The Psychology of Money for Military Servicemembers | Military Money Manual Podcast Episode 46

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Morgan Housel's book the Psychology of Money is an excellent refresher of the core concepts of financial independence and personal finance.

In this episode, Jamie and Spencer apply Housel's concepts of personal finance and investing to military life. The 3 main takeaways for today are:

1. Save money for no reason at all.
2. Play your own game.
3. Better to be reasonable with a good enough plan, than rational with a plan you can't stick to.

Military Money Manual Podcast Episode 46 Links

• Free 5-day course to maximize your travel benefits and learn all about military credit cards
• The Military Money Manual book
• Episode #2 Thrift Savings Plan: Military TSP-Everything You Need to Know
• Episode #42 Stock Market Crashes: What To Do in 20%+ Drops + A Guided Meditation from JL Collins
• Episode #23 Favorite Financial Independence Calculators
• A Million Dollar Book List | Books for Financial Independence

Outline of Episode:

• Discussing takeaways from The Psychology of Money by Morgan Housel
• Saving money for no reason at all or for any reason
• Building a margin of safety into your financial life 
• Figure out your own game and then play that game
• Letting go of social comparison
• Setting a reasonable plan and sticking to it

Military Money Manual Podcast Episode 46 Transcript

[00:00:00] Jamie: My game of what I've decided to play here. He says in the book, “More than I want big returns, I want to be financially unbreakable.” I would maybe add there and the ability to make decisions. So my game is to be financially unbreakable, to have enough where I can overcome obstacles, downturns hard things with the family, medical things like whatever it is, financially unbreakable.

[00:00:48] Jamie: Hello, podcast listeners, Jamie here. I'm with my co-host, Spencer Reese, founder of militarymoneymanual.com. Author of the book, The Military Money Manual. Thanks for joining us today as we're going to be talking about one of the best recent finance books and one you've heard us talk about several times before called The Psychology of Money by Morgan Housel.

[00:01:06] Spencer: Hey, Jamie. Thanks. Yeah, I like this book so much that I actually wrapped up my own book with a quote from The Psychology of Money by Morgan Housel. I first listened to the audiobook I think it was in 2020 or 2021 during the pandemic which I thought was excellent. The audiobook is really well done, and really well-read, and you can get that on Audible or wherever you get your audiobooks.

And then I recently reread the Kindle version and I was surprised, which I shouldn't have been because the audiobook is pretty short too. But the actual Kindle version is really quick. The chapters are really nice and succinct and you can digest one or two chapters in a 10 or 20-minute period, which is great.

And then on the Kindle, you can go and put your highlights on it. So I really enjoy reading books on the Kindle now, which is something that is new for me. Morgan's written a really great short book like I said, broken into 20 chapters and each chapter covers a different idea or motif that he's observed on money and investing.

So he's written a lot about money and personal finance and investing, and he's consolidated everything that he's observed over the years into the book. I think he's done a really great job with it. 

Three takeaways from the book for military service members or military spouses, and military families listening to the podcast today, number one, save money for no reason at all or for any reason.

But building a margin of safety into your financial life is the surest way to not get wiped out and be forced to start over. Saved money buys you freedom. He has this great quote, let me see if I can find it here. Save, just save. You don't need a specific reason to save. It's great to save for a car or a down payment or a medical emergency, but saving for things that are impossible to predict or define is one of the best reasons to save.

And we'll get into some of the details on that point there. But man, he's just got some, he's got some great quotes from this book, so I'm excited to share it. He does. 

Number two, play your own game. No one is crazy, but some people do stupid things with their money. So it's important to figure out your own game and then play that game and not get distracted by the games other people are playing.

And then number three, the third main point for today there's a quote I couldn't actually figure out who said it first, based on a quick Google, but instead of the, “Don't just stand there, do something,” They reverse it and say, “Don't just do something. Stand there.” What they mean by that is usually the correct move in investing is to do the same thing.

Whether you're in a bull market or a bear market, just aim to be reasonable and don't worry too much about being rational. Just set a plan and then stick with it. If your plan doesn't account for bear markets or for down markets, you probably need a different plan. But if it does account for that kind of plan, like the plan that I advocate in my book, simple, low cost, automated and diversified investing in passive index funds, that kind of plan I, we know that there's going to be depressions.

We know that there are going to be recessions, and that's all built into it. If you look at the rate of return of the US stock market over the last hundred years, and you just think about all the history and all the terrible things that have happened over the last hundred years and all the good things that have happened, and then all averages out.

And if you bail on the market, if you pull your investments to cash when things are going bad, you would never invest because there's always a reason to not invest.

[00:04:46] Jamie: One of my favorite things about this book is that it approaches finances from such a different perspective, from other personal finance books. In Morgan's background, he's, he was a writer for Motley Fool, and I think he's been in investment banks and venture capital like that kind of stuff from what I remember.

But he takes us from a different standpoint of thinking about the behaviors and not just the math. So we like to talk about, I know we've said and there's a movement in the Financial Independence Retire Earlier, the FIRE community right now to think about and sit and talk about how it's more than just math and there's behavior involved in finances.

I think he started that movement with this book and the momentum of talking about that and starting that discussion is caught on and is very positive. One of the things that he says in the introduction is that we're taught about money in ways that are much like physics with rules and laws, but not enough of it is thought of as psychology with emotions and nuances.

And a lot of it he says, and I agree with is just luck. The wherever you were born you said this, I think an episode or two ago, Spencer, of like wherever you were born, when you were born, whether you were born during the Great Depression or during the longest bull run in the history of the US stock market.

A lot of it is just luck. So don't always think about it as if you're amazing just because you made one good decision or you're terrible cause you made one bad decision. He says a lot of it is just luck of the timing. So I really like his focus on behavior here. A lot of it is luck and not so much as like a hard science of doing this, this, and this and you'll be wealthy.

