There are different philosophies one can have when it comes to money. Jared Dillian’s is built around eliminating as much anxiety around it as possible, so you hardly think about money at all.
Jared is a former trader for Lehman Brothers, the editor of The Daily Dirtnap, a market newsletter for investment professionals, and the author of No Worries: How to Live a Stress-Free Financial Life. Today on the show, Jared talks about the two biggest sources of financial stress — debt and risk — and how you can eliminate the stress they can cause. We discuss how three big financial decisions — buying a car, buying a house, and managing student loans — ultimately determine your financial health, and how to approach each of them in a stress-eliminating way. We also talk about how to minimize risk by creating what he calls an “awesome portfolio,” a mix of assets that has nearly the return of the stock market with half its risk. And Jared shares whether cryptocurrency fits into his “no worries” financial philosophy.
Resources Related to the Podcast
- AoM Article: Why and How to Start an Emergency Fund
- AoM Article: Start a Debt Reduction Plan
- AoM Article: What Every Young Man Should Know About Student Loans
- AoM Article: How to Buy a Used Car
- AoM Article: How to Negotiate the Best Deal on a New or Used Car
- AoM Podcast #536: How to Achieve a “Rich Life” With Your Finances
- AoM Podcast #963: Launch a Million-Dollar Business This Weekend
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Read the Transcript
Brett McKay: Brett McKay here and welcome to another edition of The Art of Manliness podcast. There are different philosophies one can have when it comes to money. Jared Dillian’s is built around eliminating as much anxiety around it as possible, so you hardly think about money at all. Jared is a former trader for Lehman Brothers, the editor of the Daily Dirt Nap, a market newsletter for investment professionals, and the author of No Worries: How to live a stress-free financial life. Today on the show, Jared talks about the two biggest sources of financial stress, debt and risk, and how you can eliminate the stress they can cause. We discuss how three big financial decisions, buying a car, buying a house, and managing student loans, ultimately determine your financial health, and how to approach each of them in a stress-eliminating way.
We also talk about how to minimize risk by creating what he calls an awesome portfolio, a mix of assets that has nearly the return of the stock market with half its risk. And Jared shares whether cryptocurrency fits into his No Worries financial philosophy. After the show is over, check out our show notes at aom.is/noworries.
All right, Jared Dillian, welcome to the show.
Jared Dillian: Thanks. Thanks for having me.
Brett McKay: So you write about investing in personal finance, but you started off your career in the military, specifically the Coast Guard. How did you go from serving in the Coast Guard to working for Lehman Brothers and then writing about investing?
Jared Dillian: Well, so when I graduated from college, I graduated from the Coast Guard Academy. I was stationed on a Coast Guard cutter out of Washington State and I knew within about a year that it wasn’t for me. And what I was really interested in was writing. There was one bookstore in town. I was reading a bunch of literary magazines. I wanted to get my MFA and teach writing and write short stories. So that was my plan. And I called up my mom and I said, mom, I have a plan. I’m gonna be a writer. And she said, that is the dumbest idea I have ever heard. So she recommended that I make some money first. So I also was interested in finance. And I started really getting interested in finance around age 23, and I applied to business school.
I went and got my MBA at the University of San Francisco. My first job in the markets was on the floor of the Pico’s Options Exchange in San Francisco, and I went from there to Lehman. I was head of the ETF trading desk at Lehman, and then ultimately I came full circle. I started writing a financial newsletter, and I published my first book in 2011.
Brett McKay: Okay. I love it. So mom said that’s a bad idea, but then you found out a way to show up mom. Like now it’s a great idea mom.
Jared Dillian: And I actually ended up getting my MFA last year at the age of 49.
Brett McKay: And it’s funny how you got that job. You talk about in your book, we’re gonna talk about today. The book is called No Worries. The job at Lehman, you just kind of showed up for that. It happened kind of by accident, but kind of not.
Jared Dillian: Well, I mean, I was interviewing at pretty much all the banks. Lehman had a culture that I fit in with pretty well. To say they were entrepreneurial would be an understatement. It was very scrappy sort of culture. And this idea that you would have this working class kid from the military that was smart and fast and motivated, I fit in perfectly at Lehman Brothers. It was the best place for me. It was a great place to work. I mean, the name Lehman is kind of odious because of what happened in the financial crisis, but I can tell you that the people I worked with was phenomenal and it was just, it was a great place to be.
