Episode 359 - The Most Controversial Topics in Personal Finance

22:58And when they do this in a model, the long-term financial outcomes are comparable, but real people might decide to spend the cashflow cost difference rather than saving it. Or they might make bad investing decisions, getting in and out of the market at the wrong times, taking the wrong risks, paying huge fees to own segregated funds or mutual funds or trade options or whatever. I think that matters. And people say this all the time. Sure, that might make sense in your model, but nobody's actually going to do that. But the thing is, some people will. I know people who have been very financially successful while renting.

23:27And I know people who have within their friend group been more financially successful as a renter than their friends who decided to buy homes. You can definitely make mistakes after both of those decisions. With the homeowner, the mistake is, yes, you have the forced savings and you don't have to worry about saving and investing the way that the renter does in order to come out even in that model. But man, we all know people, and maybe we are those people who bought homes and promptly poured tens of thousands or more into renovations that maybe enhanced our lifestyle a little bit. But I think a lot of people probably regret some of the money that they spent on their home and, or might find themselves in a position where they have to spend a lot of money on improvements to the house that they get zero enjoyment out of.

24:21My favorite is the new roof. Very expensive. I don't know anybody whose life was enhanced by a new roof, unless you were getting wet before, but you can definitely make the mistakes on both sides. Just like it's easy for people to say, and they're a hundred percent correct. If you're a renter, you have to be a disciplined saver and investor. And very few people are that. But if you're a homeowner, you also have to resist the temptation to unnecessarily pour lots of money unnecessarily into improvements, which as much as we love to convince ourselves that when we spend money on our homes, it increases the value and it can to some limited extent.

24:57But I'm sorry, you spend$50 ,000 on your house, your house is probably not worth$50 ,000 more. Maintains the value. Exactly. The investment illusion is what I've heard of and called that people are more willing to spend overspend on fixing up their house because they expect to get that value back when they eventually sell. They convince themselves that's not really an expense, it's an investment. It's a really good point though, that there's some pretty interesting stories about people who have stripped out all of their home equity over time. In Toronto, for example, where the market's just gone up, up, up, you find people who have very little equity because they've borrowed against their home.

25:30You've got to be disciplined in both cases. That's actually a really good point to end. I think it has to be acknowledged that financially successful renting and owning, as we just talked about, requires discipline and maybe some financial knowledge, but for the right person, renting is a perfectly reasonable way to pay for housing and as is owning. I think there are a lot of cases where owning does make sense. If you really want to stay in one place, it hedges the cost of that, which is important. Then the other interesting one is that the average person who has low financial literacy and doesn't know a whole lot about investing or financial markets and maybe doesn't want to take the time to learn about it, owning a home is probably better for them than trading options or something like that.

26:10Especially their debt averse. If you are more motivated to pay up debt than they are to build equity, use that to your advantage. I do want to say that I'm not currently anti-home ownership. I do own a home, as we've mentioned. I have spent more of my life renting than owning, and I was perfectly happy then too. But I'm pro-rationally assessing housing options, which can mean either renting or owning, depending on the specific circumstances. But I'm reminded every time I create content on this topic that that is a controversial take. but you don't get the same happiness dividend, I think, that I know I do and maybe you do, Dan, in owning a home, Ben.

26:46I would agree with that. And we've talked about it on the podcast before. I'm in an unusual position in that I own a Holton that I used to rent. I know exactly what sort of enjoyment we had because the property is exactly the same. I will say I enjoy owning it more than I did renting it. I just do. And is that, again, a better financial decision? Probably not. Condos in Toronto where I live have not gone up in value in about five years, but it's a place to live that I enjoy. I'm happy with the decision. That's not a spreadsheet decision. The key idea here is the idea that renting is throwing money away is the wrong way to look at it.

27:27Throwing money away is throwing money away. Renting and saving and investing the difference is not throwing money away. Buying a home and throwing money away on senseless improvements and ill-advised renovations is throwing money away. It's independent of the decision of whether you want to rent or buy. I like that. Throwing money away is throwing money away. All right, should we move on to income investing? Oh, we're just getting warmed up. Just getting warmed up. Income investing is at least as controversial as home ownership. Income investors believe that it is prudent to invest in assets that distribute income like dividends, interest, and in the case of covered calls, options, premiums.

28:08Regardless of the source, income investors have a strong preference for income and a belief that income-producing assets are superior to the alternatives. Dividend investing is another one that forms part of people's identities, like I mentioned earlier. The rdividends subreddit, for example, has, I think it's$723 ,000 last time I checked, maybe higher even now. dividend investors, as they call their community members. Then there are countless blogs, social media accounts, other online communities that are dedicated to dividend investing. I think this topic is controversial because despite its popularity as an investment strategy and the dedicated following that it has, it is objectively wrong.

28:46Medigliani and Miller proved in their 1961 paper that in a frictionless market with no taxes, a firm's dividend policy is irrelevant to the valuation of its shares. We know that when a firm pays a dividend, its capital value decreases by the same amount. Shocker. I was laughing at this. I mean, sort of the basic thing that you learn, you know, in finance, when a company announces a dividend, its price falls by roughly the same amount. And it is amazing to me how many people don't appreciate that. They feel like, all right, the share price was$50. It just paid a$1 dividend. So it's going to stay$50.

29:24And I just got like a free$1 as if it's a GIC or a bond that has a face value and then pays you some cash flow. It's a fairly simple, intuitive idea when you explain to people, like imagine a company and they pay out$10 million in dividends. The company now has$10 million less than it had. It must be worth$10 million less. It's such a simple point, but I think it's lost on a lot of people at least early on in their investing education. I think most people get this after a while and they see it in their accounts if you have dividend stocks. But when you talk about investing dividends, when you think about it on that sense, like if the company pays a dollar dividend and then you use that dollar to buy back more shares, it just seems to me like they give you money, you pay tax on it, you give them back what's left, and then you're calling that a gain.

