Can NBA Analytics Revolutionize Your Personal Spending Plan? – Episode 146

Are you ignoring the most effective shot in your financial planning arsenal? In this episode of Dentist Money™ Reese and Ryan discuss how to rethink your approach to personal spending by using the money-ball analytics behind the NBA’s recent 3-point shooting revolution. And this is no boring, painful discussion about “budgeting.” Reese and Ryan deliver hope-inspiring advice on how to use effective financial planning to live a more enjoyable life both now, and in the future.

Podcast Transcript

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty ol’ co-host, Sir Ryan Isaac.

Ryan Isaac: Good. Morning. Reese.

Reese Harper: I feel like we should introduce our newest third party on the show!

Ryan Isaac: I’m actually excited about this.

Reese Harper: We put Q back to work, because we were growing too fast, and Q couldn’t participate anymore, but we really did appreciate his tenure with us here.

Ryan Isaac: I’m going to miss him on this one, to be honest. Today’s topic is one of his life’s passions.

Reese Harper: We have brought in a new guest that has been with us for a while. We would like to introduce to you Tad Henderson, also known as Dr. Aloha.

Ryan Isaac: Welcome, Dr. Aloha!

Tad: Aloha.

Reese Harper: For those of you who do not know Tad, you can check out our YouTube channel, and you can see him there. He always wears Hawaiian shirts, and he has some strong connections to the islands.

Ryan Isaac: Lived there? Grew up there? I can’t remember.

Tad: I lived there for about five years. I went to school there.

Ryan Isaac: All of your family is there.

Tad: Yeah. I have a daughter there.

Ryan Isaac: Disclaimer: he is not an actual doctor.

Reese Harper: Just like Sir Ryan Isaac is not an actual knight.

Ryan Isaac: Okay, and also, you have a way better nickname. We got to think through this. Like, we actually brainstormed nicknames—

Reese Harper: No we didn’t! We did not! I just came up with that on the spot, just like yours!

Ryan Isaac: But you didn’t do it on air. We started with T-Bone, and then we were like, “no, that’s too George Costanza,” and then we said Dr. Aloha, and it was like, “awww!”

Reese Harper: It only took me one to get to Dr. Aloha, though, because I think it was a more natural fit.

Ryan Isaac: And I got Sir. 146 episodes ago, I got Sir.

Reese Harper: (laughs) well no, you got Sir Ryan Isaac. That’s very different. And it’s a lifer. You have tried to break out of that name, but I have people continue to email me about it. They just like it enough to— it’s kind of like some other big institutions that tried to change their name.

Ryan Isaac: You can’t do it! Wait, what did IHOP do this year? Rember? IHOP is now like International House of Breakfast, IHOb, and everyone was just destroying it on Twitter. Like, that’s the worst name-change ever. So…

Reese Harper: Anyway. We’re excited about today’s episode. Dr. Aloha and Sir Ryan Isaac have been working hard on this topic. It’s one of my favorites. I think I’d like to kick this off with a little bit of an introduction to the National Basketball Association!

Ryan Isaac: Yeah, shout out to the NBA. Well, here’s the point of today, okay? The point of today is that sometimes, it takes a long time to adopt a new rule, or a new strategy. A new technology. A new habit. You know? It takes a long time to do that. And today, we’re going to talk about how the NBA is a lot like personal spending, and personal spending being no exception to this rule that, it might be one of the hardest things to change in our lives, or alter, without some pain, sacrifice, and time. And so, what we’re going to talk about is how one of the most game-changing rules in the NBA— how it started, how it came about, and kind of the history of it. Dr. Aloha is going to jump in here with some really great NBA history.

Tad (Dr. Aloha): I’m going to show my age.

Ryan Isaac: You’re going to show your age, that’s okay. So, we’re going to talk about when the three-point rule got introduced. Now, you were starting to tell us, though, where this came from. So, the three-point rule got introduced into the NBA in 1979. The ‘79-’80 season, which was the year of my birth. The year of my knighthood. Was I knighted at birth?

Reese Harper: No. You can’t, that’s illegal.
Ryan Isaac: (laughs) it’s illegal in 48 states and the entire continent— (laughs) no. Okay, starting with the ‘79-’80 season— but you were saying, Dr. Aloha, that it started—

Tad (Dr. Aloha): So, back in the 70s, the NBA was considered to be kind of boring, and the American Basketball Association came along, and they really changed the way it was played.

Ryan Isaac: Give some context. Who were some of the big names in this boring era of basketball?

Tad (Dr. Aloha): Well, it was the Celtics with Bill Russell. It was a defensive game that he became famous for.

Ryan Isaac: Short shorts?

Tad (Dr. Aloha): (laughs) short shorts. Total short shorts. Then, the ABA came along with guys like— another great non-doctor doctor, Dr. J. Dr. J was an ABA guy, and The Iceman, George Gervin, who was a great scorer. They had the colored basketball with the red and white—

Reese Harper: So there was two associations of basketball at that time.

Tad (Dr. Aloha): There was two.

Ryan Isaac: The ABA was kind of the dominant one though, right?

Tad (Dr. Aloha): No. The ABA did alright, and it was with the young fans like myself at the time. They were really into the ABA, because scoring was so much more important.

Ryan Isaac: It wasn’t just defense.

Tad (Dr. Aloha): Right. And then they mixed the two leagues, and you get the three-point shot and more offense.

