Kitces & Carl Ep 128: Noticing What You Spend Money On That’s Actually An Investment

***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.

Show Notes

• Ramit Sethi
• Dan Sullivan
• Cheryl Holland
• Abacus Planning Group
• Jeremy Walter
• Tony Schwartz
• The Spending Practice

Kitces & Carl Podcast Transcript

Carl: Greetings, Michael Ernest Kitces. How are you?

Michael: Hello, David Carl Richards III.

Carl: That's right.

Michael: I got that right, right? DC, DCR III.

Carl: Yeah. You know what? Somebody at one of the FPDA staffer meetings I was recently at came up and said, "Hi, David Carl Richards III." And I was, "Wow, that's proper." You know what I mean? At least somebody follows instructions.

Michael: That's proper. So, everybody else who just says "Carl" is overly casual now?

Carl: Improper. Look, don't I look like somebody who cares about proper manners? Of course. Of course.

Carl Is Curious About Knowing The Difference Between An Investment And An Expense [00:38]

Carl: You know what we should talk about? I'm super curious about this idea of knowing the difference between an investment and an expense, both the personal level. I want to...

Michael: An investment is I save for my investments and I spend money for my expenses.

Carl: Yeah. I want to push the envelope of both from the business, like when is something no longer an expense and it's become an investment. And personally, what's something that you spent money on personally that's turned out to be an investment?

Michael: So that, your question outright, what's something you spend money on the...?

Carl: That's my question. It's intentionally a little vague.

Michael: All right. So, I may have to think about it a little bit more. My gut answer still actually feels like, I don't know, an investment, investment thing for many. When I hear that, my first thought is, I spent a crap ton of money on my education, on continuing my education, right? Just the alphabet soup of stuff. I know it's an alphabet soup. I'm not oblivious. It's that alphabet soup that, for me, I did... After college, while working, I had the very good fortune to grow up in a household where my parents were able to save for me to get through college. So, I did not graduate with any student loans at the end of college. But the deal was basically, we get you through college and then your life is your own and you're on your own. It's like, we will birth you out of undergrad debt-free, but you're going to have to figure out your future after that. And I was very interested in continuing to learn and sort of invest into myself that way. And so, CFP classes, master's degrees, all the various designations, most of them I figured out a way to get at least some partial support from work, but I never even had a job where they paid the whole thing and it was covered. Most of those at best, were they would pay a third of it or they would pay half of it with me for me tied to me. So that was even then because now I'll date myself a little. That was 20-plus years ago. That was many, many thousands of dollars every year that I was spending on programs, it was what? It was over 10 when I was doing the grad school work...

Carl: Wow.

Michael: ...I was spending every year because, to me, I wasn't spending the money on school. I was investing the money in myself, in my career, and my ability to do more and be better as an advisor, and then ultimately to be able to get more clients or get raises and promotions at the job because I was employee for some of that time period. To me, just that end of all things education-related, those were always investments. That was never spending for me. Even though in practice what it meant was, I drastically dialed back how much I was putting in retirement accounts in my 20s because I was spending all my free cash flow in school.

Carl: Right. Yeah. That's a great example. And the reason I'm curious about this is not only how we think about our own money as financial advisors, advisors, planners, real professionals, what do we call ourselves?

Michael: Advisors, but that's fine.

Carl: How we think about it from the business perspective that we're running and also how we talk with clients about it. Because the way I think, an expense is something that I generally want, if possible, I want to eliminate, right? If possible.

Michael: An expense is something I want to eliminate because I...

Carl: If possible.

Michael: If possible. Because just even my gut thought around it feels very different. An expense to me is something necessary.

Carl: Yeah. That's fine.

Michael: The necessity is the first word that comes to mind to me, which is ironic because that essentially means that my frame of expense are the things that can't be eliminated. Expense. It's like I'm stuck with that. I got to do that.

Carl: Yeah. But if you have a choice to lower it by 10 bucks, your cable bill, you're going to do it. If you can get the same package, I'm going to lower my cable.

Michael: Well, yes. At some point, my efficiency brain kicks in.

Carl: Of course. Of course.

Michael: Time to economize.

