In episode #4 of The Big Bo $how, Big Bo (a.k.a. Jason Blumstein, CFA®) reviews how Newton's 3rd Law at times plays out in our personal finances. Additional topics Discussed:
- NFL Salary Cap constraints and how it is affecting the offseason
- Is owning a home an investment?
- Is saving for your child's college the right decision for you?
- Working for others vs. yourself
- Some math behind "Keeping up with the Joneses"
Hope you enjoy the $how!
Episode 4 Key Takeaways:
Welcome to the fourth episode of The Big Bo $how brought to you by Julius Wealth Advisors. I'm your host Big Bo, also known as Jason Blumstein, the CEO and founder of Julius Wealth Advisors. We're sitting here in April, springtime, love the springtime, we have the grass growing, the birds are chirping, flowers are blossoming. And it's also the best time of the year in my opinion for sports. We recently had the NCAA tournament, which I'm not sure why it starts so late. The final starts around 9:40 at night, even for a somewhat young oriented guy like myself, I ended up falling asleep with two minutes left in the game.
So if anyone in the NCAA Tournament is listening out there, I'd suggest maybe you start the tournament at a normal time, say 8:00. We also have the beginning of the Major League Baseball season, the NBA playoffs are blossoming as well with my Miami Heat up 2-0 in their series versus the Hawks. And of course we have the NFL offseason taking place. Even though the NFL ended in February. They always seem to be a full year sport. And this offseason is playing out as such. One of the biggest things that took place for me being a Dolphins fan between our last episode of this is that the Miami Dolphins decided to trade for Tyreek Hill, one of the fastest, most dynamic wide receivers in the NFL today. Now a lot of people are alarmed by this. A lot of people are shocked by this. I myself was shocked as well. And when this took place I got to thinking about well, why did this take place? Right? Why would the Kansas City Chiefs look to trade away one of the most dynamic wide receivers in the NFL seemingly out of nowhere. And it got me thinking about trade offs and Isaac Newton and his third law which states that every action has an equal and opposite reaction. So let's take a step back here and think about why this took place to get Tyreek Hill traded because he was past his prime, didn't fit into the team culture? No, he got traded because Tyreek Hill demanded a salary or a contract in line with the top paid wide receivers in the NFL. And listen, rightfully so he has the right to ask for whatever he wants. But the issue was that the Kansas City Chiefs already are paying Patrick Mahomes about $45 million per year. Now, if they would have paid Patrick Mahomes and Tyreek Hill what they wanted, those two would have been about 35% of their entire salary cap.
Now, that means the Kansas City Chiefs would have dumped 35% of their finances into two players. And mind you folks, there are 53 players on an NFL roster. So you would have had to spend 65% of your money on 51 other players. Kansas City Chiefs looking at their total finances said listen, we don't want to trade Tyreek Hill because we don't think he's good. He's obviously good, but we just can't afford to do this for the team as a whole. So what do they do? They traded them to the Miami Dolphins. Now, in my opinion, we'll see how this all shakes out. In my opinion it probably made both teams worse. I mean, I think it made the dolphin slightly better, but I don't think they're there to actually win a championship and I think losing Tyreek Hill, even though they got some draft picks back from the offense, I still think it hurts their team in the long run. Now, combining my two of my three passions in life, in football, finance, and not food in this scenario. But this got me thinking about personal finances. And a lot of times in our personal finances, we are faced with similar choices, where we have a certain amount of income, we have expenses, we have assets, we have liabilities, and we don't have an endless supply. Some people are fortunate enough to have that, but most people do not. And we're forced to make these deciding trade offs. And thinking about Isaac Newton, every action, whether it's sports, or finances has an equal and opposite reaction. And, I just wanted to talk about four different ones that I see that I quite often see when I'm working with clients. And those four that are most common that I see. Number one: buying a home. Number two: paying for your children's college. Number three deciding to stick to working with an employer or and staying in corporate America may be venturing off and starting your own business. And the fourth is keeping up with the Joneses or known as your lifestyle.
