[MUSIC PLAYING]
DAVID MOLTZ: Cool,
So let's start
with your blog and your podcast.
You call it "Afford Anything."
Where did that name come from?
PAULA PANT: So the concept
of "Afford Anything"
is really the concept
of opportunity cost.
It's this notion that
you can afford anything,
but not everything.
And every decision that
you make is a trade-off
against something else.
And this concept doesn't
just apply to your money,
even though the word afford
conjures up images of money
immediately.
It also applies to your time,
your focus, your energy,
your attention because we all
have limited cognition, limited
mental bandwidth.
So really, it's this
notion of recognizing
that most of the
resources that you
deal with on a day-to-day
basis are limited resources.
And we need to be
extremely conscious--
I would say even ruthless--
about how we allocate them.
And that means, number one,
allocating our resources with
more intention and, number
two, deeply reflecting on how,
at a 30,000-foot level, what
is actually a priority to us
in our lives to each individual,
not what does society say ought
to be, or what are the default
priorities that we've been
taught.
DAVID MOLTZ: Very nice.
And your best known,
you know, kind of
in the personal
finance community
for talking and writing a lot
about financial independence.
So what is financial
independence?
And how does it
relate to your story?
PAULA PANT: OK, so
financial independence
is an interesting
concept, and it's
one that's gained
a lot of popularity
in the past few years.
I define financial
independence as the point
at which your passive income
typically, but not always,
through investments is enough.
And when I say enough,
I mean that it's enough
that it creates at least
some type of a safety
net underneath you,
some type of a floor
or a foundation such that you
know that, in a worst case
scenario, in a black swan
situation, you would be OK.
And so let's unpack that a
little bit because there's
a lot going on in that concept.
Now, first of all, so
financial independence
is the point at which your
passive income, typically
through investment-- so
what we mean by that?
So passive income is
income that does not
come through exchanging
time for money directly.
So for example, if you
have access to a 401(k),
and you make contributions
of income into your 401(k)
that money will,
hopefully, grow.
Right?
That money will grow both
through capital gains
and through dividends.
And then that growth
will compound.
So that would be an
example of passive income.
Regardless of whether
or not you harness it,
right, it's income in the sense
that it fuels your net worth,
and it makes your balance sheet
bigger, your personal balance
sheet bigger,
regardless of the fact
that you are not actively
pulling money out
of your 401(k) on
Tuesday in order
to pay for a pair of shoes.
It's still yours.
Right?
Same thing with if you make
contributions to an IRA
or to a health savings
account or if you
use that money to buy a personal
residence or a rental property,
assuming that those appreciate
or if the rental property does
well.
In all of those examples,
you have a source
of passive income
coming in that's
fueling your net
worth, despite the fact
that you're not actively
trading dollars for it.
Now when we talk about--
so the last portion
of the definition
of financial independence
is this concept of enough.
And that leads to a fairly
big philosophical question,
which is how much is enough.
And this is a source of endless
debate within the Financial
Independence community,
which is abbreviated
as the FI community.
But at a bare bones, basic
level, enough is, as I see it,
enough such that, in
a worst case scenario,
you would at least be OK.
You could feed yourself.
You could keep the lights on.
You could have some type of
a reasonable human shelter.
It might not be what
you prefer, but you
know that you would be OK.
And the example that I
often like to use is--
so a lot of people conflate
financial independence
with extreme wealth or
big other highfalutin,
pie in the sky ideas.
The example that I like to
give to kind of bring it
down to Earth a
little bit is let's
say that you had a
brother or sister.
And today, in an hour from
now, you get a phone call,
and you find out that your
sibling just got diagnosed
with a terminal illness.
And they have one
year left to live.
And you want nothing more
than to take a one year
leave of absence,
unpaid leave of absence
from work, so that you can spend
that last year or that last six
months with your sibling.
And you can't do that locally
because your sibling lives
on the other side
of the country,
or they live in a
different country.
All right, so you
need that time.
Financial independence
is the state
of having enough
passive income so
that when you're doing that,
when you drop everything
to be with your sibling
for those critical moments,
you'll be OK.
You know, you're not going
to be going to Disneyland.
You're not going to be
having $400 steak dinners,
but you'll at least be OK.
And there's a lot of freedom
that comes with that.
A lot of people who reach
financial independence-- and I
reached it when I was 31.
We'll talk about
that in a minute.
But a lot of people who reach
financial independence often
find that nothing in their
life necessarily changes.
The day to day of
their life might
look exactly the same
post-FI, as it did pre-FI.
But the psychological
relief that
comes from knowing that you've
built your own safety net
is valuable.
And so sometimes, I joke that
FI is an extremely elaborate
anxiety reduction measure.
[LAUGHTER]
So in my own life,
so my own story is
I graduated from
college when I was 21.
This was in 2005.
And I shortly after, a few
months after that, I got
my first job at a newspaper.
And my starting salary
was $21,000 a year.
And I worked at
that job until 2008.
And at the time that I left,
my salary was $31,000 a year.
By the way, I know
it's unusual to like
to sit on stage with
a microphone revealing
your salary, but I'm a
blogger and podcaster.
And I've made this very,
very public for years.