Ryan Isaac: Interesting. Okay. So, the history of this three-point shot that started in the ‘79-’80 season, everyone thought it was a guimic. Some of the greatest minds of basketball at the time thought it was an absolute joke. Like, it was this huge guimic. So, it was kind of interesting. During kind of those early years, there were 2.8 three-point attempts per game per team, you know? Not even three. It was like no one practiced this stuff. Almost ten years later, the average was only five attempts per game per team. So like, clearly not adopted yet. We’re talking about almost 1990, and not adopted yet. Larry Bird was quoted saying, “we never practiced it. Someone asked me in an interview if back in the 1908s, did your coach ever design plays for you to take three-point shots? And we never thought of that.” That’s what Larry Bird said. You know, one of the great scorers, right? Great shooters. He never thought of it. When it started to kind of take of was about a decade later, so early 90s. The first team to start averaging double-digit attempts per game was the Knicks under Rick Pitino. Rick Pitino came from college basketball.
Tad (Dr. Aloha): Yeah, he did. I think Kentucky.

Ryan Isaac: Yeah, and so, as I was reading some of this stuff, he wasn’t revered as like a great NBA coach from what— I don’t remember this person, and I’m an NBA historian. But he was one of the first coaches, though, to kind of adopt this in the system. And under him, his team was the first to start averaging double-digit attempts. In the mid 90s, then they moved the three-point line closer to the basket like 21 inches.

Tad (Dr. Aloha): It was like a desperation shot in the early days, right? It was so far out there.

Ryan Isaac: No one had it in their arsenal, so to speak. Okay. So, then they move it in, and then the average went up to fifteen attempts per game. And then a few year later they move it back, averages dipped again. So really, the final real adoption of the three-point shot at its current distance was in the early 2000s, and it was the mighty Phoenix Suns, of course the Phoenix Suns. The running Suns. Man, they had a good team! This is 2004, which in my brain feels like two years ago. That’s a long time ago. So, it was Steve Nash, and he was kind of the first to start building this wide open strategy on the Phoenix Suns, and they got a lot of flack for it, too. So today, any guess on what the average number of attempts per team per game is? Anyone want to throw out a number?

Reese Harper: I do know myself.

Ryan Isaac: You just knew statistically? Really? Oh, geez. t

Reese Harper: Well I mean, it depends on the game. You’ll see games— it probably averages in the high twenties, or maybe mid twenties, but you’ll see games where there are 30+ attempts. Especially if it’s Golden State, I mean, you’ll see—

Ryan Isaac: So, those statistics— Curry and Klay— I mean, those statistics are pretty cool to see. So the average attempt per team per game now is 25 attempts per game. As I was reading this story, I started to think about how we could relate this to a few different personal finance topics, but here are a couple of things I wanted to point out. Specifically how they relate to personal spending, okay? One of them is that the three-pointer started as a novelty act. It was kind of like the guimic of the industry that no one took seriously, but what everyone still took seriously for a long time was the two-point basket. It was getting close to— you know, it was all about real estate under the basket. They were like, “how close can we get everyone in there?” the post, and everything. So, it started as kind of this thing. In the financial industry, people pay more attention to other things and treat personal spending as kind of like this byproduct, like, this sidenote, you know?

Reese Harper: Well it’s kind of like, it’s boring, and it’s this stepchild kind of topic that doesn’t really— it’s not interesting. And no one wants their spending to be managed. You don’t want to be told like—

Ryan Isaac: Budgeting isn’t a sustainable thing.

Reese Harper: It’s not a fun topic. And the industry, one of the reasons it doesn’t get talked about is because most financial planners only get paid to sell stuff to people. And then even some of the good financial planners, some of them only charge like an investment fee so that they’re really not getting paid— they’re not getting paid like, financial planning fees, like flat fees or monthly fees or hourly fees like we do, to cover topics that aren’t related to investments–

Ryan Isaac: Yeah, or paid in another way.

Reese Harper: Yeah, so if you’re not getting paid to talk about big picture financial planning, you don’t even feel like there’s an opportunity to even have that conversation, because you’re not getting paid to talk about it, and clients don’t want to talk about it anyway. So it’s just interesting how this topic of personal spending never really gets addressed in most financial planning relationships, because it’s one that you don’t want to talk about, the client doesn’t want to, and the advisor is not really compensated to talk about it. And there is no really body of knowledge around the topic!

Ryan Isaac: That’s what I was going to say. What’s the system? It’s kind of like, the three-pointer started, and it took ten years before someone was like, “oh, this is how we work this new thing into our strategy.” I mean, what’s the system for working personal finance into the strategy of someone’s plan?

Reese Harper: You mean personal spending.

Ryan Isaac: Personal spending into someone’s financial plan? That’s kind of still an unknown in the industry.

Reese Harper: Well, I don’t think for our firm it is, but I think generally speaking, for our listeners, if you think about, how many times has your financial advisor gotten down into the weeds around personal spending with you? Categorizing your spending in different core areas.

Ryan Isaac: Or telling you, “hey, over the last twelve months, you had three anomaly months. Why? What were this anomalies? Why did your spending spike 20 grand in these three months? What happened?”

Reese Harper: Yeah, like in our practice, we look at median spending; we look at outliers; we look at the standard deviation of spending; we want to see if some people are more extreme spending than others. We feel like we spend a lot of time on this topic, but we feel like we’re also tip of the iceberg on this. This is one of the most important factors in financial planning. But man, it’s interesting how people’s patterns are so different. No one is really the same. Like, two people with the same average spending could arrive at it very differently. Some people are really consistent, some people are very extreme in their peaks and valleys, and some people have a really fast spending growth rate that really ties closely to their income growth. So as they make more money, they spend more money. And then some people, they make more money and it doesn’t affect their spending at all. In fact, some people spend less as they make more because they’re so worried about it!

