Garret (00:02.577)

Good afternoon. My name is Garrett Wong, your host of the Investing to Win podcast. As you can see, I have a special guest here. His name is Jesse Kramer. Jesse, how are you?

jesse (00:12.106)

Hey, Garrett, I'm doing well. Thanks for having me on the pod today. I'm excited for this conversation.

Garret (00:18.173)

I am as well. Moving over to video. And so this is quite a new experience for me, but I like having a fellow podcaster on and as you are, and we'll get into it, but why don't we do the normal things? Why don't you get into the intro and the particulars, tell the audience who you are.

jesse (00:34.978)

Sure, sure. So I'm calling right now from Rochester, New York, which for those unfamiliar, it's upstate New York near Lake Ontario, near the Great Lakes. I have two degrees in mechanical engineering here and I worked in aerospace as an aerospace engineer for seven years. And about midway through that time, just through kind of hobby and passion, I became like the at work expert on our 401k program, various other investing topics and some friends and some colleagues.

They encouraged me, they leaned on me for advice, and they eventually encouraged me to take some of what I was writing down and publish it online. So I started a blog. The blog is called The Best Interest. It just turned five years old last month, and I also run a podcast called The Best Interest Podcast. And as the blog and the podcast grew, and more readers and listeners began reaching out to me, asking questions, seeking advice, I realized that that's where my passion was.

So two years ago, I actually left engineering and now I work full time for a fiduciary wealth management firm and financial planning firm Working one-on-one with individuals families on their financial plans and their portfolios. So that brings me here today

Garret (01:48.013)

Wow, aerospace engineering. So can I tell a bad joke about rocket science? Like seriously? No, like you're actually like a rocket scientist, like aerospace engineering, that's like so far above my head.

jesse (01:52.95)

Please, please, yeah, go for it.

jesse (01:58.178)

Uh, yeah. So specifically I worked for a company that did many different things, but my kind of chapter of the company, we built satellite based telescope systems. So, uh, not the rockets themselves, but stuff that went into rockets and would be launched into outer space and had to survive the rocket launch, which when you're designing a telescope.

Job number one is survive the launch, and then job number two is take really, really good pictures once you're on orbit. So rockets were certainly part of my old job.

Garret (02:32.717)

So cool. Yeah, I was in molecular microbiology. That sounds so boring in comparison, but yeah. Finances, you know what? I've read your blog. Obviously we got connected here and I think it's a really good segue because we're in the new year and why don't you sort of tell us why you can, like let's talk about year end sort of financial reviews. I mean, this is January, 2024, like literally we're a few days after New Year's.

jesse (02:37.172)

Oh. No.

jesse (03:02.778)

Yeah. Well, I mean, financial reviews are a critical part of anyone's personal finances. Quite simply, you can't manage what you don't measure. And so a review, whether it's like a quarterly review, a monthly review, or some sort of big annual review, the timing is kind of a personal choice. But that review gives you the structure to measure your finances. And then once you've measured them, you can start to manage or embed.

your finances. As an example, my wife and I, we got married about a year and a half ago. So, no, my wife is part of my review process and that's really important. That's huge because we aren't always talking about finances on a daily or weekly basis and it's important to come together and talk about what's going on in our financial lives to make sure that we're on the same page. I know we're gonna get into some, or at least I hope we're gonna get into some specifics later, Garrett, but

When I think of financial reviews, I try to break them up into seven distinct topics in my review. So I think about income, spending, saving, net worth is number four, investment allocations number five. Number six is insurance and estate planning. And then number seven is goals. So a review of past goals and then setting goals for the year ahead in my case.

Garret (04:24.833)

Wow. Yeah. It's you get really granular with everything. It's very, very organized. Um, amazing.

jesse (04:31.014)

I do, but we'll talk about it some more. You don't have to get as granular as I do. I'm maybe a bit of a nerd and the engineer in me wants to get really granular, but you don't necessarily have to get as granular as I do.

Garret (04:45.773)

Okay, well, I think we can. I mean, this is a podcast and I think people are here to learn, so why don't we, I've got some questions that I have here for you. Why don't we talk about spending? I mean, that's kind of, I'm a self-professed spender and I've kind of got another control, but when I was younger, not so much. So in your post, you highlighted the importance of understanding household spending. Could you share some?

jesse (04:49.527)

Sure, sure.

jesse (05:04.526)

Mm-hmm.

Garret (05:12.493)

tips maybe on how individuals can effectively analyze their own spending habits?

jesse (05:17.386)

Yeah, yeah, so spending is an interesting one. When it comes to analyzing your spending habits, in some way, shape, or form, it goes back to that word measurement. In some way, shape, or form, you have to measure your spending. For a while, probably for seven or so years, ending about a year ago, I used an app called WineApp, or Do You Need a Budget? I still think it's a wonderful app.

The reason why I stopped using it is just because my wife wasn't really into it, and I understand why she's not into it. This app more or less demands of its users that they measure their spending in a very, very granular way. You don't have to get that granular. My wife doesn't really want to get that granular, and hence I kind of decided to meet her in the middle. But in some way, you have to be able to...

In some way you have to be able to...

Figure out where your money is going. Understand, I think that understanding your monthly cash flow is the single most important building block for successful personal finance, from which all other good things in your financial life will flow. So if someone's not measuring their cash flow, I'm betting against you in a way if you're not measuring your cash flow. So what do my wife do instead?

We update a spreadsheet every month with our account balances, our bank accounts, our investment accounts. Everything goes in there and we'll get into that spreadsheet a little bit later. But month over month, I can look at how our bank accounts are changing. If our bank accounts are going down month over month, if there's negative cash flow there, I want to know why is that? Do I need to look deeper? Do I need to look at a credit card statement, a monthly credit card statement?

jesse (07:11.978)

and start going line by line and saying like, oh yeah, we spent this there, or boy, we spent $300 on this thing. And that's kind of a regrettable purchase in hindsight. We didn't get a lot of value out of that. And speaking of, Gare, a real quick segue, and I don't want to talk too much, but everything I've talked about so far is really just dollars and cents and very kind of numbers based. But that last thing I touched on is the idea of, was this spending worthwhile? Am I spending on things that really bring me joy in life?