So I'm comfortable
sharing all these numbers.
So at the time that I left
my job, which was in 2008,
I was making $31 a year.
And I had a lot of
anxiety at that time.
Like being in my
early 20s, I could
live like a college student.
So it was fine, but I
knew that later in my life
I was going to need
something more, something
bigger, something better,
especially if I ever wanted
to have a family or
ever wanted to own
a home or anything like that.
And so I became really
obsessed with saving
and obsessed with investing.
I started making money--
while I was still
in newspaper, I
was making money on the
side as a freelancer,
and I continue to grow that.
And I became just
extremely aggressive
about saving and
investing, largely fueled
by honestly fear,
which, you know,
I wanted to make sure
that I would be OK.
And so over the
course of the next--
basically throughout
the rest of my 20s
and into my early
30s, myself and also
my husband at the time,
soon to be ex-husband,
Will, who shares my same
like enthusiasm for saving
and investing, we
lived on oftentimes
about 50% of our combined income
and invested the rest of it.
And we invested in a
combination of 401(k)--
I have a Roth Solo 401(k).
He has a simple IRA.
We both had Roth IRAs, which
later turned back to Roth IRAs.
We had HSA accounts.
We had the whole
alphabet soup going on.
And so we put a
lot of money there.
And then we put a lot of money
into rental properties as well.
We lived with roommates
until we were 31.
And I mean, our net worth
at the time that we stopped
living with roommates,
our combined net worth
was over $1 million at the time.
So we were millionaires
living with roommates
so that we could save
50% of our income
and just shovel that
into investments.
And that was the level of our
dedication towards investing.
So that was how I reached FI.
DAVID MOLTZ: Wow,
over $1 million
and financially
independent by 31,
which brings us to a
very important question.
Please share with us
your investing philosophy
and some tactics and
strategies that you use.
PAULA PANT: Sure,
at a high level,
my investing
philosophy is one that
is very fond of passively
managed investments.
So there is this thing
called index funds
that was created by John Bogle
who's the founder of Vanguard.
And an index fund is a fund that
tracks a market, a broad market
index.
So for example, an index fund
might track the S&P 500 index.
And when you invest
in an index fund,
that fund attempts, to
the best of its ability,
to mirror everything
in that index.
And that means that it will
do as well as or as poorly
as what it's tracking.
So if you invest in the
total US stock market index,
you will do as well
as or as poorly
as the total US stock market,
no better and no worse.
And what they found is that,
statistically speaking,
over the long term, over about
a 15- to 30-year time span,
you are, statistically
speaking, more
likely to do better
trying to match the market
than you are trying to
outperform the market.
You will sometimes,
occasionally, in the short run,
have funds or fund managers
that momentarily outperform.
But then they tend to, over
time, revert to the mean.
So you're better off just
taking the passive approach.
And similarly, with
real estate investments,
I'm a big fan of
rental properties.
And with rental
properties as well,
I favor a passive
approach of, you know,
don't try to constantly be
flipping home in my view.
There are other
people, of course,
who do it differently than me.
But I don't want to be
spending all of my time
trying to flip homes or
trying to go into extremely
sophisticated tactics because
that's not what I do full time.
I have a different
full-time job.
And I want to focus on
that other full-time work
because that's my
core competence.
And so I want to make my
real estate investments
as passive as possible so
that they take up as little
of my cognition as
possible, again,
because you can do anything,
but not everything.
DAVID MOLTZ: Right,
and you write and talk
a lot about growing the gap.
So what do you mean
by growing the gap?
PAULA PANT: So growing the
gap is the result of a big--
an argument, a debate that
is popular among people
in the personal
finance community
and in the FI community, which
people love to argue about
whether it is more efficient
to earn more or spend less.
It's that classic like chocolate
versus vanilla, peanut butter
versus jelly debate.
Right?
And people often tend to--
they'll choose a side.
They'll pick a camp.
It's almost like you have
a favorite sports team.
I'm on the earn more side.
Well, I'm on the save more side.
And the way that I was able
to find a bit of compromise
between those two
is I asked myself
what are we actually
trying to do here.
Like forget what camp you're in.
What's the goal?
Well, the objective is to
increase the gap between what
you make and what you spend.
And when you think
of it in that terms,
you know, growing the gap is--
the objective
becomes more clear.
Right?
You're not caught up in
endless penny-pinching.
You're not caught
up in like trying
to shrink your way to
greatness, nor on the other side
are you caught up
in just, you know,
going for promotion after
promotion and raise to raise,
trying to make as much
money as possible,
but being super careless
about your spending.
Like growing the gap
is that recognition
that you can earn more.
You can spend less.
You can do a
combination of both.
But ultimately, your
approach or your tactic
matters less than
the size of the gap.
DAVID MOLTZ: So on
the saving side,
there's a cliche that says,
you know, don't buy lattes.
Or said another way, don't
pay $5 for a cup of coffee.
Do you agree with that?
PAULA PANT: So that was
coined by David Bach.
And David Bach, he's
a best-selling author.
And he very much meant that
as a metaphor for don't be
mindless about your spending.
The $5 a day, you know,
the buying a latte,
if it is done with intention,
if you sit down, and you think,
you know, I really value this.