30:18So there has to be something else going on in order for that stock to generate a positive return. And the something else going on is capital gains. It's not dividends. But you can see the appeal with prices being so noisy. Your statements are bouncing up and down all the time, but you get that cash flow. We all get paid whatever frequency every other week or something. Getting that dividend, much like your paycheck, you can see the appeal. Absolutely. When the dividend is paid, the investor is no better or worse off before tax, after having received the dividend. They've changed the characteristics of the asset to include some stock and some cash before tax.

30:56As you mentioned though, if they have to pay tax, it's going to be less. That's an outcome that they could have achieved by selling some stock. I always find this interesting too. People talk about how they love dividends because it's cash flow, but then they have dividend reinvestment plans set up. If I was investing in a company and they said, well, I'm going to pay you a dividend. And I said, well, okay. And then as soon as you pay me the dividend, I'm going to give it back to you. And I'm going to reinvest in more shares. If I was calling the shots, I'd say, you know, how about you just keep the dividend?

31:23Because effectively it's the same. If everybody just reinvested the dividends, it would be the same as if the company never paid the dividend on a pre-tax basis. But of course, on an after-tax basis, you have less. Dividend investing has great intuitive appeal, but if you scratch the surface and you understand some of these subtleties, it actually doesn't have that much appeal. And if you don't actually need to spend the dividends, if you're drawing from your portfolio every month and you find it convenient to have those dividends paid into the account, okay, that's one thing. But if you're just going to reinvest them, wouldn't it be better to just have the company reinvest them and have it grow in share value and defer that capital gain rather than paying you a taxable distribution?

32:08Clearly, the answer is no. From an intuitive perspective, that doesn't have very much appeal, but seems to me like a better outcome for most people. I agree. People like to argue that the theory behind this, the Miller-Medigliani theory, that they make too many assumptions for the theory to actually be useful in the real world. But as you were just talking about, dividends are often tax disadvantaged relative to capital gains. We start introducing frictions and people say, well, no, this theory can't work because of the frictions. But you start introducing the frictions and it makes dividends look worse, not better than what the theory would suggest.

32:41Despite that, many of the most popular personal finance books, in addition to all of the blogs and stuff I mentioned earlier, but a lot of the most popular personal finance books, this comes from James Choi's paper, who was a past guest on this podcast, do recommend income-focused investing, particularly for retirees. Some author, I think he's referring to Robert Kiyosaki's book. He goes as far as claiming that returns from capital gains are actually irrelevant and the cash flow from the investment is the only thing that matters. That's a hot take for you. That's nonsensical because the total return of the investment, the combination of capital gains and income is what matters to investors.

33:19One of the ways this gets confusing is that dividend-focused portfolios do tend to have exposure to stocks with characteristics associated with higher expected returns, like value stocks and stocks with robust profitability, maybe stocks that invest conservatively, that can really muddy the waters in this stuff. Fama and French did show empirically in their 1993 paper, got to be one of the most highly cited papers in finance, common risk factors in the returns on stocks and bonds. They show that portfolios formed on dividend yield have three factor alphas. So they're just using size and relative price here, returns that are unexplained by other factors in the model, that's the alpha, that are statistically indistinguishable from zero.

33:57So that means that in that paper, they built these dividend-focused portfolios, and then they used a technique called regression to ask, were these returns explained by market, beta, company size, and relative price, or are dividends doing something special? They find that there's nothing special. It's fully explained by other factors. It's been a while, but I have rerun those numbers using their five-factor model with a bunch of Ken French's dividend indexes, and you get the exact same thing, statistically insignificant alphas. So the idea here is that dividend stocks are kind of a proxy for value.

34:32There's a big overlap between a value-weighted portfolio and a dividend-weighted portfolio because it's going to exclude a lot of non-dividend paying stocks, which are typically big growthy companies. Yeah, that's exactly it. It's like the old beer ad. If I wanted water, I would have asked for water. If I wanted value in size, I'll ask for value in size and not have it masquerading as a dividend stock. I said earlier that this muddies the waters on the comparison because it can be shown in some cases, and especially over periods where value stocks have done well, that dividend portfolios have outperformed the market, which is true, but dividends are not the cause of the outperformance.

35:13They're this tax inefficient sideshow. And you could have got to the same portfolio by focusing on the underlying characteristics that actually do matter instead of dividends. And you would have better tax efficiency, broader diversification because you're not excluding companies that don't pay dividends or don't pay the high enough dividends or whatever. And that just gives you more reliable long-term outcomes. Even if they're theoretically irrelevant from a financial perspective, I think the psychology of dividends is really powerful. So there's this 2019 paper from Sam Hartzmark, who's also a past guest, The Dividend Disconnect.

35:45They find that investors view dividends as free money and that they account for them separately from capital gains, like you were talking about earlier, Dan. And they call this in the paper, the free dividends fallacy. That effect makes the stock that pays a dividend seem more attractive to a dividend investor than one that does not pay a dividend. And the authors find that dividend investors in their sample are willing to pay a premium for dividend cash flows above and beyond what a rational investor would. That psychological preference, I think, is one of the reasons this topic is so controversial because is people really, really like them.

36:18To play devil's advocate or to try to give some support to the dividend favoring argument, if you're a retiree, for example, and you need$4 ,000 a month in cashflow, and you build a reasonably well-diversified portfolio with an average yield of 4 % on your million dollars or whatever it is, you build a portfolio that generates roughly$4 ,000 a month in cash flow. And you take some comfort in that. An academic would say, well, if one month you get$3 ,000, you can just sell$1 ,000 worth of stocks. And the person would say, well, but I don't want to sell my stock, say, for example, during a period when they're down.