Ryan Isaac: Because they pay off debt, and they keep spending less money.

Reese Harper: Yeah! But this is one of the most important topics, and I think that’s what you’re saying. Just like the three-point shot became— I mean, in today’s game of basketball, it’s like the mission critical— like, if you don’t have a strategy in this new age of the NBA where you can get up 25-30 three-pointers per game, you’re not going to be able to compete with Houston, and Golden State, and a bunch of other teams in the east that are starting to follow this. Even Boston is starting to get there now. And it’s becoming real critical, because it’s a more efficient way to get more points.

Ryan Isaac: Yeah, it’s 50% more points!

Reese Harper: And so, you know. Personal spending, if you can focus on that more in financial planning and really drill into it, it’s a much more efficient way to make work optional at an early age, or just enjoy life, right? And we’re not just talking about— we’ll get into this later— but we’re not just talking about how you need to grind your spending back and cut back your lifestyle all the time. But we’ll get into that.

Ryan Isaac: Well, I’m glad you said that. So there’s this popular article that went around on Twitter over the weekend about a concept called fire—it’s financial independence retire early. You’ll see a lot of bloggers talk about this where like, how fast can you accumulate a few million dollars, and how fast can you be done working? How early in your thirties can you just be done with work? You know? Which, some people identify with.

Reese Harper: It’s very millennial.

Ryan Isaac: (laughs) yeah. I don’t relate to that. It’s funny, this article was kind of being passed around on financial Twitters and people I follow, and this one guy recapped the article and he was like, “so basically, you have to make five times the average salary, save ten times the amount of money the average person saves, and hate nice things? Okay.” (laughs) oh, “and both spouses have to be working full time. Got it. Okay, that’s how you do this. Thank you, insightful article on how to retire early,” you know? Anyway. Okay, so that was one thing. The other thing I wanted to point out is like the three-pointer, spending is something that is hard to change, you know? I mean, we can’t just—when we report on it to people and we show them things, it’s not like, “hey, you need to cut your spending by 50%, like, today,” you know? And so, it’s kind of just something to keep in mind that it gradually builds up. I mean, I remember not that long ago thinking, “how does someone spend x amount of dollars per month,” you know? And now, I have four kids, and almost a couple of teenagers, and it’s expensive!

Reese Harper: You’re just saying, looking at other people, you were kind of incredulous, going, “how in the world are they spending that much money?”

Ryan Isaac: “What do you spend that on every month? You must be an extravagant spender! Crazy lifestyle.”

Reese Harper: It’s been interesting, I’ve been able to watch you go through that journey, you know? Because I’ve seen you go from median income, to well above median, to a really successful career, and I’ve heard you many times along the way say, “dude, I never thought I’d be… how am I spending this money?” You’d almost feel bad about it. Like, I’m like, “I don’t know why…”

Ryan Isaac: “I feel like something’s wrong.”

Reese Harper: Like, “how am I spending this much? I wasn’t supposed to be in this spot!”

Ryan Isaac: Well, you go from really young kids and your first home that was really cheap, and you know, maybe you share a car, you don’t really go to restaurants that much… and now, you’re like, “I’ve got a more expensive home, I’ve got older kids—”

Reese Harper: They want to do stuff—

Ryan Isaac: Yeah, there activities alone cost more money than my first apartment’s rent did in college.

Reese Harper: And you actually want to vacation and experience life before it’s over, and now’s the time you want to live, right? You want to live now; you don’t want to live down the road. I was just writing a chapter on— one day, you’ll maybe see a book come out from me, if I’m lucky.

Ryan Isaac: Spoiler alert! It’ll happen.

Reese Harper: But what we found (laughs), as with most projects of mine, there are actually like three books, and it wasn’t one, and so we’re about half of a way through three different books, because they are for three different audiences. We had something to say for financial planners, we had something to say to dentists, and then we had something to say about the system of elements and how it functions (laughs), and so, the dental book that will be—

Ryan Isaac: Do we have a working title?

Reese Harper: Um, we don’t want to give that away. It’s really exciting.

Ryan Isaac: Okay. Is it cool?

Reese Harper: Yeah, it’s cool. It’s like, The Three-point Shot. That’s what we are going to call it. Basketball (laughs).

Ryan Isaac: (laughs) Basketball? That’s all it’s called? A personal finance book for dentists. It’s called Basketball. The period at the end of it is an actual basketball (laughs).

Reese Harper: And so, one of the topics in one of the main chapters is like, we do financial planning so we can live life now, not in retirement. Like, this whole personal spending, and budgeting, and debt, and investing, insurance, all of this stuff actually, if we manage it effectively, it will make you be able to live better now. And I think, that’s why a lot of people do— that’s why you exercise. I mean, you exercise so that you’re better today and so that you have more longevity down the road. And personal finance, I think, is too often viewed like this adversarial thing between almost like— how many clients do you have that still don’t tell you sometimes about things that they want to spend money on?

Ryan Isaac: Yeah, there’s a few.

Reese Harper: Because like, I bet 10% of people— and we have to look at our own selves and say that that’s probably our own fault for making people feel like maybe we’re the bad guys, right? But I think sometimes, the financial planner feels like the bad guy. It’s like, “you’re gonna tell me I can’t do that. You’re gonna tell me I can’t spend my money on that. I can’t have that.”

Ryan Isaac: Yeah, or that good planning is all about having nothing for 30 years, and then one day when everything is said and done, then you have the life, you know?

