the rest of this is either upside or just planning for the future when they either sell that business or wind it down, etc. I think for them, there's going to be two answers I'm going to give. I'll give the answer I think they want to hear. And then I'm going to give the answer, which I think is the correct answer. So I think the answer they want to hear, they're looking for, what type of investment should I own? I want to own some stable income.

6:36I also want some appreciation. For a lot of retirees, they're going to be looking at dividend stocks or a dividend stock ETF. They're going to be looking at REITs, real estate and investment trusts. those are things that pay out a lot of income. You can also maybe add a little bit of short-term debt in there as well. So those three things in a diversified portfolio of REITs, dividend stocks, and some short-term debt, that's going to do quite well in terms of getting your income, and you'll retain their appreciation through the REITs and the dividend stocks. That's the answer they probably want to hear.

7:05It's not the answer I would actually give. And I think the problem that a lot of retirees have when they look at generating income, they overly obsess on things that actually pay income, right? And I think that the better answer is you could just buy like an overall stock market fund. I understand they're worried about valuations, but let me just walk through this real quick. You can just buy the overall stock market and it's going to appreciate over time. And over the last at least decade or so, the overall stock market has outperformed a dividend fund, even when you include total return, right?

7:36So even though that dividend fund is paying you income and you look, you see those checks coming and you feel good, the market, the stock market, you just put that in an overall index fund, that would have actually gone up more. And then the best part about that is you can just sell it down when you need to make those payments, right? Like when you need the income, you can sell. So from a tax perspective, it's also a lot better just to have it in a fund that just goes up more and you can sell it as if you're creating the income yourself. So I think a lot of things have changed in terms of corporate strategy, in terms of how companies pay out dividends or don't pay out dividends, et cetera.

8:08So as a result of that, I think overly obsessing on income is not necessarily the right choice, especially from a tax perspective. But if you really want to do that, once again, REITs, dividends, stocks, and maybe some short-term debt are the solution here.

8:22Scott Galloway:Yeah, I really like that. So the key piece of information that was revealed in the question is that they're still net savers, and that is they're creating more income than they're spending. And so they don't need income. And when you're in a dividend stock, keep in mind those dividends are being taxed. Whereas when you're in a non-dividend stock, your money is growing tax-deferred. So it should compound at a greater rate. So if you don't need income at this point, you want to take advantage of the fact that one of the greatest wealth creation vehicles or loopholes in history is that stocks compound tax-deferred.

9:01Scott Galloway:They don't spit out the profits every year and say you must take this in the form of dividend, at which point it gets taxed between 23 and, say, 35 percent if you're living in California or New York. So if you don't need the income, you absolutely want to be in stocks that compound tax deferred because they don't lose money out to dividends. Having said that, you're basically coming to the same conclusion a lot of us are, and that is the market is overvalued. Now, nobody knows. Everybody thought the market was valued or overvalued in 97, and they were right if you looked at it at 2000. But by 99, the NASDAQ had tripled.

9:39Scott Galloway:It is very hard to time the market. The one asterisk around all of this is I don't think there's ever been a time where it's more important to understand the power of diversification. And that is people think they're diversified if they just buy low-cost index funds in SPY. But the S &P, because of the concentration of market cap around the Magnificent 10, means that if you're in the S &P, you may feel diversified, but you're not. What I would suggest is you think about diversifying not only by asset class, some bond funds, equity funds, but also geographically. And that is U.S. stocks now comprise over half of total market capitalization globally.

10:21Scott Galloway:And if you add it in debt, it might be 60 or 70 percent. And you do see a cyclical rotation between U.S. and call it the rest of the world. And you want to be prepared if there's a major drawdown in the valuation of U.S. stocks, because if you just think you're diversified by being in U.S. stocks. You're not. You're actually more concentrated than ever before. I would argue you're basically making a giant bet on AI. So one, if you don't need the income, let that money compound tax deferred with stocks that aren't dividend stocks, as Nick suggests. But also at your age, given that you've already built up a nice nest egg, you're looking to probably take some risk off the table.

11:06Scott Galloway:And you do that through diversification, low cost index funds, but think about different asset classes, both equities and fixed income. And what people usually miss is diversified geographically. Any thoughts on that, Nick? No, I completely agree. I think they just need to have a good diversified portfolio for those liquid funds. So that's going to include, as I said, short term debt you're going to want. Yeah, if you want international stocks, you can go into other types of investments as well. If you wanted to get into something like farmland, that's something that produces income. It's obviously very illiquid.

11:38So, you know, getting into one of those like crowdsource platforms, things like that. But there's a lot of different asset classes out there that can produce some income. And I agree, you want to, since you don't need the income now, start planning for that, because you still have at least, let's say, 20 to 30 years ahead of you. And when are you going to wind down that business, thinking through that, how that's going to play out? Because if those aren't covering your expenses anymore, then your actual liquid assets will need to do that. So kind of preparing for that transition is the big thing to look at here.

