Podcast #481: Building Financial Independence Beyond the Stock Market

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Financial independence is a goal for a lot of folks. But what does it take to get there? My guest today explores that question on his website, Financial Samurai. His name is Sam Dogen, and before writing about money online, he worked in finance. We begin our conversation discussing how his career in equities shaped his personal finance philosophy and made him leery of putting too much wealth in the stock market. Sam shares why he recommends putting a lower percentage of your money in stocks than is often recommended in mainstream finance advice, how that percentage should shift as you get older, and alternative ways to invest, build your wealth, and create multiple streams of income that will give you more control over your fortunes. Sam then shares what it means to be financially independent and some of the blindspots he thinks exist in the FIRE, or Financial Independence/Retire Early, movement. We end our conversation talking about how to plan your financial life for the future, especially concerning what the changing world will be like for your kids.

Show Highlights

How Sam’s net worth was affected by the ’09 crash
Why Sam diversified away from the stock market
How Sam’s philosophy towards money differs from many financial experts out there
Forecasting your future — and the worst-case scenario — when it comes to your money
How Sam’s fairly conservative approach has helped him in the long run
Why your investments should have some utility
Investing in real estate without being a landlord
The wisdom of stability — in both your career and your locale
Changing your investment strategy as you age
Why Sam advocates starting a business as an investment strategy
The FSDAIR framework for paying off debt
The FIRE (Financial Independence, Retire Early) movement
How to calculate how much you need to retire early
Blind spots people have when it comes to financial independence
How do you plan for your kids’ future?

Resources/People/Articles Mentioned in Podcast

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Read the Transcript

Brett McKay: Welcome to another edition of The Art of Manliness podcast. Financial independence is a goal for a lot of folks, but what does it take to get there? My guest today explores that question on his website, Financial Samurai. His name is Sam Dogen and before writing about money online, he worked in finance. We begin our conversation discussing how his career in equity shaped his personal finance philosophy and made him leery of putting too much wealth in the stock market.

Sam shares why he recommends putting a lower percentage of your money in stocks than is often recommended in mainstream financial advice, how that percentage should shift as you get older, and alternative ways to invest, build your wealth, and create multiple streams of income that’ll give you more control over your fortunes. Sam then shares what it means to be financially independent and some of the blind spots he thinks exist in the FIRE, or financial independence, retire early movement. We end our conversation talking about how to plan your financial life for the future, especially concerning what the changing world will be like for your kids. After the show’s over, check out our show notes at aom.is/financialsamurai.

Sam Dogen, welcome to the show.

Sam Dogen: Thank you very much. Glad to be here.

Brett McKay: Oh, yeah. So, you run a website, one of the blogs I subscribe to my RSS feed, Financial Samurai. I’m not sure exactly how I stumbled upon your website. But I’ve been a longtime reader. What I like about it, it’s different from a lot of the other personal finance blogs out there. We’ll talk about what makes your sort of approach different. But before we get there, let’s talk about your background and how it influenced your philosophy towards personal finance.

Sam Dogen: Well, thanks for being a reader on my site for so long. I’ve been a reader and listener of your site and podcast for a while as well and I’ve watched it grow so tremendously. So, congratulations there, Brett.

Brett McKay: Well, thank you.

Sam Dogen: My background is, well, pretty simple, I guess. My parents were in the US Foreign Service. I grew up overseas in Asia and in Zambia for 13 years before coming to the United States for college. They were always really frugal. Whenever I’d go out to eat, my parents would admonish me for ordering anything but water. So, I knew their frugal ways since I was a kid. So, I decided to go to public school, the College of William & Mary, which was only about $2,800.00 a year at the time.

Then I landed my dream job in finance. So, from 1999 to 2012, I worked in the equities department of a couple major Wall Street firms. Then in 2009 during the financial crisis, I decided to start Financial Samurai as a cathartic way to deal with the financial crisis. So, I was thinking, “Well, instead of smoking or drinking, maybe it’d be healthier to write,” and because I love to write and I love to connect and hear other people’s perspectives. So, I started Samurai in 2009. By 2011, it was actually making somewhat of a livable income stream in San Francisco. So, in 2012, I negotiated a severance after 11 years with one firm and I decided to do this full-time and be free.