When I talk to people, whether it's readers of my blog or people I work with professionally, there are plenty of times where you look back six months and you realize you spent $1,000 on some, I don't know, what's something you could spend $1,000 on, some really great pair of boots. And you say, like, was that worth it? And sometimes people say, like, oh, absolutely, hiking is my favorite thing. I wear these boots every day. It was the best purchase I've ever made. But a lot of times...

We've all been there. We look back on some purchase like that and we say like, oh my gosh, at the time I thought it was the coolest thing. Yeah, exactly. And so those kind of feelings and that kind of learning and that kind of growth only comes from measuring what you're doing in your financial life and going back in time and tracking your past behavior and looking at it with a fine tooth comb and just saying, you know, what's this the right thing to do?

Garret (08:17.477)

Piers for Morris.

Garret (08:40.845)

Yeah, I mean, let's go back a little bit there and what you said, cause and unpack that. YNAB, I mean, you said you're a nerd, I'm a nerd. Like I actually started my financial, I don't know what you call it, fitness revolution or some kind of rehabilitation because I needed something to curb my spending. And it was always just looking like going to the teller and realizing that, okay, things are being denied. You whip out the credit card, kind of do that because, you know, so YNAB was a really

jesse (08:43.875)

Mm-hmm.

Garret (09:10.965)

Important part at the beginning, but you're right. I mean, it's heavy It's very detailed and it's not for everybody, but it's certainly a great start in just Budgeting and knowing what you're doing in all of those different categories

jesse (09:19.434)

It is.

jesse (09:24.586)

Right, right. I mean, I can tell you some stories, Garrett, of people. I'll change some of the details so as to not give them away, but essentially you have a couple who they know they're earning $15,000 a month. So let's hold that number there, $15,000 a month. And then we do a budget exercise with them and they say, yeah, we're spending $10,000 a month. Great. They know what they're spending, 10 grand. So I say, well, 15 minus 10, you have a $5,000 surplus.

every month, which is wonderful. So if I look backwards 12 months over your bank account statements, I should be able to see those bank accounts growing at $5,000 a month. Or maybe you're funneling some of that 5,000 off into an investment account so it can grow for the long term. Either way, in your long-term savings, I should see $5,000 a month. And if I look back a year, I should see 60,000 surplus. And then we do that. We actually look backwards and say, all right, let's find this $60,000. This is awesome.

and it's not there. And the reason why it's not there is because that $10,000 a month spending that they thought they had just was incomplete. And in actuality, that incompleteness, like it's great to know that, you know, it's great to think that you're spending $800 a month on groceries. It turns out you're actually spending $1,100 a month. And just line item by line item, and, oh, I forgot, we actually, we took a vacation and it cost 10 grand.

Garret (10:34.669)

Yes.

jesse (10:51.598)

but that's not a monthly expense, that's a one-time expense, so we didn't include it in our budget. Okay, well, it came from somewhere. And so you have to go through these exercises to realize what you're truly spending. And in that hypothetical, which is really based on a real story, I just changed the numbers, they were spending every dollar they earned. They thought they were saving a ton, but they weren't.

Garret (11:13.221)

I'll literally not realizing you're living paycheck to paycheck, not unlike a business, right? Entrepreneurs, your like income, expenses, balance sheets, net profit, and how many businesses look at that number that their accountant tells them, oh yeah, you made money. No, I felt like I was like stretching my payroll every single month because the number that you do on paper is not the same as your cashflow. I mean, really, that's what we're talking about here.

jesse (11:16.694)

Right, right.

jesse (11:41.93)

Right, right. I mean, cash flow really is, I think from the business side, maybe when they say cash flow is king, it might be a little bit different than on the personal side when we say cash flow is king, but just the awareness of your cash flow. You know, when we're going to get into some investing topics later, I bet, and I think a lot of outsiders look at personal finance and investing, and they say investing is the sexy part, which I get. I get why people say that, you know, good investments are the thing that are going to make you a millionaire.

Sure, that's true. But we have to take a step backwards and say, how are you funding those investments in the first place? If you're putting a thousand dollars a month into your investment account, where's that thousand dollars coming from? It's coming from monthly cashflow. It's coming from the choices you make to say, my income is X and I'm gonna spend a lot less than X so that I have a thousand dollar surplus that I can then go off and invest. So I know investing is the cool part, but monthly cashflow,

is the building block that gets you there.

Garret (12:44.437)

Okay, so let's speak about tools. I mean, obviously we talked about why NAB, you need a budget. Any other tools in general that you would recommend for the audience, for anybody who's just like, I need to get a handle on my spending?

jesse (12:56.806)

Yeah, I've heard good things, especially now. I think if anyone out there listening were to google a phrase like, what should I use instead of Mint? For those who don't know, Mint was a very popular budgeting software that was recently shut down by its parent company. And so a few bloggers and podcasters who I know and have a lot of respect for, they've recently been publishing content on like, what do you do now? What should you replace Mint with?

So those kind of articles are going to have some really good suggestions on other software tools, whether it's like Empower or Monarch Money or Kubera. There are a few different ones. My wife and I just use a spreadsheet. We use Google Sheets so we can share it. Maybe you want to use an Excel spreadsheet if you're more comfortable in Excel. It can be that simple. But there are quite a few tools. Most of them have some sort of tech component, some computerized component to them out there to measure your money.