Carl: Yeah. Totally. But for instance, human capital. If I know that by bringing someone on, or maybe we just go down the Dan Sullivan route, right? I'm going to only do what's my unique ability and I'm going to outsource everything else, not even outsource, but I'm going to get somebody else to do whether that's outsourced or inside the team. Somebody else to do all the other things. That can feel like, well, that's really expensive. I can't afford that. I'm really curious about the moment when it switches in our heads to, I can't afford not to do that. And why do some of us make that switch and some of us don't? Why do some people... I'll give you a crazy example. I, through a series of events, which it's not really useful for the conversation, but we ended up in, when we were living in New Zealand... Well, a little bit of the story is helpful. When we were living in New Zealand, my life fell, and had a climbing accident. It was really scary. I happened to be on a speaking tour in India, when it happened. So, I got this weird call at 4:00 in the morning when I was in Varanasi and all this, it was really weird, a really weird nightmare stream of my son saying, "Hey, mom's was in this accident."

So, I make my whole way home. I'm really short-cutting it because if I don't, I'll cry. I get home, Cory needs a bunch of physical therapy. We go to, I can't remember the doc. I think the doctor told us, "Hey, there's this guy named Glenn. He trains 4 of the current All Blacks," which is New Zealand training LeBron James here, you know what I mean? It's kind of a big deal. "He won't be able to train you long-term, but he might be able to... I doubt he'll accept you as clients long-term, but he'll be able to point in the right direction." We go meet with Glenn. My wife is so lovely and so fun, and she talks her way in. So, Glenn says, "Hey, I just had people cancel. So, I'll take you on as clients." So, we went to Glenn every week that we were in town for 2 and a half, maybe 3 years, we were there. And at one point after 6  months, I was like, "Wow. This is expensive." It wasn't cheap to go every Monday, Wednesday, Friday, 3 times a week, every Monday, Wednesday, Friday. But my wife was, "Hey, I don't know if you've noticed, but not only are you feeling a lot better, you're getting a lot more done at work." So, I was, "Wow." And Ramit Sethi, who we... Everybody has feelings about Ramit. But Ramit talks a lot about this too. Is having somebody clean the house or do the laundry, or the dry cleaning delivered, or paying for the help from Glenn, is that an investment or an expense? One person can see it one way and another person sees it a different way.

Michael: I will admit, I do a lot of that spending as well and very much view it as it comes from an investment frame for me of freeing up my time to do stuff that either drives more impact to the business or lets me spend more time with my kids because if I'm not working in the business, that's pretty much the only other thing that I want to do with my time. So, yeah. The lawn gets mowed by other people, all the maintenance of the house happens by other people. I joke sometimes, I can do Internal Revenue Code sections off the top of my head. I have no idea how my plumbing or any of my appliances work. I could figure it out. I'm a reasonably sharp guy but I spend no time on it. I just throw some money at it and make the problem go away because I'd just rather have my time focus on work or focus on my kids.

How Hard Is It To Make The Decision To Pay Someone To Do A Thing That You Used To Do? [10:05]

Carl: Was that hard for you? Do you remember when you made that trend when you've decided to pay somebody to do a thing that you used to do?

Michael: It hasn't been hard for me.

Carl: There's no puritanical work ethic problem.

Michael: No. No, because I know I'm still going to be working. I'm just going to be doing other things. Taking time off, I've got other puritanical problems to deal with.

Carl: Okay. You got other problems. Okay. So, this purely is just a wage arbitrage thing in your head.

Michael: Yes. Yes. That end of stuff at least is a wage arbitrage for me that I've gotten very comfortable with because I'm good at doing math on wage arbitrages. So, for better or worse, that end has not been challenging for me, just it came from... Once I found that I could grow the business more when I actually freed up my time and attention more to do it, which is a thing you got to get to. For some of us, all the discussion, well, you should hire a team to free up more of your time to go grow the business, that for some of us deep down, there's a nagging thing of, "But I don't know if I can make it that much bigger...

Carl: Or do that.

Michael: ...to actually to create that outcome or to create enough of an outcome to offset the cost of making this investment." Or at least I'm really not certain it can do it, which is basically an expression of my risk tolerance to make this investment into my business and myself and my time, to free my time. For better or worse, I found enough success in... Well, I say this, I found enough success to be able to do that, that I got very comfortable with that wage arbitrage. But to be fair, as I reflect back on that, that basically came in my 30s, not my 20s. So, after 10 years, 10 years, 36,000 days...oh, and then the wage arbitrage thing got easier. But that's only because for the first 10 years, the spending was into myself, and into my career, and into my education in the first place, it was a decade of spend money on education things, add letters, than a decade of, "Okay. Go do things with the letters and free up your time to do those things." Oversimplify life.