Brett McKay: So in your new book, No Worries, this is a general personal finance book. You talk about investing, but it’s just about finances in general, specifically how not to be stressed out about your money. I’m curious, was there a time in your life when you were under financial stress?
Jared Dillian: There’s really only been two times. And one of them was that when Lehman went bankrupt, I had a lot of company stock that got vaporized, went to zero, lost about a half a million bucks with that. And also, I was invested in the market and the market went down. So I got cut in half in the financial crisis, which wasn’t catastrophic, but it did cause me a lot of stress. And there was another time in 2017, I still trade, I invest for myself, and I got myself in this trade betting that Canadian interest rates would go down. And I was so confident that I put on this trade in just massive size, and then it went the other way. So pretty much for all of 2017, I was miserable. I was absolutely miserable. So really, what I talk about in the book is the idea that there’s two sources of financial stress. One is debt, and the other is risk. And I’ve never really had any debt stress. I’ve always been very averse to debt. But I have had risk stress at a couple points in my life.
Brett McKay: What’s life like when you’re under financial stress?
Jared Dillian: Financial stress is one of these things that is avoidable. There’s very few natural disasters. And the problem with financial stress is that it compounds other kinds of stress. So if you have marriage stress, if you have kids stress, if you have work stress, and then you throw financial stress on top of it, it makes everything worse. And during those periods of time when I was experiencing financial stress, it consumed my thoughts. It was all I could think about. It was the first thing I thought about when I woke up in the morning, the last thing I thought about when I went to bed. It made me grumpy. It made me irritable. It made me difficult to be around. Those are the types of things that happen when you have financial stress.
Brett McKay: And is the opposite of financial stress, you’re just not even thinking about money at all?
Jared Dillian: That is the opposite. And the goal really is to just not think about money ever, like ever. If you go out to lunch and it costs 25 bucks, you put down your credit card and you don’t think about it, and it doesn’t turn into this huge decision. At every point in your life, you just don’t think about money, and it is the best place to be.
Brett McKay: So you mentioned the two sources of financial stress are debt and risk. And we’re gonna talk more about these here in our conversation, but why isn’t not having enough money a source of financial stress? I mean, I imagine for some people who might be listening, they think, Boy, I’m pretty stressed out. I’ve got this car repair I need to do. And if I don’t get this done, then I can’t get to my job, but I don’t have the money. Why don’t you think that’s a source of financial stress?
Jared Dillian: Well, one of the things I talk about in the book is this idea of an emergency fund. And about half the country doesn’t have what I would call an emergency fund. And anybody of any income level can have an emergency fund. You save a couple hundred bucks a month, you do this over a period of a few years, you have an emergency fund, and the check engine light is no longer a crisis. Your cat getting sick is no longer a crisis. So, in my experience, I’ve known a lot of people who are very limited means. As long as their basic needs are met, and that’s a big caveat, as long as their basic needs are met, if they don’t have debt and they don’t have risk, even if they’re living paycheck to paycheck, they’re perfectly happy. And maybe you lose your job and then you’re on unemployment for a while, but it’s not catastrophic, it’s not the end of the world, you have an emergency fund.
People with not a lot of money can live without financial stress. On the other hand, you have Elon Musk, the richest guy in the world, who puts himself under massive amounts of financial stress. So he got a big loan to buy Twitter and he pledged his Tesla stock as collateral and Tesla went down 75%. Elon Musk was close to going bankrupt, the richest guy in the world. And like I said, it’s all man-made. This is a position that he put himself in. So the richest guy in the world can have lots of financial stress, and people with no money can have no financial stress. It’s not dependent at all on how much you make.
Brett McKay: Okay. So you can avoid some of the maybe potential stress from unexpected costs by having a financial emergency fund. But then you also talk about in the book, we’ll talk about this too later on, also just increase your revenue, the amount of money coming into your life. And we’ll talk about some ways that you can do that. But let’s talk about… Let’s go back to these two stressors, these two big ones, debt and risk. Let’s talk about debt. Why is, I mean, you kind of mentioned with Elon Musk. How else can debt be a source of financial stress? Is it just that constant knowing that there’s a bill that’s coming up and that bill can get bigger and bigger if you don’t pay it down?