Now, let's talk about the first one in buying a home. Now when I'm working with people, whether it's to buy their first home, they want to look to upgrade a home, either buy a new, bigger home or put more money into their home to fix it up. What I often see happen is that most people dump most of their wealth into their home. And they do this because they've heard that oh, well your home is an investment that's a safe place to hold your money. Well, you know, in my opinion, your home shouldn't be looked at as an investment. Your home is a place you live, it's an emotional place, you raise your family, you raise your kids, you have fond memories of where you grew up, but in my opinion, it's not an investment. And the reason why it's not an investment is because your home, one it doesn't cost, doesn't kick off any cash flow. Typically an investment, you want to calculate the return you're going to have on your investment. And the best way to do that is when investment kicks off cash flow, your home does not kick off any cash flow. Right.
Secondly, your home typically holds your money. And what I mean by that, is that right now, as we talked about in our last episode as well, and I've written about previously, your home, home prices are appreciating around the country. And a lot of people are up, say 20% 30% of our home in the past two to three years. But yet, how do we access this cash? We can't take the cash from our home, I can't break a wall in my house and out comes the cash. No, the only ways that we can access this cash is by refinancing our homes and pulling out cash. But now with mortgage rates moving up materially this year, it's going to be pretty difficult to break. A lot of people in this country who did refinance are sitting at 3% type mortgage rates. Now they're sitting around 4.5%-5%. That's a big, big deal to try to change that. Or you can take out a HELOC. Both of these scenarios allow you to access your cash, but it's going to cost you money in borrowing costs from the bank or whoever's willing to lend against your home. Now the other way that you can access your home is by selling your home. Great. You have $500,000 in equity in your home. Let's sell your home to get this $500,000. Awesome. But where are you going to move? Are you going to move within your same neighborhood or are you going to uproot your family and move to s different neighborhood most of the time, if you're raising a family, you want to stay in your neighborhood a lot of the times, which means that if the the homes in your neighborhood and if your house went up in value, most likely the entire neighborhood went up in value, meaning that you're probably not going to be able to access this cash like you thought, because you're gonna have to buy a bigger me a bigger house, but also went up in 20% to 30% of value. So again, try not to think about putting all your excess cash flow into your home, because inevitably, you could be left with a heavy anchor in a burden by not being able to access this cash.
Now, the second scenario I want to discuss is saving for college. Now a lot of people that have the luxury of having excess cash flow, take a lot of this excess cash flow, and they think, oh, I want to save for my children's college, of course, and it's a very noble thing, it's a very noble thing to do to want to put your children's priorities in front of your own. However, the issue with this is that many times people save for their kids before they save for themselves. So inevitably happens is that yeah, now you don't have now your kids don't have to pay for college. But now your kids might have to pay for you when you're in retirement because you don't have enough money saved for retirement. And let me just break down some simple math for you when we talk about the miracle of compounding and compound interest. So let's just say you have the luxury to save for your kids college right when your child is born, your child goes to college, when they're 18, you have two kids, right? So if you have two kids, and you're saving, let's say $2,400 a month or $1,200 per child, because you foresee college costs being about $500,000 per child, which, if you look at the math of college these days, it's not unheard of with inflation, or whether you go to private school or public school $500,000. So if you do that for 18 years, with an assumed annualized return of 7%, you will have roughly $1 million in 18 years once your kids are ready to go off to college. Now, the issue with this is that the miracle of compounding then stops, right you have your million dollars, you have your kids paid off for college.
But guess what? Now let's just say you had your kids when you're 30. Now you're sitting here at 48, 18 years later, and all your money that you saved up is now going to your kids' college. You feel great as a parent, but now you look at your own savings. And you don't really have much because now you just put it off for your kids. Now you have 17 years to save, if you're looking to retire when you're roughly 65 years old. So there's roughly the same timeframe, you can do that again for another 17 years. Save $2,400 a month. Now great, now you have your million dollars for your retirement. If you look at the numbers, however, it probably is not going to be enough.
Now, let's just put this, let's just flip this scenario on its head, let's take the same $2,400 We saved per month. And now we're doing it for 35 years because we didn't stop the miracle of compounding when your kids went to college and put all your money towards your kids. Now you have 35 years of compounding the same $2,400 same assume 7% annualized return. And guess what? Now that number once you hit 65 is $4.3 million. So you either have two separate buckets of 1 million for college and for your savings. Or you can have one of 4.3 million for yourself. Tell your children maybe have to pay for your own college and take out a student loan, but the miracle of compounding continues to go. You feel more secure in your retirement. Your kids then graduated from college. Yeah, maybe they might have some student loans, but then they can begin their own miracle of compounding that will last for two years for themselves. And guess what? You'll potentially have enough money for your retirement, some leftover and then you can leave some money over for your kids. So yeah saving for college. It's an emotional decision. But it's not necessarily logical as most people a lot of times don't have the ability to save into both buckets for themselves and for their kids. And if you do great, right, but again, this is Newton's third law at its finest: every action has an equal or opposite reaction. So with that said, I'm gonna have a brief commercial break. And when we get back, I'll talk about two additional actions I often see people make.