Garret (13:56.749)

Yeah, the spreadsheet is always the tried and true. I know that at my bank, which really helpful, like I just went on a trip obviously over Christmas and I'm like, okay, what did I spend? Well, most banks you can just download directly into Excel and you can kind of highlight those expenses. And then, well, what we did, we just did a bulk payment to the credit card from our travel account. And again, to your point, this is something that we do very almost.

jesse (13:59.423)

Right.

Garret (14:24.221)

similar to based on that old envelope system, which I personally find effective. So we put a few hundred dollars away every month or every paycheck into a travel fund. And then now we're not like living off of our credit cards and trying to pay off balances when we get back from a trip, we already know what we're able to spend on that trip. Then we use the credit card when we're out there. And then, like I said, just download from Excel, copy a bunch, you know.

to do that little formula, sum equals whatever, and now we're transferring from one account to the other. That's what we do.

jesse (14:53.935)

Mm-hmm.

Yeah, yeah. That's what my wife and I have essentially started doing now in the past years, since we got married, is a net worth spreadsheet, a line item or a row for every single asset, meaning like my bank account, my checking account, her checking, her savings, joint accounts, investment accounts, our house and our car has a line item there. All the liabilities also have a line item, the mortgage, student loans, that kind of thing. And then...

month over month you can track it or you can see where you stand. Credit cards are in there. So anyway, that's how we do it too. And it works great for us.

Garret (15:33.839)

Okay, so income and expenses. I mean, I'll ask the obvious question, why is that balance critical for financial health?

jesse (15:35.298)

Mm-hmm.

jesse (15:41.962)

Well, right, I mean, we're numbers guys at the end of the day, and I suppose the idea is that if you have negative cash flow, there is a finite amount of time that you have until you literally have no more money. Right? So positive cash flow is the only way to be, especially in the long, you know, specifically in the long run. Short run, sure, if you have a month of negative cash flow because something crazy happens in your life, that will happen. It's probably going to happen to most people listening.

But in the long run, positive cash flow is the only way to be successful.

Garret (16:17.241)

Well, you have to have more coming in than going out, right? You either curb your spending or you increase your income. I mean, that's what I went over with the other podcaster that recommended you to me here. So, you know, let's speak about savings because if somebody is able to get that net surplus above income versus expenses, what strategies would you recommend for maximizing savings, you know?

jesse (16:20.091)

Correct.

jesse (16:28.357)

Mm-hmm.

Garret (16:44.438)

Let's talk about first in the context of preparing for unexpected expenses.

jesse (16:49.298)

Yeah, yeah, okay. So we can start with the unexpected expenses. There's something there that perhaps everyone listening has heard of, or maybe not. It's called an emergency fund. And it's literally just a pot of money that sits in your bank account. But at least in your mind, in your mental accounting, it's there to cover your butt in case of emergency. And there's a story I like to tell. Four years ago, my wife and I took a little weekend trip away to a place called Ellicottville, which is this cute

little ski town south of Buffalo, New York. Maybe you've heard of Buffalo, the Buffalo Bills, the Buffalo Sabres in Western New York. And we're at an Airbnb. It's one of those tiny houses. So it was like a 400 square foot Airbnb. And we knew from the Airbnb listing, we were actually one of the first people staying there, which we thought had more pros than cons, maybe a little lesson learned as everyone listening will soon find out. Because the...

Garret (17:24.304)

Of course, yes.

jesse (17:45.294)

poor guy who was running the Airbnb. He was like this 19 year old kid who was trying to be entrepreneurial, trying to get some side money. The house had no central heating. And his solution to that was space heaters. And, you know, here I am, not only was I an aerospace engineer, Garrett, when it came to the telescopes, I was actually a thermal engineer. Right? Space spacecraft out in space, there's no atmosphere.

So when the sun is hitting them, they get extremely hot. And when the sun is not hitting them, they get extremely cold. That's bad when you're a telescope. So my job was to help fix that. So I understand the world of thermal anything. And here I am in this house with two dinky little space heaters on a 20 degree day in January, south of Buffalo. And the house was like 45 degrees and I'm in Fahrenheit. I know some of your listeners are probably Celsius. The house itself was like seven or eight Celsius.

Garret (18:40.773)

That's cold. Yeah.

jesse (18:43.018)

Right? It's negative five Celsius outside. And we're looking at each other like, we can't stay here. We, we, we got to go find a hotel room. It's going to be really expensive. We're going to have to argue after the fact with Airbnb about trying to recoup our money. And, and it's a financial choice as well. It's just like a safety choice, but we know like, do we just go into town and spend 500 bucks on a hotel room? Well, because we had an emergency fund, because we had multiple thousands of dollars sitting in there in the bank.

waiting for some emergency to strike. It was a very easy decision. Money basically wasn't part of the decision. I knew that our finances were gonna be totally fine even if we had to pay 500 bucks for a hotel room and even if Airbnb said, sorry guys, you chose to leave, we're not gonna give you your money back. So that's just one little example with not that much money on the line where having an emergency fund made our lives easier and less stressful.

and got us out of a bad situation.

Garret (19:43.977)

Okay, so I mean, I've obviously I've heard of emergency funds, I've heard rule of thumb, like, two, three months worth of income. I mean, is that kind of the standard out there still?

jesse (19:55.114)

Yeah, it's a function, Garrett, of how secure your job is. And what I mean by that is when you're talking about multiple months expenses, one of the main emergencies that strikes is a sudden loss of income, where you have to replace your income for some period of time while you're searching for a new job. And that's a combination of things are at play. One is just your job security, meaning, you know,

Do you feel like maybe there's a chance you might lose your job unexpectedly? Some people in some industries say like, yeah, it's a real possibility. Other people in other industries say it'll never happen. And then the second question to ask yourself is, if you were to lose your job, how hireable are you? Rehireable are you? Or in some cases, how much time do you want to give yourself to do a job search? Some people out there are maybe like a C level executive.