Reese Harper: Yeah, we know that’s not the way it should be, but I think there is— and it’s not the client’s fault, and it’s not our fault necessarily, but I think that there’s a feeling that, “oh, financial planning is going to tell me I just can’t do what I want to do,” and I don’t think that’s the way it has to be.

Ryan Isaac: Actually, that’s probably the wrap-up part we’ll jump into at the end, because I think that’s a really important thing to remember. There are trade-offs, there is a balance, and it’s kind of like, what is it worth to you? So, we’ll actually get into that. Let’s start with some of the reasons why this spending this is so important, you know? Like, why does it matter so much? The first area that I wanted to chat about is, when we’re measuring someone’s progress towards this financial independence number— or work is now optional— as we usually call it, spending is like, the denominator in that equation, you know? What we’re trying to help someone understand is, how many years worth of spending, of you’re current spending that you’re used to, do you have saved up in net worth? So, let’s talk about for a minute, like, why is spending so important in this equation? Why is it not like a multiple of income, or why is it not just a high number? We ask people this all the time when we first meet them. Like, “how much money do you think you need to be financially independent?” The numbers are usually pretty high. Some people will just be like, “$10,000,000.”

Reese Harper: Well I think when we first started, like, when I first wanted to come up with some kind of a solution to measure all of people’s financial health, one of the big questions in your mind and my mind was, “well, how do we really grade whether someone is doing okay?” And it really kind of came down to a bunch of formulas where personal spending was really one of the primary drivers. It was the denominator in a lot of the equations that would help us see if someone was doing okay, right? You take someone’s total net worth and divide it by spending, and you see how long they could live. You take their liquidity, and you divide it by spending, and you see how long they could last. You take retirement accounts, you divide it by spending, and you see probably when they are going to be taking RMDs— which is required minimum distributions, or pulling money out of your retirement accounts. Like, this spending number just became so critical, because outside of that, what ends up happening is you have to depend on your guesses about the future, and spending drives all these equations, but I just think it’s really important to acknowledge that people’s financial strength is all relative, and it’s all relative to how they spend.

Ryan Isaac: We talk about that sometimes. So, the one metric we measure called the total term— which, you just described it: your net worth divided by your annual personal spending. That will give you a number, and that number is a multiple of your spending. How many years you could live. Net worth divided by spending is how many years you could live on your spending.

Reese Harper: Yeah, if your investments didn’t grow, or anything.

Ryan Isaac: Yeah, as of today. I mean, you can do a little mini retirement checkup right now. Take your net worth divided by spending, and then do it again it six months. Then do it again in six more months. You can start to see a pattern. That is a better indicator than, say like, a multiple of income. You know, if a dentist is earning $400,000 a year, and they say, “you need to replace your income at x percent,” or a multiple of that, it kind of felt really nebulous. Like, what does that even mean? Is that way too much money, or is that not enough money? It kind of just depends. And that’s the context that makes sense. While we’re talking about this, if you want to learn a little bit more about calculating your total term, we have a free download on our website. If you go to dentistadvisors.com/tt— it stands for total term— there’s a free download, it’s probably like a seven to ten page, really nicely-designed pdf, and it will walk you through the calculation of total term, and it will help you determine where you’re at and kind of the pace you’re going on. So, that’s a little bit of history on why spending was so important relative to other measures. What I have been talking to clients a lot about lately is, what does that mean year in and year out, you know? And so, if you look at the kind of— everyone wants to know, like, “what’s my plan? What progress am I making? Where am I headed?” And I think a really basic measure for everybody is you can say, “your main goal, or a really good goal to have is, you want your net worth to grow every year by as much as you spend.” Would you say that’s fair?
Reese Harper: Yeah.

Ryan Isaac: That would add one point to your total term. So if our goal in a total term is to get to a 30, or somewhere close to a 30, by the time you want to be done working, you want to add as many points to that as you can as fast as you can. To add one point per year to your total term, you just have to grow your net worth by as much as you spend. So, I have been having a lot of conversations with kind of relating this personal spending number back to people wanting to get a grasp on like, “what is my plan, and where am I headed, and what am I trying to accomplish every year?” So, think about it! If you’re spending ten grand a month, and that’s 120 grand a year, you need your net worth to grow by $120,000 that year in order to add one point to your total term. And that’s why spending relative today matters so much. I mean, that’s why it just matters to know. And what if it’s 150 next year? And what if it’s 180 the next year, you know?

Reese Harper: Yeah, and you’ll see that early on in your career, you’ll probably struggle to even make that happen, right? You won’t even move at a 1:1 pace, but—

Ryan Isaac: Over a career, is that okay? I mean, can someone hit that on average over a career?

Reese Harper: Yeah, on average over a career, that’s a doable thing. For almost anyone, I think, in any occupation at any income level… like, it’s doable. You just have to know that that’s your real measure of progress. And for most of you in your late 40s, and 50s, and late 50s, early 60s, that’s when you’ll have years where you’ll have two times the amount of net worth growth than what you spend in a year. And so, it’s just important to think of that in terms of how much progress you’re making.

Ryan Isaac: Well, and one thing I wanted to point out, too, is sometimes, people will get on an automated savings plan, and let’s say you’re saving five grand a month, you know? And it feels good, and it’s all set up. But after a while, you can wonder, like, “is this enough? Is this doing something for me?” And you can go back to this, like— it’s relative to your spending. If your hurdle or your benchmark every year that you want to clear is 120 grand in net worth growth, and you’re saving five grand a month, or 60 grand a year… I mean, think about that! That’s half the amount of progress you have to make just in the dollars you are saving. That’s not debt reduction that’s growing your net worth; that’s not asset growth. So, just knowing this spending number every year can help bring a lot of context to other things. If you pay minimum payments on a handful of debts and after twelve months you pay down 30 grand of debt… well, I mean, you might have just added 25% of your goal, just in minimum payment debt reduction. Or if your accounts grew 20 grand or something. It gives context to all the other stuff that’s going on.