Jared Dillian: Yeah, that’s exactly right. Look, there are people out there like Dave Ramsey who say that you should never have any debt ever and you should avoid it at all costs. It’s hard to do. It’s hard to live a life without debt. It’s almost impossible to buy a house without debt. 90% of people finance cars, only 10% of people pay cash for cars. And unless you go to a community college or a very cheap school, it’s tough to go to college without debt. So at some point in your life, you’re going to have debt. It’s really about how you manage it. But that stress, even for me, like a mortgage is a very, I don’t wanna say safe form of debt, but it’s lower risk than other forms of debt. But even a mortgage can cause stress. And if you have a mortgage on your house, guess what? You don’t really own your house. The bank owns your house.
This happened to me about seven or eight years ago. I had a car. I bought a Toyota Highlander and I got a car loan from USAA and it was a five-year car loan. And once I got done paying it off, I got this envelope in the mail from USAA and I opened it up and it was my title. And I said to my wife, I was like, Why do I have my title in the mail? And she said, well, the bank has it as long as you have a loan. And it occurred to me, if you have debt on a piece of property, you don’t really own it. So you should pay down your mortgage as quickly as possible because there is nothing better than owning a house free and clear where there is no encumbrance at all. The bank does not own it. You own it. And no matter what happens to you. Whether you get sick or you get an injury or get laid off from work or something terrible happens, they cannot take the house away from you. They cannot take the car away from you. You don’t have debt on something. You own it, not the bank.
Brett McKay: Well, that idea of paying off your mortgage as quickly as possible, that’s a hot take in personal finance world because you’ll have people who argue, well, that’s a dumb move because your home loan might be a low interest rate. If you got it 10 years ago, 3%, 3.5%, they would say you’d be better off instead of paying off that loan, that mortgage, investing that ’cause the return rate in the stock market is like 7% or 8%. Why don’t you buy that argument?
Jared Dillian: So this is the number one question I get. I get this question all the time. And really, it’s a decision theory problem. So if you pay down a 4% mortgage, you earn a certain 4%. It’s like making 4%. If you invest in the stock market, you earn an uncertain 9%. So do you wanna earn a certain 4% or an uncertain 9%? And the 9% return, you can have big up years, you can have big down years. In the down years, you’re going to have losses and you’re going to have debt. The point is that is the path that contributes to the most financial stress. And let’s say, once every 30 or 40 years, we have one of these bear markets where the stock market is down 50%. That is going to cause you a massive amount of stress.
The other thing I would add is, I don’t really look at things in terms of interest rates. I look at things in terms of dollars paid in interest. So, the house that I’m living in now, I bought in 2015. I paid it off in 2018. Over the first three and a half years of the mortgage, I added up all the interest I paid. I paid $70,000 in interest over the first three years of the mortgage. And as you know, all the interest is front-loaded. So I’m thinking to myself, $70,000 is a lot of money. What could I have done with that money other than paying interest? I could have taken vacations. I could have done something else. Who knows? But I paid $70,000 in interest. So if you look at a car loan that is a super long-term car loan, like an 84, 96-month car loan, then you are going to pay on a $60,000 car, you are going to pay $30,000 or $40,000 in interest over the life of the loan. Interest rate doesn’t matter.
Brett McKay: That puts things in perspective. Speaking of home mortgages, do you have any advice on structuring a mortgage? Is there an ideal mortgage you should get? And then with the paying it down quickly, are there some mortgages or some banks that penalize you for paying down early or is there certain ways to do that so you don’t get hit with any fees that you might not know about?
Jared Dillian: Well, first of all, in terms of buying a house, the US is the best country in the world because we have fixed rate mortgages for the most part. You can get an adjustable rate mortgage and those make sense sometimes. But in most places in the world, mortgage rates float, especially in Canada. And they’re dealing with this right now. Interest rates went up a lot. Houses were already very expensive. And Canada is suffering right now because of interest rates going up. So we have fixed mortgage rates here in the US. You can get a 15-year mortgage or a 30-year mortgage. 15-year mortgages are generally better. The payments are bigger. So you have to be able to afford the cash flow on the payment, but you’re paying a lot less in interest.
And you’re gonna own the house a lot quicker. But if you want to get a 30-year mortgage, what I say is that you should be able to afford a 15-year mortgage, and you can still get a 30-year mortgage. So you should at least be able to afford the 15-year mortgage. If you can’t, it means you’re buying too expensive of a house. And in terms of prepayment penalties, prepayment penalties are very rare in the United States. Most conforming mortgages don’t have them. What I tell people is review the loan documents before you sign them. Ask the banker straight up, are there any prepayment penalties. So prepayment penalties only exist on about 2% of mortgages in the United States.
