Power Up Wealth podcast – How Do You Measure Financial Success – Episode 60 transcript:
Sharla Jessop 0:00
Financial success is often viewed by how much money someone makes or their personal possessions, but are these really good measurements? I’m Sharla Jessop, President of Smedley Financial and today my guest and colleague James Derrick, will share a different perspective on measuring wealth.
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James, thank you for joining me today.
James Derrick 0:52
Happy to be here.
Sharla Jessop 0:53
James is Chief Investment Strategist at Smedley Financial. He holds a CFA designation and an MBA. James, as humans, we often compare our own financial situation to others that we consider to be successful. And we use that as our measuring stick. What could be wrong with that?
James Derrick 1:09
Well, it comes pretty naturally. In fact, Charlie Munger, the longtime partner of Warren Buffett, who just passed away, said that the world runs on envy. So he certainly saw it. I think it does. It comes naturally to us all. So we think more about spending our money than probably earning it or saving it.
Sharla Jessop 1:28
So true. I think that’s right. I heard a client who years ago said to me, the heart doesn’t want what the eyes don’t see. So if you’re not out shopping for it or looking for it, you’re probably not going to spend your money on it, or that could be comparing it to your neighbors. So tell us about how we should look at a measuring stick a proper measuring stick.
James Derrick 1:45
The focus on spending goes way beyond just individuals, it goes to a national level. So GDP, Gross Domestic Product, is a measurement of how much we are spending. It’s one way to look at it. If we’re making a certain amount of income, and taking on debt to spend. All of that is considered economic growth, even though the debt is making us more vulnerable as a nation. So I find that fascinating.
Sharla Jessop 2:12
So how do we translate that to personal spending in our personal lives and what we can do?
James Derrick 2:18
It’s important just also look at the income and budget is kind of a boring word. Nobody wants to go there. But I think it’s important. The country may have the flexibility to print money for their debt, although even even they have some restrictions. Because if you print too much, you get inflation, which we’ve seen, but at the national level, they also can look at other measurements of success. Happiness would be a great one. But we don’t really have a quantitative way of measuring that. But another one that is comparable to gross domestic product is gross domestic income. And so it’s literally just adding up everybody’s income in the country. And I remember back when I was working on my undergrad in business school, and the teacher said, now there’s gross domestic income, but don’t worry about it. It’s basically the same as gross domestic product, we see the same thing now when GDP reports come out from the government. It’s headline news. When gross domestic income comes out, no one even notices. And there’s been a massive divergence between the two lately. Let me dive into this because I think it’s fascinating and then we’ll get into like maybe more individual and personal levels, where we hope that the same thing is not happening. GDP has been fantastic this year, a big surprise. In the third quarter of 2023. GDP was 5.2%, which is a shockingly big number. GDI, the gross domestic income was 0.4%. So the income was not growing. But the GDP was, so what does that tell us? Well, it tells us the money’s coming from somewhere else. And that somewhere else is most likely going to be debt and government spending, which is also debt right now. So the economy now, according to the Atlanta Federal Reserve, GDP now is 1.2%. So it’s slowing down. So GDP has been fantastic. And it’s slowing. And I think that’s exactly what we would expect when we know that the income hasn’t been keeping up and that people have been using more and more debt. Spending has been up about 3%. And so it’s just not supported by the income. The gross domestic incomes actually been slowing for eight quarters in a row. So that’s two full years where every three months the income has been slowing down. Doesn’t mean it’s been shrinking, but the rate of growth has been slowing, slowing, slowing, slowing. And so eventually it’s going to have this impact where we’re not able to spend. On a personal level, the way that I would explain this is, this is incredibly simplified, but if I make $50,000 and I spend $55,000, I’ve got 5000 bucks in debt, and interest rates on credit cards, by the way are really high right now. Actually the highest, they have ever been even higher than the 1980s. which stuns me because all interest rates were high back, then. I make 50, I spent 55. Now I need to pay off that extra $5,000. So that would mean that the next year, I would have to, again, I make 50, I would have to spend 45. So that would be like, I mean, that’s a, that’s not just $5,000 less than I make. Spending $10,000 less than I spent the year before, who can do that?
Sharla Jessop 5:26
Almost impossible.
James Derrick 5:27
It’s a massive, massive change. So it was so when you think about it at an individual level, though, it begins to make a lot of sense why we need to watch our spending. Because those numbers as the debt gets bigger and bigger and bigger, the possibilities of paying it off are just incredibly difficult.
Sharla Jessop 5:48
That makes sense, people are making maybe the same payment, maybe they’re paying more than the minimum payment. And they made making the same payment with a goal of paying it off at a certain time, but because of the increase in interest rates, the interest portion is growing at a greater rate than what they’re paying it off. And now they’ve extended the payment on something for years.