And, you know, they're not interested in just taking any old job. They want to look around and really take their time to find that specific job that's going to advance their career. Or some people just have such unique skills that there just aren't that many jobs for them. That kind of person might want to have more than two or three months of expenses in their emergency fund. They might say to themselves, I could need a year to find a new job. In that case, they might need 12 months of expenses in their emergency fund.

Garret (21:20.725)

Okay. So, uh, and that's, that's great. That's a great point because I have, I have a 19 and a 21 year old. And since they were like eight years old, even when I was giving them five bucks a week in allowance, I was like, okay, you have to put certain amount into long-term savings and yet another account, and we did this at a local credit union into your emergency fund, just trying to teach lifetime habits and they're like, well, how much should we have? And I said, well, it really depends on.

jesse (21:28.183)

Mm-hmm.

Garret (21:49.229)

what your expenses are because they might've been working two part-time jobs where for my wife and I, obviously it's a little bit more, we kind of did the three month thing, but where does that money come from? I'll ask that obvious question. Like how do you even start?

jesse (21:58.114)

Mm-hmm.

jesse (22:02.546)

Yeah, right, right. So, right, savings equals income minus expenses and, and for most people, the easy way, the easiest way for them to maximize their savings is to investigate and ultimately cut some of their expenses. It's very easy to say and ultimately everyone out there should be thinking to raise their income over time. I mean, that is the better path to long-term success is finding ways to raise your income.

But it's also the harder thing to do. The easier thing to do and the more applicable thing in the short term to do is to cut your expenses. You can't do that unless you're actually measuring those expenses, hence kind of what we were saying before about measuring. You can't manage what you don't measure.

Garret (22:51.309)

Okay, so let's say that you have a surplus, but now we're talking about, wow, I want my travel, I want, I don't know, my investments. How can I even possibly do that? What's the priority here?

jesse (23:05.17)

Yeah, I mean, there does exist something out there. It goes by different names. The name that I had first heard is the financial order of operations. And for those out there who are familiar with math, there's this math order of operations, right? Please excuse my dear Aunt Sally, or what? Parentheses, exponents, multiply, divide, add, subtract. Similar for personal finance. There's an order of operations that's generally agreed upon that says if you have excess money,

The first thing you should do with it is build up your emergency fund. And the second thing you should do with it is it in the U S at least, it's usually you should, uh, get your employer matching your 401k because that's free money. Another very high priority though, that's universally applicable is to pay off high interest debt, like credit card debt. So you can go through this order and, and one by one, start checking these things off. And then if you still have excess money, move on to the next one, check that one off next.

Garret (23:47.301)

Mm-hmm.

jesse (24:03.634)

And that should help people prioritize the different things in their life, because there are a lot of ways to spend money. There are a lot of ways to use money. The financial order of operations helps provide a framework of priority for that.

Garret (24:19.457)

So unless I wasn't paying attention, what's more important, an emergency fund in that order or other types of, or let's say paying off high interest credit card debt, what's more important when you're starting?

jesse (24:32.938)

Yeah, yeah, usually getting at least a little bit of an emergency fund is almost always priority number one. And that little bit, it might not be the full six month emergency fund. It might be something like one month, like just set aside one month worth of expenses upfront. Or another common kind of measuring stick that I've heard before is set aside enough money to cover all of your insurance deductibles. Because that's the idea of like, you know, if I break my leg,

Garret (25:00.132)

Oh.

jesse (25:02.734)

Yeah, health insurance covers it, but maybe the first $2,000 has to come out of my pocket before health insurance will kick in. So I better have $2,000 sitting there in the bank in case I need to cover that kind of deductible. So that's another measuring stick that I've heard before for that initial emergency fund. That's usually priority number one in that order of operations.

Garret (25:25.197)

Yeah, you know, I'm going to speak to a side story. I mean, it's not really a story more of a distant memory for me living paycheck to paycheck. I was a spender. All my credit cards were kind of maxed out. I had two or three, you know, $20,000 each type of thing. And we're like, okay, let's pay off those credit cards. But our financial planner at the time, a good friend of ours was like, no, like kind of need to like the same advice that you're giving Jesse, once you start with a small emergency fund.

And I'll tell you, you know, it was, again, you look at it, we didn't put much away, 50 bucks every two weeks. It's like, what can we cut out? Okay, we're not gonna go for dinner every single week or whatever. And all of a sudden it was 200, then 400, 800. All of a sudden it's $1,200. And I have to say there's something with my self-confidence.

jesse (26:03.124)

Mm-hmm.

Garret (26:18.729)

knowing that I had $1,200 in the bank. And it wasn't because I had $1,200 worth of room on my high interest credit card, I had $1,200 cash that I could do. And it just gave me more confidence to keep going. It made me feel better about the situation. And that kind of was the propulsion, bad choice of words with a rocket scientist, to kind of get me there, you know?

jesse (26:40.183)

Yeah, yeah, though I think there's, you're definitely onto something and it's similar I think in some ways to something I've talked about which is when I've talked to some people and I went through this myself, a lot of people in their, sometime in their 20s, they've now been working for maybe a few years and they've been contributing to this thing called, in America it's called a 401k through work, right? And maybe they weren't paying attention to it too much.

One day they decide to open up their statement in the mail or log in online and they see $7,000 there. And they're like, it's kind of like shocking in a way, in a great way. But they also realize like, I should probably learn a little bit about what's going on here. Maybe I need to learn a little bit about investing itself, or maybe I need to learn a little bit of just what is a 401k, how this money get there in the first place. And it also brings them a lot of positive feelings because they've built up this account.

slowly but steadily, drip by drip, to multiple thousands of dollars. So I think it's a very common theme to do some little things right, get those baby steps going, and the momentum builds, the confidence builds, and you just wanna keep going.