Brett McKay: What about down payment? Is there an ideal number or percentage you recommend people having for a down payment on a home?
Jared Dillian: Well, you should never put down less than 20%. And ideally, you should put down as much as possible. You should put down as much as possible. Having lots of equity is a good thing. In the mortgage industry, they have this concept known as LTV. And LTV is loan to value. So if you put down a 20% down payment, you have an 80 LTV. Okay. If you put down a 35% down payment, you have a 65 LTV. The higher the LTV is, the more likely that mortgage is going to default. Because if you don’t have a lot of equity in the house and something goes wrong and you can’t pay the mortgage, you’ll just walk away. But if you have a lot of equity in that house, you are going to stay and find a way to keep paying that mortgage so your equity isn’t stranded.
Brett McKay: All right, that makes sense. Another thing you recommend people do in order to reduce the potential stress of debt that comes with owning a home is not treating your home like an investment. How can that help?
Jared Dillian: Well, it’s funny. I’m in the process of selling my house right now. And I’m closing in May. We have sort of an extended closing. And I own this house from 2015 to 2024 during a period of time when house prices went up a lot. So you would think I would get rich off this house, but I really didn’t. I put a lot of money into it in terms of maintenance. I replaced the roof. I replaced the air conditioner. I replaced all this stuff, painted the house, power washed it. We sunk a lot of money into the house. And then at the same time we’re gonna have to pay 6% real estate commissions on the way out, which is gonna be a lot of money. So what I’m gonna have left over is really not that impressive.
A house is what you call a negative carry asset. A positive carry asset is like a stock or a bond. It’s a stock that pays dividends. It’s a bond that pays interest. You’re actually getting money. But a house is negative carry. You’re paying interest. You’re paying property taxes. You’re paying HOA fees. You’re paying insurance. You’re paying maintenance. It’s not a great investment. But what I will say is, houses are often the best investment for people because it is the only investment where they don’t check the price of it every day.
If you have a stock… Let’s say you own Google and Google’s going up and down, and up and down, you’re watching it, and eventually you’re gonna get spooked out of the stock and you’re gonna sell it and you’re gonna stop compounding, and it’s gonna continue to go up. A house, you don’t have the price of it on your phone, you can’t check it. You’re gonna live in the house for 10 years, so you’re just gonna forget about what it’s worth, and it’s going to continue to appreciate without you looking at it. And that’s why a house is not an investment, but for some people, because they can’t sell it, it is actually the best investment.
Brett McKay: And I imagine there’s a lot of people who have gotten trouble in the past 15 years treating homes like an investment ’cause they thought, Well, I can buy this house, thinking that it will go up in value and then there’s a burst, and then they’re like, Okay, actually, I’m under water now. And if they just thought of their home as just an asset that they use, they wouldn’t have had that issue, ’cause they would have probably spent less on a home.
Jared Dillian: Yeah, house is depreciating. You have to put a lot of money into them. We kind of have a culture of real estate speculation in this country, and what’s interesting is the financial crisis killed it for seven or eight years, and then it kinda came back. But yeah, a lot of people buy houses to speculate, and it’s not really a good idea.
Brett McKay: We’re gonna take a quick break for a word from our sponsors.
And now back to the show. So you mentioned another big purchase that often requires a loan, cars. Any ways that people mess up car buying that causes financial stress due to debt?
Jared Dillian: Well, the way people get in trouble with cars is they put way too much emphasis on what brand of car they’re buying, how that fits into their identity. They think of themselves as somebody that drives a BMW or Mercedes or something like that. It doesn’t really matter. So the capacity utilization of a car is 4%, which means that if you had four people in the car driving 24 hours a day, it would be 100%. But you have one person in the car, you drive it a half hour to work, it sits in the parking lot, you drive it a half hour home by yourself, it sits in your driveway, you’re only using it 4% of the time. It just does not matter. It just does not matter. It’s a way to get from A to B. So in the book, I talk about, yes, you could buy a used car, but that’s harder nowadays, because used car prices have gone up a lot, and also you’re kind of tempting feet with maintenance issues and stuff like that, so I’m not really a big fan of buying cheap, used cars. I like buying new cars that are cheap, that will last forever, so Toyota’s in particular. I have owned Toyotas my entire life going back to 1995. I have owned like five different cars. They’re cheap. They last forever. They don’t have maintenance issues. I have never had one not start, unless I ran the battery down, and they’re terrific cars.