Carl: Totally. And I want to get back to the amazing financial advisors that listen to this, and how you see this show up in decisions they're making in terms of how to run the business, and there's no right or wrong in this question at all. I think this thing lives in constant tension that will never be resolved. But let me ask you one more question that I'm curious about, just trying to push the edge of this. There's a really well-known author that we all know and recognize. And I've known him forever. And he, early on, when he first started getting speaking requests, he asked for some help around how to arrange a speaking request. And I was walking him through the idea that you typically include business class travel. So, it's the speaking fee plus business class travel and accommodations is pretty typical. And so when you get on plane, you're typically going to sit in the business section of the plane. It's very uncomfortable that I didn't... He particularly, I remember him saying to me, "Well, if that's the standard, can't I just..." And this is actually is done in the speaking industry. You can just say, instead of business class travel accommodations, you just say, speaking fee plus X...

Michael: Yeah. Flat...

Carl: ...as a voucher, a flat thing.

Michael: Flat dollar amount and then I'll go figure out my plane tickets, however, I'm going.

Carl: Yeah. And so he would do that and then sit, buy the cheapest ticket, and he was always, "Yeah. 4 of those a year, fund my kids' education accounts." Fast forward 4 years and he's...

Michael: I just hear that, I'm like, "Well, just raise your speaking fee by another $1,000, my friend."

Carl: Fast forward 4 years and he's 100%, he's like... What did he say to me? "If it's not seat A2, I'm not going." So, there's an example of, oh... And the story you can tell yourself is, I sit, there actually is a difference. Sorry, there is a difference. Whether it's worth paying for is a completely different discussion, completely. But the story that you tell yourself is, I arrive... The reason people are willing to pay for business class travel for speakers, they are in their head saying, "Well, they'll arrive ready to speak, right? It helps them be prepared to speak." Do you see that as an investment or an expense?

Michael: Oh, God. Well, if I really need it to be effective to speak, it's an investment to me. In practice, because I've navigated this from the speaker world, I don't require business class travel domestically, because I'm fine in coach. It's not that long on the plane. I'll be fine. When I travel internationally, I require them to buy business class. If you need me to travel over an ocean for 18 hours and be functional the next day, I need a seat that I can actually lie flat and sleep on, or I'm going to be a train wreck when I'm supposed to be good on the stage for you.

Carl: Yeah. Fascinating. I only brought that up because... So no, I'm watching that progression in my speaker friend. So, where do you see... I'm curious, I'm trying to be really careful here about not being right or wrong.

Michael: But...

Carl: But where do you see mistakes made in terms of the way advisors think about this for their own businesses?

Michael: For their own?

Carl: Yeah. Investment versus expense, this idea of investment versus expense. Where do you see mistakes made?

Michael: I cross a lot of domains. I think there's a whole giant list of, I'll just call them those wage arbitrage kinds of scenarios. It's everything from hire and let go of tasks that you don't really need to. There's some of that in the business, we call that traditional delegation, hire an administrative assistant to delegate some things. It gets harder for most of us when you get into home, family, personal tasks. I remember a fascinating discussion years ago with Cheryl Holland of Abacus Planning Group down in South Carolina. It's fascinating. I think they're a billion or few dollars that they've grown to wonderful team, incredibly successful firm. And she had talked about the challenge that she's growing this very successful firm and hiring all these people and driving this growth for her household. But she still had very traditional household roles at home, which meant as the wife, a lot of things fell to her. And she was, "I don't have the time to do." And so she said, one of the hardest things she ever did was, as she put it, this is her words, not mine. She said, "I hired a wife for myself. I hired a wife to do the things that kept coming to me as the wife because my husband just wasn't doing them or taking them," I guess. And so she didn't want to create marital strife, but she needed to power the business board. She was, "I had to get over the fact that I just needed to hire a wife for myself who is getting dry cleaning picked up, and whatever stuff." I forget all the details that she that she had on the list.

But the thing that stuck with me about it is that was a really hard thing to do because it wasn't in the business domain, right? It was in the personal domain where all sorts of other dynamics, family dynamics, spousal dynamics, upbringing, what we were raised in, role models we've had, how we're supposed to function in a household unit, there's a whole bunch of other stuff that comes in for that. Getting back to the earlier conversations, I felt a version of that myself. And I just basically had to make the conscious decision of, I'm just basically going to be an ignorant homeowner. I'm not going to know how anything in my house works and is fixed. I'm going to throw money at that to have someone else do it, I throw money at it. I try to be responsible in who we're hiring, but it is, I'm going to pay whatever they make me pay. Because I don't want to spend my time on it because I think my time is better spent elsewhere.

How To Determine What Is An Expense Task And What Is An Investment Task [19:14]

Carl: Yeah. Yes. There's 2 really important things I want to just comment on. I have this friend, Jason, who makes a ton of money, and he's a really high-powered, incredibly valuable per-hour person and still changes his own oil of all the cars. And I was having this car, I was, "Why...?" He's, "I like it." I don't...