Reese Harper: For those of you who might feel like you don’t have a lot of extra liquidity because you’re growing a second location, or you’re adding an associate, and you’re struggling to be able to put cash away, you can also look at this and this same math applies as your practice is— like Ryan said, one way you can grow your net worth is saving. One way you can grow your net worth is paying down debt, and having your amortization schedules decline. Another way you can grow your net worth is having the value of your practice or the equity in your business continue to go up. And for me, that has been a lot of the way that I have been able to grow my own personal net worth, and I have had to be able to feel like that’s a real thing and try not to get stressed out if in one year, it wasn’t a ton of liquidity that I built up, but maybe the business grew a lot, right? My practice grew.

Ryan Isaac: Maybe you added more debt, too.

Reese Harper: Yeah. Maybe I added some debt, but I also added some equity in a second location, or adding an associate really grew the equity. But I still relate that to my spending. I still relate that to my spending, and I kind of go, “well, for me personally, I know that my spending is comfortable at x amount of dollars per month,” and then I have to look at that and say, “well, how much did I grow my net worth? How much did my practice grow?” And I can kind of feel good about my progress, and it’s always related to, how much net worth did I increase relative to how I spent?

Ryan Isaac: Yeah, it’s just such good context, like, in the current year. So, another big question of spending is, what does spending typically look like as someone nears or gets into retirement? Do you want to comment a little bit? I think there’s some misconception that there’s this ability to cut spending or slash it by the time we’re going to be done working. Like, “oh, the mortgage will be paid off, and kids will be gone… I’ll bet I can cut this thing in half,” you know? Why don’t you give some context to people’s actual situations you’ve seen, and then what data tells us, too.

Reese Harper: Yeah. I think you and I have spent a lot of time researching and looking into this. And my first piece of advice would be, your spending can decrease a lot if you want it to. It usually doesn’t, but it can if you want it to. Typically, the most comfortable is to have it at least be similar to where it was prior to retirement, even if you did pay off a mortgage. Because as many of you know, remodeling a house, and putting a new roof on, and redoing interiors, and buying furniture, and maybe putting in a pool for the first time that you wanted to and that you’ve been saving up for, or getting a better car… I mean, there are a lot of upgrades that—

Ryan Isaac: When cash finally gets freed up, you’re like, “now we can finally do this thing!”

Reese Harper: Yeah, just in my own experience I have found that when people pay off large amounts of debt—

Ryan Isaac: Or get more income. (laughs) like, there’s a place for it in your brain.

Reese Harper: Yeah, there’s always a place for that money to go, and it’s not just like, “now I spend less.” National studies show that most people spend less in retirement than they do pre-retirement. And it has been my experience that while that is true for the majority of people, it’s usually because they feel obligated to spend less, because they are no longer earning money, and they are worried about—
Ryan Isaac: They have to start like, rationing their supplies.

Reese Harper: Yeah, their nest egg is shrinking, or they’re eating into it. And that’s a very different psychology when you start going, “I’m no longer earning money, and I’m spending into my nest egg, and it might run out.”

Ryan Isaac: You brought that up in a forum. We were talking about personal spending. So, you are referring to the statistics that show, in your 60s when people are new into retirement, spending is pretty much the same. If you get into 70s and especially 80s, that’s where you see the decline in spending. Some might attribute that to less mobility, or declining health; you’re not traveling as much as maybe you would before. But you made a point on the forum in this discussion we were having, and you said, “well, how much of these studies are people who are just running out of money, and so they have to spend less money, and so they’re reporting lower spending, and then it’s making the averages look like, oh, in your 80s, you can plan on spending less money” (laughs). No, they had to. They’re healthier than they thought they were going to be at 82 and they’re like, “oh man. This has gotta keep running for another ten years.”

Reese Harper: Yeah. I don’t think most people— like, I know for myself, I don’t travel right now as much as I would like to travel because I’m feeling some financial pressure to pay for certain things for my kids. And maybe more than the financial pressure even is just the time I have, right? But I know if I wasn’t working and I didn’t have all the obligations that I have right now, I would prefer to travel a little bit more than I’m traveling right now, and I’d prefer to order organic produce delivered to my door every day and not have to prep my meals. I would prefer to have a personal trainer holding me accountable all the time. I’d prefer to rotate through vehicles once a year (laughs). I would prefer to remodel my house, or move, or improve my landscaping every year. Like, nothing crazy, right? Just little things that I don’t—

Ryan Isaac: But as soon as 500 bucks gets freed up from a debt, or a little bump in income, like, you know where it’s going to go! You have a list in your brain (laughs).

Reese Harper: Yeah, I’m just saying, there’s a lifestyle that I’m not living right now, and ideally, I would like to see my lifestyle improve. I’m really happy. I don’t have everything I want—

Ryan Isaac: But we all have lists of stuff. Yeah.

Reese Harper: We’ve all got lists, and those lists are things that if you had the resources to spend money on those things, you would like to do that. And so, I just think it’s a really bad plan to start out in your 30s and be like, “my whole plan is contingent on me cutting my spending dramatically at the point when I’m supposed to be like, really enjoying all the hard work that I put in.”

Ryan Isaac: And you finally have the time to do it! Don’t tell me you won’t be shopping more.