37:00Again, these are not necessarily arguments that will stand up to scrutiny if you break down the math. It's not the worst idea in the world for somebody to build a portfolio that generates a reliable yield. And as we were saying earlier, if one of the behavioral benefits is it makes a person say, I'm not going to sell my stocks when they're down because they're still paying their dividends and that's all I care about. That's at least doing the right thing, if not necessarily for the theoretically correct reason. So it's not just intuitively appealing. It might actually be at least a reasonable, if suboptimal investment strategy for someone who is actually drawing down their portfolio for expenses.

37:46Totally agree. It is important. There's research on the marginal propensity to consume from dividends versus capital gains. People are much more likely to spend from their dividends. To your point, Dan, if someone is retired and living off of their portfolio and needs income and they won't spend from their capital, dividends are incredible. It's not the only way to do it. At PWL, we focus on total returns and then we manufacture the income that clients receive through some combination of dividends and sales, selling some stock. The client receives what feels like a dividend because they just get an amount that shows up in their bank account.

38:26If someone does not have that service or if they're a DIY investor for whatever other reason, yeah, I mean, the dividends are super valuable. To say that they're psychologically appealing and that they have powerful psychology is not to say that they're bad or that psychological motivations to own assets are a bad thing. One common counter argument that I do want to address is that dividends make up a huge portion of total returns. I've seen this argument many times. How can you say that dividends don't matter when you look at the returns? I looked at December 1978 through May 2025, the total cumulative return of the US market is three times higher when reinvested dividends are included than when they are excluded.

39:05The price only return is much smaller than the total return when you include dividends. People will say, well, how can you say that, of course, you should invest in dividends. Look how much higher the logic doesn't make sense in my brain. People will use that to show that dividends are important, but it actually shows that reinvesting dividends is important. Not that dividends are special. It shows that dividends do come out of total return And if you don't reinvest them, you're going to have a much lower return. It's just terrible math. It's a bit like saying, and I'm making numbers up, it's probably in this ballpark, right?

39:36Long-term stocks have returned 5 % due to price appreciation and 3 % due to dividends, something in that ballpark. Well, if it returns 8 % instead of 5%, you're going to have a lot more money at the end. Wow, there's an insight for you. I think the idea is if you got 8 % capital gain and 0 % dividend versus 5 % capital gain plus 3 % dividend, what would your return be at the end of any period? And the answer is in a registered account, the same. In a taxable account, way less with the dividends. It's one of these things that if you don't understand the subtleties and you're just learning about investing and somebody very confidently presents this kind of data to you.

40:19You're just blown away by the power of dividends. And really what you should have been blown away by is the power of compounding. That's all it is. It's nothing to do with dividends or not dividends. It's just growth compounded over time, builds wealth. And what would the company have done with that money that was paid out as dividends anyways? What, they've just flushed it? It doesn't just disappear if they didn't pay the dividends. One would hope not. And this is why we were saying if you could convince all companies that you didn't need dividends, then they could just reinvest in the business.

40:53I think it's worth mentioning too, whether a company pays a dividend or not is irrelevant from the investor's total return standpoint, but it's not irrelevant to the business. We all kind of understand this. I think that if you're a mature business and you don't have a lot of opportunity to grow with your profits, it makes a lot of sense for you to pay that dividend to investors and let them do whatever they want with it. For more growth-oriented expanding companies, they're likely to invest all of those profits into growing the business. And that's why if you go one way or the other and you invest only in dividend-paying stocks or only in non-dividend-paying stocks, you're going to end up with portfolios that are very different from a sector breakdown, right?

41:40You're going to end up with a lot of mature, low-growth companies paying dividends or the opposite. I think we all agree our perspective is hold them both, hold all of them, and then you get much more diversification in that way. If you're indifferent to whether the growth comes in the form of capital gains or dividends, the total market approach is the way to do it. Totally agree. All right. Is that enough for dividends? I think we're probably good there. I think so. I do want to touch on covered calls too, which also fall into the income investing category. They're more of a recent phenomenon, not in terms of their existence, but in terms of their popularity with investors, they've got their own pitfalls, derivative income from selling call options on securities held in the portfolio.

42:24That's what happens in a covered call strategy. You own some stocks, you sell call options on those stocks, collect option premiums. That does create an income stream. Selling the option creates an income stream, which results in a high yield most of the time, which is why investors like them. But that income is mechanically coming at the expense of foregone expected returns. So this great paper, it's got a great title as well. It's a 2024 paper, A Devil's Bargain When Generating Income Undermines Investment Returns. The authors explain that when someone opens a position by selling a call option, the trade has not ended, it has only begun.

42:57The seller has a liability that is not resolved until either the position is liquidated or the option matures and is settled. And so they explained that when covered calls are implemented to deliver higher derivative income, what investors should actually be expecting is lower total returns, higher tax realizations along the path because of the income that's being distributed, and a more negatively skewed return profile. If you asked someone if they would want those characteristics or their opposites, those are unfavorable characteristics. People don't generally want those things. Lower returns, less tax efficiency, and a more negative skewness.

43:35No thanks. What the authors are cautioning is that investors who allocate to these strategies for their income alone without accounting for these other considerations might have made a devil's bargain. That's why they called the paper that. But I do want to mention that a covered call strategy is not necessarily bad because what it does offer is reduced exposure to the equity risk premium plus exposure to something called the volatility risk premium, which in some cases, maybe somebody would want to build that portfolio. But I think the problem and what the authors of this paper are talking about is that investors don't invest in these strategies for that reason.