Brett McKay: So, you mentioned that you started this in 2009, right when the financial crisis hit. Were you affected personally by that? Was your bottom line, your net worth adversely affected?

Sam Dogen: Absolutely. I was crushed. So, I started in 1999, right? 10 years saving, investing really, really diligently. I remember the first moment I started working, I’d get in the office at 5:30 AM and then I wouldn’t leave until 7:30, 8:00 PM all the time. I knew after about a month, I couldn’t last. So, I was basically saving and investing every single dollar I could afford. I lived in a studio with another friend for a couple years because I knew I couldn’t last in this industry.

So, I actually lasted about eight years longer than I thought I would to 2012. So, during the financial crisis, my net worth got crushed by, I would say, 30, 40% at the bottom in a matter of about six months that took 10 years to accumulate.

Brett McKay: So, before this time, were you following a traditional mainstream approach to personal finances where you said, “Okay, I’m going to set aside this amount of money all in stocks because I’m young, because I got a long time for that to grow, and even if there are setbacks, I got time to make up”? Were you following that sort of thing and did your philosophy change after that?

Sam Dogen: So, because I worked in finance and equities specifically, I decided to basically invest in almost everything but equities. So, my investment of choice was real estate once I started accumulating a large enough nut. So, I diversified away from the stock market after maxing out my 401(k) and receiving company stock and stuff like that. But investing basically in San Francisco real estate and in Lake Tahoe real estate. So, I figured my career was already leveraged to real estate, my bonus, my pay, my promotion. So, I didn’t want to have more in equities.

It was interesting because when I started in 1999, it was full market. It was a dotcom mania. Then by 2000, dotcom bomb, bubble burst, and then by 2001, a lot of paper millionaires lost a lot of money and a lot of people got fired in the industry. Then, so that was a wake up call. Then had good times all the way up until 2008, and then things blew up again. So, my history in the equities department and in investing hasn’t been quite a glorious one, even though stock market is close to record highs now. It’s been quite treacherous, actually.

Brett McKay: So, like I said earlier, one of the reasons I enjoy reading the articles on your website is because your philosophy towards personal finance seems to go slightly against what you typically see from accepted personal financial advice. So, how would you say your philosophy differs? So, talk about, what do you think the overarching philosophy that you have towards money and how does that differ from mainstream advice?

Sam Dogen: I strongly believe that we all have the ability and deserve to be rich. I really come with that mindset that we all deserve to be extraordinarily wealthy if we want to be. Now, obviously, there’s going to be more challenges, we’re going to face more hurdles than some other people. Some people have huge head starts with their parents, with their jobs, or whatever. But thanks to the internet, we can learn other people’s stories. We can learn other people’s archetypes and follow along and learn from others so we can ourselves get better.

I have some fundamental thoughts about personal finance and that is, one, if the amount of money you’re saving each month doesn’t hurt, you’re not saving enough. Then two, I think it’s important that everybody forecast their misery. That ties together with fundamental number one. Too many people, I think, don’t forecast their future. They start a job and they think, “Wow. This is so fun. My colleagues are awesome. My boss is great.” But as we all know, life happens. Right? Life happens at our job, things get boring, people get fired, exogenous variables happen all the time.

It’s important to look ahead five, 10 years from now and constantly be thinking what are some of the things that might trip you up? What are some things, good and bad, that might help or hurt you along your path to financial freedom? So, when you start practicing thinking ahead often, whether it’s in your career, your money, your business, you start internalizing this different way of thinking where you’re just not some zombie sitting there in the present thinking about what you got. But you’re thinking ahead and hopefully making rational decisions to get to where you want to go.

Brett McKay: All right. So, it sounds like, yeah, number two is think worst case scenario. What’s your backup plan if things don’t go right?

Sam Dogen: Always think about blue sky scenario, realistic scenario, and worst case scenario. I think it’s going to be optimistic, but if we have a default assumption of everything going out great, that’s probably really dangerous for the most of us.

Brett McKay: I guess one of those default assumptions that you see frequently in the personal finance world is going back to equities. It’s like whenever you read these personal finance books, they always assume 8% return on investment. That not necessarily be the case for some people.