I value this moment
in my morning
where I can drink a latte
and write in my journal
and reflect on what's
coming up in my day.
That conscious,
intentional spending
is very different
than mindlessly
buying a $5 coffee
every morning and then,
at the end of the
week, complaining
that you don't have enough
or wondering why you're still
in credit card debt.
Those are same action,
but the thought behind it
is the differentiator.
That being said, in the
world of saving money,
there's what I call
the big three--
housing, transportation, food.
And if you can get
those big three right,
then you can actually
make a lot of small--
you can get a lot
of small things
wrong, if you get those
three things right.
Because for the
average American,
housing,
transportation, and food
are going to be your
three biggest expenses.
DAVID MOLTZ: And
actually, just as a
follow up on that, same
concept of like how
do you think about making
budgeting and budgeting
and spending
decisions, especially
for certain categories?
So to come up with
a budget, how do you
decide for these
categories, oh, my budget
is going to be $50 or
$100 or $200 a month?
Is it arbitrary?
And then also, like how do
I decide how much to spend
versus how much to invest?
You know, if I have x
amount of dollars, you know,
from my paycheck,
how do I decide
where to allocate that money?
PAULA PANT: So it's
interesting that you
ask about different
categories because I'm
going to take a step
back for a second
and question the premise.
What is the point of
allocating your budget
into specific, granular,
line-itemized categories?
Ultimately, a budget
is a tool that people
use in order to make sure
that you are saving enough.
So again, let's take
that step back and ask
what's the objective here.
If the objective is to make
sure that you're saving enough,
well, let's start with that.
So you take whatever
your take-home income is,
your after-tax income
and, from that,
decide how much
you want to save.
And when I say save, I
mean that very broadly.
I mean that as anything that
improves your net worth.
So how much money do you want
to put into retirement accounts,
use as additional payments
on a debt, so maybe
additional payments towards
a student loan or a mortgage?
And then savings could
also be literal savings
in a savings account.
Right?
So take your income, then
ask yourself how much of this
do I want to save, meaning
any improvement my net worth.
Yank that off the top.
And then whatever is left
over is yours to spend.
And there isn't actually
any reason to line
itemize it any
further than that.
Now if you want to, if you're
the personality type who
loves tinkering
with spreadsheets,
and that sounds like
a really fun way
to spend a Friday night,
then go for it, you know,
if that's what you want to do.
But to a lot of
people, a lot of people
believe that they
can't stick to a budget
because they create these
incredibly granular budgets
where they've allocated
precisely $37 a month
for dog food.
And then it turns out that
they've spent $42 that month.
And then they throw up
their hands in despair
and decide that
budgeting is not for me.
And I'm just not
very good at money.
Right?
And so the concept of what I
call the anti-budget, which
is what I've just
described, which
is this very simple,
two-category budget of save,
spend, the anti-budget
was something
that I developed
in order to address
that concern that a
lot of people had,
that problem that
a lot of people
had because so many
people were giving up
on the notion of
budgeting, thinking
that it had to be more
complicated than it is.
DAVID MOLTZ: So
for people that do
want to increase
their savings rate,
as you were talking
about, what are some ways
to go about doing that?
PAULA PANT: Oh, so again,
if you think of savings
more broadly as growing the
gap, then you can earn more.
You can spend less.
You can do a
combination of both.
So let's talk about
each of those.
So earning more,
you can do that--
and it depends on really
where you are in life,
like what your
life situation is.
For some people, like if
you have the opportunity,
if you're at a company
that is large enough
to have the opportunity
for promotions and raises,
then hitting it
really hard at work
and making yourself extremely
valuable to your company
so that your company
reciprocates with rewarding you
with some of that value
that you are giving to them,
that can be an
incredibly powerful way
to save because, if you keep
your current standard of living
exactly where it is,
and then you earn more--
you get raises.
You get promotions.
You earn more.
And then you bank
all of those raises.
So you just keep living
exactly where you are today
and save every single raise.
That, over the span
of 10 years, assuming
that you continue to get raises
and promotions over the next 10
years, that alone can be
rocket fuel on your finances.
Of course, that
assumes that you are
at a company that has those
types of opportunities.
You know, in my case, I worked
at a very small newspaper,
where, like I said, my
maximum salary was $31,000.
And at that company, the highest
paid person at that company
was making about $60.
It was just a small
company that didn't
have those types of
opportunities for advancement
or at least those
opportunities for--
I didn't have the opportunity
for a six-figure income
where I worked.
And so in that
situation, developing
some type of a side
hustle or a side business
could be a good approach.
And I'll divide that actually
into two different levels
because, in terms
of side businesses,
you have the gig economy stuff.
Right?
You have driving for
Uber, driving for Lyft,
renting out of room on
Airbnb, walking dogs on Rover,
renting out your car on Turo.
Those are all gig
economy types of ways
to make some extra income.
The benefit is that that
income is immediate,
but the drawback
is that you can't--
well, with the
exception of Airbnb,
you can't really distinguish
yourself very much.
You don't have much of
a competitive advantage.
And so while you have
some immediate income,
your upside potential
will be limited.
The other type of
side income would
be something like freelancing,
consulting, something
where you have unique value that
is your market differentiator.