Garret (27:54.093)

Awesome, no, excellent advice. Okay, so we're at year end. We've gone through about half of our financial review. Now we're gonna talk about, oh, I've got a surplus, investments. So now assuming that you get to that point, you're financially healthy. So I read the blog, investment allocation's a pretty significant topic. Explain how individuals should approach reviewing and maybe even rebalancing their investment portfolios.

jesse (28:13.695)

Yeah, yeah.

jesse (28:21.426)

Yeah, this is a deep dive for sure, Gar. We probably won't get all the way deep, but I'm going to cover hopefully some of the high-level surface-level essentials here for people to understand. Because I bet the average person out there has heard before of, oh, so-and-so, their portfolio is 70% stocks and 20% bonds and 10% real estate. And it's like, what exactly does

Garret (28:26.425)

That's a podcast into itself. I know.

jesse (28:51.342)

Perhaps more importantly, like why? Why is it that specific fraction or percentage? We call that an allocation. Why is it that specific allocation? So that's a really big part about what I do here at work is working with individuals and families to eventually get to a proper portfolio allocation. And it's very important too, because something we talk about and kind of if you look at the studies, it'll show that when it comes to portfolio performance,

Like 80 or 90% of performance is a function of allocation. And then the remaining 10 or 20%, that's a function of actual security selection. Meaning, allocation is I'm 70% stocks, security selection is well, what stocks or what funds? Yeah, yeah.

Garret (29:37.929)

Actually, hold on. Hold on here, Jesse. It looks like my camera shut off. I don't know. Just give me one second here.

jesse (29:43.722)

Oh yeah, no problem. Oh yeah, it looks like it did on my end as well.

There we go. I can see you now.

Garret (29:55.405)

Yeah, I think it's got a half an hour limit on it somehow. And it's probably, I don't know, it's some kind of setting cause I'm using a direct DSLR as my camera. So yeah, I just have to go in those settings. It might happen one more time, but I'm trying to cap this at around 40, 45 minutes. So I think we're good. So I'll just make a note of that. Make sure that we can just cut that out. 30 minutes. Okay.

jesse (29:59.458)

Hmm. Okay.

jesse (30:08.226)

Okay.

jesse (30:18.047)

Okay.

jesse (30:22.654)

Yeah, yeah. Do you want me to start? Do you want me to start over again on kind of the allocation?

Garret (30:28.749)

Yeah, yeah, let's just do that and I'll edit the other. I'll just kind of go from my question and then I'll edit right, cut right to your answer.

jesse (30:35.342)

Cool, cool. Yeah, it's a, allocation's a really important topic, Garrett. It's something I spend a lot of time, both professionally and on the blog and podcast, thinking about and talking about. And right, it could probably be a podcast unto itself, but I wanna cover a lot of the important, kind of high-level details here. Now, okay, allocation. What exactly is allocation in the first place?

When you hear something like, oh, this person's portfolio is 60% stocks, 30% bonds, 10% real estate, those percentages, that kind of makeup, that is their investment allocation. And if you look at the underlying data of investment performance, allocation is responsible for 80 to 90% of portfolio performance. The remaining 10 to 20%, that comes from the specific

what's called security selection, meaning, okay, 60% of my portfolio is stocks, that's allocation, but then what stocks or what funds are actually inside of that 60%, that's called security selection. So the biggest player when it comes to performance is allocation, is your allocation decisions. And very basic here, just want to keep things hopefully low level, simple, is that different asset classes, stocks and bonds are two examples of asset classes.

Different asset classes live in different places on the risk reward spectrum. So higher risk assets tend to also be higher reward assets. The reason why they're higher rewards is because you're taking a bigger risk. And similarly, lower risk assets tend to be lower rewards. Bonds tend to live on the lower end of the risk reward spectrum. Stocks usually live on the higher end of the risk reward spectrum. And the reason why I'm

telling everybody this is because you and I, Garrett and everyone listening as individuals, we all have specific unique goals out in the future, financial goals. And those goals have specific timelines associated with them and they also might have specific amounts of pain that we'd feel if we don't reach those goals, if we don't hit those goals. So the timeline and then that pain, those two things help us understand how much risk someone can take in their investments.

jesse (33:00.17)

Short-term goals, for example, you have less time to get there. Therefore, you can't take as much risk and cash or bonds or more stable investments are the proper allocation choice for short-term goals. But longer-term goals, where you can afford a little bit more time, you can take a little bit more risk and allow your investments to grow, that's where higher risk, higher reward assets, like stocks or alternatives or some forms of real estate,

That's where those investments are more appropriate. So I'm gonna pause there, because it's pretty deep, but yeah, what are your thoughts?

Garret (33:31.509)

Okay. Yeah, no, I think, you know, okay, investment allocation, I get that. But in the context of a year-end review, what are we looking at exactly? We're looking at performance, like something like a stock. Is it like, oh man, like I lost 20% on that. Do I sell? Do I keep my real estate portfolios done really well? Like, what are we doing on a yearly basis?

jesse (33:41.378)

Sure.

jesse (33:56.146)

Yeah, yeah, good question. I should. And you asked that originally. I should have gotten back to that point. So on an annual review basis, we're doing a few things. One, we're understanding, is our allocation still appropriate for our goals? You know, have our goals changed during this year? And if our goals have changed, do we need to change our target allocation? The second thing, which you just alluded to, is rebalancing, which is to say, okay, maybe our goals haven't changed and therefore,

An 80-20 portfolio is still appropriate for us, but this year the market ripped. The stock market did great and the bond market did so-so. So we started the year at 80-20, but because the stock market did so well, now we're at 85-15. And so I'm going to rebalance back to 80-20 to bring it back into my target allocation, to bring my portfolio backwards. When it comes to specific stock selection, Garrett, which you just mentioned, now I'm a proponent of the fact.

that average people should not be doing specific stock analysis. The reason why is because, let me ask you, this is a good pop quiz for you, Garrett. Take a Wall Street analyst, someone who spends their 50, 60 hours a week studying stocks. How many different companies do you think that one analyst, just one guy down in Wall Street, how many different companies do you think he's really tracking?