Sam Dogen: Oh, no. There’s huge sequence of risk issues. If you look back at 2000, you saw losses in 2000 of around 12% and then 2001, you saw another down year. Then in 2002, you saw another down year. So, three years in a row where you ended up losing about 42 to 45% of your wealth. So, if you actually had a significant amount of wealth then, you’d be in trouble if you wanted to retire around then. Then of course, we had another downturn in 2009, right?

Brett McKay: Right. Then another thing people don’t think about too is that if you lose … The other mainstream personal finance advice is, “Well, if you lose in the stock, you have time to recoup that.” But the often overlook is that sometimes, it takes longer for you to recoup those losses than you think it would take.

Sam Dogen: Oh, yeah. So, if you lose 50%, you’ve got to make 100% just to get back to even. But during that time back to 100%, you’re losing time. So, the older you are, naturally, the more you’re going to appreciate your time because you have less of it. I think a lot of people maybe in their 20s or in their 30s will under appreciate time and think they’re invincible and they have all the time in the world to get this back. But you will soon realize maybe when you hit 40 or plus and if you have a family to raise and people to take care of that you really don’t want to waste so much time trying to get back to even anymore.

So, at some point, you’ve got to figure out how much is enough for you and you’ve got to dial back your risk tolerance and say, “You know what?” Maybe four to 5% returns a year on my portfolio or on my overall net worth is good enough. Maybe it’s not worth the risk of trying to make a 10% plus return,” because it really doesn’t change the quality of your life and it could actually significantly negatively impact your quality of life by having you have to work more or stress more just for money.

Brett McKay: So, yeah. That goes to one way you differ from mainstream personal finance stuffs. The article of faith is that the younger you are, the more money you should have in equities. I think it’s 90%. It’s something like that, the number you see thrown around. But you personally don’t do that. You said because you worked in equities, most of your money went out of equities and di things like real estate or whatever. So, it seems like it’s a very conservative approach. How do you think that conservative approach helps you win in the long run?

Sam Dogen: I don’t know if it’s conservative, but I think it’s more rational. I think people who are putting 80 and 90% of their net worth in the stock market, I think might need to do some soul searching here and look at their net worth distribution and look at other asset classes like real estate, like fixed income, like your own business equity, because life is quite complicated. 80, 90%, no way. Yeah, maybe in when you’re 20s and you don’t have a family and you’re a vagabond or you just want to move to job every two to three years.

But in my view, wealth is more about real assets, so assets that you can derive utility from, that you can live in, that you can generate rental income. Stocks, you can’t really derive any utility. You need actually a purpose for your stock investments. The issue with stocks, don’t get me wrong, I’ve got about 25% of my net worth in stocks. But the issue with stocks is that it goes up slowly and then it just crashes very quickly due to panic.

If you don’t have a discipline for what you are investing for, you’re throwing money into a vehicle that is shown to do well over time, but there’s really no utility. That is something where I like to invest in something where it could potentially go up, appreciate in value, and provide utility. Two things. Not just, oh, it could go up and make me richer. Who cares?

Brett McKay: Well, it seems also too, by focusing on things like real estate or your business or even just acquiring skills so you can ask for and negotiate for a raise, those are things that are in your control. The stock market, you can’t do anything about that, really.

Sam Dogen: Yeah. You’re a minority investor that is subject to the whims of the government, the Federal Reserve, fraud, whatever. I think the stock market is great for those who want to give up control and just invest passively. So, at the same time, if you believe in yourself, if you want to be active and try to build wealth, I think you can do a little bit better job through a business or through real estate. There’s obviously some great stocks that I like because I really believe in the business people and the product. Amazon, Tesla, these are amazing products and I would be willing to bid on these people.

So, one of the interesting thing that I noticed from my 20s to now my 40s is that not only do I invest in public equities based on the fundamentals, but I really try to invest in the people. The people who I see are business visionaries who can get the job done and who can think ahead always three, five years and anticipate, because Financial Samurai, even though it’s just a personal finance side, it’s our lifestyle business, and I like to think ahead as well to see if I can grow that, because it’s fun.