And so the advantage to
that type of side income
is that you can potentially
make a lot more.
The disadvantage is that
that can take a while
to build into scale.
So that income is
not necessarily
going to be immediate.
DAVID MOLTZ: Very nice.
And another thing you say is
never delay gratification.
So what does that mean?
PAULA PANT: So that much
applies to the thinking
or the mental construct around
saving money and investing
money.
A lot of people refer to saving
money as delayed gratification.
And I think that that's a
huge mistake, especially
because, you know, you're
trying to encourage people
in their 20s and 30s
to save, especially
to save for retirement because
the longer your money is--
time in the market is far
more important than timing
the market.
And compounding growth is, you
know, a wonder of the universe.
Right?
So when you tell
someone in their 20s
to delay gratification,
that sounds pretty awful.
But if you reframe
that mental concept,
and if you say you know what,
I'm not delaying gratification.
I am super gratified by
watching my net worth grow.
Like I am super
gratified by looking
at the numbers in this account
and watching them get bigger
and tracking my net worth
and watching that line go up.
That's super cool.
And that brings me far more
of a sense of satisfaction
than some cheap
plastic junk or a car
that is marginally nicer than
the one that I already have.
Right?
Like that's a way that you can
reframe gratification, rather
than delay it.
The other aspect of that
is to have a very strong
why that motivates you.
So you don't want to be
unhappy in the present
for the sake of a future.
You do want a future
that you look forward to.
You want a strong,
compelling why in the future,
but you also want to frame that
saving and investing in a way
in which you're enjoying
the present moment.
So for example, when I
lived with roommates,
like my thinking at the time,
my mentality was like, cool,
I've got built-in friends.
You know, I've always got
people to eat dinner with.
And you know, so there were,
of course, certain drawbacks
with that like sharing
a refrigerator.
But I mentally focused on
the advantages, rather than
the disadvantages.
And that made it feel like
an immediately fun option,
rather than as a sacrifice.
DAVID MOLTZ: And so yeah,
we talked about kind
of saving and investing.
How about investing
versus paying off debt?
So you know, most people
have some sort of debt,
whether it's a mortgage or
student loans or whatnot.
And how do you think
about whether, if you
do have some extra cash, do
you pay down debt quicker?
Or should I do the
minimum payment
and invest that in
the stock market?
And there seems to be
arguments both ways.
What are your thoughts on that?
PAULA PANT: That's an
excellent question.
Now first of all, both of
them are fantastic options.
Anything that improves
your net worth is awesome.
So regardless of which one you
choose, either way, it's great.
In terms of how to think
through that question,
there are a couple of
different approaches.
First of all, I'm
going to differentiate
between high-interest debt
versus low-interest debt.
Now we know that, historically,
the US stock market, depending
on the years that you're looking
at, the time frame that you're
looking at, historically,
the US stock market
has returned somewhere
between 7% to 10% ish
as a long-term
aggregate average.
Warren Buffett has predicted
that the US stock market
might, to the extent
that anybody can ever
predict anything
about the future,
has predicted that the US stock
market may produce 7% returns
in the future, moving forward.
Of course, projection is
just a fancy word for guess,
but we can use that
as a ballpark figure
as we're kind of thinking
through this decision.
So if you have a debt that has
double-digit interest rates,
right, if you've got a
debt that's 10% or more--
or I would argue,
personally, 8% or more,
pay that off because you're
not likely to do better
in an index fund, in a
broad market index fund.
Now if you have a debt that
has a high single digit--
we'll say somewhere between
5% to 8% interest rate--
there's still a strong argument
for paying that debt off.
Although, the argument is
a little bit less strong.
But when you talk about
investment returns,
you want to think of
them in the framework
of a risk-adjusted return.
And what that means
is that getting
a return of 8% in
a treasury bond
is very different than getting
a return of 8% in Bitcoin,
right, like two totally
different types of risk
that we're talking about.
So if you're thinking about
arbitraging the difference
between the interest
rate that you're
paying on a loan
versus the return
that you could get
in an investment,
you want the potential
gap to be big enough.
You want that spread
to be big enough
to justify the added risk.
So for example, if you have
a mortgage at a 3.5% interest
rate, and you have $10,000
that you got as a bonus,
and you're wondering
should I apply
this $10,000
towards my mortgage,
or should I put this $10,000
into the stock market, well,
at that point, we're
talking about a spread that
is large enough that there would
be, in many cases, a pretty
valid argument for putting
that 10 grand into the market.
If the spread is really small,
then it's just not worth it.
So that being said, the
other thing that I'll say
is that there are
many people who
are proponents of getting rid
of debt as quickly as possible
because there are a lot of
emotional and psychological
benefits to getting
rid of that debt.
And so in addition
to the math of it,
in addition to the opportunity
cost and the expected value,
you also do want to think about,
you know, we're not machines.
We're not robots.
And if that psychological
benefit to being debt-free
is going to help you get
a better night's sleep,
well, then there's
added value in that.
DAVID MOLTZ: Yeah,
so you've obviously
made a very compelling argument
like why you should invest.
There are seasoned
investors in the room.
And there's also people
just getting started.
