2996: [Part 2] Passive Income and Other Money Myths by Leif Dahleen of Physician on Fire on Intentional Spending

[00:00:00] This is Optimal Finance Daily, Passive Income and Other Money Myths, Part 2 by Dr. Leif Dahleen of Physician on Fire.com

[00:00:11] 2. You traveled for free with credit card points. No, you didn't. Credit card rewards are fantastic, and I've saved myself many thousands of dollars by utilizing them well.

[00:00:24] I've earned all those reward points and miles by charging the vast majority of our spending to various credit cards that offer juicy rewards.

[00:00:34] I wouldn't be all that surprised if I've charged over a million dollars to plastic over the years.

[00:00:40] The banks that issue these cards are profitable companies. They charge retailers about 3% of what the consumer pays for goods and services.

[00:00:50] Retailers, also wanting to be profitable, bake that 3% cost into what they charge for goods and services.

[00:00:57] If we're smart consumers, we get 1-2% back in the form of credit card rewards.

[00:01:03] It's not 3%, but it's better than a poke in the butt with a sharp stick.

[00:01:08] It's just not a great deal for the consumer.

[00:01:10] However, we can assume things cost close to 3% more than they would if credit card fees didn't exist on retailers' balance sheets,

[00:01:18] and we're typically not getting 3% back from the card issuers.

[00:01:22] Yes, you can find certain redemptions of miles or points that exceed that value,

[00:01:28] but the best hassle-free cashback cards offer 2% back on all spending.

[00:01:33] If, instead of getting cash back on all credit card purchases, you redeem them for travel,

[00:01:39] you can find some great deals, and, as mentioned, win the game by getting better than a 3% value at the redemption.

[00:01:46] But let's not confuse rewards travel with free travel.

[00:01:50] Let's say you used 50,000 points or miles to book two round-trip flights.

[00:01:56] Depending on the airline and the destination, that may be next to impossible,

[00:02:00] but I'm giving you the benefit of the doubt.

[00:02:02] You might be inclined to consider these flights as free travel,

[00:02:06] but the truth is that you could have $500 cash in your pocket instead.

[00:02:11] Or, perhaps if you've used a different card,

[00:02:14] you might have earned $1,000 worth of points with that same amount of spending.

[00:02:19] Where the rewards get extra juicy is when you get the welcome bonuses for multiple cards in short order.

[00:02:26] But that's straying far from the point I'm making.

[00:02:29] With all credit card rewards, including welcome bonuses,

[00:02:32] you can typically opt for cash or travel by either choosing different cards to open and use,

[00:02:39] or by choosing a different redemption option from the same card.

[00:02:42] You can spend your points on travel,

[00:02:45] or you can spend your points on cash or cash equivalents like statement credits.

[00:02:49] But don't forget that the person who actually paid for those points is you.

[00:02:55] Number three, you need a budget.

[00:02:58] This statement is more of a marketing plan than a money myth.

[00:03:03] Jesse Mecham's app, YNAB, guess what it stands for,

[00:03:07] purportedly has hundreds of thousands of users who use it to get their budgets under control

[00:03:12] and reach their financial goals.

[00:03:13] I haven't looked closely at the service,

[00:03:16] and a few of our interviewees swear by it.

[00:03:19] But budgeting is not something I've ever done.

[00:03:22] I've never needed a budget,

[00:03:24] and I like to think that most high-income professionals don't need one either.

[00:03:28] When I talk about budgeting,

[00:03:30] I mean preemptively determining how much money you plan to spend

[00:03:34] in various categories and sticking to the plan.

[00:03:37] For me, it's too prescriptive and unnecessary.

[00:03:41] I do believe that some people truly do need a predetermined budget,

[00:03:46] and those who spend excessively in a way that's harming their ability to reach long-term financial goals

[00:03:51] should give budgeting a try, even if temporarily.

[00:03:55] It could help instill thrifty money-saving habits that may come naturally to others.

[00:04:01] I do believe in intentional spending and being a good steward of money,

[00:04:05] paying yourself first by maxing out retirement accounts,

[00:04:09] and those sorts of budgeting-adjacent activities that lead to long-term wealth.

[00:04:14] However, for most of us, I think a true budget is too restrictive

[00:04:19] and should only be implemented when other money-saving methods have failed.

[00:04:24] Number four, you need a side gig.

[00:04:27] I had a side gig.

[00:04:29] You're looking at it.

[00:04:30] There was a time when it paid me as much as my doctor job once did.

[00:04:34] But side gigs like this are a rarity.

[00:04:37] If you're a professional earning multiple six figures a year,

[00:04:41] the odds that you'll come close to earning that same hourly rate or more

[00:04:45] by doing something different are small.