Brett McKay: So, let’s talk about investment strategy. We’ll call it that. A wealth strategy for someone who’s in their, say, 30s. So, you mentioned someone, that they’re in their 20s, no family, no strings attached, putting most of your money, 90% of your wealth in stocks, probably not a bad idea. But let’s say you’re in your 30s, family, you have a house. So, there’s a lot more at stake if your net worth takes a beating. So, what does a strategy look like for that person? I know specifics, it’s going to vary from person to person, but generally, what does that look like for you?

Sam Dogen: It’s going to be dependent on everybody’s individual earnings powers and ability. But if you’re in your 30s and you have a family, you should be at least neutral real estate by owning your primary residence. So, neutral real estate is just floating up and down with the water and the tides. You’re short the real estate market if you’re renting. Right? You are a price taker, you’re paying rent, and you’re getting no equity. So, you’re short the market. You’re only long real estate if you are long, or if you own more than one property. This is really important for people to think about. If you short the stock market over a 20 year period, you will probably lose a lot of money.

So, for those who are anti-real estate, renting for 20 years is also quite similar to shorting the stock market over a 20 year period due to inflation and the normal appreciation of assets due to labor and so forth. So, I think if someone’s in their 30s with a family and so forth like that, you should probably have something around 30% to 40% in equities, 30 to 40% in real estate, so you’re at least neutral real estate, and the rest in more stable, lower risk investments like fixed income and CDs. I think you should always have five to 10% of your net worth at least in low risk, stable income securities.

Brett McKay: Okay. Real estate. You’re big on that. What if you don’t want to be a landlord? Right? I have friends who that’s what they do and it sounds like a nightmares sometimes because the tenants are just terrible, they trash it up, they’re always having to do repairs. So, that’s something else to consider too if you’re thinking about doing real estate. But are there other ways to invest in real estate without having to do that?

Sam Dogen: Yeah. You can just invest in a REIT and be a commercial property landlord that way. There are many different types of REITS. You can invest in real estate crowd funding, which is where you invest a 1,000 to 10,000 at least in these commercial properties across the country. Again, when you’re talking about being a landlord, you’re talking about going long real estate. It’s going beyond your primary residence. So, one step at a time. Own your primary residence if you know you’re going to be there for five, 10+ years.

I’ve found that stability does wealth pretty good. No matter what people say about job hopping every two to three years or whatever, just finding your community, find yourself in your 20s or whatever. But after about 10 years of looking, I think you should probably find or realize if there’s a place in the world where you want to settle down and establish some roots. Once you establish some roots, you see a lot of positive network effects from your relationships, your network, the other opportunities around that city, and you’re investments in real estate. The stock market, you can live anywhere. But there’s positive network effects if you can stay in one place for a certain period of time.

Brett McKay: Right. That goes counter with a lot of young people. They think they got to constantly move, job hop, job hop, move to this city. It might be good to just settle in a suburb where you’re happy. Right?

Sam Dogen: Hey. Sometimes, it takes longer to find yourself. I thought I was really lucky to find a job in finance, and I would have gone anywhere in the country and in the world to get that job. So, I just went where the job took me. But eventually, I wanted to settle down. When I found San Francisco in 2001, I was like, “You know what? This place is cheaper than Manhattan, it’s more diverse, the weather is great, good outdoor life, and it was closer to Hawaii where my dad’s side of the family’s from, and Taiwan where my mom’s side of the family’s from.”

So, I figured, “Hey. Why not set up shop?” So, I’ve been here ever since and I think I’m going to be moving soon to Hawaii. But it’s been a good run. If you can identify something quicker where you’re going to be happy living, I think that’s a great thing.

Brett McKay: So, you mentioned that breakdown for someone in their 30s with a family, 20 to 30 in stocks, 30 to 40 in real estate, and then some of the rest and very stable things like CDs or fixed income type things, does that change as you get into your 40s or 50s?

Sam Dogen: It definitely changes and there’s just so many different permutations that it’s hard for me to give some exact recommendation. But I do believe that everybody should figure out how to build their own longterm growth equity. So, in other words, starting a business. A lot of people are like, “Well, I don’t know how to start a business.” Whatever. Neither did I . But if you look at the world’s wealthiest people and their asset allocation breakdown, the wealthier they are, the larger percentage of the net worth comes from equity in their business.