And I guess one
challenge that I still
have is trying to figure out
my ideal asset allocation.
Everyone disagrees with it.
You know, some people would
say you're very young.
You should be all stocks.
Some people would say you
should have your age in bonds.
Some people should say the
market has been very volatile.
You should have real
estate in your portfolio.
And others would
say cash is king.
So with so many
different asset classes,
how do you make a decision
on how-- you know,
based on things
like risk tolerance,
how do you decide for
you specifically, rather
than just some rule of thumb?
Like how do I decide
what my personal asset
allocation should be?
PAULA PANT: That's
also a good question.
So when people diversify
their investments,
the idea behind
diversification is
to have an assortment
of what are known
as low-correlation assets.
And so low-correlation
assets are
assets in which, when
one moves this way,
the other doesn't move, or
it moves, you know, inverse.
So like stocks and bonds,
that's an easy example.
They tend to have an inverse
correlation with one another.
When one goes up,
the other goes down.
And so having that mix
of stocks and bonds
smooths out the ride
in your portfolio.
And really, what it does
is when you rebalance--
the idea behind
rebalancing is that you
sell some of the winners
and buy more of the losers.
You know, you buy things
that underperform--
you sell things that
are doing really well
and buy more of what's
underperforming.
Rebalancing a portfolio
forces you to do exactly that.
It forces you to sell the
winner, harvest the winners,
and buy the underperformers.
And as a result, the whole
concept of rebalancing
forces you to take a
contrarian approach
and move in the opposite
direction of the market.
It forces you to be greedy when
others are fearful and fearful
when others are greedy, to
paraphrase that famous quote.
And that's the reason why
asset allocation and buying
an assortment of
like different assets
and then rebalancing
periodically
is so well regarded
among many people.
That being said,
it's not necessarily
the only way to do it.
There are plenty of people
who make the argument
that, particularly
when you're young,
having an all-equities
portfolio,
you know, balanced out
with a strong cash reserve
would be better than putting
a portion of your portfolio
in bonds since, historically,
over a 40-year time span,
those equities are
going to do better.
And so there are
people who will argue
that having any type
of a bond allocation
means that you are giving
up some returns in exchange
for that smoother ride.
So if you talk to 100 different
people about asset allocation,
you're going to hear
101 different responses.
The way to think
through it for yourself
is, first and foremost, again,
what's going to help you
sleep more easily at night
because your behavior
and your contributions are
the single biggest determinant
of market performance.
They've found that people
often underperform the funds
that they are in.
And on the surface,
that sounds impossible.
Like if you're in a fund, how
could you possibly underperform
the fund that you're in?
But the reason that that happens
is because people get nervous,
and then they dance in
and out of the fund.
And as a result,
they underperform
what they're already holding.
And so they've actually found
that dead people actually
outperform the living when it
comes to investment returns
because they just
don't touch-- they
don't touch their portfolio.
And so actually, I learned
that through JL Collins who
gave a great talk at Google.
And so that's the first question
that I would ask yourself.
Right?
Like the math of
it is one thing,
but the behavioral component
cannot be understated.
So if having that
bond allocation
or having some portion of
your portfolio in commodities
or in real estate or just
keeping an excess in cash
beyond what most financial
advisors might recommend,
if that's what helps you hold
steady through market declines
and hold steady
through a recession,
then it's worthwhile.
DAVID MOLTZ: So speaking of
JL Collins and other industry
titans, like Warren
Buffett, Jack Bogle,
they all say US stocks.
You know, put your money
in either the S&P 500
or the total US stock
market and don't touch it
for a really long time.
What are your thoughts on US
versus international investing?
So should people be investing
in international stocks?
So I guess could
you talk about kind
of home-country bias
and then whether or not
you recommend investing
internationally as well?
PAULA PANT: So I do, yes.
I think that it is
a very good idea.
Again, this is one of
those controversial topics
where there are some people,
JL Collins being an example--
he makes the
argument that, if you
are invested in major companies
that are based in the United
States, like Google
or Nike, you know,
many of the big
companies based here
do business in countries
around the world.
And so he and many other
people make the argument
that, simply by virtue of
investing in large-cap US
companies, you necessarily
have international exposure
indirectly through them.
And his argument is
that, for that reason,
international funds
are unnecessary.
They also, oftentimes,
depending on the specifics
of the type of plan that
your company offers,
these funds can often
be more expensive.
And there's also currency
risk because you're
using US dollars to invest
in companies that operate
in different currencies.
And so in addition
to all of the risks
that you have when you become
an investor in a company, which
is what happens whenever
you buy a stock,
you also have currency
conversion risk
to contend with as well.
So for that reason,
there is a camp
of people who think that
international investing is
unnecessary.
Personally, I disagree.
I think that it is important to
have an international component
to your portfolio.
And so there are three
subsets, major subsets,
to international investing.
There's developed
markets, emerging markets,
and frontier markets.
And I would argue
that, at a minimum,
developed markets, which
are well-established,
stable markets, should be
a piece of your portfolio.
Emerging markets,
probably, you know,
they tend to be a little
bit more volatile.
But if you have the stomach
to withstand that volatility,
I think that's also
an excellent addition.
Frontier markets might be
a little bit too volatile
for a lot of people.