James Derrick 6:06
Exactly. And so you want to watch your spending, and you don’t you don’t want to get into a hole like that, of course, if anybody is I mean, there are a lot of different strategies to that you can hurry and pay off the smallest level of debt and you know, and then apply, once you pay off that smallest amount of debt, then you apply that amount to your next debt payment. You could also tackle the one that has the highest interest rate of which makes a lot of sense mathematically as well. Thing I want to emphasize right now is how looking at spending just is not a very responsible way of living. And we don’t want to do it like the US government does. We don’t want to measure our success by how much we’re spending.
Sharla Jessop 6:45
That’s a recipe for disaster.
James Derrick 6:47
Yeah, if the family vacation is financed on debt then that’s trouble. And so rather than looking around at the neighbors, and all the things that they’ve been able to do, you don’t know their situation. And so don’t get too caught up in that envy that Charlie Munger talked about.
Sharla Jessop 7:03
And we’re right in the point, we’re just coming through the holiday season, as we’re recording this. And we’re right at a point during the year when a lot of people go into debt in order to deliver a Christmas that they think is required.
James Derrick 7:16
Oh, absolutely. I was driving in the car the other day listening to radio ads, and I couldn’t believe all the big ticket items that they were trying to sell. I mean, it was a you know, $500 power tools, and, you know, several $1,000 snowblowers. And, and I thought wow, these, these are really big tickets. And people are spending. I mean, they make it so easy now, you know, online with online spending. But you know, the nice thing about Amazon Prime is you can also get free returns!
Sharla Jessop 7:45
Returns.
James Derrick 7:48
If you find yourself in the hole, that is not a bad option to go.
Sharla Jessop 7:51
Sometimes easier is not always better.
James Derrick 7:54
Yeah.
Sharla Jessop 7:55
That could be the one time.
James Derrick 7:57
Yeah. And what I find too is, as I save money, in one thing, I end up spending the money somewhere else. And I know a lot of people are probably the same way. And it doesn’t matter how much money you make, you know, you could be making a half a million dollars a year or a million dollars a year. But if you’re spending more, eventually, you’re gonna find yourself in trouble. And so every once in a while, no matter how much or how little money you have, you need to either budget or at least have some idea of what’s coming in, and what’s going out.
Sharla Jessop 8:29
You know, people don’t really like budget, that’s kind of a four letter word. It just has a really negative feeling to it. But the reality is, it really can create financial freedom, if you understand your spending and kind of monitor what’s coming in and what’s going out.
James Derrick 8:44
Yeah, the most effective way of budgeting is to put cash in envelopes. And I think in this internet age, that goes double, because Amazon doesn’t accept cash. So it’s really going to be effective for that reason too. You know, most people probably don’t need to go that extreme. But you you just you need to take the time to take a look at it before it’s too late.
Sharla Jessop 9:09
It’s easy to get out of hand and lose track of what you’re actually spending, especially when you’re spending electronically using VISA credit cards, Venmo, a lot of those things where it’s not being tracked immediately what you’re spending it adds up.
James Derrick 9:21
Absolutely.
Sharla Jessop 9:21
So what do you think that are some of the things that people could do to be more successful and measure be more successful in measuring their outcomes or success financially versus just watching everyone else?
James Derrick 9:34
Well, I mean, one of the things that we recommend people do is decide what money means to them. Because it might mean status, it might mean security, it might mean privacy, it might allow you to provide for others. Decide what’s most important about money for you. And then the other thing that we say and so that deals with values. The other thing that we say is pay yourself first. So make sure that you’ve got money going into savings. I mean, the way that A 401k can come out of your paycheck is fantastic. You’re gonna want to do the same thing with other savings as well, where you automatically are saving every single month.
Sharla Jessop 10:09
Pay yourself, make sure you’re at the top of the list, not the bottom.
James Derrick 10:12
Yeah
Sharla Jessop 10:13
Because if you’re in the bottom, the money’s gonna be gone.
James Derrick 10:15
Absolutely. And so I think those are the most important things. And then maybe the final thing I might say is you can schedule regular meetings to go over finances with your family. Now, I don’t do that. But every once in a while, we do have these meetings. And I think it’s important that everybody knows how we’re doing and where we’re at and where we want to be.
Sharla Jessop 10:34
I think that’s great advice. And I think it doesn’t matter if you’re a young family starting out, a family and with high school and college students, or if you’re going into retirement, talking about your finances, understanding your spending and managing it is really important.
James Derrick 10:48
Yeah because typically, there’s a divide and conquer in each family. So, you know, one person might be in charge of paying the bills. Well, so how does the other one know how they’re doing? So you’ve got to talk about it.
Sharla Jessop 11:01
Good advice. James. Thanks for joining me today.
Shane Thomas 11:09
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
