Special to the Financial Independence Hub
Let’s face it, saving and investing should be simple.
- Save, automate your savings to buy stocks.
- Invest in stocks and/or low-cost products that invest in stocks to avoid mutual fund salespeople.
- Disaster-proof your life by having some cash stashed.
- Rinse and repeat.
But simple is not easy.
All too often, we humans love to make things far more complex than things need to be.
We’re wired that way unfortunately. Egos often get in the way.
Given many people continue to struggle with personal finance, every day, there are tens of thousands of books published out there on this subject – building and maintaining a responsible investment portfolio is only part of the personal finance success equation…
Learn why you should Buy This, Not That
Sam Dogen (aka Financial Samurai) knows a thing or two about personal finance success.
Sam founded FinancialSamurai.com in July 2009 during the depths of the global financial crisis.
Sam’s goal through that site was to deliver and share a cathartic way to make sense of the chaos at the time. Fast forward to today, more than 90 million people have visited Financial Samurai, and tens of millions more have read his work on publications such as CNBC, Yahoo Finance, and Business Insider.
Sam was previously at Goldman Sachs and Credit Suisse for 13 years – but he’ll share more details below!
When Sam is not writing or playing with his kids, you can find him on a tennis court or softball field in San Francisco, or on My Own Advisor giving away a book!
Sam is a graduate of The College of William & Mary and received his MBA from UC Berkeley.
I got a chance to chat with Sam recently about his new book: Buy This, Not That – How to Spend Money Your Way to Wealth and Freedom.
Here is our interview below before Sam:
Sam, welcome to the site – I know you’ve left a few comments over the years and nice to see you back!
Sam, maybe not everyone is aware of your financial journey and Financial Samurai beginnings. Can you share a bit of your bio with my readers? Where do you live, what have you invested in, and “how did you get here” to writing this book?
Sure thing, Mark.
I grew up in The Philippines, Zambia, Japan, Taiwan, and Malaysia before coming to America for high school and college at William & Mary. My parents were in the U.S. foreign service.
After college, I joined Goldman Sachs in NYC in their international equities department. It was a dream job, except for the fact I had to get in at 5:30 am and often leave after 7 pm! As a result, I decided to save and invest 50% of my after-tax paycheck so I could one day have options to escape.
In July 2009, I started Financial Samurai and helped kickstart the modern-day FIRE movement. It’s been great to see so many people embrace their financial independence journey since then. My definition of financial independence is having enough passive investment income to pay for your basic living expenses.
I decided to write Buy This, Not That because I felt it had to be written. When I started Financial Samurai, there weren’t a lot of personal finance bloggers with finance backgrounds. I noticed when I first got my book offer in early 2020, there weren’t many finance authors with finance backgrounds either! So, I decided to fill this hole and provide my perspective.
Instead of scratching the surface, I decided to go deep into many financial topics. I then tackled some of life’s biggest dilemmas many of us all face.
Sam, in your book, you wrote:
“My first hope with Buy This, Not That is to help you let go of the fear of making a wrong financial choice. Let that sink in: there are no wrong money choices, just as there are no perfect choices, only optimal or suboptimal.”
Talk to me about your investing and wealth-building journey. What mistakes did you make? What successes did you have? What did this teach you and what do you hope to pass along to others in the book?
Mark, I made the suboptimal choice of buying a vacation property I didn’t need in 2007. I got it for 15% off, but it ended up declining by another 40% during the financial crisis! Luckily, most of its value has recovered and I’ve been taking my kids there since 2018.
Not extrapolating my income into the future was my biggest lesson learned. I was paid very well in 2007 and thought my income was just going to go higher. Life is full of ups and downs. Therefore, please be conservative with your income and return forecasts.
One of the key takeaways from the book is to encourage readers to think in probabilities, not absolutes. Don’t think you need 100% certainty to make a choice. Otherwise, you’re going to miss out on a lot of great opportunities.
In The Psychology of Money, Morgan Housel wrote effectively:
You don’t have to be a perfect investor. Getting wealthy and staying wealthy is “about consistently not screwing up.”
I agree with this/have always agreed with this and this aligns nicely to your 70/30 decision making philosophy. Can you explain that for readers and why is that framework so important to you to convey in the book when it comes to investing and wealth-building?
Use my 70-30 decision-making framework to build wealth and make more optimal choices. The framework states that if you believe there’s a 70% probability or greater your choice is the correct one, go for it, while having the humility knowing that 30% of the time, you’re going to get it wrong. And when you do, you will learn from your mistakes and get better.
Once you start approaching everything with a probability matrix in mind, you’re going to gain a tremendous competitive advantage compared to those who don’t.
I like that.
Sam, I personally equate the definition of Financial Independence (FI) as your investments generate enough passive income to cover your day to day living expenses. I’m not into this Barista FIRE, etc. What’s your take? Agree? Disagree? Why?
Yes, since 2009, I’ve stated that being financially independent means having enough investment income to cover your basic living expenses. However, I think Barista FIRE is a reasonable stop gap where you can earn extra income and receive subsidized health care while working a traditionally lower-wage job.
But at the end of the day, don’t fool yourself. If you still need to work, then you are probably not financially independent.
When I left work in 2012 at age 34, I had about $80,000 a year in passive investment income. I knew I wouldn’t starve, but I also wasn’t 100% confident I was doing the right thing. Therefore, I had my wife, who is three years younger than me, keep on working until age 34. If everything worked out with my new adventure, she could join me. In 2015, she was also able to negotiate a nice severance and hasn’t been back to work since.