Brett McKay: And then also in the book, you have a step-by-step guide for buying a car. And this can be really useful, especially if someone hasn’t gone through their car buying process. It can be intimidating, because there is this asymmetry of information. You’re going in, you might not know anything about the price of the car, the finances involved in the car. The salesperson does, and they do that shtick where they’re like, Well, I gotta go talk to the guy up in the booth, and it [0:21:54.0] ____ more intimidation. But you offer some guidance on how to manage that. Any big takeaways from that, on how to manage that negotiation process?
Jared Dillian: Well, at a minimum, you need to do 10 minutes worth of homework. You need to know what your trade-in is worth, which you can look up in a second on Google, and you need to know what the new car’s worth. So if your trade-in is worth $11,000 and the new car is $40,000, then you’re gonna have to write a check for $29,000. And if you go in there and you’re talking to the salesperson and they give you some number that just doesn’t make sense, then you have to start asking questions. But like you said, there’s asymmetric information, they have information on incentives, they have information on maintenance packages. They’re going to try to extract as much value as possible out of you, and you don’t really know how to handle that. But like I said, the minimum amount of research you need to do is on the value of your trade-in, the value of the new car.
Brett McKay: And also, you recommend people, when they are buying a car, to not only consider the price that you’re paying for that car to acquire it, but also like a home, you have to take an account, there’s other costs that go into owning a car; maintenance, potential accidents, insurance, etcetera, and you need to include that in how you think of how much a your car cost?
Jared Dillian: Yeah, and what I say in the book is that you should spend no more than 10% of your income on transportation, and that includes gas, which for most people is about $3000 a year, then includes insurance, which is maybe about 1500 a year. But it also includes depreciation. So if you have a $40,000 car, you can depreciate it over 10 years, 4000 a year, so you’re gonna have $4000 in depreciation per year, plus 3000, plus 1500, is 8500 a year, which is what you’re gonna be spending on your car, which means in order to own that car, you need to be making $85,000 a year. So 10% of your income is spent on transportation.
Brett McKay: Another big purchase that people will make during their lifetime, that you probably have to take out debt for, is college education. Anything that people can do to reduce the stress of debt that comes from getting a college education?
Jared Dillian: Well, college education, college financing is… It’s really terrible what’s happened. So basically, the biggest problem that we have today is that there was a law signed in 2009 which allowed something called income-based repayment plans. So let’s say you spent to $100,000 going to school, you borrowed $100,000 and your payment would ordinarily be 1200 a month. But what the government does, is they say, Look, you’re making $45,000 a year. So we’re gonna means test this, and you only have to pay 300 a month, and a lot of people say, Cool, my loan payments are only 300 a month. But the problem is, is that you’re not paying the full payment, and the part that you’re not paying is being added on to the back of the loan. So I’m sure you’ve had this experience online or on Twitter or something, where you see somebody complaining about their student loans and they say, I started out with $70,000 in loans, and 15 years later, I have $100,000, and this is terrible. So what’s going on here is that they signed up for an income-based repayment plan, they’re not paying the full amount, and the amount of the loan is growing over time. So if you are under an income-based repayment plan, you have to pay more. You have to aggressively pay down the loan. So even if you only owe 300 a month, that’s a check you have to write, you need to be paying 600 a month or 800 a month, just to pay that loan balance down.
Brett McKay: So the takeaway there, pay down your loans as quickly as possible. And you gotta remember too, if you’re on one of those income-driven repayment plans for your student loans, you may not only not be paying down the principal, you may not even be paying off the interest on your loan each month or the full interest, so the interest just keeps accruing, your debt will keep growing even though you’re making monthly payments. And the thing about student loan debt, you can’t discharge it with bankruptcy. You’re stuck with it until you’re dead.
Jared Dillian: Yeah, the goal should really be to pay it off in five years, and you have to think about this before you go to college. You have to know what you’re gonna spend, and you should have some idea of what you’re gonna make when you graduate. And if you can’t pay it off in five years, then you need to go to a cheaper school.
Brett McKay: Okay, so the big takeaway for reducing the stress of debt, you have to take on debt. There’s purchases in life you can’t make without debt, it’s pretty much impossible to do, but take on as little as you can, and then pay it down as quickly as possible. Would that be kind of the two big principles?