So I wouldn't
necessarily go there.
DAVID MOLTZ: Gotcha.
And several of
your episodes have
gone into kind of
behavioral finance, which
I know a lot of us
find very interesting.
And so can you kind of
share some key lessons
you've learned on how
psychology impacts investing
and maybe what we
should do about it.
PAULA PANT: So first, there's
this notion of loss aversion.
And loss aversion is the
concept that losing money
feels worse than making the
equivalent amount of money.
If you invest $5,000,
and you lose $1,000,
and now you're down to $4, that
feels a lot worse than the joy
that you would feel if that
$5,000 went up to $6,000.
And so loss aversion
and, you know,
its closely related
cousin negativity bias,
highlights how we often can
spend more time playing defense
than we do playing offense.
Right?
We spend more time and energy
trying to protect ourselves
from the downside than we do
trying to pursue opportunities.
And that's something, as you
feel yourself emotionally
reacting to your investments--
like if you make a practice
of tracking your net worth,
and you do this quarterly--
DAVID MOLTZ: Daily.
[LAUGHTER]
PAULA PANT: You're
probably going
to have some quarters--
unless you're very lucky,
there might be quarters where
your net worth goes down,
perhaps significantly.
And when that happens, you
will feel that sense of that.
Seeing your net worth
decline feels a lot worse
than the joy you felt the
previous quarter watching
it go up.
And that's that moment to
check in with yourself and say
am I about to do
something stupid.
Am I about to make an impulsive
decision based on this feeling
that I have right now?
So that's one of the components.
Loss aversion is one of
the behavioral components
of managing yourself
as an investor.
I would argue that managing
yourself and managing
your own mindset is the
precursor to managing money.
You can't effectively
manage your money
until you've managed
your mental space.
So in addition to loss
aversion, sunk cost
fallacy is another
popular fallacy
that people get hung up on.
Sunk cost fallacy is this
notion that I'm already in it.
I may as well stay in it.
I've already put in so
much time and effort.
I may as well keep doing it.
I see this a lot when people
buy rental properties.
Right?
You'll make 10
offers on properties.
None of them get accepted.
You make the 11th offer.
It finally gets accepted.
And then you send an
inspector out to the property,
and the inspector
finds something
completely unanticipated.
And you think to yourself I've
put in so much work just trying
to find this property, plus I've
paid $400 for the inspector,
you know, this has already cost
me so many hours of my time.
Let's just buy the thing.
Right?
And that's sunk cost fallacy.
Now that you're
this deep into it,
you don't want to give it up.
But that's not an
effective framework
for making that type
of six-figure decision.
Anchoring is another one.
So anchoring is this
notion of, well,
I paid $100 for this stock.
And so now I'm price
anchored to it at $100.
The stock has dropped to $70.
I'm just going to wait until
it gets back up to $100,
and then I'll sell it.
Right?
That's a tempting
thought to have.
But in reality, it's
completely illogical.
The stock does not care
what you paid for it.
So those are all examples
of very, very common
mental fallacies that we
can fall into as we think
about how to manage our money.
DAVID MOLTZ: And so
knowing that psychology
has such a major
influence on investing,
one thing I'd like
to hear from you
is, so going back to
the asset allocation,
if you're young, if
you're in your 20s or 30s,
you should be
predominantly all stocks.
So it seems like--
and some people
are even preaching be
100% stocks for example.
And that's extremely
aggressive, especially
because a lot of
millennials have never--
they haven't gone through
2008, for example,
with money and the market.
So I guess my
thought is knowing--
again, going back to the loss
aversion and things like that,
do you actually recommend
maybe young people have
a more conservative allocation
until they see how they react
going through volatility
or a bear market
and making sure they can
handle that sort of, you know,
volatility or loss?
And then once they
do that, maybe they
could actually then take on
a more aggressive allocation,
knowing they can handle it.
PAULA PANT: I
would not recommend
that for all young
people, but I would
ask each individual
person to know yourself.
If you think that there is a
reasonable likelihood that you
might panic the next time
that we have a recession,
then put those
safeguards in place
that will save
you from yourself.
And so the tactic
that you just cited,
which is have a heavier bond
allocation or a heavier cash
allocation when you're
young so that you
can see how you react at
the next recession, that's
an example of a way that you can
build a safeguard in which you
protect yourself from yourself.
That's one of many examples.
You could also work
with an advisor
and give them clear
instructions to like no matter--
when we have our next
pullback, no matter
what I tell you,
right, don't let me
shoot myself in the foot.
Right?
Don't let me be my
own worst enemy.
That might be another way,
another tactic that allows you
to save yourself from yourself.
But at the end of
the day, what you
want to do is really know
yourself and then put
those safeguards in
place that allow you--
that they compensate
for your weaknesses.
DAVID MOLTZ: Great.
I have one more question.
And then I think
we actually might
have time for a few
audience questions
so if you want to think about
anything you might want to ask.
But first, before we get
there, let's talk about habits
because that's a huge component.
You chat a lot about that on
your podcast, habits and habits
building.
You've had some great guests
come on and talk about that.
And one of the things you
said that stuck with me
is that basically habits
beat willpower any day.
And I think that's fascinating.