Reese Harper: Yeah, you’re just going to cut everything. Like, it’s just— all the studies that show that people do that… I mean, all they are doing is they’re interviewing people, and they’re just saying, “what are you spending?” Well, the average American under accumulates for retirement, and they don’t have a lot of resources, and so, of course they’re going to spend less. They’re not going to be like, spending more if—

Ryan Isaac: “Are you worried about your spending sir?” “Uh, yeah! I didn’t save enough.”

Reese Harper: We get that comment a lot in forums. If you’re not part of our group conversation, go to our Facebook group and join. It’s dentistadvisors.com/group, and join the conversation there, because there has been a lot of cool things that has come out of that, one of them being this conversation we had about spending a few— it’s probably been a month or more now.

Ryan Isaac: Yeah, it was really helpful. And, you know, another big question with future spending and retirement and “will I have enough in my future” is, “am I gonna have to go back and get the equity out of my house?” We were talking about this on a podcast, but you know, not monitoring your spending during your working years and even into retirement, you won’t know how long that’s supposed to last you. And that’s a huge question, because it is usually a pretty big asset that people have on their balance sheets, and that’s a common question we get. Like, “should I plan on using my house equity? Am I going to have to?” Look, monitor your spending. Divide it into your net worth at any give moment in your life, and you’ll know how much of your house is going to be part of that. It’s just a big discussion. I hear that all the time, too. Okay, another point— you were kind of touching on this, and you have been talking about this around the office lately— what are some things you can do now to have a good spending lifestyle and travel a little bit, and to have some things you want to have without totally breaking the bank?

Reese Harper: Well I think to start, let’s just talk about that concept of how financial planning should be fun, because what it does is it allows you to get—

Ryan Isaac: (laughs)

Reese Harper: Like, good financial planning, it is fun for me. And the reason it’s fun is because it gives me the license to finally spend some of my money on things I want. Like, because I do good financial planning, right, and I have confidence that I’m going to be okay, and that I’m on track to be financially secure at least— when we say financial security, we’re not talking about financial independence, okay? There’s a difference there. Financial independence would be, you have a pile of money big enough to where you never have to work again, and you could just live off the interest, and you never deplete your principal. That’s real financial independence. That’s a good goal for a lot of people; that’s my personal goal; it’s a lot of people’s individual goal, people who are high-income earning professionals, but you could also have a goal of financial security, which means that you’re going to be find at a normal retirement age, and you’re just going to spend down your portfolio and live on what you have saved up. And I mean, there’s a big difference there. There’s a massive difference between the amount of wealth— it’s probably 30% more wealth, right? That you need in order to achieve financial independence versus financial security.

Ryan Isaac: Oh, there’s probably a huge psychological difference too, when you’re in the middle of that.

Reese Harper: There is. There is. But all I’m saying is, each of you probably know in your gut— based on your life experience, and who you are, and your tendencies— and you can meet with a good financial advisor. If you don’t have one, obviously join the Facebook group and ask us the questions there. You probably know whether you’re the type of person that is going to achieve a high level of financial independence, or if you’re the more financial security type of goal setting, right? And for us, that range is somewhere between like a 20x your spending to 25x your spending for financial security, and 30-40x spending for financial independence, right? Those are kind of your broad brush strokes, just so we’re kind of all talking about the same thing, here. But once you at least know that you’re on track to one of those two outcomes— whichever one really resonates with you— and you know that the path that you’re on is leading you there, I think it starts giving you a little bit of a license to say, “well then I can do this! I can take my money and buy this thing.”

Ryan Isaac: So, you’re reminding me of a conversation that always happens with a new client. Especially when a client is like, “hey, can we get my spouse kind of on board in this conversation? Because this whole spending, budgeting thing is definitely a hot-button issue in my house,” and that’s like everyone’s situation. What always ends up being like a fun, surprising conversation is, in the middle row of our Elements®— so, our Elements® table is twelve blocks, and there’s a top, a middle, and a bottom row— the middle row is all cash flow. You can see what I’m talking about at dentistadvisors.com, and then click on services, and Elements®. The middle row is all cash flow. Where is my money going? There are four places: you can spend it, save it, pay taxes, and pay debt. And it’s always surprising, because people have the expectation that we’re going to do the budget thing, you know? That we’re going to crack down, and tell you to stop spending in this category, and save money, and spend less. But it’s always surprising when the focus gets shifted to a savings rate, and the focus is like, “look. Let’s automate a healthy savings rate for your income level.” And when we know we’re hitting that savings rate, then the micromanagement of the budget goes away. Like, you actually don’t have to argue with your spouse about what just happened on Amazon, you know? Because your savings rate is high enough, and we’re calculating it at a pace to reach those goals that you’re trying to reach. And it’s cool to focus on something else that inevitably helps the budget, you know? Saving enough money at a high enough level… it helps the budget without having to focus on the budget and make everything about the spending and the budget, and the micromanaging of it.

Reese Harper: These conversations about budgets are like tired and old.

Ryan Isaac: Well they don’t last. It’s like a really hard diet; you’re like, maybe 30 days, man.
Reese Harper: I think that the focus on savings— like, if you’re saving 21% of your annual gross income, I really don’t care what you’re doing with the rest.

Ryan Isaac: (laughs) yeah. Like, you’re not wasting it on taxes unnecessarily. Yeah.