It doesn’t matter what kind of business it is. It’s just equity in their business because when you have a business, you can not only earn money from that business. You could hire your friends and family for that business and you can sell your business for multiples of revenue or earnings, whereas if you have a job only, you can only sell your time. So, you don’t want to limit yourself. The way I look at my online business is that I run it because I enjoy writing and I enjoy connecting with other people.

But I also run it because I have a son now and I know that life is going to be hard for him as he gets older because of globalization, because of the speed at which information travels, and because of the rigors of trying to get into a good school, and so forth. So, my motivation now is to keep the business running long enough until my son tells me, “I want to have nothing to do with learning about online marketing or writing or anything like that,” because I think the world’s going to get much, much tougher and it’s going to get much more bifurcated to those who have and then those who have not prepared.

Brett McKay: So speaking of a business, it doesn’t necessarily mean you have to completely quit your job to start a business. I mean, you are a big proponent of having a side hustle where just a side stream of income that supplements your income from your career.

Sam Dogen: Oh, absolutely. You don’t want to rely just on your job income. There is no way in hell, if I was back in my twenties or thirties that i would have just one job. We know that companies aren’t as loyal as they once were and so there for you have a higher risk of getting fired at any given moment in time, and the great thing is, is that the internet has allowed you to develop so many side hustles. From Upwork, to Craigslist, to TaskRabbit, to ride pressure driving these are side hustles and then there is obviously the businesses where you can start your own website to sell stuff, or you can write stuff, and build your brand. I mean it is just endless and it is just so easy to start now. You can start your own podcast, get enough listeners, you can get advertising dollars, it is just an endless variety of ways to make money, and I am so excited for people who are growing up in this area right now who are younger and can take advantage.

Brett McKay: So then also it can turn into a full time gig, eventually, possibly.

Sam Dogen: Oh yeah, definitely, possibly right? The best is if you’re working, let’s say you are working from 7:30 a.m. to 6:00 p.m. you can either work on your side business from 5:00 a.m. to 6:30 or 7:00 a.m. or after you get home. You do that for two or three hours, you tinker with it, you toy with it, there is no downside at all. No downside at all, the only downside is if you ask your company, “Hey, can I do this.” And they say, “No” and you do it anyway, and they find out and they screw you or something. So you have to be strategic about that, but I worked on Financial Samurai off hours, for two to three hours a day for two years before It started making a livable income stream.

I remember in Santorini, Greece I was just hiking my way up the hill and I wanted to get a 10 dollar beer, and I got an email with my iPhone. There was wifi at the bar … this was 2011, and it was like, “Hey, Sam I’d like to advertise on your website. If you put up this advertisement I will pay you 1,200 bucks.” And I was like wow! 1,200 bucks really? I was like, okay! Sign me up. So, I put up the code and in about 25 minutes, he PayPaled me the money instantly, and I was like, “oh! Time for another beer.” That was the moment where I was, “Hey, there is life after finance. This is pretty cool.”

Brett McKay: Okay, so speaking of things that we can do to control, and have more control over our wealth. Starting a side hustle, also your job, like for some people they might not be able to quit their job right away. But one thing they have control over is negotiating a higher salary. A lot of people are afraid to take that leap.

Sam Dogen: Yeah, I don’t know why. Maybe, it’s a self confidence issue. The first two years I was learning right? Learing, what the hell am I doing, I was a consignor, but after a while you get the hang of what it is you need to do to provide value at your firm. So everyone needs to understand, the reason that you have a job is because you create more value to the firm, then your total compensation and benefits. If you didn’t, you would be fired. So as long as people know that, they need to have confidence in themselves into providing more value, and I do recommend that everybody at most every two years have a heart to heart with their manager and say, “Hey, these are the things that I provided to you. I would like a raise.” If you go on the open market, you could probably immediately get a 25% raise, easily. So, you have to keep your employer honest, at least every other year, and preferably you can do so every year during your year end review. That is if, you’re not suffering from Dun and Kruger and thinking you’re providing more value then you really are.

Brett McKay: Yeah, I imagine there are a lot of people like that. So I guess one thing is keep a record of the things you’ve done. So that you can present that to your employer when it is time.

Sam Dogen: For sure. Your manager doesn’t remember what great things you did in the first and second quarter. So it is up to you to manage up, manage your manager, and highlight with confidence, but with respect these are the things that I have done for the firm to make it better and this is why I deserve to be on this track. You need to make sure, that your manager is on top of your career progression.

