It's not often you'll hear a financial advisor tell you not to quit your day job. In fact, Don't Quit Your Day Job is one of the smartest personal finance sites on the web. We spoke with its founders, PK and Cameron Daniels, about personal finance and how we can do better.
Why'd you choose Don't Quit Your Day Job as your blog's title? Is the snappy comeback also good financial advice?
Cameron: Personal finance carries a certain taboo in society. Discussions are often hushed or shrouded in secrecy. It is considered indecent to discuss salary levels or personal savings plans. An unfortunate consequence of this attitude is that finance is outsourced to professionals. Whether this means brokers, financial assistants, bankers, advertisements is unclear. What we seek to illustrate with the blog (and title) is that personal finance is basic. There is no need to specialize in finance to understand the core of sound financial practice.
Thus, there is no need to quit your day job to learn this. And, what is that core? Generally, spend less than you earn. The rest is details.
PK: We thought it might be funny to have a self-deprecating title. "Don't Quit Your Day Job..." feels like something an incredulous reader might say while rolling his eyes. And, for other than the arguable exception of Cameron (so, at least 2/3 of us), finance isn't our "day job."
You're right, though - over time we recognized that for a lot of folks it is reasonable advice. One common theme in personal finance is the whole "spend less or earn more" debate, which is silly because there is a limit to saving, but no limit on earning more. Encouraging a side job is all about keeping your "day job" - and all the benefits that come with it.
How are we as a society when it comes to financial literacy? Could we as a society know more about money?
Cameron: The numbers tell the tale.
- $11 T in consumer debt.
- About 30% of consumers have debt in some form of collections.
- 10% of student loans outstanding are currently in default.
We are still in the shadow of the Great Recession where millions declared bankruptcy due to over-extension. This is the world we live in.
But there is room for hope. Information can be accessed at your fingertips for free. This didn't exist 15 years ago, let alone 50. Mint has helped bridge that gap as well as the digitization of a lot of information. I see this progress in technology as purely positive. I can place a trade that is executed instantly for <$10. The old, onerous process including a broker has been shattered.
As companies and America as a whole shift from defined benefits to defined contribution plans, there is room for education on risk. Those who saw their 401(k)s shrink in 2007-2009 and then sold did the exact opposite maneuver that they should have. Understanding the volatility inherent in the market and then planning accordingly for an overall, diversified portfolio appropriate for your life goals is the single, largest gap between current understanding and a future state of self-reliance.
PK: In general? Poor - but I don't think it's as fatal as some writers make it out to be. It would be nice if everyone was more interested in finances, but even for people (like me) that think about finance all the time, it isn't like every financial debate has been settled.
For the individual who recognizes that their own financial literacy is lacking? You can find an expert - whether in the form of an advisor, or perhaps in a book or on a blog. In fact, you should - just having a poor grasp of finances doesn't mean your finances can't get help from the experts.
I do think North American society could collectively know more about money - the biggest thing for the individual is probably mistrust of the financial system - many people will avoid investing completely because they feel they might be wading into a scam. Or, worse, people see too many options - and analysis paralysis leads to no decisions at all. There's a definite danger of avoiding any risk altogether throughout a long career, just to come up short at retirement time.
I won't get into the politics and economics of the matter here - that'll take more than the five years I've dedicated to this weird hobby so far!
What are some common misconceptions you see about personal finance?
PK: How long do you have? (I kid!)
I'll point you at a couple that are particularly infuriating:
The idea that "personal finance is personal" is a reasonable excuse for every spending problem, and there are no "best practices."
Another one is more rare, but I had seen it around enough to write a piece. I'm doubtful "you are saving too much for retirement!" is a good lead for financial articles.
How often do we get in our own way when it comes to money? Do we fool ourselves about making "rational" decisions?
Cameron: Rationality is very personal to each individual. Let me provide an example: I love golf. I get to the range three to four times a month. I play a round of 18 maybe two to three times a month outside of the summer hours (Texas is hot). Is this hobby rational? Would an outsider who does not enjoy golf understand the cost and time inherent in wearing dorky pants and swinging a metal stick at a stationary ball? Probably not.
In this sense, it is difficult to say that humans are not rational. I disagree, however, with a significant amount of spending habits of Americans. Studies have shown that people overestimate the present. Why would I save for a retirement that may not come when I need a vacation now?