44:09They don't say, oh, I want a lower beta strategy with access to the volatility risk premium. They say, I want the 11 % yield or whatever it is. So I think that's the problem is just not fully understanding the trade-off and being kind of blinded by the income. I do want to say, as we've talked about, that income investing can have significant psychological merit, which is probably why it persists as a strategy and probably why it's so controversial. There's this mathematical, theoretical way to say, no, this is wrong. And then psychologically, it's so right for so many people and those things conflict so deeply and they're so far apart from each other, it becomes a controversial topic.

44:45Like I mentioned earlier, investors are much more likely to spend from their dividends rather than from their capital. Psychologically, an income portfolio for someone who's drawing down their investments could be really valuable, can help them spend their assets, which is great. Now, I would add that a better result could be achieved by focusing on total returns and systematically selling from a more well-diversified portfolio to fund consumption. But overcoming that psychological preference is easier said than done, especially for someone who's not working with an advisor. But I think to the extent that income investing improves investor behavior, and as long as the investor understands the trade-offs they're making, and I think that part's really important, it's probably fine.

45:25I mean, in some cases, it's probably better than fine. It's probably really valuable. It really comes back to the same idea as the rent versus buy. It's not that one is right, one is wrong. Although I think this one leans a little bit more, I don't want to say wrong, but certainly suboptimal in a way that the renting versus buying doesn't necessarily do. But we need to just be careful that we understand what we're arguing about. I think we all agree if dividend investing turns everybody into a stock picker who only looks at yield and nothing else, of course, it's a terrible decision. But if it turns you into a dedicated buy and hold investor whether you're reinvesting dividends during your accumulation years or drawing down your portfolio when you're retired, it's not a bad thing.

46:12If you trust that strategy more than you do a total return one, and I've had this discussion with a lot of investors and some people kind of say, I understand the trade-off. I don't disagree with you, but I'm still going to be a dividend investor. And I respect that. There are certainly worse investment decisions you could make than buying a bunch of blue chip dividend stocks and holding them for the long term. It is true. All right, let's move on to financial independence, retire early. Our last controversial topic. Light the fire. Save the best for last. This one really does get people fired up.

46:46All these topics do though. I don't know if I can say any one of them is more controversial than the others. Depends who you're talking to, I guess. The original premise of FIRE, of financial independence retire early was that people should aim to earn as much income as they can, even if that means enduring work they don't necessarily enjoy. You hear a lot of people from very high income professions thinking about this and talking about this, saving as much as possible of that hopefully high income, often 50 % or more, even if that means making meaningful lifestyle changes. So you're enduring work you don't necessarily enjoy, saving a whole wackier income, which is not a bad thing inherently.

47:21You're doing those things in order to attain the ability to choose to stop working for money as soon as possible. In principle, that's not terrible. Similar to other controversial topics, there are large online communities of people seeking financial independence. And I think being an adherent to this philosophy does form part of people's identities. I would say in terms of being part of people's identities, this one's probably stronger than the other two. Doesn't mean it's more controversial overall, but in terms of being part of who someone believes they are, I think this is probably one of the strongest ones.

47:52Now, I don't want to straw man fire. I want to be clear up front here that the concept has evolved over time. It really gained widespread popularity around 2011, but today there are a ton of different versions. There's lean fire, which is retiring with enough to fund the bare necessities. Fat fire, which is retiring with a much higher net worth and higher expenses. Coast fire, which is earning enough income to cover your expenses, but not having to save anymore. So you're kind of coasting. Then barista fire, I think is earning enough so that you can work as a barista and the rest of your expenses are covered by your portfolio, I think.

48:26I hope I got that one right. There's probably lots of other variants as well. The fact that there are so many different versions that have evolved from this idea, I think speaks to the fact that fire means different things to different people. There are a lot of different interpretations and applications of these ideas. Now, I think in my opinion, at least, it's kind of easy to argue against the most extreme version of saving 75 % of your income and retiring at 30. But I also don't think that's what most people are actually doing and how they're applying this. And I do think it's very hard to argue against the fundamental lessons that come from this idea.

48:56So I'm going to try and go through both. Now, ultimately, FIRE is self-help ideology. That statement's controversial, as I found out in the rational-minded community. That's what it is. I don't think that there's an argument about that aspect. It is self-help ideology that leverages frugality, often in the extreme, and knowledge of capital markets, which is an important part of FIRE, the financial literacy aspect. It leverages those things to achieve freedom or the feeling of freedom from the need to work much earlier than normal. Different motivations people have to get there, but that's ultimately what it is.

49:30It rejects overconsumption and being on the hedonic treadmill, which are great things to reject. I think those are lessons a lot of people should learn, but it's moral judgments on the value of consumption and work, I think, or what make it controversial. There's this 2021 paper. It's really interesting to read. The Financialization of Anti-Capitalism, the Case of Financial Independence Retire Early. This paper explains that FIRE shares certain elements with the dominant traditions of self-help, which exhort individuals to work upon themselves, take charge of their lives, and become free. Those ideas are not new.

50:03What FIRE has added to it is the financial literacy aspect. That paper quotes this 2005 book written by an academic, Self-Help Inc. Makeover Culture in American Life. That book describes how self-help literature defines its readers as insufficient, as lacking some essential feature of adequacy, and then offers itself as the solution. And then it says, the resulting contagion of insufficiency constitutes the self-improvement industry as both self-perpetuating and self-serving. That all sounds kind of gross, And I'm not saying that FIRE is all of those things in a negative way. However, FIRE has spawned countless bestselling authors, ad-filled blogs, and pay-per-view features from people who supplement their own income by telling others how they too can be financially free.

