Nick Maggiulli, chief operating officer and data scientist for Ritholtz Wealth Management, joins The Long View this week to discuss insights from his new book titled "Just Keep Buying: Proven ways to save money and build your wealth" and his blog, OfDollarsAndData.com. Here are a few excerpts on personal finance and growing wealth from Maggiulli's conversation with Morningstar's Christine Benz and Jeff Ptak:
You Can’t Just Cut Spending to Grow Your Wealth
Ptak: In the book, you discuss what you call the biggest lie in personal finance. What is it, the biggest lie in personal finance? Maggiulli: I think the biggest lie in personal finance is that you can grow your wealth by just cutting your spending. You can just cut your way to having a lot of wealth. And I think, generally, if you look at the data, it's just not true. Yes, of course, if you're someone who has high income, you have very, very high spending, then it's very possible for you to do that. But most people that have – that can't – they don't have a high enough income to grow their wealth. So, it's really – it's not their spending, it's the issue. If you look at – I was looking at data from the Bureau of Labor Statistics, and people in the bottom 20% or the bottom 40% of households, there's not much to cut. Like, I actually show the numbers in the book. I'm like, okay, you're spending $800 a month on rent, or $900 a month on rent, like, how much you're going to cut there? It's like, there's not enough wiggle room for them to grow their wealth just based on cutting spending. And so, I think it's a lie, because generally, it doesn't work for most people most of the time, which means the solution is to grow your income. Now, I'm not saying growing your income is easy, but that's the path out. And almost – and if you actually look at the data as well, savings rate and income are highly correlated, positively correlated. Like, people generally with more income, save more, and that's true as you go further and further up the income spectrum. So, that one piece of information alone kind of proves my point. And of course, you're going to like, well, I know a rich guy that doesn't save anything. It's like, yeah, those are the exceptions, like – oh, I know a celebrity that blew all their wealth, right? You can name like 5 or 10 celebrities that went bankrupt. I can name every other celebrity that didn't, right? That's the difference. It's very seductive to use these stories and examples of people that went broke. And I'm not saying they don't exist. But at the same time, like, I have so many more examples on the other side where, like, yeah, you know, like, I don't know anything about, like, for example, The Rock, or Oprah or any of these people and their money mindset and how they spend money. But I do know that they all have high income, right? That's the one thing I know with certainty. And so, I think that's the kind of the main point I'm giving up there.
How Can You Grow Your Income?
Benz: How about some ideas for growing income? What are the key things that you talk about in the book with respect to that? Maggiulli: I would put these into two different camps. There's the like – okay, your main hustle thing and then their side hustle stuff. So, just in main hustle, which is like, climbing the corporate ladder. I'm one of those people that I'm not against, like, 9 to 5s, you shouldn't do that, you should kind of be your own boss and all that. I'm not against the people that do that, either. But I think a lot of people, a lot of millionaires out there got there by working a 9 to 5 job and getting experience and doing that. We all don't need to be entrepreneurs and run our own businesses and do that. So, I think there's a lot to just building your skills and becoming valuable in a company and kind of slowly making more money over time. I think that's definitely a way to do it. The other options, which are all like side hustles, is like, okay, do you sell your time and expertise? That's one idea. Do you sell a product or service of some sort, something you can – that's not always linked to your time, but maybe it's linked your time initially. But over time, as you get more efficient at it, you can sell it for less time. There's idea of teaching people, like doing online courses, things like that. I've seen people make some good money doing that, whether you're doing making a product in that way. In addition – I think those are kind of the biggest ones you can look at. And then, the last way to grow your income, I say, in addition to that, like, buying income producing assets. So, the whole idea of creating these income streams, and those are great and all, but you ultimately want to take that money from those income streams and then invest it in income producing assets that start paying you more. So, that's things that will pay you dividends or any sort of cash returns, cash yields, things like that. So, I think, ultimately, the short runways to increase income are all kind of based on your labor and work you do, whether it's selling products, teaching, things like that, selling your time. But in the long run to raise your income, you're going to have to invest in income producing assets. I think that's the ultimate way to build wealth.
Is It Too Late to Grow Your Wealth?
Ptak: I wanted to go back to something you mentioned before. It was that first 10 years example, it accounting for 50%, essentially, of what's ultimately built up over time. And as we know, sometimes life in circumstances can intrude, and people aren't able to put away savings to the extent that they might want. And so, listening to that, they might conclude, oh, my God, I'm screwed. I wasn't able to tuck money away in my first 10 years. So, what are the implications for say, my longer-term financial and retirement security? What do you say to try to assuage concerns like those? Maggiulli: I mean, it's not that you're screwed. I mean, it depends on – there's so many factors here, like, I would need a little bit more information to kind of get at like -- if you're – if you have zero dollars in retirement savings, and you're 60 years old, like, I can't make that math work. Unless you have some really high paying job, that's going to – you can save enough in five years or something, you plan to retire at 65 or 67, then, yeah, those people, it's going to be very tough. I'm not going to sugarcoat it. For certain people, it is going to be very difficult to do things like that. You may just have to lower your lifestyle. But that's not true for everyone. If you don't – oh, I didn't save in the first 10 years doesn't mean you're screwed. It just means you have to save more in the intervening years, or maybe just work a little longer, I mean, all else equal, assuming you want that same lifestyle. So, I don't think it's like, oh, they're screwed. There's still time. There's still time for people to do things. And I think the thing I would focus on then is not worrying about, oh, well, I don't have as much money invested. It's like, okay, what can I do to raise my income? Maybe this is like a gift. I realized I didn't follow; I wasn't optimal in the past. But what can I do now to improve my future? And like, maybe the fact that you didn't save then is now causing you to like work harder or think more about how to do this in such a way such that you raise your income. So, it's not always a bad thing that you've made mistakes. Like, I made a bunch of mistakes. And if I hadn't made those mistakes, I wouldn't be behaving better now. So, I don't think we need to always look at mistakes just like it's a massive failure, because we learn from that, and that might make you better in the future. So, I think that's the thing to focus on is how can you be better instead of saying – instead of beating yourself up for messing up.