Studies have shown that by shifting 401(k) contributions from an "opt-in" (where you have to choose to participate) to an "opt-out" (where you have to choose not to participate) have significantly increased savings rates in those companies. This bodes well for structuring incentives in the future to help citizens achieve financial goals.
America has done a great job in structuring a lot of their incentives around savings, and there's room to improve. Earned income tax credit. 401(k)s. Roth IRA. These are great vehicles to encourage better savings habits amongst Americans.
PK: I'd say getting in our own way with money decisions is a constant - the more money that passes through your hands, the more opportunities there are to make mistakes!
Luckily, there are many ways to automate common tasks - automatic bill pay, direct deposit, monthly ACH transfers to investments, 401(k)s, HSAs, other employer accounts - and surely a ton more. Mint definitely comes in here - I appreciate knowing, at a glance, how much money is in all my accounts and watching my automation do its thing...from 36,000 feet. I rarely intervene in the day to day financial symphony, and if I do, it's usually because of a surplus (say, a bonus) or a one-time event (say, a refinance). I hope I've prevented a few money mistakes with this setup.
As for fooling ourselves with faux rationality? You're undoubtedly correct there as well. That one's a little harder to get around, too, because who will take the opposite side when you debate yourself about the rationality of a move?
One strategy I've heard to deal with your second question is to define all of your rules up front - if you're an investor, that might mean defining the criteria that it would take to buy or sell a stock; if you're looking for a house, it might mean writing down when it's worth renting versus buying. It's not an 100% foolproof method, but you're almost certainly more rational during the calm times than during the emotional periods when you might want to buy an overpriced house or buy a rocketing stock...
If you could tell your younger self one thing about money, what would it be and why?
Cameron: The honest answer is to not worry so much about finances. I went to a private school and ended with ~$50k in student loans. This weighed on my decisions significantly, but looking back, I sweat the details too much. I think the largest lesson to my younger self is to understand the importance of working a job as well as enjoying it. Take your passionate self and find a career where you can invest that self in. It will be difficult to find any other decision that will give a better ROI to both your money and your well-being.
PK: "I know you're avoiding Apple stock because you're a huge Apple fan and are worried about rational decision-making...but seriously, go all in. Oh - and start a blog immediately."
Actually, here I am thinking about time travel paradoxes and butterfly effects - I don't know how much I'd change, in retrospect. I'm pretty happy with how everything is shaking out...and if I had hit the lottery on Apple stock, who knows how that would have affected my financial philosophy? Would I be giving this interview, even?
I think the best we can do is look at the past as a sunk cost - no regrets, just lessons learned - and use that irreplaceable life experience (take note, young recent college graduates!) to better inform our future decisions.
What's the future of investing and personal finance?
Cameron: Time is money. For a second, look past the trite saying. You can hire gardeners for your house. You can hire a personal chef. You can hire tutors for your children. You can hire a chauffeur. For almost any portion of your life, there is opportunity for outsourcing. If you did all of the above and not making significant money? I would imagine debt issues would be in your future. But every decision you make in this way is a tradeoff between outsourcing parts of your life and your money.
I am a huge fan of automation. It helps take out mundane tasks from your life and place it in the hand of automation. Steady, regular contributions to your 401(k) does wonders to your contribution rate. You don't notice it's gone. A common lesson in personal finance is to split your paycheck into two sections - one for your needs on spending, the other straight towards savings. The argument goes you will not miss the difference, and it can significantly up your savings rate.
I envision a future where we are able to automate and outsource more and more of both our financial and our personal lives and am encouraged by what that can do for both my efficiency and my free time.
PK: To extrapolate from the current day - I'm encouraged. The last generation of finance has seen trading costs race to the bottom, better disclosure on fees, free resources for research, many good sources for information and even good government encouragement in the form of tax credits and availability of 401(k)s, IRAs, 529s, HSAs and the like.
So, let's hope that the future sees the individual becoming a better manager of his or her finances - not down in the weeds on every cent, but at least using resources (again, Mint is perfect here) to take a look at the big picture and see where the leaks are. And, of course, once those leaks are identified, hopefully taking some action.
We'd like to see more individuals trust investing in general - especially Millennials and folks who came of age in a scary time for the markets. Index or target date funds for most folks, automatic bill pay, direct deposit, 401(k)s? Those are the habits of a happy future retiree.