[00:06:21] Spencer: Yeah. He really just, lays out here's what I've observed about how people make financial decisions, and then here's what I'm doing with my own money. He might give some prescriptions of, I think that for most people, a passive index fund investing strategy is going to be the one that works.

But he also makes it very clear that, hey, you might be a day trader and that might be your full-time job is to trade stocks. I don't know who you are, right? So if that is, that's your job, then your financial situation is going to look completely different from, a young service member who's trying to pay off their car loan and is putting 5% into their S&P.

He starts the introduction with this great quote. “Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.” Then he goes into these two great stories and compares and contrasts two individuals.

One is Ronald James Reed. He was a multimillionaire gas station attendant and janitor. He ended up, I'm not going to ruin the whole story, but he ends up donating millions of dollars after his death and never worked a job making more than $50,000 a year or whatever. People are like, where did all this money come from?

And surprise, it was just long-term investing and compounding interest. He compares Ronald to Richard Fuscone, who is the former vice chairman of Merrill Lynch. Merrill Lynch is 600 billion assets under management investment firm. Richard ended up going broke during the global financial crisis because he was over-leveraged.

He had borrowed too much and he was living right to the limit of his income. When it slowed down and when interest rates came, went up, he couldn't afford his lifestyle anymore. He ended up declaring bankruptcy and they ended up selling his house. He had a Harvard MBA or like Wharton Business School top education, right? 

What Morgan has done is he just says look, you can be Richard and be the most, educated, financially savvy, individual, one of the most financially savvy individuals in the world who has access to millions of dollars of leverage and the smartest people in the room and you can still screw it all up if your behavior isn't financially optimal. Or you can be a Ronald and you can just apply some simple rules and given enough time and given enough compounding interest, you'll end up a millionaire eventually. 

All right. So let's keep going here.

We'll start with our main point number one, and then we'll get into a couple of other just subpoints of other topics that I like how Morgan addresses them. In the book that I wrote, The Military Money Manual, I give a lot of examples of why you'd want to save money. I share some of my personal stories.

Right after my wife and I got married, she was driving around in our 2002 Saturn L 300, went over a speed bump a little fast, and cracked the oil pan we had to take it into the shop and it was like a $500 repair, but at the time we had a couple of thousand dollars in our emergency fund.

So while it stung and it wasn't fun it was pretty easy to cover that expense. So I talk about a few other examples in my book and there are all kinds of bad things that can happen. But Morgan takes this really interesting approach and he says, yeah, sure. You can think of all these scenarios, but at the end of the day, just saving to save and to buy yourself options essentially is why you should save. Yes, you could save for emergencies, or yes, you can save for certain purchases but just save in general. If you think about it, it makes complete sense. If you're not saving, you're not saving anything, right?

You're spending a hundred percent of your paycheck, you are living in a very precarious situation. If you have any kind of unexpected expense pop up, if you're living paycheck to paycheck, then you're going to be in a world of hurt and you're going to have to dip into savings, but we just established you don't have any.

And so you're probably going to have to take on some kind of debt, and now you're going to be in an even more precarious situation. I shared that one quote from the book earlier, but here's the other one that I have here. 

“Some people save money for a down payment on a house or a new car or retirement. That's great. Of course. But saving does not require a goal of purchasing something specific. You can save just for saving's sake. Indeed. You should. Everyone should.”

[00:11:27] Jamie: I love how he talks about having a margin of safety or room for error. He calls it in chapter five because he says it's one of the most underappreciated forces in finances, having a margin of safety.

And I feel like I can really agree with this in my life. I think a lot of people feel less stress in life, especially with their finances, which often leads to less stress in their life overall when they have a little bit of a buffer. We've talked before in our financial independence episodes about how building wealth, financial independence, and long-term investments give you options that F U money.

And he has a whole chapter about freedom and just having the ability to make choices. In fact, he says let me see if I can find the exact quote, that having control of your time is the highest dividend money pays. I think that is a great kind of summary of the save money. Even if you don't have a specific goal, just saving money is going to give you options.

And one day the option might be, do I keep my job or not? Do I take this assignment that I'm going to make less money because I'm not getting combat pay as much or I'm not going TDY as much? Or does the spouse become a stay at home parent so they can homeschool for a couple years? because the schools are really bad here.

You don't know, a year ago, no, three years ago, no. A new Covid was coming, right? No one knew it a month before. Okay, maybe before January we knew in January, but you don’t know what's coming next month or next year. So sometimes just saving will give you that room to make good decisions when the time comes.

[00:13:10] Spencer: Yeah. He also has a chapter called “You'll Change” and it just talks about how the person you are today is not the same person you're going to be in tomorrow or in a year or 10 years. So long-term planning and setting yourself up, or creating a lifestyle for yourself today and not taking into account your future self is foolish because your future self's going to have different priorities and be a different person than you are.

One thing I talk about in my book is you're not just saving for the present you, you're saving for the future you too. So, if you can take a little bit of your income and set it aside and send it to your future self and thanks to the magic of compounding interest and a rising stock market over a long period of time and assets that grow in value and produce income, you can send more money than you currently have to your future self. I know, there's so many times when I check my portfolio or check my TSP balance, right? And there are hundreds of thousands of dollars in there. I think sometimes, “Where did all that money come from?”

Because I don't remember putting money in there, but it was so automated. It came right out of my paycheck. It wasn't like I was writing a check every day. That is one of those powerful ideas that he has in the book about just saving to save and saving because when you have money set aside, that represents freedom.

