How to Know When You Have Enough, Build a Safety Net, and Spend Money Well — ft. Morgan Housel

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1:47Welcome to Prop G on Money, a special series where we're joined by Morgan Housel, bestselling author of The Psychology of Money, along with his latest The Art of Spending Money. This is the second and final episode where we're taking your questions on all things money, saving, spending, and everything in between. Anyways, if you'd like to submit a question for next time, you can send a voice recording to officehoursofproptomedia.com. Again, that's officehoursofproptomedia.com. Or post your question on the Scott Galloway subreddit. Morgan, you ready to chop some wood here? Let's do it. Our first question comes from user DeliciousCoffee993 on Reddit.

2:20They say, at what liquid net worth should people consider slowing down and enjoy time over continuing to build via paychecks? Unless you start your own business, it is unlikely most people will hit Scott's level of wealth. So at what point should people consider it enough? Or put another way, at what point is another$1 million just not worth the loss of time with kids, parents, etc.? The difficulty of this question is how easy it is to tell yourself, once I have$1 million, that will feel like it's enough. or 5 million or 10 million, whatever it might be. And you genuinely tell yourself that. You genuinely believe it, that once you have that much, then you won't feel any desire for more.

2:57And if you are like 99.9 % of people, if you're fortunate enough to get to 1 million, 5 million, 10 million, whatever it is, then the right amount is gonna be roughly double that. There's so much evidence from the research that shows that no matter how much money you have or how much money you earn, the amount that you think is enough is double of what you have right now. People who have$100 say the right amount is$200. People who have 100 million say the right amount is$200 million. It tends to be that. It's always just this perpetual moving of the goalpost to do that. Now, there is a thing where if you are satisfied with your relationships, you're satisfied with the work that you do, you have a good marriage, your kids admire you, the city and the town that you live in really admires you, then your desire to say, I need so much more tends to be much less than it otherwise would be.

3:49So I think if you are very confident in other aspects of your life, then your desire to associate your net worth with your self-worth really diminishes. And so I guess to answer the question, there is no right amount for that. I know people who have lived very good, amazing lives pretty much in some form of retirement with half a million dollars. There are also decabillionaires who wake up every single morning saying it's not enough. It is not enough. This is the classic Chris Rock joke where he said, if Bill Gates woke up with Oprah's money, he'd jump out the window. And so there's always a level at which it's never going to feel like it's enough.

4:22Understanding your propensity to move the goalpost and your desire to find value in your life outside of your net worth is one of the most important topics with money. Yeah, I think about this a lot. So you say something, Morgan, that really resonated with me, and that is rich is the stuff you see, wealth are the things you don't see, right? The real wealth is a peace of mind. You know you're bulletproof. You don't need a flashy car. And so I used to think of, I no longer say this is what rich is. I say this is what wealth is. And that is figure out how much money what your burn is. Say you need$100 ,000 to live your life.

5:01What wealth is, is you don't have to do anything. You don't have to get up. Whatever you do, you choose to do for money because your passive income is 100 grand a year. And generally speaking, a general benchmark is to say, okay, if that number is 100 ,000 times it by 25, that assumes that 4 % post-tax return, you're pretty bulletproof, which means that once you've managed to save$2.5 million, which isn't easy, you're done or you're technically wealthy. So the question then becomes, well, what is that number? And for me, that number has gone up a hundredfold. And I'm not exaggerating. I thought when I was in college, I thought if I ever have a base of a million bucks of liquid net worth, I'm kind of done.

5:43And that is I'll be working just to work. Then as I got older and I thought about a family and a house, it went to 10 million. And then when I got to 10 million, I decided I'd really like to have a plane. I'd really like to give money away. I'd really like to feel like I'm relevant. And unfortunately, and I hate to say this at my age, relevance for me is still strongly attached not only to my professional relevance, but how much money I make. And I can't snap out of it. And I've said openly, I think everyone has certain addictions. And that is, what is an addiction? Something you engage in despite it having negative ramifications in other parts of your life.