50:51This is, I think, where it becomes problematic. All of us can agree, look, if this is important to you and whether you want to work until you're 30 and then retire and live off$30 ,000 a year, that's great. Knock yourself out, do whatever makes you happy. And I mean that honestly. Where it becomes a big problem, I think, is when people sort of present their own lifestyle as something that you can learn from and copy. And what they're presenting is dishonest. because this is where I think a lot of people will present themselves as, look at me, I retired early. And it's like, you didn't retire early.

51:31You are now an entrepreneur. And maybe you have created, whether it's a blog or a YouTube channel, or you sell books, or you do something that earns you probably quite a bit of money. That's not retirement. Good on you. You're obviously a very good business person, but don't present that to people as something that they can also do because you did it. That's just dishonest and misleading to people. And it may take them some time and some investment in both time and money before they figure out that what they were modeling their lifestyle on is just simply dishonest. I take issue of that too. And people in those communities take issue with me taking issue with it, which is interesting.

52:13The idea of retirement is also an interesting piece of this. I think that the FI community, as they refer to themselves, has really tried to get away from the RE part. I think that's one of the straw man concerns, is that people will just say, well, no, nobody actually wants to retire. We just wanted to have enough money to be financially independent if we wanted to be. So like normal financial planning, saving money, spending less than you earn. It's hard to argue with that premise. It's just a matter of how it's presented to people. I think you have to disown the term fire if that's your goal, right?

52:46That you're saying, well, I have no interest in retiring early. I just want to be financially independent so I can make what was my side hustle, my full-time job. Great. That's amazing. Great financial goal, not retirement. Call it what it is. Is it even financial independence though? Yeah. I mean, it depends. If someone saves up enough money to live at a subsistence level, but then has to do other work or chooses to do other work to supplement their income, are they financially independent or are they just putting a title on having some savings? That's a good point. I don't know what it is about this topic that just bugs me.

53:20I'm trying to be impartial. But think back to the interview we had, Ben, with Scott Rickins and the movie that came out. Remember that him and his wife went through the decision from a value standpoint of a lot of the things they spent money on. They realized that having, I think it was a BMW SUV, didn't give them the pleasures. They went down a much more modest vehicle. And these choices based on values, they moved from Southern California to somewhere upper Northeast, I believe, and their cost dropped dramatically. And they were no less happy. We need to kind of do a follow-up perhaps on that and see where they are now.

53:51But they took that values lens and went through their spending and realized they were just spending because the crowd they were in and where they were living and working, that's what the people spend money on. They're like, hold on a second. This is not necessarily who we are and where we want to bring up our daughter in this environment of consumption. There's nothing wrong with that. Totally. Scott's a great example where this became a really important concept for him and he made it a source of income, which is great for him. And he's probably helping other people, but we could go and pay 10 US dollars to watch his movie, which is great.

54:23That's not a bad thing, but I don't know. There's just something about telling other people how they can stop working by telling people how you did the same thing while making income off of doing it that just doesn't sit right with me. I get it. I don't want that whole dialogue that we just had to come across negatively, but it kind of is what it is. It's a form of self-help that people are making money off of. If it's helping other people, that's great. Self-help is not a bad thing. If it helps people feel better about their lives and make better decisions and better values, judgments about how they spend their money, that's great.

54:52Now, what does make FIRE stand out from other strands of self-help is that it emphasizes a certain form of financial literacy and the use of financial markets through low-cost index funds to achieve this ultimate goal of freedom, freedom from necessity, freedom from the need to work. Now, I say a certain type of or form of financial literacy because it focuses heavily on the 4 % rule, which as we've talked about ad nauseum is questionable. It focuses largely and typically on investing in US stocks, which are two things that are problematic maybe I think fire came of age over a period of time where the US stock market has performed incredibly well.

55:31I would even maybe venture to say unsustainably well. I hope a lot of people don't have a rude awakening at some point if that performance doesn't continue the way that it has. Scott Rickins is another interesting example of this. By its nature, fire implies that left to their own devices without fire and without the evangelizing of the fire concepts that a lot of people do, that people are going to overconsume and they're going to waste their lives working miserable jobs they don't enjoy. And FIRE offers the promise of this simple mathematical 4 % rule solution to freedom. I do want to mention that FIRE is not anti-work.

56:05We talked about the retirement piece, Dan. It promotes autonomy, not retirement, but autonomy, which is the freedom of the need to work for money. And that freedom is minimized by unnecessary consumption and anything else that contributes to having to work for money. Debt is another one. If you have debt, If you spend too much money, you need to keep working. And fire wants to get away from that. Those are powerful ideas. I think that aspect is really useful. Connecting your spending to your values, like we talked about with Scott Rickins, is a very worthwhile exercise for anyone to do. Everyone should do that.

56:38Overconsumption is probably not going to bring you lasting joy to yourself and your family. And it comes at the expense of needing to work longer to be financially independent. Spending less than you make, that's always a good idea. certain types of fire, take that maybe to an extreme, but it's not bad information for people to consider. I think being in a financial position to choose the work that you want to do, that is also incredible. The problem, I think, is that a lot of spending, even on things that are not necessities and even on things that are luxuries, and some but not all people who practice the fire concepts might say are a waste, some of that spending can be perfectly fine.

57:16It can be valuable and it can create great experiences for your family. That doesn't mean over-consuming, it doesn't mean buying material things, but I think the focus on minimizing spending can be harmful. The other thing is that work is an important part of human happiness. You go through the PERMA model of well-being, it's positive emotion, enjoying what you're doing minute to minute and being grateful for what you have. You don't really need work for that, I guess. Engagement, finding states of flow and being fully immersed in an activity or task. Positive relationships, you can get that outside of work, but I think you can also get it within work.