Garret (35:23.629)

I would say dozens if not hundreds.

jesse (35:26.422)

Right, that's a good guess. The answer is usually much less than that. Usually it's six or eight or 10, 15, something like that, where someone says, you know, I work at JP Morgan Asset Management and I am the go-to expert when it comes to Costco, Pepsi. Like that guy who's got, he's the go-to guy at JP Morgan for a few, he's studying like six or eight or 10 companies. And that's all he's doing all week, 52 weeks a year.

Garret (35:30.708)

Oh, okay.

jesse (35:54.014)

And there's one of him at JP Morgan studying Costco and a few others. And then he's got a counterpart at a bunch of other firms who are similarly covering the same number. But you realize like there are a few people in this world who all they do with a lot of time every week is figure out whether Costco is appropriately or inappropriately priced in the market and whether you should be buying it or selling it. And then you have some Joe Schmo who works as a plumber.

and he spends 30 minutes after work once a week listening to my uncle Jim Cramer, who yells at him from CNBC and says, Costco's a buy. And is that plumber smarter than all those guys on Wall Street and over the long run, going to beat all those guys on Wall Street in terms of being right or being wrong in his opinions? You start to realize that individuals playing single stocks is a losing game for those individuals. So anyway, a bit of a diatribe. I went down a bit of a rabbit hole there, but.

Garret (36:49.389)

Yeah.

jesse (36:52.47)

That's just my thought.

Garret (36:53.213)

No, that's all good. Um, he's not really your uncle, is he? Was that just a bad joke? Okay, I had to ask.

jesse (36:56.65)

No, no. Yeah, that's just a classic joke from the best interest. Yeah, yeah, same spelling of the last name, not my own.

Garret (37:06.355)

Yeah, no, that's hilarious. Something that I wanna get back to, you had mentioned emergency funds and making sure at the very least that you can cover your insurance payments. Let's dive into the importance of insurance and estate planning and personal finance. What's some basic steps that maybe our listeners should start with just for these?

jesse (37:25.962)

Yeah, so I think the average listener should think about insurance. We'll start with that one. Insurance is there to cover expenses that you wouldn't otherwise be able to handle with your current lifestyle. In other words, you're knowingly paying insurance premiums that you'll likely never fully recover in order to reduce your exposure to expensive risks. So an example might be the one I talked about earlier. What if I get in a car crash on my way home today?

and I, you know, heaven forbid I break my spine. Like that might be a multiple $100,000 expense that I couldn't cover out of pocket. Well, I need health insurance for that very unlikely but very expensive potential reality. Whereas pet insurance, which is something that at one time I owned, and then I really thought about it and I kind of changed my mind on insurance. Pet insurance is pretty expensive insurance on the whole, if you actually look at the insurance spectrum.

And the idea is there, well, boy, sometimes you go to the vet and it turns out it's 700 bucks and it was more than you wanted to pay. That's all true. But I can cover $700 expenses from my normal day-to-day life. Or my emergency fund, exactly right. And if there was ever a time when my dog needed a $100,000 surgery, as much as I love my dog, she's a great girl. But we're going to have to have a really hard conversation because I'm going to have to do

Garret (38:40.029)

or your emergency fund.

Garret (38:55.054)

Yeah.

jesse (38:55.11)

I don't think that is a, unfortunately, I don't think that's a wise use of money. Now that might get me a lot of hate out there, but we all have a number. For me, maybe it's 100. Correct, correct.

Garret (39:06.085)

Well, it's priorities. I mean, you know, people have to choose. If your dog is that important to you, then you make that priority. I mean, that's fine. Then pay the insurance, right?

jesse (39:12.97)

Right, exactly. And exactly right, Garrett. That person with that priority, maybe pet insurance is the right move for them. Totally right.

Garret (39:23.341)

Yeah, but things like mortgage insurance, right? I mean, that's kind of the one that popped into my head because if you break your spine or, you know, God forbid anything else, you can't work. So therefore you won't have a roof over your head, right?

jesse (39:28.716)

Yeah.

jesse (39:32.93)

Right.

jesse (39:36.318)

Yeah, yeah, exactly, exactly. So that's why, I mean, insurance is great as long as it's used in the right way for the right reasons. Another rule of thumb, one of my rules of thumb, I mean, insurance and investing should never be mixed. Meaning there are some products out there that are sold as both life insurance products, which is insurance against your untimely death, but they're also sold as investments.

which on its surface sounds kind of cool. You're like, wait, so I can put money into this life insurance product, play these life insurance premiums, and then if I don't die, well, maybe eventually I can convert this policy just into cash. That sounds wonderful. The problem is when you actually look at the math and you see how much those monthly premiums are, you realize you would have been much better off just buying a simple life insurance policy.

taking the difference in monthly premiums, because the simple policy is cheap. Take the extra money that you would have paid on the more expensive insurance policy and just invest that money into your real estate. I know a lot of listeners like real estate, your stock and bond portfolio, you're gonna be better off that way.

Garret (40:46.585)

Yeah, no, I think each case is different, right? I mean, I have investors at company and say, well, with the thousands and thousands I've paid for property insurance, why don't I even, I shouldn't even have that. I could have saved up and if I have a flood that's 30 grand, I'm just gonna pay that. However, the underlying point in there is the liability and the risk of somebody breaking something or your renter dies on a fire. And now you've got millions and millions of dollars that need to be covered, right?

jesse (41:00.92)

Mm-hmm.

jesse (41:12.926)

Yeah, yeah. And that's also a little bit of Monday morning quarterbacking or results-oriented thinking. I mean, it's very easy after the fact to say, well, you know, I paid insurance for 30 years and nothing bad ever happened. I mean, that's right. And that's, you know, you were one of the cases where that's true. Other people bought insurance and then the next week something terrible happened. And they were very glad they had that insurance. So anyway, just food for thought.