6:24I'm addicted to the affirmation of others. If someone comes on on YouTube and says, Morgan's amazing, but Scott's an awful human being, it will bum me out and maybe take me away from my kids for a few minutes. That's an addiction. It shouldn't matter. I'm also addicted to money. I got lucky again, and I'm done. Theoretically, I'm done. If I have a bad day in the market, it upsets me, and it makes no difference in my life. So my number went up a hundredfold. When I hit, finally did hit that number, I have consciously tried to have a practice of saying, okay, get off the hamster wheel. Money is the ink in your pen.

7:04It can write new chapters. It can make certain chapters burn brighter, but it's not who you are. What is your purpose? Like, what are you trying to achieve here? Because my whole life, my only purpose was economic security. My mom got very sick and we didn't have money. And when I had kids, as I told you I wasn't in the place I wanted to be. So it is just hardwired into me. And it's something I've always had. I've never been able to fully snap out of it. But I do think what Morgan's talking about, evaluate your relationships, evaluate, you know, evaluate your health. And once you have a point where you know you can survive an economic shock, take your kids on a vacation, have health care, you know, they say that that is around, they used to say that was 75 ,000 a year.

7:46I think that's bullshit. I don't think anyone can be economically stress-free at 75. I think that's more like 200 or 300 grand a year. And I don't know if you've read any Daniel Kahneman, but his research was once you get to that certain point, incremental money is no happiness, which says to me, and I want to put this to you, this goes back to public policy. I don't, I believe that. So for me, pick a big number, two,$3 million a year. I don't understand why we wouldn't have tax rates of 60, 70, or 80 % because it's not making anyone any happier. Whereas if you can redistribute that money to universal, you know, childcare or healthcare subsidies or schools or afterschool programs, things that really make a difference in people's lives.

8:31And it's not going to make any difference in uber wealthy households. If they have, if they make 4 million a year instead of four and a half, why wouldn't we have incredibly aggressive incremental tax rates above a certain amount. I realize this is a bit of an off-ramp here, a diversion, but I'm just curious to get your thoughts on this, Morgan. Yeah, I mean, that's effectively what we did in the 1950s. In some aspects, it did work out. In many aspects, it didn't. One little quirk on this that I think is important is what some of the research shows, is that if you are already a sad, depressed, glum person, the evidence is that earning more money— It's not going to change.

9:08It's not going to do anything for you. And you can put a face on that and really imagine someone who is earning tons of money. Their income is doubling every year. They're promoted. They get huge bonuses. They're making millions of dollars a year. But their marriage is shot. Their kids don't talk to them. They're overweight. They smoke. They don't sleep at night. They have a dirty conscience. Like, go on down the list. Of course, that person's not happy. But if you are starting out as a happy, content, smiling person, then earning more money is like an amazing thing. Like it leverages who you are in either direction.

9:40And that's what's really important. But it's too easy to tell yourself, if only I earn twice as much money, then these problems would go away. If only I earn more money, then my spouse would love me more. My kids would talk to me more. I would be in better health. I think around the edges that actually can be true to some extent, but dramatically less than we assume that it will be. Let's go on to question two. Question number two comes from user To Put It Frankly on Reddit. They say, is it OK to hold a higher cash balance? For example, 35 % of total portfolio at 4 % yield just to help me sleep at night.

10:12I'm 31 years old, but I worry with all the layoffs in the tech scene, I may be unemployed for one to two years and want to have that cash for peace of mind, even though I should probably invest it. Morgan? Not only is it okay, it's what I do. And I'm not recommending necessarily that everybody does that. But the biggest risk in your personal life and throughout the economy are things that you are not talking about and nobody sees coming. The biggest economic stories in the last 25 years were 9-11, Lehman Brothers going bankrupt, and COVID. And the common denominator of all three of those is nobody saw them coming until the moment that they happened.

10:47And same with Pearl Harbor, same with like all the big events are the ones that are unforeseeable. And in your personal life, your individual life, nobody gets married thinking they're gonna be divorced. No 25-year-old thinks they're gonna die of cancer in the next 10 years. Go on down that list. The biggest risk in your personal life are things that you are not thinking about today. Because of that, the only thing that you can really do financially to guard yourself and protect yourself in that world is have a level of savings that seems like it's too much. Like if you are only saving for the events that you can foresee, then by definition, you're not prepared for the surprise.