Brett McKay: So talking about financial strategies, and trying to get the most bang for your buck, and getting … they create the most wealth, and the most income for you … people who have debt, I guess one of the best things that they could do is pay off that debt, because that just frees up so much money for themselves?

Sam Dogen: Yeah, so debt is interesting. Whether you have student loan debt, mortgage debt, you better not have credit card debt, because not even the great Warren Buffett has been able to return, an annualized return equal to the average credit card interest rate. So my formula for paying down debt and investing is called F.S. Dair, D.A.I.R. Basically what you want to do is take your debt interest rate, lets say it’s 4%. So you would essentially use 40% … so you just multiply it by 10. You got 40% of your cash flow to pay down debt, and then 60% of your cash flow to invest. So you are always paying down debt or investing. If you debt interest rate … let’s say it on two and a half percent, so my mortgage is only two and a half percent, and I’ve only been using about 25% of my cash flow to pay down that debt and I’ve been investing 75% of my cash flow to invest.

Now, I limit it up to 10%, so if your debt interest rate is 10% or higher then you should spend all your free cash flow to pay down that debt, because 10% is ridiculous, ’cause the debt interest rate needs to be compared to the risk free rate of return. So what is that risk free rate where you can earn money and not half to worry about losing money? That risk free rate return is either a one year treasury bill, or a 10 year treasury bill, or your money market rate. So right now you can get a money market rate, interest rate of 2.5% and you can get 10 year treasury bottoms only about 2.7% rate, right now so it’s not that great. My point is, that is if you pay 10% or higher in debt interest rate, you’re paying like a seven and a half percent plus premium on a risk free rate of return, that is like robbery so that is why credit cards are so rich, and that is why you see so many websites promote credit cards.

They make so much money off people who don’t pay off their debt, every single month. You have got to crush that credit card debt, you should never have credit card debt, and then you should have a disciplined formula using F.S.Dair to pay down debt and invest, in a proper ratio.

Brett McKay: Gotchya, so lets talk about a goal that a lot of young people have, and there is a lot of talk about this lately in the news and the media. This fire movement, what is it? Financial Independence, Retire Early, is that what that stands for?

Sam Dogen: Mm-hmm (affirmative)

Brett McKay: Alright, there is a lot of talk about it. What is Financial independence look like for you? Because you have written about that too on Financial Samurai.

Sam Dogen: Yeah, like my tag line is achieving financial freedoms sooner rather than later since 2009, and so financial independence to me is simply having enough gross passive income to cover your best life, living expenses. It’s that simple, so you need to invest and save beyond your 401K, and your IRA and so forth. You need to build a large enough after tax investment account, spits off enough gross income so you don’t have to work. Now where the lines get shady, or gray is that a lot of people who are proponents of the fire movement don’t have that concept. Their passive income does not cover their life expenses. What they’re doing is, they are talking about financial retire early, meanwhile they are hustling like hell, on their blog, or on side hustles trying to make a living in a non traditional way.

So it is important for listeners to really fill a need between, what is true fire, and you know what everybody has their own definition. The reality is that we have come through … we have just come through a 9 year bull market, so it really easy to understand why so many people are feeling confident about their finances, but I just want people to be a little bit more reserved to understand, hey, what’s really behind the movement? You know is the person who is expounding fire, does he or she have enough passive income to cover his or her life expenses? Or is he or she working 70 hours a week as freelancer and saying they’re financially independent, but they are really just changing their jobs from full time work to freelancing.

Brett McKay: Gotchya, and then so like you talked about it is passive income. How do you get that sort of passive income? Is that just real estate? Are you investing in stocks that pay dividens, what is that? How do you get that passive income, where you are making enough to cover your basic life expenses?

Sam Dogen: Yeah, so, you want to invest in things that spit out income. So, the value of anything is based on its current earnings and future earnings, so passive income investments such as certificates of deposit, fixed income, and bonds, physical real estate, peer to peer lending, dividens investing, private equity investing, creating your own products online. For example, I have a book that I make about $4,000.00 a month and it is about how to negotiate a severance. What else is there? Real estate crowd sourcing, that is definitely one of them. So there is definitely, multiple ways that you can make passive income and the passivity, or whatever the word is, is different. You know some, owning physical real estate is going to be less passive then just owning a dividens stock, for example. But you know you basically want to build up a portfolio of different passive income investments.