Right?
It's like it's very hard to walk
by like a donut or something
and not grab it.
But if you, in advance,
develop a habit to not walk
by the donut, it's very easy.
So can you chat more about
that, building the habits.
PAULA PANT: Oh, this is
one of my favorite topics.
OK, so first of all, yes,
habits beat willpower.
The notion is willpower
is kind of like a muscle.
It tends to be,
for most people, it
tends to be strongest in the
morning and weakest at night,
which is why a lot
of people have--
they stick to their eating
plan for the whole day,
and then they have
that late night snack,
you know, that they
never intended to have.
But it's 11:00 PM.
And you're tired.
And this seems like the perfect
moment to eat that donut.
Right?
When you create habits, those
habits are largely unconscious.
Right?
When I wake up in the morning,
when I pick up my toothbrush,
the next thing that I do is I
pick up my tube of toothpaste.
And I put the toothpaste
on the toothbrush.
That's not a conscious thought.
I don't pick up my
toothbrush and then
stand there looking at it
wondering what to do next.
It's muscle memory.
It's a habit.
This is the trigger or cue--
picking up my toothbrush
is the trigger or cue
that precedes the next immediate
action, which is picking up
that tube of toothpaste.
And so in order to form a
habit, things to be conscious
of-- and this comes from Charles
Duhigg in his book "The Power
of Habit"--
is time, location,
immediately preceding action,
emotional state.
Right?
And if there's a
particular habit
that you're trying to break--
he gave the example
of he would always
get up and start, around 3:30 in
the afternoon, he would get up,
and he would eat a cookie.
And he just kept doing this.
And then he kept eating cookies.
And he started gaining weight.
And so then he noted the time.
He noted the location.
He noted the emotional
state that he was in,
which was kind of bored
or restless or wanting
a break around that time.
And he was able
to replace getting
a cookie with just taking
a walk and, you know,
satisfying that emotional
state, satisfying
the state of like
boredom restlessness
without the cookie.
So he kept the cue or
trigger, and then he
kept the reward, which
was the satisfaction
of his restlessness, like that
entertainment and distraction.
And he replaced the
action in the middle.
So if you break down
a habit into cue,
action, reward,
then keep the cue.
Keep the reward.
Switch out the action.
There's this notion also
called habit stacking.
And that is to build habits
on top of other habits.
And so the reason that
habit stacking works so well
is, because every habit
needs a given cue,
if you have a cue already
because that cue is
a habit that you're
already doing,
then, since you're
already doing it,
you know that you can stack
another habit on top of that.
So for example, every morning
I make a cup of coffee.
Earlier this year,
I decided that I
wanted to create a habit
of writing in a journal.
And so I now stack my
journal writing habit
with my coffee habit.
I will never forget to
drink coffee in the morning.
That's impossible.
And so when I have
that cup of coffee,
that is now the cue or the
trigger that tells me time
to write in a journal.
And then the next habit
that I will form--
and it's typically most
effective to only form
one habit at a time.
A lot of people try to stack
on too many habits all at once.
And then the whole
thing collapses.
So choose one habit.
For me, it was
writing in my journal.
Stick with that
for 30 to 60 days.
And then at the end of that,
then add in another one.
So right now, it's
the end of February.
I started the journal habit.
It's been about 60 days.
And now that that has
been pretty consistent,
now I can add on the next habit.
And so the next
thing I'd like to do
is meditate for
about 10 minutes.
And my intention is, again,
that habit stacking, coffee,
journal, meditate.
So each one is a cue or
a trigger for the next.
AUDIENCE: How do you think
about cash flow investing
with real estate?
Are you like an LP in a fund?
Or are you a sole proprietor?
And you buy apartment buildings,
and you manage them yourself.
What do you do?
PAULA PANT: So I personally--
again, I want to
spend as little time
on real estate as
possible for myself.
And of course, every
real estate investor
is going to have a
different strategy based
on what your career is, what
your business is, you know,
how much time you have.
For myself, with that
passive philosophy,
I want to spend as a little
time on it as possible.
So I only buy residential
rental properties
in the United States.
That's the only thing
I'm interested in.
And that does not
necessarily mean
that that is better or
worse than any other type.
You know, so I'm
in no way implying
that that's better than
commercial buildings
or warehouses or storage units.
It's just I want to keep
it as simple as possible
so that I can focus the vast
majority of my time and energy
on my business and my
career because that's where
I can make the biggest gains.
AUDIENCE: Hi, Paula.
I have a question going back to
the asset allocation discussion
that David started.
And it's also coming off
that real estate comment.
What is the
recommended percentage
of your net worth that
you would invest in index
funds versus rental properties?
Because it seems
like all the research
I've done on all the dialogue
from the financial independence
community is basically
split into those two schools
of thought.
Like do index fund investing,
or buy rental properties.
And if I may outline, it
seems to be the rule of thumb
for index fund investing is
the 4% safe withdrawal rate.
And then the rule of thumb
for rental property investing
would be the type of cap
rate you're going for.
And a going rate for the
cap rate might be like 7%.
So is that a 7% rule
versus a 4% rule that
accelerates your date to FI?
Or am I off there?
Just curious.