11:18And the surprise is always the biggest risk. And so when I save money, or if a financial advisor were to look at my asset allocation, they might say, what are you saving for? You saving for a house? You saving for a new car? And my answer would always be like, no, I'm saving for a world in which the biggest risk is always what I don't see coming. I have no idea what the next COVID is going to be, what the next 9-11 is going to be. And if I only have enough cash for the risks that I can foresee in front of me, I'm going to be caught off guard. And so the other thing about that is that if you have a higher cash balance, it gives you a fighting chance to keep invested in the stocks that you own.

11:55The only thing that's going to matter for the investments that you own over the course of your life is whether you can remain invested when shit gets real, when shit hits the fan. That's all that matters. And if having 35 % cash means that when the stock market falls 50%, you're able to leave it alone because it's not that big a deal and you have this cash, this liquid savings, then actually the return on that cash is much, much higher than the 3 % you're getting in your savings account. If it prevents you from selling and having this unbelievable financial scar from dumping your stocks at the bottom, then the actual return, the implied return, it's a hidden return that you earned on your cash, might be 10 % or 20%.

12:31And so that hidden return on cash from letting you sleep at night, from being there when you need it, and preventing you from dumping your stocks at the worst possible time can be enormous. Yeah, I love that. Money helps you do wonderful things, but money isn't just about the additional things it gets you. It's about freeing you from an absence of things, an absence of stress that you can't afford health care. It's about taking things away. It's about knowing that if someone in your life, God forbid, is diagnosed with lung cancer, it doesn't mean you're going to go bankrupt. So it removes certain stressors.

13:08And everybody, at the end of the day, has a different level of emotional susceptibility to stress. Now, theoretically, people will say, always be invested in the market, just diversify, that that's usually the way to go. There's also people that say, always have six months of kind of emergency funding. Because to your point, Morgan, what you never want to be. Well, one, you don't ever want to be stressed, but two, you never want to be a forced seller. Because if you're a forced seller, I can guarantee you, basically, when you get divorced, you're a forced seller. And that is, you've got to sell a house, you've got to sell stocks, you've got to divide stuff.

13:47And I can guarantee you, I don't care when you get divorced, it will be at exactly the wrong moment for the assets you have. the forced seller, if you're a forced seller, it usually means other people are forced sellers and buyers are swooping in with, they smell fear. They're swooping in with ridiculous below market offers. So the great financial recession where, you know, the markets got cut in half or more, they ripped back what in 14 months. So you want to talk about emotional stress. If you had a burn and not enough savings to cover your burn and you were a forced seller of stocks, and then you saw them rip back, imagine the anxiety you registered then.

14:28So I 100 % agree with Morgan. You don't wanna be a forced seller. A lot of it is kind of up to you around where you get emotional comfort. What I do is I don't have 35 % in cash. What I have tried to do is make myself somewhat bulletproof by a massive amount of diversification. That is, I don't have 35 % in cash. What I have is no more other than real estate where I'm overinvested. But outside of that, I never have more than three or four percent of my net worth in any one thing. Because now it's everything's sort of correlated now, but it's unlikely. You know, it's unlikely I'm an investor in a Chinese fast fashion company, in Japanese bonds, and in a European aerospace company and in tech stocks.

15:13It's unlikely they're all going to go down together. They might. I also own some Bitcoin, which I never thought I would own. I also own some pound sterling in case the dollar crashes. Because to be clear, cash in the U.S. dollar right now is riskier than it's ever been. It itself is a decision. It's an investment decision. So we have a traditional sort of comfort, false cold comfort, that if I have savings in dollars, I'm fine. Well, there's a scenario where those dollars are not worth nearly as much. So I get comfort, and everyone has to find their own levels of comfort, and there's best practices, but I get comfort, the same comfort that, to put it frankly, on Reddit gets, I get that comfort from massive diversification.

16:04Any final thoughts here, Morgan? No, I think that's good. I mean, all the stocks that I own is basically mostly the Vanguard Total Stock Market Index. It's 6 ,000 companies that's owned in there. You're right that usually in the heat of a crisis, most correlations go to one. And it doesn't matter whether you own small caps, large caps, techs, banking, it doesn't matter. They're all going down indiscriminately. That tends to be the case. And so you can still kind of fool yourself even with big diversification, particularly for short periods of time when everyone's panicking. But to that point, I love this definition from Napoleon.