Reese Harper: You’re not overspending on lifestyle, right? If your savings rate is 21%. So, I kind of lean more— David Bach wrote a book called The Automatic Millionaire, which was really popular 10+ years ago. Ultimately, his focus was like, automatic savings drafts at a higher percentage of your income really drive results for financial planning, and I have adopted that philosophy, and that’s what has driven part of the Elements® philosophy. We’re not spending time— we’re tracking spending, right? We are tracking spending at the gross monthly level. Is it nine grand on average? Is it twelve? Is it seven?

Ryan Isaac: Yeah, you’re not saying ignore it. You’re not saying like, don’t think about it.

Reese Harper: I’m just saying, we don’t need to get into whether you’re spending too much on restaurants versus dining out, and what the difference is between fast food versus restaurants.

Ryan Isaac: Or shopping. What’s the shopping category? Is that toiletries, or Nordstrom?

Reese Harper: Yeah. (laughs) if anyone has budgeted through those online spending trackers, you’re kind of like, “well I don’t know what this is! There’s 40 categories. Is this like, restaurants, or is it shopping?Like, what’s shopping? What’s entertainment? I don’t know! Like, I’m confused.” And so, the focus shouldn’t be on that, and it should be more on the savings percentage. And each of you have a specific savings percentage that a good financial advisor should be able to coach you on. My point is, I would just focus on setting a target savings rate for your income as opposed to over-obsessing about budgeting, because what it will do is, above and beyond a target savings percentage— let’s say your target savings is 20%. Well, that might be enough. Like, we’ll be able to run some projections and decide like, “okay, at 20%, you’ll be able to hit a—”

Ryan Isaac: A 25 Tt at 63 years old.

Reese Harper: A 25 Tt, which is— yeah. Work optional at 57 if we were to, say, push to a 30% savings rate. Do you want to push that hard, or—

Ryan Isaac: Or do you want a pool?

Reese Harper: Or do you want a pool? Do you want to travel more? Do you want to drive nicer cars?

Ryan Isaac: Or do you want to take the extra money that could go to your retirement accounts and just pay down your debt faster? Does that make you feel better?

Reese Harper: Yeah. I just think, that’s a license that people need to feel like they have with a financial advisor. And the only way you’re going to feel that, honestly, is if you have someone you’re paying for advice, and not just like— like if there is only one way your financial advisor gets paid, and that’s if you put money into your 401k—

Ryan Isaac: Don’t plan on getting very proactive advice around that situation.

Reese Harper: (laughs) I’m just saying there’s not a lot of— it’s hard to depend on— like, if your life insurance agent is your financial advisor—

Ryan Isaac: And smart, and well-intentioned, and works really hard, and has integrity… fine. But if there’s not a business model—

Reese Harper: For him to give advice, right?

Ryan Isaac: That pays him to tell you about your spending, and tell you how it’s affecting your life… then it won’t happen.

Reese Harper: And he only gets paid if you put money into a variable universal life insurance policy or a whole life policy… then good luck getting a conversation that is letting you feel good about spending, right? And a lot of financial advisors might pay lip service to this, and they might say, “you’re fine, you’re fine, you’re fine, you’re fine.” And I hear that a lot. Like, “my guy says I’m fine. My guy says I’m okay. Like, I know I’m okay.” But ultimately, you have to make sure that’s the truth, okay? Make sure that’s the truth, and you know that by looking at your savings rate and looking at what Ryan said earlier: your net worth growing at least at the same rate as you spend in a year. And if you don’t know the answers to those two questions— what is your percentage savings rate, and what is your net worth growing every year relative to your spending— then you probably—

Ryan Isaac: That’s like 80% of a financial plan, too. I mean, it’s huge.

Reese Harper: But most financial planners that you’re working with right now probably will have a hard time telling you that, because you’re not tracking that information. And if they’re not, then how can they give you the assurances that you’re going to be okay? So once that’s happening, then you can have confidence that you can spend more. And then, financial planning finally becomes fun, because it was the license that you want— like, you paid the price of time, and effort, and energy to get to the point where you felt good about spending your money on things, and you didn’t really stress out.

Ryan Isaac: So that’s the perfect segway to kind of wrap things up. I said earlier that we would hit this topic of, if you spend more money to enjoy life today versus like, “oh, I’m just going to grind it out and wait ‘til I’m 65 to do this,” there could be trade offs. Now, I think some of the caveat to what you’re saying is, there will be people will big enough businesses who chose to really grind the entrepreneurial grind, and build a bunch of locations, and build a huge net worth that like, they might be able to spend a ton and still have a lot of net worth in the future, too. Other people might run a great business, make a good living—

Reese Harper: The first person you just said is— there is a person out there who literally it did not matter. I mean, it was like, they made so much money—

Ryan Isaac: Well, some people have the opportunity to just earn more money in their lifetime. Through opportunities available, through just natural talent and personality, or through choices.

Reese Harper: And what are you saying, that spending is not as important in that scenario, or what?

Ryan Isaac: No, that there are some people who will be able to build like a 40 total term and still spend like a wild banshee today.

Reese Harper: Yeah. So you’re saying that there are people who are wealthy enough to not have to worry about their spending. But I would say that that is still very very rare, because most people I know in that situation build a spending pattern that is so high that they might have had a high total term maybe in their 40s, but their spending habits get so extreme—

Ryan Isaac: Well if you need a net worth so big that just some basic interest kicks of 40 grand a month indefinitely, and you’re used to 40 grand a month— like, that’s what feels normal for spending—

Reese Harper: Yeah, I would say that most people that are extremely wealthy still have to focus on, is their net worth growing at the rate that they’re spending? They still need to.