Michael: That's fine if you like it.  I actually don’t like that part.

Carl: He's, "I don't actually like it, but I like I got to do it. I like that whole feeling." I was, "That's really fascinating." So, he's really self-aware about it. He's, "I like the feeling of doing something that I don't love to do." Totally fine, right? So, that's why I'm careful about right or wrong, good or bad. And then my wife, Cory and I had this exact conversation where we said we needed to hire a husband. We're like, "We need to hire a husband because, Carl, you're clearly not getting this done." So, I understand that one too. Here's another one that's interesting to me. I think financial planning is a huge chunk of, at least the way some of us do it, it's not the right or wrong way, is creative. There's an element of it like looking somebody in the eyes in the face of irreducible uncertainty, helping people make decisions with incomplete information.

So, to me, it's becoming increasingly important, an hour or 2 outside is work. It looks like I'm riding my bike to anyone else who sees me, or hiking or surfing with Scott Frank, it looks like I'm doing...or skiing. It's work. It's a required part of my functioning work. That one's been hard for me to get over too. And I think increasingly when you shift from "Manual labor," time, and effort to results and creativity, and you pointed at something earlier too, lumpy income, the business is worth more. Well, that business, you don't know that right this second, right? It's not worth more in the form of cash in your pocket. It's worth more in the form of equity. So, there's all sorts of weird things in here about is this an investment or is this an expense? Is this walk I'm going on right now an expense of time? Or do I find myself being 10 times more productive because I did it? Gosh, it's hard to sort out. You know what I mean? And I talked to advisors all the time, they're... In fact, Jeremy Walter, I told him, I'd throw him under the bus for this and he was fine with it. For a while, he would hide about taking Friday off. I remember I texted him...

Michael: He was taking Friday off, but he wouldn't tell anybody?

Carl: Yeah. He even said, I've been secretly... And I was like, "Secretly-wise, I don't want anybody to think I'm a slacker." Well, it turns out taking Friday off wasn't an expense. Taking Friday off was not only an investment in the business for the other 4 days, it was also an investment in the family and the home, and all those other things that come into play. So, I think this idea of thinking really holistically about investment versus expense... If I find an investment that I know that if I throw a dollar at it, it will produce $2 or even a $1.25, I want as much of that as I can.

Michael: Well, I agree. I think most of us being wired that way, it's sort of the planner goal-oriented achieve, maximize, optimize mentality. I don't feel like that's the hard part for us. If I hire the team member to delegate some stuff and I free up my time, can I actually really grow the business enough to make this work? Okay. I love the metaphysical statement of taking Fridays off as an investment in the other 4 days to be more productive. It's okay. But do I really believe deep down I could be more and more productive enough to not just drown in my work trying to get 5 days a week work done in 4 days?

Carl: Totally.

Michael: There's...

Carl: All sorts of challenges.

Michael: I don't find the challenges literally making the investment for most of us. It's our confidence and conviction that the payoff will actually come.

Carl: There's a guy who wrote, let me stumble around just for a second while I see if I can get the name this fast, but it was a book... Oh, it's Tony Schwartz. That's what it was. And Tony Schwartz talked about how, for intellectual work, thought work, 90 minutes is the outward edge at a time without a break. And that typically 3 90-minute blocks is about all you can do in a day. And he read that research somewhere. And then so he took that research and said, "My next book, that's how I'm going to write it." And I'm totally paraphrasing. I'm going to try to be careful. I'm notorious for exaggerating. I'm trying to be careful here, but he talked about how much faster and how much better the book was because he wasn't in the office pretending to work for 8 to 12 hours.

Michael: Right, right, right.

Carl: He did the 90 minutes, took a break, walked outside 15, came back, did the 90 minutes, took lunch, came back, did 90 minutes went home. The book got done faster, the book was better. I can't remember how much that... But it was dramatic. And so, I am always thinking about the way we use time and the way we use money as, because, again, my definition of real financial planning is aligning your use of capital and capital to me is time, money, energy, and attention. So, there's always an asterisk next to capital, time, money, energy, and attention with aligning your use of capital, what's important to you. From work perspective, it's, okay, influence... The number one thing important to me is impact. Can we have an impact on people? And you only get permission to have an impact if you, profit equals permission to have impact. So, of course, profit's important too. So, I want to align my use of time, money, energy, and attention into the things that have the highest impact and allow me permission to keep doing those. And sometimes that's a walk. And sometimes that's an extra team member. And sometimes that's Monday, Wednesday, Friday with Glenn. And sometimes that's business class. And sometimes it's changing my own oil to go the opposite direction. It's just so interesting that it's not a static answer for all of us. And to me, the answer to this whole conversation is, well, why don't you just start paying a little more attention?