And for us in the military, we can't just quit our job tomorrow. But one day you're not going to be in the military anymore. Whether that's separation, whether that's retirement and then you're going to have a civilian job if you want it. Then you can quit for most of those jobs, but even in the military, you have terms of enlistment or terms of I can't remember what the officer term is, but appointment operation. Are you appointed as an officer? 

[00:15:19] Jamie: And so you have times where you can choose to get out or not.

[00:15:22] Spencer: Exactly. So at the end of your service commitments, then, if you have savings, it opens up options for you. If you don't have savings, then it limits your options because yeah, sure you can still get out.

But if you get out with $100,000, $250,000, it's going to feel a lot more comfortable than if you get out with just the leave that you can sell back a few $10,000. That's the situation a lot of people find themselves in. But if you had If you set up the automated system years ago, if you could go back in time and tell your past self, “Hey, please just set aside a little bit, whether it's 5% or 10% of your paycheck, then it's amazing how fast it grows.”

[00:16:15] Jamie: He talks a lot, Spencer, about when to know if you have enough, and I don't know if this is jumping ahead to not, but he talks about preventing the goalpost from moving and knowing that it's enough. So he says, savings can be created by spending less and you can spend less if you desire less.

So how can we desire less? We've talked about our brain's adaptation to continuously want more. What advice do you have for that? 

[00:16:47] Spencer: Yeah. That's a classic. You'll hear, you'll see it on some websites or some podcasts as hedonic adaptation or the hedonic treadmill. Essentially what it is you have a baseline level of happiness, and when you acquire more things, or even more experiences for that matter, but as you just acquire more of life, you just become used to it.

That becomes your new baseline. Do you know a few things that you can do? There's a great course called The Science of Happiness. It’s taught at Yale. They have these rewires basically, where they have these tasks they want you to perform, daily or weekly or whatever it is for a couple of days or a couple of weeks.

Essentially you're just tricking your brain into just noticing your situation. It can be as simple as every time you go get a glass of water, just think about how many people in the world, it's over 700 million I think last time I checked, how many people in the world can't just get clean fresh water daily. I'm not even talking about water in their home.

I'm talking about just like full stop. They can't get access to clean fresh water and it's millions. It's hundreds of millions. That's insane when you think about it, that here we are in 2021 and we're on the iPhone whatever, 13, 14, and 13. There are still people in the world who don't have access to clean drinking water.

That's insane, the insane thing about our world and about our economy is that you have access to all of these different things and yet some people don't even have access to clean drinking water.

And so a lot of it is just recognizing how good you have it. If you're listening to this podcast right now, you probably have it pretty good. Recognizing that, whether it's through journaling or just taking a break and noticing your situation or there's a lot of talk about gratitude journals, and just hey, just every day, take two minutes in the morning and jot down three things that you're thankful for.

Like one person you're thankful for, one thing you're thankful for, and then one activity you're thankful for. Doing that tricks your brain basically into recognizing, huh, I have it pretty good. A lot of what drives people when they think they don't have it that good, they try to fill that void with more things and more experiences and more people, and more money. 

Morgan talks about it in his book, there's this centimillionaire, worth over a hundred million dollars. He's on this conference call during the 2008 global financial crisis.

And he hears that Warren Buffet is about to buy 5 billion of Goldman Sachs stock. He hangs up the phone and calls his stockbroker 16 seconds later, his stockbroker buys 175,000 shares of Goldman Sachs before the news is public. So both of them just committed all kinds of insider trading.

Insider trading, yeah. SEC violations. They got caught. It was like the easiest case the SEC ever had to prosecute, right? And guess what? He went to jail and he had to pay millions of dollars in fines. This was a guy who was worth a hundred million dollars and you know how much he made off of that trade?

He made a million bucks. But guess what? He ended up losing his freedom, his reputation, and lots of his money. I don't know if his family stayed with his wife and kids, but that's a real risky run there. It just shows that even people who, I don't know anybody with a hundred million dollars, but I can imagine that if you had a hundred million dollars, there's a lot of things that you can do that people with a hundred dollars or a mere million dollars can't do.

Yet they're still just as messed up as everybody else. They still have the same problems and they're still on the hedonic treadmill. They're still looking for that next thing and they're trying to fill that void and you can't do with money, it has to come from somewhere else, whether it's, relationships whether it's religion or philosophy, it has to come from somewhere else. Having that idea of enough, it's not going to come from money, because you can always get more money.

He talks in the book about how I think it was baseball players and how they start out making a half million dollars a year, which sounds great, right? But then they're comparing themselves to the guy who's making 30 million a year and he's comparing himself to the hedge fund managers who are making 300 million a year.

And they're comparing themselves to Jeff Bezos, who made 40 billion during the pandemic.

[00:21:55] Jamie: Next week on Amazon Prime day, he's going to make another billion probably.

[00:22:01] Spencer: Exactly. So there's always a bigger fish.

[00:22:05] Jamie: He talks a lot about ego in the book and how that affects our decisions.

Basically, a lot of our desire for more things is just trying to boost our ego, you were saying a minute ago, kind of getting back to the savings. Another thing you mentioned is when you're saving, you don't have to be saving for a house or a boat. Don't save for any of those.

He says I'm saving for a world where curve balls are more common than we expect because in everything he's learned about personal finance, everyone, without exception, will eventually face a huge expense they did not expect. They don't plan for these expenses specifically because they did not expect them.

So that's that savings without a specific goal, giving yourself a margin of error or a safety buffer, however you want to think of it, is so powerful.

[00:22:53] Spencer: Yeah. I think when you're saving on the road to financial independence, it's easy to think, okay, this money is this is for my FI, this is for my retirement.

I can never touch this money. But money is fungible. Money can be moved from account to account, and sometimes you don't want to touch it because it's in a retirement account and there are going to be penalties if you take it out. But for Roth IRAs, you can take any contribution out of a Roth IRA immediately and put it to whatever purpose you want.