Welcome back. So we're here to talk about the final two or the last two common actions I often see people taking when I'm working with clients, or prospective clients. And those two are continuing to work for someone else, or starting your own business. And also keeping up with the Joneses/lifestyle creep.
Now, let's talk about the first one of getting a job or starting your own business. Now, this one obviously hits close to home to me, when I started off my career, like most people, you don't really have much saved up. So they tell you to go to college, get a good job. And, a lot of times, they also tell you well, now that you have a good job, go out and spend your money, you deserve it, you worked hard. Well, again, like most in life, every action has an equal or opposite reaction to ever sitting there. And you're working hard, but you're also spending all the money that you have. You're not doing thoughtful planning and investing tied to your goals. You're going to probably wake up in 10-15 years and have what's going on with a lot of people in today's society and a lot of what we saw take place currently.
Now post COVID-19 lockdown, we have this thing that people have coined the Great Resignation, where over the past year or so as things have opened up with COVID, we've had 47 million workers quit and switch jobs. Now it's funny. And there's a recent study that said, one in five or 20% of those workers who quit, and thought they're going to go on to greener pastures, working at another job are unhappy in the job that they have. Now, trying to look a little bit deeper into this. In my opinion, I think what's going on is that a lot of people are just unhappy working for other people. Right? You don't have autonomy, you don't have independence. Right? And seemingly, what you fall into is working for someone else that cares more about their present than your future, which again, there's nothing necessarily wrong with that, businesses have to make money to keep the lights on but you also have to make money to keep your lights on. So there's a dynamic at play.
But let's get back to the root cause of the issue. The issue that I see people coming, coming to me with, in many cases, they wake up, they've been working for 15-20 years for someone else. I don't like my job. I want to change. Okay, great. Well, let's talk about this. A lot of times, though, what happens is people don't have the luxury to do this, because they didn't do proper planning, and investing in the first 15-20 or so years of their career. And now they have to continue to be on this perpetual hamster wheel. And, of course, starting your own business and being a business owner, which I know myself as starting my own business, has risks. But like most in life, and investing, and in life, there's risk rewards. And there's ways to balance those risk rewards, a lot of the time, that is doing the key planning in the early stages of your working life to give you the flexibility to make the decisions that you want, gives you the flexibility to live life on your terms, not other people's terms.
Now, the last action that has an equal or opposite reaction that I want to go over with everybody is what I'll call Keeping Up with the Joneses or the lifestyle trap. Now, again, all these things sort of work hand in hand, just like Patrick Mahomes, I pay Patrick Mahomes, I can't pay Tyreek Hill. So a lot of times, you get this nice, steady, stable, comfortable job and to have the money coming in. And of course, you move to a nice neighborhood, you now have to keep up with your friends and your and your family. And you start spending all this money. And what I tried to do, to let people know when I was actually with my brother in law this weekend, we're talking about this. And what I try to hone into people is that wealth is not necessarily your income, it isn't your income wealth. How wealthy someone is, is really a matter of your expenses. And if you fall into this lifestyle trap, where you're purchasing all these excess luxuries, and I'm not trying to tell people you shouldn't spend your money, enjoy your life, but just know that every action has an equal or opposite reaction. For example, when we're working with clients, we try to get them to a place of financial freedom and financial independence. And we're trying to get them to a place where they can sustainably live off their wealth at a 3% annual spend rate. Now, there's some math and stuff that goes behind these numbers. But for simplicity, if you have a pie of one or 100%, you divide that by three, or 3%, you have 33.3 years to run out of money if you never earned a penny on your investments. And most likely, over time, you will earn money on your investments. So we try to say that we tend to tell people that just 3% spending, you get yourself into the green zone. So again, bear with me here while I go through some numbers. So great. So now you're living a life where you need $100,000 to sustainably live your life. Simple math, $100,000 divided by 3%, tells me that you need $3.3 million to get to a place of financial independence or financial freedom. Awesome, most likely if you start off if you start off early in life, and you do the product planning and the investing and it's not overly far fetched to get to that goal, in my opinion.