57:49Meaning, finding purpose beyond yourself through work hobbies or other stuff like spiritual beliefs. And accomplishment, setting and achieving goals that provide a sense of accomplishment and mastery. A lot of that is stuff that, yeah, you can get it without working, but work is a really good way to get a lot of it. And again, fire is not necessarily anti-work, but I think to the extent that it requires extreme frugality, which again is something that people will argue with, that it doesn't require extreme frugality because there are all these different types of fire. But at the extreme, if it requires that and enjoying unenjoyable but high paying work so that you can save and reach your FI number as soon as possible, I think those things can be problematic as opposed to finding work that you do enjoy or building your professional skills so that you can find other work in the future that you enjoy.

58:37Another issue is that while past research has shown that people don't need much money to be happy, more recent research actually disagrees. There's 2010 research from Kahneman and co-authors that suggested a happiness plateau at around 75 ,000 US dollars. That was 2010. So if we brought that forward, adjusted for inflation, it'd be a higher number today. That research used a measure of happiness that was later deemed by Kahneman and the co-authors of this new paper to be insufficient to draw conclusions from. It was based on asking study participants to recall if they had smiled or laughed a lot the previous day.

59:10That plateau after$75 ,000 of income came from that question. Now, subsequent research, a 2023 paper with Kahneman as a co-author, used a more continuous measure of happiness. It had an app on people's smartphones and it would ask them throughout the day how they were feeling. That research found that happiness does increase linearly past$75 ,000 and all the way up to$500 ,000 of income. The reason that they find in the paper is that because as people earn more money, they feel more in control of their lives. The example that one of the co-authors gives in an interview that I watched is that people with higher incomes can choose to buy organic raspberries instead of dried pasta.

59:49Again, that's just the example the author gave. They also have more financial resources to do things like change jobs if they don't like their job. That starts to sound like the same things you get from fire. Just an interesting note here is that income above$100 ,000 in the study did not have the same linear effect of increasing happiness for the least happy people in the study. I think that's how they tied this result to the 2010 paper is that the 2010 paper was more connected to unhappiness than happiness. And so that's why they found the plateau. So they replicate that finding with the least happy people in the study, but it doesn't replicate anywhere else.

1:00:27in the happiest people in this sample, the effect of increasing income actually has a kink in it where it starts to become more extreme. People start to get even happier after$100 ,000 if they were already the happiest people in the sample. It's a really interesting finding, but it sort of tracks. If you think about people who are truly miserable are probably not miserable for financial reasons. And so adding more income is unlikely to improve their outlook. But if you're a person who has a real thirst for life and you have good relationships with friends and family, then having more money can really help you enjoy more experiences like that with the people that love doing the things that you love to do.

1:01:09I was always very skeptical of that, this idea that once you hit$75 ,000, it doesn't matter. Now, again, I never really understood that. Is that pre-tax income for one person or is it household? It's a meaningful difference, but any of us who have been in a position where we used to make that much money and then make more can probably say, yeah, it's nice to make more money but yes, it levels off at some point. I don't know where that number is but it's interesting that they said it's somewhere around 500. It's a big number. It is increasing with log income is an important point. So it's the amount that your income has to increase to get that linear increase in happiness increases with your amount of income.

1:01:51The way the author described it is that it's like, Adding$10 ,000 to your income doesn't have a linear effect, but adding 10 % to your income does have a linear effect. Yeah, that makes sense. It really looks to me like FIRE, achieving financial independence slash retire early, and just drop that part off, achieving FI. And earning more income are two ways to get to a similar place. Neither one is going to solve unhappiness. Both can make people happier. Achieving a state where you have the financial flexibility to choose the work that you enjoy. Keeping in mind that some form of work is probably a good thing for most people to have in their lives, even if it doesn't pay that much.

1:02:28If you can put yourself in a position to do work that you want to do, that's great. If that work is having a positive impact on other people, you're probably going to feel even better. I think that's a great goal to have, but so is finding work that's rewarding both financially and psychologically. In either case, FIRE or earning more income, however you want to approach it, knowing what's important to you and being intentional about your objectives, I think is really important. I think to the extent that FIRE helps people get there, I can see it as being very useful. But I can also see the focus on minimizing spending, the focus on an FI number as an inflection point in your life, because we know that post-goal attainment pleasure tends to drop off pretty quickly.

1:03:10It might feel really good as you progress toward a goal, but once you achieve it, people tend to be quite disappointed with how they feel. And I do worry that settling for high paying work that people really don't enjoy with the intention of at some point exiting the capitalist system altogether, I can see those combination of things being harmful in some cases. That sounds like a real recipe for unhappiness to me, to devote all of your energy in working very hard at a job that you despise just because it pays well and you see some point where you can exit that job and use the money you earn to do what you really enjoy.

1:03:49I mean, more than the other two issues that we've talked about today, this one is all over the map. There's no fire or not fire. There's this massive range of what people mean about it, And it's impossible to say too much generally about it. I think we can all agree, as you've sort of explained, Ben, is focusing on the idea that you should try to be more meaningful in your choices. Don't focus on making a ton of money and then spending it on things that don't make you happy. Don't work so much that you sacrifice all of the other things that are enjoyable in life. These are all very obvious things and can be discussed within a FIRE framework, but don't necessarily have anything to do with retiring early or even, frankly, financial independence.

1:04:37It's just about being a little more mindful in your life choices. Cameron, do you have thoughts on this? I agree with you. That's what I said about Scott Rickins. That was my big takeaway from that. Then you mix in our conversation with Professor Mayor Stabman. He talked about that as well. How many things cost a lot of money? And he says, my life is better being able to afford these things for sure. But to make mindful choices as you spend, absolutely. But the hedonic treadmill is just so easy to get on and stay on it. Yeah, it is. It was the mayor that talked about that was housing sizes have doubled over the last, I don't know, generation or two.