Now, should you do that? Probably not. But again, Morgan talks about this, it's about being reasonable and not rational. So if you have finally found, you just got out of the military, you've got a great job, you find a good house, you've got a good mortgage rate, and you need a little bit of money for a down payment if you need to take that out of your Roth IRA so you can get into this home and you're going to end up living in this home for 10, 20 or 30 years. Do it. 

He has this great quote about you're not a spreadsheet. Can you find that one?

[00:24:00] Jamie: “You're not a spreadsheet, you're a person, a screwed up, emotional person.”

It took me a while to figure this out, but once it clicked, I realized it's one of the most important parts of finance.

Don't aim to be coldly rational. Yeah.

[00:24:11] Spencer: Yeah. Don't aim to be coldly rational. We, you and me, Jamie, we love our spreadsheets, but at the end of the day, if it came down to choosing between your family and the spreadsheet, you would gladly give up the spreadsheet.

There are curve balls in life and there are tons of things that I never expected to have to spend money on, but because we were saving and investing for financial independence, you ended up having more.

It just buys you flexibility. When you have money set aside and you move to a new country and you need to buy a car to get around, you've got the cash there and you can pull it out if you need to. Maybe it's going to set you back from your financial independence goal by a couple weeks or a couple months.

In the long run, it's going to be okay.  Once you're on the path, you can see the journey to get there. If today someone took everything I own away from me, as long as I kept all the principles and the ideas that I've built up over the last, 34 years or probably let's say 15 years of studying personal finance and investing, it's okay.

Like I could start over from 34 and I know I'd be financially independent again by 65. So much of it is just knowing the path that you have to take and then having the patience to stay on that path to get to your goal. That's good.

[00:26:10] Jamie: Speaking of the path you have to take our second main point, we talked about playing your own game and not what other people are doing, and I think under this one there's kind of two.

Two areas in my mind of not doing something just because everyone else is doing it, like maybe trading crypto or buying a real estate property or you have to figure out your own path. The other thing he talks a lot about that kind of falls under this in my mind is the social comparison and how the goalposts are always moving, which we hit on a little bit, but what do you think about playing your own game?

What are your favorite things from the book that hit?

[00:26:42] Spencer: “What seems crazy to you might make sense to me, your personal experiences with money make up 0.0000000001% of what's happening in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take on. And so on.” 

To me, one of the best examples of this, and I know my dad listens to the podcast, so hey dad, but we are constantly disagreeing about where the stock market is going in the near term, in the short term, in the long term. He is always sending me the doom and gloom newsletters that say, “Oh you think a 20% market drop is bad? Wait till you see what's coming up next. Better buy your gold, better buy your Bitcoin.” 

That's not me. I am the eternal optimist and when I see the stock market down 20%, I think, oh, that's great. It's a 20% off sale. Now, it sucks because I have a lot of money invested.

I think this is one of my first six-figure losses since the Covid crash. But if you don't, go back and listen to our, What do you do when the stock market crashes episode. As long as you don't realize the gain, you don't sell, you don't cash out, and you hold onto your shares.

In the long run, history has shown it's going to be okay. You're going to still make your money back. It just goes to show, my dad graduated college in the eighties with super high inflation and stocks weren't a good play at the time. But for me, my entire life, I grew up in the nineties, right?

You could buy any stock and it was a good buy. When I started investing I was in college from 2006 to 2010 studying economics. So what did I study? I watched in real-time the Global Financial Crisis as the entire world economy collapsed around us. Our econ teachers were like, “This is nuts. This is historic. This has never happened before.”

Yeah. You guys are in a great time. So when did you know, and when did I start investing? March 2009. So I've had nothing but a huge bull run. A huge tailwind pushing my investments up. So that's my experience, right? And so again, that makes up a fraction of a percentage of the total world experience.

I'm only one in 7 billion people. So it's easy for me as this white male from New England to say, “Oh yeah, just buy US stocks. Like they always go up. It's great. That's how I think the world works.”

But there are plenty of people, even very similar people to me, like my dad, who don't think that's how the world works.

And he's not crazy. I'm not crazy. At least we think, but we both have very different interpretations. We have very different interpretations of how it all works. I think it's important to get back to some of the points that we had, playing your own game. Even though what other people are saying might make sense and they might be rational, you have to figure out what game they're playing before you start copying their actions.

[00:30:20] Jamie: A hundred percent. So one, one example I have is when Robinhood got really popular, the trading app, that was like selling the idea of we're going to take it, we're going to stick it to the man and take it to the big banks and we're going to open up trading to the average layperson and get rid of all these fees and these upsells and extra charges and just anyone can invest in the stock market right on their phone.

And so everyone was talking about it at work. So everyone signs up like, here's my referral code. You get $5 of Tesla stock if you sign up and everyone's passing these around, but you don't know what the person next to you, their goal may be to pay off their student loan debt this year.

And then the person two seats down, their goal may be to save up for a down payment for a house, three seats down. They may be trying to save up for financial independence or one of them's trying to fund their emergency fund because they have a baby coming. So just because everyone else is doing it, you can't just jump on Robinhood or the crypto.

And I know we've talked about, Spencer, how both you and I put a very small percentage of our investments in crypto over the last couple of years. Now one of the apps that we used from our friend is not even letting us get our money out. So thankfully it was a very small percentage, but had we just blindly followed?

Like one of the bro tips, hot stock tips of the day. Plenty of people put the majority of their liquid net worth into crypto and now it's down 70%, 80%, if not a hundred percent depending on your coin. But even, even my Bitcoin and Ethereum are down, I think like 75%, 85% from when I bought.