DAVID MOLTZ: That is a
pretty specific question.
[LAUGHTER]
PAULA PANT: So first of
all, to the first half
of your question, which is what
is the proper asset allocation,
again, I don't think that there
is any specific correct one.
Right?
Like at the end of the day,
at a big picture level,
what you're trying to do
is increase your net worth
in a risk-managed way.
And so however you can
increase your net worth
in a way that is comfortable
to you is the way to do it.
Right?
The best, the quote unquote,
"best strategy" in the world
is the one that you'll actually
stick to because, ultimately,
regardless of whether your
contributions are going
to rental properties
versus index funds,
your contributions are going
to be the single biggest
determinant of your success.
And so if you--
and again, humans can play
these psychological tricks
on themselves.
Like we have this tendency
to compartmentalize money.
Like if you think about
it, money is money.
You've got this big pool of
assets, and it's all money.
But if we compartmentalize
it mentally,
if we think this
is the batch that's
going to be used for
my kids' college fund,
well, we're less likely to take
the kids' college fund batch
and spend it on
caviar and champagne,
even though we might take a
batch from this other bucket
and spend that on
caviar and champagne.
Right?
Ultimately, it's
all your net worth.
It's all your money.
But compartmentalizing
is very powerful.
And so that really, in
terms of asset allocation,
is what I would
encourage you to do.
If you can
compartmentalize like,
you know, maybe the
income that I make from--
the income that I make
from this freelancing
that I do on the side goes
towards rental properties,
but the income that I
make from my primary job
goes towards index funds
or vise versa, whatever.
You know, it doesn't matter
what the decision is.
That compartmentalization
can often
be a motivator that helps
you increase contributions.
And I think that is far more
important than the tactic
of nailing a proper
asset allocation.
DAVID MOLTZ: Nice, all
right, one last one.
AUDIENCE: Who wants it?
AUDIENCE: Hi, first, thanks for
coming out and talking with us.
So my question has to do with
asset allocation to a degree,
but also real estate and equity.
So ultimately--
PAULA PANT: Popular topic here.
AUDIENCE: Yeah,
you know, if you're
noticing that a substantial
portion of your net worth
is in home equity, what
are kind of the key points
to factor into the
decision of whether
or not to pull the
equity to invest?
So you know, ultimately,
you discussed 4% and change.
If it's a home equity
line, if there's
a variable versus fixed, what
are you looking for as far as--
you know, you mentioned
7% or 8% return--
kind of that gap?
What's that spread
that you kind of look
for to decide whether or not
it's meaningful to actually
pull money out of investments?
PAULA PANT: Oh, that's
an excellent question.
So the concept of, if you
have a significant amount
of home equity in your
personal residence,
pulling that home equity
out to invest-- now
first thing I'll say
is a lot of people
have a knee-jerk reaction
to this where they think,
oh, no, don't do that.
That's not a good idea.
But if you think
about it logically,
right, what is the
difference between--
what is the difference
between taking money
that you would otherwise use
to make accelerated mortgage
payments and using that for an
alternate purpose versus having
a good amount of
home equity and then
borrowing against it for
same said alternate purpose.
Right?
At a functional level, those
are exactly the same actions.
But a lot of people will say--
you know, person A will say
I'm not making any accelerated
payments towards my mortgage
because I would rather put
that money into investment x.
And person B would say I am
making accelerated payments
towards my mortgage.
And now, look, I've got
all of this home equity.
I'm going to borrow against
it and put that money
towards investment x.
Right?
Like it's the same thing.
So the first thing
I'll say-- and I'm
saying this for the sake of
everyone who's listening-- is,
you know, don't have
that knee-jerk reaction
against borrowing
against the equity
in your personal residence
because, in many ways,
many of us are already doing
it through opportunity cost.
So then to answer your
specific question,
how would I think through
whether or not to do it
for a given investment?
The first thing that
I would ask is not
the potential return
on that investment,
but I would ask what
is the risk of ruin.
Right?
What are the chances that
that money that you withdraw
could go down to zero?
On something like a
broad market index fund
or a rental property, the
chances of that falling,
sure, that's there.
But the chances of that
dropping by 50%, you know,
or losing a very
significant amount of money
is, historically speaking,
not that likely to happen.
You know, so in that regard,
your downside is, at least
historically speaking, limited.
And to that extent,
that makes it
safer than say taking
out that same HELOC
and using it to start your own
business, which could go down
to zero.
So that's the way
that I would approach
it is manage the downside.
Manage the risk of ruin.
Because so long as that money,
in a worst case scenario,
so long as even if you
don't make any returns,
if at the end of the
day, you break even,
and then you're mad at
yourself because you've just
paid a bunch of closing
costs, that's not
going to be a deathbed regret.
Right?
AUDIENCE: Thanks.
DAVID MOLTZ: All right, well,
that's all the time we have.
Last question for
Paula, for those
that are interested
and want to learn more
about you and "Afford
Anything," where should they go?
PAULA PANT: So my podcast
is called "Afford Anything."
So you can find it wherever
podcasts are found.
And my website is
affordanything.com.
DAVID MOLTZ: Great,
well, thanks, everyone.
Thank you, Paula.
[APPLAUSE]