Garret (41:39.53)

Yeah, 100%. So let's speak about again, in the context of that financial review. Now you've done your analysis, we're about 80% through your sort of list of things there. What do we do in terms of our goals? How are we setting our goals for the next year based on what we have there?

jesse (41:45.783)

Mm-hmm.

jesse (41:56.946)

Yeah.

Yeah, and real, I just realized, Garrett, I owe you a little bit more of an answer. Can I talk about estate planning just super quick, and then we'll go to goals, because estate planning, the idea of estate planning, there's two big topics here. One of them is called a life file. At least that's what I call it. So I think you don't know when you're going to get hit by a bus. It's sad to think about, but it's true. So I think people out there should put together what I call a life file, which is simply a binder or a box of...

Garret (42:07.193)

Yeah, sure. Yeah.

jesse (42:27.082)

important documents, important passwords, important account information that you might need to hand to another person in your life or a partner or someone like that in case you pass away. Otherwise, you are going to leave your next of kin with a really big mess. It's something I've seen firsthand. When you're grieving a loved one, or really what's going on here is when your loved ones are grieving you, that's what we're talking about here. When your loved ones are grieving for you, you don't also want them to have to be

calling banks and calling the utility company and calling the cable company and calling them, let them grieve and let them know that the financial side is all organized and taken care of. Okay, that's topic one, the life vile. The second topic are your big three documents, a will, a healthcare proxy, and a power of attorney. If you don't have those, if you have a family and you don't have those three documents, you should probably change that.

If you're single and you're early 20s, you might not need those three documents yet, you're probably okay. But once you have other people in your life who you're responsible for, you should probably have those big three documents. I'll pause there, Garrett. Any questions or thoughts or do you want me to go on to the goal setting?

Garret (43:37.821)

No, no, I'll just add something there. A mentor of mine, a lawyer, actually, when we were doing our will, it surprised me. He was in his 60s. And he said he reviews his will annually, like every single year. And I'm like, David, like, what could change? And he said everything. You could have a trustee that you no longer want to be a trustee. You might have different things, people that you want to write out of your will or just, hey, now it's time to put

jesse (43:39.905)

Yeah.

jesse (43:54.656)

Mm-hmm.

Garret (44:06.937)

you know, a do not resuscitate thing or whatever, or something into your world, because you're kind of getting up there. So yeah, he was advocating for us to do that on an annual basis as well.

jesse (44:17.918)

Yeah, I mean, I can understand it. An annual review of a will is maybe on the more aggressive side than I've heard before, but listen, I mean, it's so much better than the other stories. There's a lot of stories out there of people who they wrote a will when they got married and then they haven't thought about it until they retired. And that's a big problem. So, right, whether it's annually, every few years, every five years, I mean, it's definitely something you want to have in your mind of.

Do we have one and is it in an updated fashion that we find acceptable, for sure. Cool.

Garret (44:51.245)

Yeah, yeah, no, the take home message is just make sure that you're aware of it and you're, you know, analyzing it on a regular basis.

jesse (44:58.263)

Yeah, yeah, yeah.

Garret (45:00.705)

Okay, yeah, let's talk about goals for the year.

jesse (45:03.042)

Cool, so when I think about financial goals, I've always used what's called the SMART framework. Having read about it a little bit, I understand that some people disagree with the SMART framework and that's okay. So SMART is an acronym in this case, and it stands for specific, measurable, achievable, relevant, and time-bound. And so we can kind of go through those one by one and realize, okay, a specific goal, save more money.

It's not specific enough. Give it a dollar value. Give it a number value. Be specific with your goals. Measurable. Now, thankfully, most money goals are measurable. I can think of some that aren't. Some goals, if someone says like, my goal is to feel better about my money. That one, you might wanna try to find a way to measure it. It might just be the feelings inside your head. I get it, but the more measurable, usually just the better goal it is.

achievable. When we're talking about annual goals here, let's say someone's listening to this and they're starting more or less at square one in their financial life. Their annual goal should not be, I want to become a millionaire. Maybe that can be their lifelong goal, but for their 2024 goal, they should pick something that's achievable, something that's realistic. Relevant. Okay, in this case, maybe the relevant isn't the most relevant to financial goals. I'm not sure, but

You know, you want it to be a goal that's relevant to your life. I suppose we can use the R there. And then time bound might be the most important one here. You know, the clock is ticking. So maybe you want to have weekly goals or monthly goals that lead up to your annual goal. But either way, if you're setting 2024 goals for yourself right now, it is a time bound goal. And you've now got 365 minus five days, we're recording this on January 5th, to reach that goal.

Garret (46:59.949)

Yeah, that's really, really good. One thing that came into my head is we're talking about goals. What do we do throughout the year? I mean, how are we measuring those financial plans into our daily life? How do we know we're on track? How often should we be checking? Are we gonna wait till the end of the year?

jesse (47:19.434)

Yeah, that's a great question. It gets a little bit into the whole personal side of personal finance. I do know some people who log into their bank account or log into their budgeting app multiple times a week, if not daily. That's a little bit too intense for me personally. I would say though, I probably log into my kind of my daily bank account, meaning like the bank account that I do auto payments from, the bank account that my paycheck goes into.

I'm in that bank account maybe once a week, three times a month, something like that, just to look at it and say, do all the payments on my credit card, are those all real? Do those all make sense? Did my paycheck hit? Am I in any sort of trouble of like, am I going to miss my next payment for X, Y, and Z? So I do think people should be paying attention to their finances and thinking about their goals at least once a month. I think going more than a month.

without even having the idea of your personal finances cross your mind, that's too much. But beyond that, once you get once a month down, is it every week, is it every day? That's a little bit personal and up to the individual.