So you can't just jump on the bandwagon without understanding what your goals are and what the person that is trying to get you to do it, what their goals are. The game is just different for each person.

[00:32:09] Spencer: I think eventually if you understand what game they are playing, and I think for a lot of people like they think they're playing different games, but they're really not.

What do we all want in the end? Everybody wants to be wealthy, right? Who wouldn't want to be? Maybe there are a couple monks out there that don't, but for most people listening to this podcast you probably want to be rich, you probably want to be wealthy, and you probably want to have choices and freedom, to make those choices and have enough money that you know you work because you want to.

And so once you realize that we're all pretty much playing the same game. People are always looking for shortcuts and people are always looking for ways to get to that goal faster. Whether it's day trading stocks, whether it's options trading. I know that was really popular during the pandemic cryptocurrency.

There are always people who are out there and a lot of them we used to work with, but I think it's an entity military unit. There's always somebody who's out there, who's not trying to scam anybody, they're trying to do the right thing. But they think they found a shortcut and they think they found a way to get to their goal that much faster.

Maybe they get in at the right time, but do they get out at the right time? And, I'm in the same boat where I've got just a little bit of crypto because I was dabbling in it and I knew that the whole system would collapse because every time I get in on something, I'm the black swan. If I tell you to buy anything other than VTSAX run away because it is about to collapse. In fact, funny story, when I was in high school, the US had just invaded Iraq and as part of that, they issued a new currency.

And so this is a good one. So I got into this I think, I'm pretty sure it was legal, but basically I was buying Iraqi dinar, this Iraqi currency on eBay from like guys who were over in Iraq and they were shipping it back to the states. You get, I don't know, something stupid like you'd give 700 US dollars and you get a million Iraqi dinar because it was trading at whatever that is .07 cents to the Iraqi Denar.

But pre-war, it was 3 US dollars to a dinar, so they were like, oh, even if it goes back up to parody you're going to make so much money. Of course, nobody made any money. The Iraqi economy was in shambles. They fought a civil war for the next 10 years, 15 years.

And then they had to deal with Isis. So, everything I touch, it's like the reverse Midas, everything I touch does not turn to gold, but what it has done is it's reinforced over and over again that there is one game that I'm good at and that is long-term passive index fund investing.

And as long as I stick to that, we're going to be okay. But if I try to dabble on anything else good luck. 

[00:35:46] Jamie: That's a great point. What I was going to say is similar because, for you and I, we've decided our game is passive low-cost index fund investing and to get to financial independence.

So we have the option to work or not work before the average person in Western civilization does. I was talking to someone the other day and I asked them if they were planning to work for a long time and they were like, yeah, I think so. Maybe 60, or 65. I'm just like, man, they have no concept of the fact that there are other options.

And sometimes when I mention to friends or people at work or someone that like, “Hey I'm aiming for financial independence by 45”, and their mind's blown that's even an option. So if, someone's playing a completely different game than you and they're trying to find shortcuts, just let it reinforce your decision that you made a year ago, or six months ago, or five years ago, whenever you decided that financial independence sounded appealing to you, that you're in it for your goal.

And don't let in social comparison. Another great thing from the book is that just because someone has a really nice car, a hundred thousand dollar Lamborghini or whatever maybe, nice Teslas or whatever you're into these days, like just because you see someone with that car doesn't mean they're better off than you or they're wealthier than you or richer than you.

It just means that they spent a hundred thousand dollars or that they took out a loan for a hundred thousand dollars. We like to compare ourselves to other people's situations and try to figure out things like that, but it's just the fact that they made a purchase or they took out a loan that doesn't mean they're in a better spot than you in any way.

[00:37:19] Spencer: Yeah. He's got one quote here about a measurable percentage of those reading this book will at some point in their life earn a salary or have a sum of money sufficient to cover every reasonable thing they need and a lot of what they want. If you're one of them, remember a few things. The hardest financial skill is getting the goalpost to stop moving and then he talks about social comparison and it's so true. As I reached the end of my military career it is hard. As I get closer to financial independence here, you start to think, oh what if I just worked for a couple more years? What else, what other toys, what other adventures?

What other houses, what else could I add to the lifestyle? If you start going down that road, it's a slippery slope to mix all the metaphors, because like he says if you don't stop the goal posts from moving, or at least slow the goalposts down a bit, they're going to always be just ahead of you.

[00:38:35] Jamie: To close the second point, with this quote that summarizes my game of what I've decided to play here, and he says in the book, “More than I want big returns, I want to be financially unbreakable.”

I would maybe add the ability to make decisions. So my game is to be financially unbreakable, to have enough where I can overcome obstacles, downturns hard things with the family, medical things like whatever it is, financially unbreakable.

If you ask 10 of your friends I would be willing to wager a bet that none of them would use that term as that's the game that they're playing. So remember that you have to play your own game. 

That leads us to point 3, which is to set a reasonable plan and stick to it.

[00:39:20] Spencer: Yeah. I mentioned it before, but being reasonable if not completely rational.

And the example that he uses is he's paid off his house and he lives in a completely paid-off house. When he brings this up to his financial buddies or he's in the financial ecosystem because he used to write for a market watch. Now I think he writes for an investment company.

They say, oh, that's crazy. Why don't you just look at my spreadsheet? You could borrow at two and a half percent and invest that money at 7% and you'd be, multimillion dollars richer when you're 60.

And Morgan just says, oh, that's great. I understand, I know the math. But to me, having my home completely paid off, no bank can ever come in and say, you've missed a couple of payments. Yeah, you're out. We're foreclosing on the house. He said, for him that level of security is worth basically any cost.

But the cost is just paying off your mortgage and foregoing maybe a little bit of future growth if you invested the money. But the other thing for Morgan is if he doesn't have a mortgage payment, that's one less thing in the budget that just frees up that little bit of cash flow.