16:38He said, the military genius is the man who can do the average thing when everyone else is losing his mind. And I think it's the exact same in investing and finance. If you can merely be average when everyone else is panicking, you are top 1%. And so it's less too about your financial diversification and more about the behaviors that you can maintain once or twice per decade when everyone's losing their mind. I love that. We'll be right back after a quick break.

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20:31Welcome back onto our final question. User Bowtender OC says, a big fan of Morgan. I'd love to hear some detailed personal spending from him. He's discussed his approach and philosophy, but I'm curious about specifics like where does he skimp and where does he splurge? Is he financially independent? Does he put money in plans for his kid's future education, private or public schools? Does he fly first class or private ever? Are his friends normal or wealthy? And what about you, Scott? I could just share my screen and pull up my credit card statement or something. I don't know. No, look, my wife and I have been together since we were very young.

21:09So we became adults together. And when we met, we didn't have any money. So we've gone through this together, which has been a good experience. And our financial situation changed very dramatically in the last five years when we had two kids and we had already been married for 10 years. As a big saver, and I still am a very big saver, I don't view it as saving money. I view it as purchasing independence. And so what is the biggest expense that I have? It's independence. And that feels like I'm cheating on that question. I get it. But it's the most valuable thing in the world to me to wake up every morning and be like, I can do whatever I want.

21:41I can do whatever the heck I want today. And that's my prized possession by far. People have different personalities on that. But to me, nothing has ever meant more than that. We do spend on actually spending stuff quite a bit more than we did five years ago. We bought a new house a year ago. We've got to take awesome trips. The truth is we buy anything we want. There's no budget. The truth too is that that was true 15 years ago when we made 99 % less money. And so it's always kind of been like that. What's important to me, always been important, but very important now that we make a little bit more money is that I'm not beholden to the money, that the money is not commanding my personality and that I don't say, oh, because we make this much money, we have to drive this car and I have to own this watch and I have to dress this way, even if I don't want to.

22:28That is when you are just a victim. you're beholden to what money's telling you to do. And so I want to use it as a tool to become the best version of myself, but I don't want it to define who I am. And so we travel well, we eat well. I love hanging out with my friends. I have one of my best friends in California. I've known him for a quarter of a century. He's an awesome guy. I love paying for his first class ticket to fly up and see me. And then we go out to fancy restaurants. Nothing makes me happier than doing that for him. It's the coolest thing in the world. And so I want to use money as a tool to do things like that rather than being beholden to what I'm supposed to be because I earn X dollars per year.

23:07Yeah, we're of the same mind here. I'm older than you. How old are you, Morgan? 41. So you're way ahead of where I was at your age. I'm 60. I got very lucky. There's nothing like$7 trillion in stimulus pumped into the market to keep people who already have assets wealthy. And so I basically, vis-a-vis our government, been using the next generation's credit card to see my assets, which I were able to acquire. I'm not humble. I'm a fucking monster. I'm talented. I work hard, but it's better to be lucky than good. And since 2008, my net worth has absolutely exploded because what do you know? We've been in the biggest bull market in the history of any economy anywhere for 17 years.

23:52And I'm on the back nine. And that is, I would say the difference between the U.S. and Europe is the U.S. is the best place to make money. Europe's the best place to spend it. I'm in Europe for a reason. I'm in the part of my life where I've decided I want to spend a lot of money. I think in a capitalist society, I can't stand it when people don't know how to spend their money. I know a lot of people, and you just wrote a book on this, who are really, really wealthy. And they have tacky homes and they don't take nice vacations and they worry about money. I'm like, what's it? I'm of the mind you don't really own money, you rent it.

24:25But if you rent it out, you can do just amazing shit with it. And so when I kind of hit my number, which is, and this is a story of extreme privilege, very lucky and very talented and born at the right place at the right time with the right skin color and the right outdoor plumbing, disproportionate advantages that created a man. I want to do my land acknowledgement, but I spend a shit ton of money. And I spend probably 50 % of it on what I'll call experiences. And that is I do amazing, amazing vacations with friends and family and plan them out and live in beautiful homes. And I just don't let, I love what you said about your friend.