Garret (48:33.645)

Yeah, no, that's really good because my next question actually is, you said it, personal choices, finance. Let's talk about balance. Where is that intersection of personal finance, management, overall lifestyle? Like we can go too far to the other way, but now we're not living. What do we do, especially for like young professionals?

jesse (48:41.207)

Hmm

jesse (48:53.132)

Yeah.

Yeah, it's a challenge. It's a challenge. It's one of the first things I wrote about on the best interest was the struggle at the time. I was 27 and the struggle of saying, here's my one paycheck, which is fine. I'm working as an engineer. It was a solid paycheck, but I have to pay down student loans and I'm paying rent and I'm paying for groceries. My friends are all doing pretty cool stuff and I want to do that cool stuff with them. I also know that I should be saving for retirement.

I don't know how much or exactly why. At the time, I wasn't sure, but I knew it was something I should be doing. And so you have this one dollar that can only be spent one way. And once you go out with your buddies and buy a beer with that dollar, it can no longer go into your retirement account. But once that dollar goes into your retirement account, it can no longer go buy a beer with buddies. So you do have to find the balance. And again, everyone's gonna be a little bit different, but I wanna tell a little bit of a cautionary tale.

I lived in Wisconsin for a year. It was my first job out of college. And I had a buddy at work who I went over to his apartment and it was immaculate. And I still remember the day, I don't think he's gonna listen to this podcast, so hopefully he won't mind me telling this and he's anonymous. But I still remember the day he came back to his apartment with a turntable and speakers and like a pile of new vinyl records.

And the whole thing was like a $3,500 purchase because he basically got the biggest, nicest speakers he could buy. And it kind of started this personal finance conversation where I was like, holy cow, man, like, that's amazing. And we just started talking about the different ways that he and I spent money. And I realized, and he kind of realized too, that he was saving $0. I mean, he was living paycheck to paycheck, granted he was 22, so he had enough time to make up for that. But basically it's that.

jesse (50:48.25)

he was all the way on one side of the spectrum and really didn't have any balance when it came to savings in his life. And if he chose to continue that forever, I mean, essentially he would be unable to retire in the long run and his finances would always kind of be on a knife's edge of one emergency away from being in real trouble. So I just tell that story to say.

you know, when you're getting that paycheck and you're a young adult, which was part of what you asked Garrett, like it is really tempting to go buy those really cool things you've always wanted. And I think people should, as long as they also have a bit of the balance of putting money away for a rainy day, an emergency, and also putting some money away for their long-term goals.

Garret (51:38.573)

I would echo that because I think if you slow your emergency funds and your investments just a little bit, you're still getting there with the balance of being able to spend money on a trip or some toys, but you don't have to go hog wild in both. Otherwise, you're not going to be happy and you hear these people going, well, I could get hit by a bus tomorrow. And yes, you could. So make sure you enjoy life, but you just have to have balance.

jesse (52:02.35)

Correct, correct. And it's like the YOLO mindset goes both ways because it's like, you're right. You only live once and you should enjoy it while you last, well, while it lasts, you should. And therefore you should spend money today. But the other side of that coin, and this is something a mentor of mine, his name's Phil Pearlman, and if anyone out there wants to look him up, he's worth looking up. Phil talks about how your future self is almost...

Garret (52:15.658)

Mm-hmm.

jesse (52:30.974)

a guaranteed reality, meaning here we are on January 5th, 2024, Garrett, on January 5th, 2025, based on actuarial data, there's like a 99.5% chance that Garrett will be here a year from today and Jesse will be here a year from today. Those versions of ourselves are almost 100% guaranteed. Maybe not quite, but almost. And you need to think about them too.

Because they're only living once. And you kind of expand that out into the future and you realize that your 50 and 60 and 70 year old self, maybe they're not 100% guarantees, maybe they're not 97% guarantees, but they're probably gonna be there too. And if they get to that point in their life with no extra money, because the version of you today decided to spend it all and do something really stupid, you're doing future you a real disservice. So if you internalize the fact,

that future you is pretty darn real, and YOLO applies to them as well, and you should set them up for success. In the long run, you're really doing yourself a favor.

Garret (53:42.257)

Yeah, no, great advice. So before we wrap up, let's summarize because we got really deep into the weeds a little bit. I know that you had started off by kind of saying, I think it was seven or eight things of your actual financial review. Why don't we end the podcast by kind of just mentioning those things, kind of summing up for the listeners.

jesse (53:56.12)

Mm-hmm.

jesse (54:02.414)

Sure, let me see if I can think of them off the top of my head. Income, spending and saving, investment allocation, net worth statement, insurance and estate planning, and then your goals, reviewing past goals and thinking about goals for the year ahead.

Garret (54:24.101)

Fantastic. All right, I love it. Okay, so before we stop, I ask every single guest this question. So I have to hear what you have to say. This is the Investing to Win podcast. How do you define success and what does winning look like for you?

jesse (54:39.662)

Great question. And I know we've been talking a lot about finances today, so I suppose in the financial realm, success to me means flexibility. So that can be flexibility in my time and also flexibility in my money. You know, they say money doesn't buy happiness. I really do think that's true. But flexibility does buy happiness. And when you have your finances all taken care of, you can buy yourself quite a bit of flexibility.

Garret (55:11.425)

Love it. No, I, well, I'm an entrepreneur, so time is very important to me. I chose this grind because of the flexibility of my time, regardless of what the stress might be. So you know what? This has been great. It's been a lot of fun. Time flew by. Hopefully it did for our listeners as well, and they learned a ton. So thanks for connecting, and thanks for coming on the show.

jesse (55:32.498)

Awesome, yeah, thank you for the invite, Garrett. I really enjoyed it. And yeah, everybody out there, hope you enjoy. Thanks again, Garrett.

Garret (55:39.385)

All right, take care.