I mean depending on life could be a lot of cash flow, but it frees up that cash flow so that his lifestyle, when we talk about lifestyle creep or we talk about a financial independence number if you’re decreasing your number by 25x $40,000 less a year, that's a million dollars less that you have to have set aside.

Yeah. Then that gets right back to his point about the margin of safety, right? Like when you have flexibility built into your plan and I really like what you talk about, Jamie, with having unbreakable finances, right? You could get hit by a car tomorrow. God forbid someone in your family could have cancer and you wouldn't be able to work another day in your life and it's going to be okay, right?

Yeah. You've set it up so that it's going to be okay and at least from the financial point of view, right? And that's another thing I've been thinking a lot about recently a lot of what we're talking about here is just solving the money problem, right?

Because everybody, when they come into the world, unless you inherit 10 billion, now you have a really big money problem. When any of us come into the world and for most people listening to this podcast, when you join the military, you start off with this money problem.

And for most people, that money problem is, I don't have any. Or I have a negative amount of money. That was my problem when my wife and I got married, we were both collectively worth negative amounts of money because of our student loan debts.

That's similar to your story too, but what we're talking about here is we're talking about solving the money problem of life, but there are so many other problems that you need to solve in life. Just solving the money problem. That's good. That's something that you need to do, especially if you want to be financially independent, obviously.

But also building in flexibility to your plan is going to allow you to solve a lot of the other problems that you're going to have in life. 

I really like how Morgan talks about the idea of being reasonable, if not completely rational. He talks about how it's so important for people to recognize that you don't need to get it a hundred percent right.

Even getting it 80% or 50% right is enough to get you to FI. That wasn't a quote, that was just me talking in like a quote voice. But he does talk about one of his deeply held investing beliefs that there's little correlation between investing effort and investment results. That's something that I have found to be true so many times.

In fact, the more I research an investment and the more that I spend trying to understand an investment, it seems the worse I do. I think crypto is one of the best examples. I first heard about Bitcoin and in 2010, maybe it was, I was going to school, Boston University right across the river from MIT.

I knew guys who were in the cryptocurrency scene very early on, really. When they first explained it to me, I was like, I don't get it. What's the point of this? Sounds cool, but no thanks. Again, I turned it down when it was a dollar, when it was $10 when it was a hundred dollars when it was a thousand dollars.

And every single time I'm like, it's not the game I want to play. It's not. So I've turned it down every time, but I did understand what my plan was. My plan has always been, passive index fund investing, dollar cost average over many years. It's worked. I've executed it through several downturns and right now we're in one of the worst downturns.

In fact, I listened to a podcast the other day and it was the worst six-month period of the US stock market plus bonds. So bonds and US stocks combined. It was the worst six-month period in the financial markets. But guess what? My portfolio's still there. I haven't gone back. I haven't gone to zero.

It's a lot lower than it was a couple of months ago, but it hasn't gone to zero.

[00:45:12] Jamie: One of the quotes I think we've said before is, “I can afford to not be the greatest investor in the world, but I can't afford to be a bad one.” I think that kind of summarizes the mindset there of the passive index fund investing of, it's okay if I don't make 40x gains in the recovery, I'm going to make good enough.

I'm going to average with the stock market and if I beat it by a percent or two, great, but if I am right with it, then that's fine too. So a lot of people just are out there chasing to have an amazing return on their investments instead of just an okay or average one, which is a lot easier. 

Going back to your point Spencer, about, financial problems and how a lot of the stuff we talk about is finances.

I think it is important to remember though, that this is not in the book. This is Jamie's personal opinion. A lot of the financial stuff does affect life in other ways, marriage, job relationships, and things like that. I just did a quick Google search, and the top reasons for divorce in the United States and financial disagreements were number two on there.

So there are definitely ways that these financial conversations can impact all of your life, especially your relationships with your significant other, with your kids, with your parents, and with your coworkers. If you're stuck in a dead-end job because you can't afford to quit, then that's going to affect your happiness and your joy in life, which is going to affect everything.

What's reasonable to you may not be ideal at the moment, but hopefully as you have savings. 

The other point I wanted to get back to just real quick was the mortgage-free freedom and having a paid-off house. Sure it doesn't make sense on the spreadsheet, but imagine if say your monthly mortgage payment is about 20 to 25% of  your budget each month, it's probably more like 20 to 30%.

I bet most people don't keep it below 25%. That's what I think that's the percentage that Dave Ramsey recommends. So most people are probably well above that. Say it's 30%. If you get rid of your mortgage, imagine having 30% of your budget freed up and then what that could do to your savings rate.

So there's a lot of potential there as well. That is not just you making a temporary hit on the investment. Sure. A little bit of lost opportunity cost. But I'm a big fan of that concept and if I didn't have to move again, I would try to pay for my house for sure. Instead of renting.

[00:47:35] Spencer: I think it's a little, that example doesn't work as well for military folks, just because we're moving, on the officer side it starts to be, as you get later in your career, it's every year or two. Then on the enlisted side, usually it's every three to five years.

So depending on your branch and everything. But yeah, it's definitely when you do get to the point where you can have a home, paying it off quickly or just paying cash for it is, again, it might not be rational, might not make sense on the spreadsheet, but it it's definitely reasonable.

[00:48:19] Jamie: Yeah. Think about the safety of margin that it would provide no matter what happens to you or to your job so that your family has a place to live. Yeah. As you age, I have a relative who is older, and what are they going to do when they get older and aren't working anymore?

So if they had a paid off house, they would have a lot less grief, anxiety, and stress about aging because no matter what, they would have a place to live. So anyway, that's a Jamie rant.