1:05:09Are people necessarily happy? Why do we have all these great big houses? It's incredible. Personally, I thoroughly enjoy what I do for a living. We get to think about topics like this. I get to hang out with guys like you guys and how we get to help other people make better decisions. And I get to nerd out on topics like this with all the people in the Rashford Miter community who agree and disagree with me, but still have thoughtful discussions either way. I wrote the notes for this episode in the morning on a holiday. Monday this week was a holiday. I didn't have to work. PWL office was closed.

1:05:39My parents were coming over later in the day and we had a great day hanging out together, but I had these ideas in my head and I wanted to sit down and write it and work on it. I would have been frustrated if I couldn't. I don't want to overemphasize meritocracy. I think back to the episode that we had with Robert Frank, who talked a lot about the role of luck in outcomes. I don't want to minimize the role of luck. There was lots of that as well, but I've worked here for almost 12 years. I've worked my butt off, as I know you guys have too, and I've gained qualifications and skills and whatever else, social capital.

1:06:13It's allowed me to choose the type of work that I want to do and get paid well for doing it. I get not everyone feels they can achieve the same thing. And I can see FIRE as an attractive way to exit the system altogether. For me personally, and I'm not saying that FIRE is wrong or anything like that, but I would far rather focus on that side of it, on working hard and gaining valuable skills and being financially successful from that direction than the other way. Now, that doesn't mean I spend all my money. I think I'm still doing a pretty good job saving, but at the same time, we don't worry a whole lot about budgeting or money or whether we're going to buy used or new bikes for the kids when they decide that they want to get more serious about mountain biking.

1:06:57For me personally, I like that. I think if I were being really restrictive about our spending in order to be financially independent, it wouldn't be the same. That's just how I feel personally. There's different kinds of people. I think I'm wired the same way you are, but then like I worked on Monday holiday as well, not because I'm on a hedonic treadmill or I'm a workaholic. It's because I didn't have anything better to do that day. And I genuinely enjoy what I do. But anytime I think about these kinds of lifestyle choices and get involved in these debates, I always say like, number one, I get up every morning and recognize how fortunate I am to be doing a job that I really love because there's very few people, I think, that can say that.

1:07:44Typically, when I talk to people who talk about early retirement, it's less about a desire to not work than it is about a desire to not do the specific job they're doing now. And those are very different things. And I can think of a few people who kind left the job that was grinding them down and found something that they work fewer hours, they make less money, but they're much happier. That's the winning formula if you can do it. But it is really hard to find that. I'm thinking of a client of mine who was a dentist and worked very hard, built up his practice, retired, quote unquote, in his early 50s, and now does volunteer dentistry or serving underserved communities.

1:08:31He only works a couple of days a week. It's perfect for him. But that's really hard to find. I know other people have kind of done the leave my full-time job that I hated because I wanted to retire early. And the barista sort of thing, like people say, well, I'm just going to get a job like in retail because I just need to make a little bit of money. And they hated it. Because if you're a professional and you spend decades working in a certain job, you're probably not going to enjoy working in retail with people who are 30 years younger than you. It's just unlikely to be a recipe for success. It is so difficult for each individual to kind of figure out the work-life balance that makes sense for them and to put it under the umbrella of FIRE or any other name.

1:09:13I just think conflates an enormous range of possibilities here. I always have to be really careful if we're going to sort of say this strategy makes sense or this strategy is problematic. It's like, which strategy are we talking about? I agree with all that. Another thing on that idea of really not enjoying parts of your job or a specific job, you can skill out of that too. As you get better and better at something, at a job, you have to do fewer and fewer of the things that you don't want to do. Indulgate them. Exactly. Maybe I'm biased here because that's been my experience and maybe that's not what everybody experiences.

1:09:48And for those people who don't experience that and feel like there's no way to get out of the bad working situation that they're in, I think that financial independence is probably extremely valuable. I do find it difficult how evangelical many of the people who promote this concept are. I've discovered the holy grail of living a good life and everybody must know about it. I don't know how much of that is promoting the idea for financial gain and how much of it is promoting the idea because they truly believe that they're helping other people. That's one of the things about this topic that I find the most great, the evangelizing of I've discovered how to live a good life and everyone must know about it.

1:10:22I agree with that. And I fear that it's mostly the former. In other words, people sort of glamorizing it and painting as a winning formula because it's a formula they want to sell to you. And we haven't mentioned the 4 % rule. We did mention it maybe briefly. It underpins so much of this, the simple math of retirement. The 4 % who has a lot of problems. We've covered this extensively in other videos and interviews, including with Bill Bengen, the guy that created the rule. But it basically says you can spend 4 % of your portfolio value in the first year of retirement and then adjust that amount for inflation each year thereafter.

1:10:55That math makes it very easy to calculate your FI number, your financial independence number. We talked about this with Scott Rickens too, Cameron, I don't know if you remember that part. But he basically said, Ben, I know you've done a lot of work in the 4 % rule and you think it doesn't make sense, you think it's kind of stupid or whatever, but it's a really, really useful tool for people to set financial goals for sure. That's got merit. And I think even though the 4 % rule is imperfect, it's not terrible. It could be worse. And if someone's going to use that, the way that you'd use this to calculate your financial independence number is you would take your spending and you would divide it by 4 % or multiply it by 25.