Is There A Rubric For Figuring Out Investment Vs Expense For Everyone And “The Spending Practice” [26:42]

Michael: I was just going to say, so what's the rubric? What's the framework to figure out what the thing is? I'm struck even as what you're saying and then you went right there that it kind of takes a little bit of introspection to say, what would move the needle for you, right? Is it hiring another person to delegate to? Is it outsourcing your wife or husband's household tasks as we talked about, is it education? Is it more walks? Is it Fridays off because that makes Monday through Thursday more impactful and productive? What is it for you? Should I sort of ask rhetorically but literally for people listening, what is it for you? And what's holding you back from the thing? Because the other thing I find when I have some of those conversations is, I don't know, I'm spitballing numbers, but half of us don't know what the thing is and the other half of us know darn well what the thing is. There is just some reason why I can't...right? Cheryl's was like, "But I'm the wife, I have to do the wife things. But then I realized I don't. Not those things." There's other things she does. She's still happily married as far as I know. But...

Carl: Jeremy's was he didn't want people to think he was a slacker.

Michael: Yeah. Yeah. Yeah. And again, all from my end, my big summer job for years was mowing lawns. That was how I made my money in savings. I've got a lot of my first money memories are tied to what I do with lawn mowing money. So, saying I'm not going to mow the lawn and pay someone else, took me a while to get to, especially because it's been a lot of years since I was doing that. So, 30 years of inflation on the cost to mow a lawn, it gave me a mild freak-out moment. So, I was, "Wow. That's what that costs now? Holy cow." But I need to let go of that. There's other things I need to do and I want to do with my time.

Carl: Totally. I worked on this project for a while, at some point, it's going to see the light of day again called The Spending Practice. And it was this idea of rather than being bad or good, it was just purely, look, I spent time, money, energy, and attention on that thing, whatever. It's easy to do money, but time is even more crazy, you want to have a crazy time, go look at your screen time on your phone. So, I spent that much time on that. No shame or blame. So, this is answering the question, how do you figure it out? I think you figured out by practicing and you practice by noticing. So, I spent time and money on that thing. And here's a super quick story so we can wrap up. But my friend Rob, Rob had a buddy that he used to take to lunch every month and Rob went through the spending practice. And I wrote a little thing that I used to hand out.

And Rob went through the spending practice and he noticed this expense every month, and we sat down, and, "Tell me about that expense. No shame or blame." He's like, "Oh, that's a buddy of mine. He's having a hard time." This is one of the only times he gets to connect with anybody. So, we were like, "Oh, what are you investing in? What are you investing in? What's the value?" That's what it was. "What's the value that's being expressed in that spending?" Well, to him it was friendship and support. Oh, super interesting. So, we wrote in that column, friendship or support. And then Rob took the next step which was, is there another way to express that value in the same relationship? Sometimes the answer is no. Friendship and support is enough of an answer but he's, "We both love to hike and we both work on a trail." Our office building backs up to a trail. So, they started just hiking once a month. And he's the bonus, "I increased the amount that goes to my Vanguard S&P 500 fund by 50 bucks a month because of that." So, now he's, "Now I'm investing in another value called future freedom and a value called friendship. And it didn't cost me anything to do." I think you can do the similar thing, go through the spending practice yourself and just start paying attention to, "I notice Jim Collins used to do this." He had a little book he'd carried around called the Bug Called Jim, that's what he'd write on the front, the Bug Called Jim and he would just notice, "I notice the bug does a little better when he spends 10 minutes outside before each phone call." He was just...

Michael: He was writing himself like he's an experimental.

Carl: That's exactly right. That was really, really cool, I think. He's, "I noticed the bug gets angry faster when he's hungry." So, I think you just start noticing. I know I do a heck of a lot better...I've only recently discovered that I do a heck of a lot better when I have more protein in the morning. Interesting. Well, good high-quality proteins, actually not an expense anymore. Normally, when I look at the grocery bill, I'm like, "We got to reduce that? That's an expense." Now I'm, "Oh, no. I'm really glad we're spending that extra money because the good high-quality protein makes me more productive." So, anyway, that's it. That's an example. Just pay attention and notice.

Michael: All right. I like that. I like that theme. Thank you, Carl.

Carl: Cheers, Michael. See ya.

Michael: See ya.