[00:04:48] Side gigs can be great for non-financial reasons also,

[00:04:52] and I'm not going to discourage anyone from starting one of their own.

[00:04:55] Picking up new skills and knowledge while exercising different parts of your brain

[00:05:00] that don't get as much use in your career can be deeply rewarding.

[00:05:04] You can also do some side hustling within your profession,

[00:05:07] leveraging your skill set and experience in new ways or simply in a different setting.

[00:05:13] Locum tenens work and other moonlighting opportunities can provide a solid income boost.

[00:05:19] However, none of this is necessary if you've got a good job that pays well.

[00:05:24] Your social media feed may be full of side gigging doctors singing their praises,

[00:05:29] but a main gig ought to be enough to support you and your family financially.

[00:05:34] If it's not filling your cup in other ways,

[00:05:36] you may have other issues to address,

[00:05:39] but don't feel like you need a side gig.

[00:05:41] You don't.

[00:05:42] And number five,

[00:05:44] earning more is as good as spending less.

[00:05:48] Foes of frugality are quick to point out that there's no need to focus on spending less

[00:05:52] when you can just earn more.

[00:05:54] They do make a good argument in that there's a limit to how much you can cut spending,

[00:05:59] but there's no limit to how much one can earn.

[00:06:02] There are issues with that line of thinking though.

[00:06:05] One is that there is a limit to how much one can make

[00:06:08] while working as an employee within a health system.

[00:06:12] Earning more might mean taking more risk and possibly earning less,

[00:06:16] or uprooting your family and moving somewhere else for a better job.

[00:06:20] If making more money was easy, everyone would do it.

[00:06:24] Furthermore, a dollar saved is better than a dollar earned.

[00:06:28] Every dollar that you don't spend is about a dollar sixty that you don't have to earn.

[00:06:34] Why?

[00:06:36] Taxes.

[00:06:37] To look at the benefit of earning more,

[00:06:39] you need to factor in your marginal tax rate.

[00:06:42] That is, the tax paid on each additional dollar earned on top of what you already earned.

[00:06:48] This is higher than your overall average effective tax rate.

[00:06:52] If your household income puts you in the 32% federal income tax bracket

[00:06:57] and you pay a middle-of-the-road 5% state income tax,

[00:07:02] your marginal tax rate is 37%, assuming no local income taxes.

[00:07:08] When you earn a dollar, you keep 63 cents.

[00:07:12] To keep a dollar, you need to earn one over 63 or $1.59.

[00:07:17] With a marginal tax rate of 37%, reducing annual spending by $10,000 improves your bottom line

[00:07:26] by the same as earning an additional $15,900.

[00:07:32] In some locales and at higher incomes, marginal tax rates can reach 50% or more.

[00:07:39] In that case, you'll need to earn $20,000 extra to match the benefit of spending $10,000 less.

[00:07:46] You may want to think twice before your next credit card swipe.

[00:07:54] You just listened to part two of the post titled

[00:07:57] Passive Income and Other Money Myths by Dr. Leif Dahlin of PhysicianOnFire.com.

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[00:10:22] I saw Leif give a talk at a Camp Fi event where he presented many of the points in this article.

[00:10:28] The one that completely blew my mind was that I actually didn't need a budget.

[00:10:33] This was just a few years ago, and at the time, my Midwestern gentleman had just moved into my house.

[00:10:39] As we were figuring out the best way to combine finances and sort out our budget,

[00:10:45] I found myself drowning in transactions that I was trying to keep organized.

[00:10:49] I was managing budgets for my personal spending, our joint spending, as well as my business.

[00:10:55] It was incredibly time-consuming and annoying, and I procrastinated on it constantly.

[00:11:01] And then Leif set me free.

[00:11:04] I realized that I was spending a ton of time categorizing transactions and monitoring a budget

[00:11:11] for very little benefit.

[00:11:13] It didn't lead to any change in behavior, and because we've already reached most of our financial goals,

[00:11:19] it's not like there was a meaningful finish line to be working towards.

[00:11:23] So I hired a bookkeeper for the business, and I simply stopped budgeting.

[00:11:28] I do see value in tracking our expenses from a very high level just to know how much we're spending each year,

[00:11:35] but even that is fairly loosey-goosey.

[00:11:38] What I know is that we're still saving and investing every year.

[00:11:42] We've never tapped into our savings accounts, and we're spending less than we earn.

[00:11:47] There's little utility in obsessing over every dollar spent after you've reached a high degree of financial security.

[00:11:56] And that's another episode of Optimal Finance Daily in the books.

[00:11:59] I'll be back with more for you tomorrow.

[00:12:01] So have a great rest of your day, and I'll catch you on the Tuesday show where your optimal life awaits.