1:11:27It gets you to the same place mathematically. And that number gives you how much you need to save to achieve whatever your financial independence number is. To the extent that that motivates people to save for their future and avoid spending too much, that's great. It should probably be lower, practically speaking, and people probably shouldn't use a fixed withdrawal rate, which I think people in the FIRE community do acknowledge that you should have some flexibility in there, which probably increases your average lifetime spending rate, but you just can't follow a fixed inflation-adjusted spending rule, which is worth mentioning the problem with the 4 % rule there.

1:12:02That's an easy rule to keep in mind that every$1 of perpetual spending you put in your lifestyle, you need$25 of retirement assets. I remember in that movie, they had that meter above the financial decisions they were making. So smaller cars saved us whatever thousand dollars per year, which equated to 25 times that in retirement assets. That math is elegant. And again, if that helps people make better decisions, I think that's really valuable. But I think people do have to be aware that it stems from research that came out in the 1990s, was based on historical US market returns, which we know now looking backward has been the best performing market in the world.

1:12:36It's also based on a 30-year retirement period, which is clearly insufficient for someone who is retiring early or becoming financially independent early. That's just one other gripe I have with a lot of FI and FIRE is that it focuses on the 4 % rule and it focuses on past US stock market returns. I would say too, that when you look at that multiply by 25 number, it's huge. Based on the 4 % rule, if you want$40 ,000 a year, you need a million dollars. Great. How do I get a million dollars? Most people will work their whole careers and not save a million dollars. So how are you going to generate that kind of income?

1:13:15And this is where I feel like when you start to look deeper, people are only living partly off their savings, but they're also doing self-employment, which is great, which is not retirement. So let's just make sure that we describe it accurately before we present it as an option for other people. I like that. To wrap this up, personal finance is personal, as the title would imply. What's right for one person is often wrong for another. And given that level of subjectivity, I think it does make sense that there are highly controversial personal finance topics. And when people make their financial decisions part of their identity, it becomes really difficult to objectively evaluate whether what they're doing actually makes sense.

1:13:59So my hope with this episode is that detailing some of the most controversial topics in personal finance, including the psychology and moral philosophy that makes them controversial, is going to equip listeners to make better decisions.

1:14:15All right. After show. Let's go. It's been a while. I'm rusty at this. Well, do you want to read the first review then, Cameron? Sure. If I can pronounce the name here. Lately, this podcast is so well done, crisp, concise, and interesting. It's at the bar so high, and it has actually led me to stop listening to some of my previous favorite podcasts, which simply aren't done this well. Keep it up by The Aug from United States of America on iTunes. I got to say, when I saw that review come in and it said lately, I was getting ready for lately to be like, lately, this podcast has been terrible. It was the opposite.

1:14:51So that was nice. I also heard from Rick in Prague on LinkedIn and said, it's been two years since I last sent you a message. And as I just finished listening to AMA number six, episode 357, I thought I'd send another. I wish you all the best in your new role and continue to enjoy the content you, Ben, and your other colleagues roll out. Greetings from Prague. Very nice. I did want to mention that there was quite a lively discussion. I posted my notes for the FIRE topic in the Rational Mindler community because there was a discussion that had started on that topic. So I just said like, hey guys, I'm working on a topic for the podcast and for my YouTube channel on this.

1:15:28Let me know what you think. And I posted in there that it led to a big discussion. In a lot of places on the internet, that could get pretty ugly pretty quickly. I can say for sure the topic is controversial based on the discussion that ensued. But I do find that the RR community, the rational writer community is an incredible place to have thoughtful, intelligent, respectful discussions, even when people disagree with each other, even on controversial topics. And some of that is the moderation. We have an incredible moderation team. Some of it is the fact that we don't let just anybody participate.

1:15:57Some of it is the fact that people who have been problematic in the past have been removed from the community and not allowed back in. But we have almost 12 ,000 people in there and a lot of them highly active in discussions and a lot of them highly educated and intelligent people. And it's just a really neat place on the internet. Do you want to talk about the t-shirts or should I? Oh, this is your happy place. You go for it. My son told my brother, he got a kick out of it. Once I explained what it was. Does Dan have a shirt yet? I don't think he does. I don't have one yet, but I hope you're sending me one.

1:16:26Oh yeah. It's in the mail. Right, Cameron? We're sending them one? Yeah, double X up. It's in the mail. The premium t-shirts, it's a very nice cotton t-shirt, but on the front emblazoned in big white bold letters are the five factors in the Fama and French five-factor asset pricing model. So you've got market minus risk-free, MKT minus RF, and then you've got SMA, HML, RMW, and CMA. I don't have it with me, otherwise I'd hold it up. Then it has rational reminder on the sleeve. As far as nerdy t-shirts go, at least within this niche of nerdiness, it's got to be one of the nerdiest t-shirts that exists.

1:17:03It's got to be top three. Don't wear that one outside the house. But it is a premium t-shirt, Dan. It is a premium t-shirt, a five-factor premium t-shirt. By the time this episode's released, my understanding from talking to Angelica is that those will be up in the store, which is at shop.rationalreminder.ca. It's also linked on the main Rational Reminder website, so it's easy to find. I have a show for you guys. You guys watching Mobland? No. Oh, what a show. If you kind of like that Ray Donovan sort of show, which I do, a lot of action. I love Ray Donovan. Oh, if you like Ray Donovan, you'll love Mobland.

1:17:39Sure. I did watch the last season of, there's a show called Animal Kingdom. Do you guys ever watch that? Oh yeah. That's in that same vein. Absolutely. Then you'll love Mobland. Okay. Yeah. That was a great show. We hadn't seen the last season yet, but it was on Netflix. So we binged it over the last couple of weeks. It was great. That's a phenomenal show. Yeah, it's a good show. All right. I think that's it for this episode. Anything else from you guys? No. Well done, Ben. Well done, Dan. All good. Nice work as always. Thanks for listening, everybody. Stay well.