[00:48:53] Spencer: Yeah. No, it's so true though because, for most people, you're not going to work your entire life.

And now if you earn a military pension or a pension from another company, or you have sufficient savings, you might have income your entire life, and then social security kicks in your sixties as well. But, it is very liberating if you get to the point where you're not working anymore and you don't have a mortgage payment anymore. Just like you said, it builds that margin of safety in there and allows you to run an unbreakable financial house. 

A couple of other things that he talks about in the reasonable plan is “there's an old pilot quip that their jobs are hours and hours of boredom punctuated by moments of sheer terror. It's the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.” 

I would say that should probably be autopilot there, not cruise control. 

I think that's a great quote there because I'm pretty sure wrote this book before the Covid crash too. I have to go and check because I remember that. Now the 20% drop that we've had in 2022 has taken a few months, but the Covid crash was quick.

It was rapid. You could check the market every day and be like, oh, great, I just lost another $10,000, or, no, I'm down another 6%. There were times on the way down when I was thinking, should I just stop the bleeding? Should I just go move some of it to cash, wait for it to drop another 10%, and then go back in?

But if I had done that, I'm so glad I didn't do that. I probably would've missed timed it completely, because the day it started going back up, which was like March 20th, I think, and it was like right in the middle of our, “14 days to flatten the curve” and travel was locked down.

Warren Buffet had just dumped all his airline stocks. It was madness. You couldn't find toilet paper anywhere. We were trying to make masks out of like socks, and it was insane. I don't think I would've had the intestinal fortitude to move back into the market at that point.

But what I didn't do was sell. That was my moments of sheer terror there, because we were at an all-time market high just before the covid crash as it almost always inevitably is, you're all, the market is always hitting all-time market highs. So my portfolio was at its all-time high.

And to watch it go from all these years of savings basically just completely reversed themselves. I went back, to the amount of money I had in 2015, right? Or 2016, I can't remember what the exact year was, but, It was painful cause it was like, man, all that money I just threw into the market over the last, four or five years has basically evaporated, but it hadn't evaporated, right?

I still own the shares. They were still there and I had a plan and I stuck with it. I think that's the biggest takeaway right there, is to have a plan that you can stick with during moments of sheer terror. If you don't have that kind of plan go to the bogleheads.org, go to my website, look up my asset allocation, read my book, there are tons of books out there and how to build a reasonable portfolio.

But basically, just like stocks and bond index funds, mix them together and you'll be fine and you'll be fine if you're in the TSP. Go listen to our TSP episode because we've got a whole bunch of different portfolios that you could build in the TSP. We don't know which one's going to be the best because we don't know the future.

And that's the fun part of it. Also the terrifying part of it. 

[00:53:31] Jamie: He talks, Spencer, in the book about bull markets, bear markets, and having FOMO or fear of missing out. If some of our listeners haven't heard that term, how can we apply some of the principles and the psychology side of money to the current stock market drops that we're seeing here in the middle of 2022?

[00:53:49] Spencer: During the bull market, it was funny coming to work and it seemed like everybody at work was on Robinhood who were day trading were buying Tesla at 200 bucks and a couple of weeks later it was at 400 bucks and they were buying more, they're going to what was the phrase?

We're going to take it to the moon. We're going to ride it to the moon.

AMC and all the GME. It's your classic bubble. It happens all the time in economics, whether it's the Dutch tulip bulbs back in the 1600s. In the book, he talks about Cisco stock, and I remember this when I was a kid in 1999, not the exact details, but in 1999 Cisco stock rose 300% to $60 a share, and it was valued at 600 billion, which at the time was insane.

And there was an economist who said, who pointed out that the implied growth rate of the stock meant that it would be larger than the entire US economy within 20 years. That's insane, right? You can't have a company outgrow the entire US economy in 20 years. That's what a lot of people were saying about Tesla as it was skyrocketing up and up. “Oh, it's a new economy, it's this time is different, right?”

You always hear this time is different, but it's usually not. Bubbles and bear and bull markets do their damage when long-term investors, he says bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another, he has this other line.

So you may have looked around and said to yourself, “Wow, maybe these other investors know something I don't”. I think there was a lot of that with why I bought crypto or a little bit of crypto earlier in the year and last year. Was, there’s a lot of smart people, seemingly smart people who were involved in it, right?

A lot of them are pretty smart. But at the end of the day, I didn't know any different, and maybe in the long run, they'll be proven right. Maybe one day Bitcoin will replace the US dollar, but in the short run, like it doesn't really matter. If you're buying US stocks and all of a sudden we switch from using US dollars to Bitcoin, like Apple will still sell you an iPhone, right?

They're still producing a product. They don't care what they sell to you in, whether it's in Japanese Yen or Euros or US dollars or Bitcoin, right? Like they'll still sell you the iPhone and if you own a little bit of the company, you're going to be okay. No matter what currency it's priced in.

As long as you recognize that and you can keep your FOMO down to a minimum. For me personally, there was some of that going into the decision to buy a little bit of crypto. “Hey, I don't want to miss out. If this is if this is the next thing I don't want to be left on the outside.” And then, sure enough, the bubble pops and it falls 70% within a couple months. 

One other thing he talks about is in investing, to be successful, you have to pay a price, right? To buy anything of value, you have to pay for it. But what's interesting about investing is it's not dollars and cents that you're paying, it's volatility.

And so his quote says, “Like everything else worthwhile, successful investing demands a price, but its currency is not dollars and cents, it's volatility, fear, doubt, uncertainty, and regret, all of which are easy to overlook until you're dealing with them in real-time.” 

He has another line where he talks about considering volatility to be the fee of successful investing.