12:05Scott Galloway:Yeah. And the only, just hearing you speak, the only thing I would add to that is that at some point, like my dad died with about 800 or 900 grand to his name, and he should have spent more of it. And that is my dad was so terminally cheap that, well, having said that, I think he got a lot of joy from asking for his frozen margarita to go. He was just so painfully cheap that I don't think he ever really had a chance to enjoy his money. And then at some point, assume you're going to get a 4 % return on your money, assume that at some stage that 4 % is more than your burn. What I would suggest is you and your wife maybe at some point think about, okay, could we spend a little bit more money on travel, on maybe fixing up our house, on maybe giving a little bit of money away to things we're passionate about or people who could use some help.

13:01Scott Galloway:I think the whole point of being as responsible as you've been and working as hard as you've likely worked is that at some point, you know, money means nothing from zero to 18. It kind of means way too much, sometimes everything, kind of 18 to 70 or 80. And then as you get towards the end of your life, it means nothing again. And I just wouldn't be afraid at some point to think, how could we have a little bit of fun? You know, could we take a really nice cruise? Could we give some money away? Could we, you know, buy a piece of art that we've just always loved? Could we, you know, whatever it might be, take our family for a reunion?

13:41And that is what I sense in your question is that you're very responsible.

13:48Scott Galloway:And I don't want to say people can be responsible to a fault. But keep in mind, money, I believe money is meant to be at some point spent. So just be mindful at some point. You may want to ask yourself, could we have a little bit of fun with some of this money? Yeah, I'd agree with that completely. I think one of the things, and if you actually look at the data on this, it's very surprising because like if you look at people who have, let's say, a 60-40 portfolio, they're following the 4 % rule and you do that for 30 years and you go back through history and you just do that every single year as in a simulation you're more likely to end up with four times your wealth than you are to be below your starting balance so in this case of this couple if they start with the million dollars and they just started using the four percent rule in the 60 40 they're more likely to have four million dollars and you know adjusted for inflation in the future than they are to be below a million after 30 years so i think the spending more is something that we don't talk about enough here okay we'll be right back after a quick break

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18:23Scott Galloway:Welcome back. Question number three. What should the average family with young children be focused on in this economy? My husband and I are in our early 40s with some under 30K savings and two children under two. We moved to a lower cost state to be near family, part-time childcare, and a house in an upscale area we will inherit someday within 10 years. Do we hold off on investing in our future and hunker down through this storm? Thank you so much for what you do. You know, do you want to live in that other house is the big question I would ask. Like, do you want to live there? You know, is that where you guys want to take over at some point?

18:56Or are you happy to like sell that home in the future if you just find a home that you like, right? So I think it's a question of like, It's more of a personal question than a financial question in this case.

19:06Scott Galloway:They're working. They have two kids. They have a start in terms of savings, but not enough to, quite frankly, feel comfortable yet. And they have two children. This isn't a Hallmark Channel advice, but I traded off a lot of time with my kids, and I focused on work because I wanted to figure out a way to make more money than I was spending, which was really difficult living in New York. and they did what ultimately I did and that is they did a geographic arbitrage and I moved to Florida where the school we sent our kids to was 12 or 14 ,000 a year not$58 ,000 a year at First Presbyterian or Avenues.

19:44Scott Galloway:So we did the geographic arbitrage which it sounds like what they've done. At this point, what I would say more than anything is that you and your partner need to get aligned around your approach to earning, saving and the trade-offs around time with family and sacrifice. It's nice to have one person at home. It's also nice to have financial or more financial security of two incomes. I would argue also there's a lot of evidence showing, especially with daughters, they make more money when they see their mom working. And let's be honest, usually when we talk about two incomes, it's mostly the mom going to work, although that is changing a bit.

20:22Scott Galloway:But my advice is that you get alignment with your partner. There is no balance. There's just trade-offs around what are the sacrifices in terms of lifestyle as we do kind of automated savings plans or automated investments that take advantage of maybe the company we work with around matching or state-sponsored tax-advantaged savings plans. But get alignment. You might decide, look, we're not going to have a lot of savings. We're going to live pretty modestly even when our kids are out of the house because we want to spend more time with our kids or at our church or coaching Little League. or that having a certain level of wealth by the time their kids are ready for college or out of college is important.

21:03Scott Galloway:And we're gonna need to make certain sacrifices in terms of lifestyle or maybe spending more time focused on our careers. But I would suggest they do the math and get alignment around goals and the sacrifices and trade-offs required to hit those goals. And again, this isn't, people have a tendency to be very generous and hallmark with other people's money. When my kids were young, I got alignment with my partner and I basically said, I'm going to work all the fucking time and it's going to come at a cost. It's going to put a strain on our relationship. I'm not going to see our kids as much as I would like and probably would be good for them and good for me.

21:41Scott Galloway:I hate to say this, but I put, I don't want to say I put family second, but I put financial security and the optionality and wonderful things that would afford me and my family later in life. I prioritized that and it came at a cost. but I had alignment with my partner. And now I have a tremendous amount of balance because I worked very hard. I got lucky it paid off. And now I can basically do whatever I want, whenever I want. So I go back to, again, the keyword is alignment with your partner and recognition that everything requires trade-offs. And you just need to decide with your partner, what are the trade-offs, where on that spectrum is the right point for you in terms of, again, those trade-offs.