Brett McKay: And how much do you need to, sock away. So you can get that passive revenue, that passive income. Because I think … is it more then what people think they might need, like a lot more?

Sam Dogen: So the math is pretty simple, let’s say you live off of ten thousand dollars a year, so you have ten thousand dollars divided by your expected return, realistic return on your passive income. So let’s say that’s 4%. You would need two hundred and fifty in capital to generate ten thousand dollars a year in passive income at a 4% rate of return. So let’s say in San Francisco, you have a family to support and a house and all that stuff and you want two hundred thousand a year in passive income, and you take a conservative rate of return of about 4%, then you need about five million dollars. So this is just passive, after tax income. You can supplement that my doing freelance work, or you could have a more active income such as you can run a podcast, or you can run a website. There are all sorts of things you can do once you no longer have a full time job. But it’s important to just realize it is the after tax, investments that are going to create that gross passive income for you.

Brett McKay: Gotchya, so you mentioned the example like ten thousand dollars a year? Are there some people that live off of ten thousand dollars a year?

Sam Dogen: Oh, I was just using it as just math.

Brett McKay: Oh, okay just math

Sam Dogen: Yeah, so, if we say a hundred thousand dollars a year at a 4% rate of return you need two point five million dollars in capital.

Brett McKay: That makes sense, okay. But I mean I guess part of the FIRE movement too, and you said part of becoming … increasing your net worth is also decreasing the amount of money you spend. So you have more money, that’s another component, besides making more money. Even though you’re making more money, that’s an important part, but requiring spending less money is also an important component of those.

Sam Dogen: Yeah, I would say a good ratio would be to focus 80% of your time making more, and 20% of your time having a reasonable budget. Don’t be stupid with your spending. The thing is the FIRE movement has really been pushed by people who live in low cost areas of the country. Whether they live in the Midwest or the south, or the heartland of America, but as we know especially through the presidential election last time half the population live in the expensive coastal cities like San Francisco, New York, Boston, Washington D.C.,Seattle, Los Angeles and so forth. So what might be go for one person to live off of thirty five thousand dollars a year in Alabama, is maybe not going to be that feasible for someone who’s living in New York City or Manhattan. So the numbers are very different, and so I am trying to … given I live in San Francisco and I will probably go to Honolulu … is to try to speak about financial independence, but half the population at least you live in expensive coastal cities, and who want to stay inexpensive coastal cities because that’s where their family and friends are.

Brett McKay: Yeah that makes sense. Like middle class in Manhattan is going to be a different number compared to someone in Mobile, Alabama.

Sam Dogen: Right, and so that I just the way it is. Things are expensive because of opportunity and because often times due to lifestyle that area brings. But then, obviously there is going to be a breaking point where there is just to many people, traffic, and all sorts. So people can geoarbitrage, more power to them, but I have found it is harder to just pick up your life and go live in a cheap place, or country around the world if you don’t have any connections.

Brett McKay: All right, are there any other blind spots that people have when it comes to planning for financial independence?

Sam Dogen: I think a lot of people … this is actually an important blind spot. So a lot of people in the FIRE movement say, “Yeah, just go move to a low cost area of the country in the south or the Midwest.” That’s fine, but if you’re a minority often times it doesn’t, it’s not that easy. It just feels, like you are just not as comfortable. You suddenly go from, a 30% racial population in your city, or even a 50% like in San Francisco if you are an asian person and you go to … somewhere else and you’re only 6% of that population, it might feel kind of weird so that’s a financial blind spot. You can’t just tell people, “Hey, you can move and just lower your cost of living.” I think a lot of blind spots come from extrapolating your returns. You know, were all pretty wealthy now after a nine year bull run. Any body who has been investing in stocks, real estate, private equity, whatever and so the danger is extrapolating your compound returns over the past nine years, for the next nine years.