Don't think of it as a fine, don't think of it as something to avoid. There's this concept in behavioral economics where you have fees and fines. The classic example was they weren't picking up their kids from preschool at the right time. So they said, okay, so from now on there's a fee of $50 an hour if you don't pick up your kids on time.

And what happened, people started picking up their kids even later because they were like, “Oh, great, I just have to pay. I just have to pay for it, and then I don't have to go pick them up.” So they were treating it like a fee when the preschool was thinking of it like a fine to punish people.

And it's the same thing with parking tickets, right? If it's $10 to park in the meter, but $20 to get a parking ticket, some people will just take the parking ticket because yeah, they consider it the fee of parking, not the fine for doing something wrong. So in investing, it's definitely, volatility is definitely the fee that you pay.

When you're a long-term passive index fund investor and you are not doing anything because it's not part of your long-term strategy to change during a bear market, and you're watching, tens of thousands or hundreds of thousand dollars of losses and you're like, “Shoot, what am I doing wrong?”

You're not doing anything wrong. You're just paying the fee and the fee is some years, some months, maybe even, longer. If you look at the Japanese stock market for some decades, you're going to be down and you're going to think, “Man, maybe I should get into active funds.”

Maybe I should get into something else. But that's when you have to go and reevaluate your first principles. If you got it wrong the first time and you decided, you know what, maybe putting all my money into Bitcoin exchanges wasn't the right idea, because now I don't have any money because they've frozen it all and they've lost it.

Go back and reevaluate your first principles. But if your first principles are sound and you understand that sometimes stocks are down and sometimes bonds don't pay as much as you'd like them to, and that's part of your plan, then that's good. Stick with it. 

[00:59:58] Jamie: All right, Spencer, I think we have fully hooked people on the line that they need to go read the full book, but I think we gave them enough to get some big takeaways out of the book if they haven't.

I'm going to close my contributions to the podcast and then I'll pass it back over to you for your kind of last point and main takeaways. I think the one quote that kind of summarizes my favorite concept of this, he says, “One of the most powerful ways to increase your savings isn't to raise your income, it's to raise your humility. People with enduring financial success, personal finance success, not necessarily those with high incomes, tend to have a propensity to not give a damn what others think about them.” 

So I think that is a great summary of the way that this book just flips personal finance over and the way we've all looked at it in spreadsheets and calculators, and then what we've even talked about.

We had a whole episode about what our favorite calculators were. This book just really flips that over of the mindset shift and the psychology that goes behind it. If your goal is to have extra money and more savings to show off to people, then you're never going to achieve that. There's always going to be someone wealthier than you.

Everyone's always going to have someone else that they're trying to catch up to, someone else with a better job. Someone else with a nicer car, someone else with a nicer house, or whatever. The only way to increase your savings, he says, isn't to raise your income. It's to raise your humility. So I will leave that with the listeners today and pass it back to you for closing.

[01:01:40] Spencer: Yeah, I like that. Anytime a book tells me to raise my humility that's probably going to be one of my favorite books. 

The last point I want to leave the listener with is the Craziness of Compounding Interest. He talks a lot about Warren Buffet in the book. At the time that he wrote it, Warren Buffett's net worth was about 85 billion, and I just looked it up, I think it's 95 billion today in 2022.

That's with the stock market being down 20%. But so he says, “As I write this, Warren Buffett's net worth is 84.5 billion. Of that, 84.2 billion was accumulated after his 50th birthday. 81 billion came after he qualified for social securities in his mid-sixties.”

So it's just absurd. If you like, 99%, more than 99% of Warren Buffett's net worth came after he turned 50 years old. It says a lot about being a smart guy and being a clever investor, but he's actually, he's not the greatest investor of all time, other than he's been investing the longest. The power of compounding interest is absolutely absurd.

One of the main reasons that we know his name is that he's been investing for such a long time. He's been since his 50th birthday, I think he's 89 now or something. Let's see, Warren Buffet, age 91. Okay, so he's been messing for 41 years since his 50th birthday. So if you think about that kind of timeline, that and that timeframe, the decisions that you make today might be impacting a 91-year-old in the future.

And so for me, what would that be? Let's see, in 57 years. So 57 years of compounding returns. That could turn my little net worth into quite, quite a lot of, quite a bit of coin. All right, listeners, thanks for hanging out with us today. Psychology of Money, Morgan Housel.

You can find it on Amazon. I also have it on my website, and the address is militarymoneymanual.com. You can read another review I have on there. I think the article is called Financial Independence Books. If you just search for that, you should be able to find it on my website. Three main takeaways for the military listener today.

Save money for no reason at all. Just save money. Build a margin of safety into your financial life. Save money buys you freedom. Number two, play your own game. No one is crazy, but people do stupid things with their money. So make sure you know what game you're playing. Stick to it. If you want to go dabble in some other games, that's fine, but do it in such a way that you won't get wiped out.

And finally, number three. Don't just do something. Stand there. Usually, the correct move with any investing, whether it's during a bowl or a bear market, it's just the stick to your guns. Stick to your plan. Be reasonable. Don't worry too much about being rational, but don't change your strategy, especially if it's a long-term passive index fund strategy.

If you're thinking, what am I doing? I'm down 20% this year. It's okay. It's built into the system. You're going to be fine. 

As always, if you have any questions or feedback, you can message us on Instagram. I've got a lot of great messages recently. It's @MilitaryMoneyManual. I also have a Twitter now. I guess this is the first time I'm revealing that publicly.I don't check it that often, so it's mostly just to promote the book, but it's @MilMoneyManual, or just search Military Money Manual. It should pop up on Twitter, email info@militarymoneymail.com. We appreciate all of you for joining us today. We're grateful for all of you. Keep sharing the podcast with your friends, your coworkers, and your relatives that can stand listening to us, and we'll catch you in the next episode of the Military Money Manual podcast.