Ryan Isaac: Okay, so to wrap this up, then, I thought it would be kind of interesting to mention just some of the trade-offs, then, if I decide to do a 20% savings rate instead of 25%, because I would just want to spend more money. What are some of the trade-offs I could expect? Because you were saying something really important, which is, at least admit it, right? At least admit what it is through data, you know? What your net worth is growing. What you’re spending. What you’re giving up in exchange. So here’s a quick list of things that if you’re going to decide to have a higher lifestyle or spend a little bit more money today, here’s some of the trade-offs that could exist; it could be one or a few of these. One might be slower debt reduction. You have to admit to yourself, like, “if I want to keep a good savings rate, and I want to have some nice things and have a good lifestyle, I might not also be able to plow through debt really fast, you know?”

Reese Harper: Which is a total fine thing. And in my case, I think that’s one of the choices that— there are a couple of choices you can make. You can have your associate own some of your practice. You can give up some ownership. Or, you can borrow some money to buy another location and not pay it off as quickly. Those are the two levers that you can pull. You can either slow down your debt reduction, or give up some of your ownership, if you’re not wanting to sacrifice your financial security.

Ryan Isaac: Some people have a hard time with that. It’s been engrained, like, “get rid of debt as fast as possible.”

Reese Harper: Or own 100% of your practice and never share it.

Ryan Isaac: Or you might be the person that decides to do less or slower business reinvestment. Maybe that second location or that associate or that new technology comes a year later than you want it to, or a few years later, because you want to maintain a savings rate and just spend more money today. And you just have to be— I guess I’m saying, these are just things to admit to yourself, to admit them through data and numbers, and—

Reese Harper: Well you’re saying, there’s some other things to. Like, maybe working longer. Maybe I just want to work longer. Maybe I’m the type of person who’s like, “you know what? I love what I do so much that I just want to work until I’m 75 years old, because I really do like it.” And I think there’s a strong argument for that perspective, because man! Some of the happiest people I know are working in their mid 70s, and they had a great life, and they really enjoy their work, and it’s keeping them healthy. It’s keeping their mind active, and their hands active, and it’s keeping them exercising for some people.

Ryan Isaac: Well, think about it: what a cool profession dentistry is, because it is something where if you keep your physical health up and you actually enjoy the work, it’s a career with longevity. I mean, you can earn a six-figure income on like, a day-and-a-half a week doing what you love into your 70s. That’s not common! That’s a pretty rare thing. So, if you’re the person that’s saying, “look, I’m willing to extend my working life a little bit so that I can travel today with my family while my kids still live with me,” or “I just want to put in the pool, or have the boat, or have the cabin, or the beach house,” then, okay! Be that person. Let’s just admit it on paper; let’s admit it through the numbers. Or, another one I thought of is, you might have to say, “look. The last asset it my portfolio that I touch when I’m in my 80s is my house. It’s not going to my kids; it’s not just going to stay free and clear and get past through my estate. I’m going to go and get the equity out of it, in exchange for spending more money today and not building up a high enough net worth that I don’t need to touch my house in the future.” That could be okay to. So, you had just mentioned these things that I think— well, you had mentioned admitting it, you know? Like, what is the exchange doing?

Reese Harper: Unfortunately, I think there two— like, we have had several conversations in the last month where you and I have both interacted with new dentists or dentists in their 40s, and some in their 50s, who will say, “you know what? I just know I spend a lot, and I know I’ve got this lifestyle, and I wanna keep it, and maybe I just want to set up a retirement plan for my office. But like, I don’t want to do any seriously planning. I’ll deal with that later.” Like, that’s where we would call someone out on that and just be like, look. You can’t just have the attitude of like, “I’ll deal with this later,” because that’s not planning. That’s not consciously saying, like, “I’m going to work later—” like Ryan is saying— “because I enjoy it. I’m just going to have a more modest savings rate. I’m gonna have a more modest debt reduction, or business growth.” You have to just acknowledge all these things, and I think that’s what some people refuse to do. Like, they just refuse to have the conversation, because they’re scared about what it might do to make— it might make them change something that they don’t want to change, and that’s probably where it’s a little bit unhealthy. I would just say, look. If you’re the type of person that’s just avoiding this because it’s something that you don’t want to deal with, it’s never going to get better. And it’s never going to get easy. Consciously working until you’re 75 but having the financial wherewithal and financial security to know you’ll be okay what you’re doing that is different than being an anxiety-stricken, working until I’m 75, worried that if I get hurt or if anything happens to me, I’m totally hosed.

Ryan Isaac: Well and you’ve said it multiple times in this podcast. It feels good to know that’s the case, because then you can take that trip guilt free, you know?

Reese Harper: Yeah. Financial planning is fun when it finally gives you a license to spend your money. And a good financial plan should incorporate spending your money and enjoying it.

Ryan Isaac: Yep. Love it. Thanks everyone for listening. Take the shot, alright? Build the strategy. Take the deep three. Is that the takeaway from today? It matters! The strategy matters.

Reese Harper: Yeah. Remember that financial planning ultimately can be really enjoyable, because it gives you a license to live better now.

Ryan Isaac: I love that. Okay, if you have any questions about your personal financial situation that you’d like to review and talk about with one of our advisors, book a free consultation, a free phone call, on our website, dentistadvisors.com. There’s a big button that says, “Book Free Consultation,” and you’ll have a chance to schedule an appointment with one of our advisors; we’d love to chat with you. Join our Facebook group! A lot of Q&A and a lot of good discussions are happening there. Just go to dentistadvisors.com/group, and join there. You can call or text us any time you want at 833-DDSPLAN. We’d love to hear from you, and thanks for joining us.

Reese Harper: Carry on!

Spending