Hopefully, we continue to be all Warren Buffett, but the reality is there are going to be down years, so last year 2018 was a Dow six percent plus year on S&B500, and so if you have another down year, and another down year, your expectations are going to be off, your forecast. There are other blind spots too, a lot of people compare someone else’s middle to your beginning and they don’t have the patience to grind it out and to do what someone else has done to get to where they are. I think that’s very important, that’s why everybody need to understand the background and the history of the person who is espousing whatever it is he or she is espousing.

Another blind spot is that parenting, people think that parenting is easier and cheaper then it is. You know if you are a full time worker, parenting might very well be easier because you are not parenting you are at your job 40-60 hours a week right? But if you are a stay at home parent who has to deal with everything 24/7, that can be much harder, and you know parenting takes a lot of time. It can take a lot of money depending on where you live. So these are a some of the blind spots that I see.

Brett McKay: Speaking of kids, you’ve got kids and this is something that I’m always thinking about to, is like how do I prepare my kids financially for the future. There is always that … you know, I have had people on the podcast talking about how college as we know today won’t exist in 10-15 years. So I’m always thinking, “man, should I be socking away money in a collage saving account for my kids. If they’re not even … they’re going to go to online to get some sort of online credential.” What is your approach to that for planning for your kids financial future?

Sam Dogen: Yeah, this is something that I am really excited about, and I am also nervous about. I don’t know exactly … I believe by the time my son goes to college in 16-17 years, college is not going to be as important as it is now at all. We’re learning everything so much quicker and everything is free online now, that spending records amount of money for tuition of four years is ridiculous in my opinion. It use to take 10 hours to go to the library to look up, check out books, and do research, now you can do everything online. So why does it still take four years, and record high tuition to get that same collage degree, it doesn’t make sense at all. So I’m prepared for the collage system to change, maybe they will change to only two years or three years required in 16, 17 years. But I am certainly not wanting to spend record amounts on an education that is not going to provide the returns. So what am I doing, well I am hedging. I am contributing fifteen thousand a year, which is the state gift maximum per year to a 5-9 plan.

Hopefully it will make some money and earn some tax preferred income on returns along the way, but too my greatest hedge is to continue running Financial Samurai so that there is something that I can teach my son when he is old enough to learn about communication skills, writing, speaking, maybe videography, maybe community building, maybe SCO, content marketing, business development and so forth. The funny thing about a lifestyle business is that it has the same components theoretically the same departments as a much larger business. You have the PR department, CEO, CFO’S whatever it is I could create some role for him so he can learn, and hopefully he will be interested in learning something.

I remember when I was going to business school part time, I remember being so much more interested in the subjects because I was learning something in the classroom and then utilizing what I learn in my real job in finance. So when we go through school, I mean none of us remember anything of what we learned in grade school. Anything like Chemistry, and Biology it is all out the window but hopefully I can teach him some cool stuff that is relevant to what he is learning in school so that he can find something more interesting by the time he goes to college if at all.

Brett McKay: That’s kind of been what I am doing. I am hedging, I’m socking away money in the 529 account, but also planning for college to be not around. So-

Sam Dogen: Yeah.

Brett McKay: We will see how it shakes out. We’ve got my kids 8 … we’ve got 10 years.

Sam Dogen: Yeah, my kid is 21. So I think college is the last bastion of the elite, who want to protect this, their institutions and it doesn’t really matter anymore. I really don’t think college matters anymore in 16 to 17 years.

Brett McKay: Well SAM, where do people go to learn more about your work?

Sam Dogen: You can come to Financialsamauri.com I’m always there or you can go to Financialsamauri.com/forums and there is a great community of people there who are looking to build wealth largely through income generation and investing.

Brett McKay: Sam Dogen, thank you for your time. It has been a pleasure.

Sam Dogen: Oh, thanks so much.

Brett McKay: Well that wraps up another addition of the A1 podcast. Check out our website Artofmanliness.com we have thousands of in depth articles about personal finance, social skills, personal fitness, you name it we’ve got it. Also while you’re there check out our podcast archives at artofmanliness.com/podcast and if you haven’t done so already I would appreciate you taking one minute to give us a review on iTunes or Stitcher, it helps out a lot. If you’ve done that already thank you. Please consider sharing this show with a friend or family member who you think would get something out of it. As always, thank you for the continued support and until next time this is Brett McKay telling you to not only listen to airing podcast but put what you’ve heard into action.