Now, let's just say you've had a lifestyle, creep or life or want to live a life of Keeping Up with the Joneses. So now you actually are now spending $300,000 a year to sustainably live the life that you want to live. Simple math again $300,000 divided by 3% tells me that you now need roughly $10 million dollars to sustainably live that lifestyle. That's a big difference, a $200,000 difference and the lifestyle that you want to live the money that you need increases the amount of investable assets you need to live off of by almost $7 million. So again, I'm not here to tell you to think you're living a bad life or what have you. I'm just trying to show you that your actions have an equal or opposite reaction to the choices you make in life. Right?
So what's the common denominator here? Right? We saw as we talked about in the beginning, the chiefs decided to spend a lot of money on Patrick Mahomes. Hey, is that if he's young, and he's the best quarterback in the league, supposedly, right. But that didn't allow him to sign Tyreek Hill, you also saw the same thing with Aaron Rodgers and Davante Adams. Now, here's an interesting one: I'm a Dolphins fan. Breaking down, what you don't see is that Tom Brady has actually lived his career having the most Super Bowls of any quarterback of all time? Well, I don't know him. So I never asked him this, I believe he understands this concept of every action has an equal opposite reaction, because he's actually taken a lot less money, he's taken about $15 million per year. And an average contract lower, again, a lot of money relative to society, but much lower relative to some of these bigger name court bigger contracts that are coming back out for the likes of Patrick Mahomes and Aaron Rodgers. Right, because he knows that he is only as good as his team. If he has the best arm in the league, but he's getting hit on every single play because they don't have enough money to pay offensive linemen. It doesn't matter if he has the best lineman and the best arm. But then he throws to a wide receiver who can't catch the ball, it doesn't matter. So he understands this concept that every action has an equal and opposite reaction.
And then I think back to college, my favorite college professor. And if you would ask the class, hey, you know, what's the number one answer and finance I need? asked? You know, in the beginning of the semester, Everyone raised their hand, they would say an answer. Oh, this that no, wrong. He said the number one answer was finance. Is it the pets? And why does it depend? Well, it depends on your scenario, on the many different variables in the equation of your life, right, you need to understand your assets, your liabilities, your income, your expenses, and ultimately, your cash flow. And what I would tell people is that, again, I talked about this, in previous shows, is his numbers that I'm making up. But it's quite clear to me that if most of our society cannot, is living paycheck to paycheck, and the percentage of millionaires hasn't really increased on a real basis in more than 20 years, most people don't necessarily understand this stuff. And typically, it's become taboo in our society to talk about money and finances. But I'll tell you this, that every single player even if you're the best player in the league, whether you're Michael Jordan, or you're Tom Brady, every great player needs a great coach.
So if you're looking for a great coach, shameless plug here, feel free to reach out to us at Julius Wealth Advisors. Talk to us, give us a call 201-289-9181 or email me at email@example.com. So know that every action has an equal or opposite reaction. And it's important to understand these dynamics and it's also important, as we like to tell people as we wrap up this fourth episode of The Big Bo $how, which we hope you all enjoyed. You got to live a life of integrity. Gotta live a life of knowledge and I hope, I hope we're giving you some great knowledge on the show. If you want to learn about anything else, feel free to email me you can email me again Jason@juliuswealth.com or firstname.lastname@example.org, trying to instill as much knowledge out there as we can. And you got to live a life of passion. So with that said, enjoy the spring. In my opinion, the best time of the year in sports. Baseball, literally my little league team starting up on Tuesday, wish us luck. Go Miami Heat. All the best. Thank you for tuning into The Big Bo $how.
The content is developed from sources believed to be providing accurate information. The information in this podcast is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Julius Wealth Advisors, LLC (“JWA”) is a registered investment adviser located in Englewood, NJ. Registration as an investment adviser does not imply a certain level of skill or training. The publication of The Big Bo $how should not be construed by any consumer or prospective client as JWA’s solicitation or attempt to effect transactions in securities, or the rendering of personalized investment advice over the Internet. A copy of JWA’s current written disclosure statement as set forth on Form ADV, discussing JWA’s business operations, services, and fees is available from JWA upon written request. JWA does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. JWA is neither your attorneys nor your accountants and no portion of this podcast should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.