Jared Dillian: That’s exactly right. Yeah.
Brett McKay: But the thing is, when people hear that, they think, Okay, I gotta aggressively pay down my debt. In order to do that, I gotta get really frugal. I gotta scrimp and eat beans and rice. But in the book, you talk about this whole idea of being hyper-frugal, extremely frugal, in order to reduce financial stress, actually just makes you more financially stressed. How so?
Jared Dillian: Well, what we have in the United States is we have big personal finance. We have a personal finance industry, whether it’s Dave Ramsey or Suze Orman or whoever else, The Millionaire Next Door book, all this stuff, we are taught that the path to wealth is through cutting expenses. Like, if you live in a 1200 square foot house, if you have $199 suit, if you buy a 14-year-old Chrysler Sebring that smells like cigarette smoke, if you do these things and you live this life of austerity, then you can get to a million dollars. And it’s true. The math checks out. You can get to a million dollars if you do this, but you are going to be miserable. And it puts you in a position where you are obsessed. This is kind of what we talked about at the beginning of the show. You are obsessed with money. Every financial decision becomes this crisis or this huge decision, and it’s a terrible way to live your life. So basically, the whole premise of the book is that the little things, whether it’s lunch or coffee, your clothes or stuff like that, the little things do not matter at all, it’s the big things. It’s your house, it’s your car and your student loans, and it’s really nothing else. And if you get those three things right, if you don’t screw up those three decisions, then you can spend $25 on lunch without breaking a sweat. It’s really not that hard.
Brett McKay: Yeah. I imagine there’s some people out there who get off on the austerity. They actually enjoy clipping coupons. They get a rush out of it, but they might be making their family miserable, like, it stresses their kids out because they see mom and dad just obsessed with money all the time.
Jared Dillian: I grew up in Connecticut, and Connecticut culturally is an interesting place because Connecticutians are known as Nutmeggers. It’s kind of a derisive term in Connecticut. A Nutmegger is somebody who is cheap and clips coupons and stuff like that. And I grew up in a family like that. We used to get a piece… If we got a piece of mail, we used to check to see if the stamp was hit by the canceling stamp. And if we got a piece of mail where the stamp wasn’t touched, then we would cut it out and save it and glue it on another envelope, and it was the best thing in the world, because we save 29 cents. That was the environment that I grew up in. It just does not matter. These things do not matter at all.
Brett McKay: Okay, so being too austere, that can make you stress out even more when you’re trying to reduce financial stress. So what should the mindset towards money be that you’re striving for?
Jared Dillian: It’s really about balance. It’s about balance. Just as it’s possible to spend too much money, it is also possible to spend too little money. Now, if you spend too little money, you’re never gonna go bankrupt. You’re not gonna have these financial problems. But what’s gonna happen is it’s going to harm your relationships with other people. And I’m sure you know somebody in your family or a friend that is really, really cheap, and they never take out their wallet to pay the bill for dinner, and they don’t give gifts at Christmas, and they do all this stuff, and they’re just hard to be around. It’s hard to have a relationship with these people. So on one hand, the people who spend too much, they can affect their financial well-being. The people who spend too little, it affects their relationships with other people.
Brett McKay: So how do you know… Okay, so let’s say someone’s listening and they’ve got… Maybe they got a mortgage, they’ve got a car payment, maybe they’re paying out some student loans, how can you take this approach to money where you’re not focusing so much on the little things, like, giving up a coffee or whatever, while still trying to aggressively pay down this stuff you’ve got on your plate?
Jared Dillian: Well, I will say that there’s two phases of life, and in the first half of your life, you’re in accumulation mode, where you’re working, you’re saving, you’re paying down debt, and you’re investing, and you do that till about age 45. And then at age 45, you’re in decumulation mode. You’re selling stocks, you’re selling bonds, you’re selling assets, you’re spending the money, and you’re having a good time. So there is a period of time, in your 20s and 30s, when you do have to undergo some austerity, but that’s the right time to do it. It’s much easier to do austerity in your 20s and 30s than it is in your 60s and 70s. I think we all want a comfortable retirement. And the saying is, you have a choice. You can either eat ramen in your 20s, or you can eat Alpo in your 70s.