So, when did you realize FI (Financial Independence)?
In 2012 when I was 34. At the time, I had a net worth of about $3 million that generated about $80,000 a year in passive income. But the biggest catalyst was negotiating a severance that paid for 5-6 years’ worth of regular living expenses. My severance paid all my deferred cash and stock compensation over the next three years. I also had a private investment made in 2010 that wouldn’t come due until 2017 that was fully paid out.
Thanks to a lucky bull market since I left, my net worth and passive income have compounded with the market. Even though we have to provide for two young children now, our passive income is enough to keep us both unemployed until they leave the house.
I believe there are many paths to FI. You can invest in the stock market, real estate, be a private equity investor, start, run and sell a business and more. What was your path to FI? What role did luck or good fortune have in your path to FI?
I would say 60% of my ability to achieve FI by age 35 was due to luck (post highlights my lucky breaks). I got lucky landing a job at Goldman Sachs in NYC because the firm didn’t recruit at William & Mary. Instead, I got on a bus to attend a career fair and made it through six rounds, seven months, and 55 interviews.
Because I knew I was lucky, I felt like my luck would eventually run out. As a result, I decided to live frugally and save and invest as much as possible.
Today, I feel very lucky to have learned from so many mistakes I made since starting my FI journey in 1999. As a result, we should be better able to weather the various storms for an indefinite period of time.
Buy This, Not That was a lucky break too. I got rejected by every literary agent I contacted back in 2012. But at the end of 2019, an editor from Portfolio Penguin Random House pitched me to write a book with them! Given the opportunity and the fact that we’d be locked down for an unknown period of time, I decided to write the book and make the best out of a suboptimal situation. The book made the Wall Street Journal bestseller list, which was a combination of hard work and luck.
In Buy This, Not That, you wrote:
“The best passive-income investment is investing in dividend-paying stocks.” Can you share with readers your bias for that decision and why you feel so strongly about that?
You, from your book:
Mark, I think there is always a tug of war between dividend stocks and real estate for the #1 passive income investment. Dividend stocks win out for most people because they are easier to buy, require no effort, and have a favorable tax rate in America.
However, I love real estate because it is less volatile than stocks, it can be renovated to boost its value, and it usually provides a higher rental yield. However, the older I get, the less I want to manage tenants and deal with maintenance issues. As a result, I’ve turned more toward private real estate investments for 100% passive income and diversification of my expensive San Francisco real estate holdings. So far, I’ve invested $810,000 in a couple funds and individual private real estate deals.
A lot of folks that read my site, are either aspiring for FI, approaching semi-retirement or retirement, or in retirement – looking at ways to sustain their portfolios including finding an ever-magical asset allocation.
What’s your take on asset allocation as you get older? How much cash should you keep? How much fixed income? At what ages and why?
As they say, once you’ve won the game, there’s no need to keep on playing. But everybody’s risk tolerance and desires are different. Buy This, Not That provides three net worth allocation frameworks by age based on risk tolerance and goals. You’ve highlighted one framework below and my reply to that model!
And my model:
In terms of cash, I also like to have around 5% of my net worth in cash.
So, do you agree with any Equity Glide Path?
Reference: Michael Kitces work as one example:
In general, I do believe equity exposure should decrease as we age. You will find the recommendations in my various frameworks. But again, it’s up to you to decide your own risk tolerance. Just know that your risk tolerance is likely an illusion. You will only know what your true risk tolerance is until you start losing a lot of money (30%+) with significant assets in a bear market.
My perspective is somewhat different from most people writing about retirement because both my wife and I don’t have day jobs. So, we pay 100% of our $2,300 a month health care insurance bill and have to carefully manage our investments so we don’t lose too much.
It’s very different writing about asset allocation in retirement when you are still gainfully employed with a pension. It feels different once that steady paycheck goes away.
To wrap, Sam, for folks on their FIRE/FI journey, what advice do you have for folks a few years away from their target income? Inflation? Other? Sequence of Returns Risk?
What advice do you have for folks who have achieved their FI number and are now transitioning to the “other side” as part of your Buy This, Not That summary…
Mark, if you’re only a few years away from your target passive income and net worth, I encourage you to step on the gas. A favorite saying I have for my readers is: If the amount of money you’re saving and investing doesn’t hurt each month, you’re not saving enough!
And since you’re very close to hitting FI yourself Mark, I also encourage you to pretend like you no longer have a paycheck. Instead, try to live off your passive investment income instead. This is your test drive to see if what your investments are generating is truly enough.
For those on the other side of FIRE, make sure you find something meaningful and purposeful to do. There are a lot of negatives of early retirement I’ve written about in the past. Losing your identity and purpose can be very jolting. It’s best to find something you want to do before you leave your day job behind. But if not, make sure you put yourself out there and find a community of people who share your same interests. FIRE can be very lonely, especially if you pull the ripcord at a younger age.
Even though writing Buy This, Not That took two years to write and edit, it gave me purpose during the pandemic. Further, I was motivated to write the best personal finance book possible to give people the courage to live their ideal lives. Finally, just the thought of my kids being able to take the book to show-and-tell class one day provided the greatest motivation to keep going.
I could have asked Sam a dozen more questions, but I figured we’d stop here and offer you a chance, to win an autographed copy of Sam Dogen’s book Buy This, Not That below.
Alternatively, you can buy Sam’s best-selling book on demand via his site right here.
I look forward to sharing more reviews and offering more giveaways again on my site, soon!!
Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on Oct. 4, 2022 and is republished on the Hub with his permission.