Brett McKay: Yeah, I’d rather the ramen in my 20s. So the overall goal is just to have a healthy relationship with money. Someone who’s super frugal and someone who’s a lavish spender, they probably have more in common than you think, because they’re both thinking about money all the time. When you’re younger, you wanna think about cutting, spending more, but if you get those big financial decisions, so like you said, college loans, car, house, you can eventually get to a place where you don’t have to think about money so much. But you also say that in every phase of life, instead of just thinking about cutting expenses, we should also be thinking about increasing our income. In your experience, what are the biggest obstacles for making that happen. What holds people back from making more money?
Jared Dillian: I think the reason that people don’t do it is that it never occurs to them to do it. They’ve never been told that. Nobody has ever told them, Look, if you have this problem, where you don’t have enough money, that there’s two solutions to this; one, you can just cut expenses, but two, you can grow revenue. There’s a bunch of things you could do. You could get a raise, you could switch jobs, you could go back to school to get another job that pays more, you can do the passive income thing, you can be a landlord, you can start a business. These are all things that you can do. Look, even an extra $10,000 or $15,000 a year, for a lot of people, makes a huge difference. And by the way, making more money is a lot more fun than cutting expenses. Cutting expenses sucks. It’s the worst. That austerity is terrible. But if you were to get a side hustle and make an extra 10 or 15 grand a year, that is actually fun.
Brett McKay: And you put the stuff to the test. When you were in the coast guard, you were like, I’m not making much money. I need to make more money. I’ll go get my MBA. And then a couple of years later, you’re making lots more money than you were in the coast guard.
Jared Dillian: Yeah, about 20 times more. [laughter]
Brett McKay: Right. Yeah, I think that’s a good reminder. If you’re feeling pinched in your wallet, there’s a place for cutting expenses. Maybe there’s stupid stuff you’re spending money on, you probably shouldn’t spend your money on. Do you need all those subscriptions? But always think about, How can I make more money? There’s different ways you can do that. You ask for a raise. We had a podcast with Noah Kagan, where he talked about how you can start a business in a weekend, in 48 hours. And you can make a decent chunk of change that can change your life by spending a little bit extra time in the weekend, coming up with a business.
Jared Dillian: There’s 24 hours in the day. We work about eight hours, we sleep in about eight hours. That’s eight hours left over. You can accomplish a lot with that time.
Brett McKay: So we talked about the stress that comes from debt. Let’s talk about the stress that comes from financial risk. What can people do to mitigate stress from risk in their lives?
Jared Dillian: Well, what we have in the US today, the conventional wisdom is that you should put all your money in the S&P 500 Index fund, and just dollar cost average that over time, it returns 9% a year, and when you retire, you’re gonna have a few million bucks. That’s the conventional wisdom. That works, but it can also cause you a lot of stress along the way. If you invest in the stock market, you get the returns of the stock market, which are very good, but you also get the volatility of the stock market, and the stock market’s very volatile. In any given year, it can be up 15% or 20%, or down 15% or 20%, and that volatility is going to cause you a lot of stress. It’s gonna cause you a lot of stress. Over the course of a 40-year, 50-year investing career, the market is gonna go down 10% about 20 or 25 times, it’s gonna go down 20% about seven to 10 times, and it’s probably gonna go down 50% at least once. There’s gonna be one time in your life where you have a major Pucker factor and you’re freaking out, and you have watched half… And God forbid this happens right before you retire, but you’ve just watched half of your net worth just get vaporized. That is a huge amount of stress.
I came up with a solution to that, called the awesome portfolio, which is stocks, bonds, gold, cash, and real estate in 20% proportions. And the interesting thing about that portfolio is it gives you almost the return of the stock market, but with about half the risk. And I don’t know why everybody doesn’t wanna do this. You’re returning 1% less, but you get half the volatility of an 80/20 portfolio. It’s really a magic bullet.
Brett McKay: Have you done Monte Carlo simulations on this thing? Has it stood the stress test?
Jared Dillian: Yeah, absolutely. But the interesting thing about it is, if you invest in the awesome portfolio, about 40% of the time, you’re gonna regret it, because about 40% of the time, the stock market is going to beat the awesome portfolio by 10% or more. But about 20% of the time, you’re gonna be really happy you did it because the awesome portfolio is gonna beat the stock market by 10% or more, and those are the years that really counts, because that’s when you’re tested. That’s when you have those big bear markets. Just for example, in 2008 during the financial crisis, the stock market was down 38% that year, but the awesome portfolio was only down 9%. You barely would have even have felt it. And the worst year in the history of the awesome portfolio is down 12%. So you look at this and you’re like, Okay, I get almost a return of the stock market, half the volatility, and my worst year is 12%? Where do I sign up?
Brett McKay: Why cash? Why keep so much in cash?
Jared Dillian: Well, I used to get that question a lot before interest rates went up, when interest rates were zero. Now, you can actually get 5% on cash, so that makes a lot of sense. You have cash for two reasons; one, it stabilizes the awesome portfolio and reduces the volatility. Two, you should have 20% of your money in cash all the time anyway. Being fully invested is way overrated. You wanna have cash because of the option value of cash, because cash is an option to buy something cheaper in the future.
Brett McKay: Right. So if you see a good deal on a car, you’re like… You’ve got the cash to do it. So [0:38:50.5] ____ to take out a loan.
Jared Dillian: Yep.
Brett McKay: Yeah. Do alternative investments, like art or cryptocurrency, play a role in an awesome portfolio?
Jared Dillian: Well, I get the crypto question a lot. The problem with putting crypto in the awesome portfolio is, first of all, if you back-test it, it looks great because crypto has gone straight up, and anything that goes straight up is gonna improve the sharp ratio of the portfolio, so it’s gonna make it look better, but past is not prologue. The problem with putting crypto in the awesome portfolio is that you’re gonna stare at it all the time. So even if you put 2% of the portfolio in crypto, what is the thing that you’re gonna watch all the time? You’re gonna be watching crypto. You’re gonna stare at it all day, even though it’s only 2% your portfolio. And the purpose of volatility is to make people make stupid decisions. So the thing about the awesome portfolio is, number one, it’s not volatile, and number two, with the exception of the stock market, none of the individual asset classes are volatile either, so none of it is gonna cause you any heartburn.
Brett McKay: Yeah, again, the goal is to not even think about your money?
Jared Dillian: Yup.
Brett McKay: Yeah. Well, tell me more about crypto. What’s your take on crypto? It’s so funny. I remember four years ago, five years ago, everyone was like, Oh, crypto, crypto, crypto, then it went down, everyone stopped talking about it. Now everyone is talking about it again ’cause Bitcoin’s at its all-time high or whatever. What are your thoughts on crypto?
Jared Dillian: I have owned it a couple of times, I’ve made money one time and lost money one time, and on balance, I’ve made money. I don’t like it. It’s too volatile. I am pretty risk-averse. I’m pretty conservative. And I actually… Back in 2019, I bought a lot of Bitcoin. I bought a huge amount. And I sold it in 2021 and I killed it. I did really well. But the whole time that I owned it, I just stared at it all the time. I was always pulling up the Coinbase app. It was just… I was really glad when I sold it.
Brett McKay: Yeah, you became like a coupon clipper, or reverse coupon clipper, just constantly thinking about it. Well, Jared, this has been a great conversation. Where can people go to learn more about the book and your work?
Jared Dillian: The book is on Amazon or any place you… It’s on Barnes & Noble. It’s everywhere. My personal finance website is jareddillianmoney.com. Right on the landing page, you can sign up for a free newsletter. You get my thoughts on personal finance every week. You can follow me on Twitter at @dailydirtnap. And yeah, that’s pretty much it. I just hope you get the book. It’s been a life-changing book for a lot of people.
Brett McKay: Fantastic. Well, Jared Dillian, thanks for your time. It’s been a pleasure.
Jared Dillian: Thank you.
Brett McKay: My guest today was Jared Dillian. He’s the author of the book No Worries. It’s available on amazon.com and bookstores everywhere. You can find more information about his work at his website, jareddillian.com. Also check out our shownotes at aom.is/noworries, where you can find links to resources and we delve deeper into this topic.
Well, that wraps up another edition of The AOM podcast. Make sure to check out our website at artofmanliness.com, where you can find our podcast archives, as well as thousands of articles that we’ve written over the years about pretty much anything you’d think of. And if you haven’t done so already, I’d appreciate it if you’d take one minute to give us a review on Apple Podcast or Spotify. It helps out a lot. And if you’ve done that already, thank you. Please consider sharing the show with a friend or family member who you think would get something out of it. As always, thank you for the continued support. Until next time, this is Brett McKay, reminding you to not only to listen to the AOM podcast, but put what you’ve heard into action.
