Want to learn how to build wealth?
In today’s interview, I speak with Sarah Fallaw, owner of DataPoints, a technology company that provides financial planners with psychometric assessments based on the data and research from her father, Dr. Thomas Stanley, author of The Millionaire Next Door and The Millionaire Mind.
The behavioral factors that have proven to build wealth
We break down the 6 scientifically proven behavioral factors that influence the likelihood of success of transforming one’s income into net worth. These are the important factors of building wealth on your own and maintaining that wealth, eliminating the notion that the only way to become wealthy is to have it passed down from generation to generation. They are the sets of behaviors and experiences that have been shown to relate to net worth, regardless of age, income, and percentage of wealth that has been received through gifts or inheritance.
In its most simple form, it really only boils down to just a few things. You must be disciplined, spend time increasing your financial acumen, actually caring about your finances and you must be able and willing to do the things required to build wealth, regardless of how tough it may or may not be. There is no black box or magic pill. It’s simply hard work, dedication and increasing your knowledge that will cause you to truly transform your income into net worth and build lasting wealth.
What you will learn:
- How your parents shape your ideals around money and how that relates to your ability to build wealth from an early age.
- The important factors to build wealth on your own and maintain that wealth.
- How deciding where you are going to live that can ultimately impact all of your other spending decisions.
- How overconfidence has a negative correlation to build wealth.
- Is having a “household CFO,” where one spouse is in charge of managing the household finances, a benefit or determent to building wealth for your family.
- Why setting aside time to review your finances highly increases the likelihood of being wealthy and why multitasking decreases the probability of accumulating wealth.
- How the noise of social media hinders your ability to transform income into net worth.
- Why the statistics show that doctors score well below the average in social indifference.
- What myths around investing are still holding true and how education is helping debunk these myths.
When it comes to lifestyle inflation, where do you draw the line? – Ryan’s article on KevinMD.com
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Full Transcript: 6 Proven Behaviors That Build Wealth
Ryan Inman: Thank you so much for being here. We have got a ton of great things planned for 2018, super pumped on it. The soon to launch new website at financialresidency.com and really all the exclusive content that I’ll be creating for our community. Today’s interview is one that you’re not going to want to miss. You’re going to want to hear the whole thing. I talked to Sarah Fallaw, owner of DataPoints, which is a technology company that provides financial planners with psychometric assessments based on data and research from her father, Dr. Thomas Stanley. You might recognize his name as he’s the author of The Millionaire Next Door and The Millionaire Mind.
Sarah specializes in the measurements of behaviors and personalities, and throughout her life, she was influenced by her father’s work, and as they collaborated together throughout her career, she recognized that he really did have the measures that could predict and help people understand the behaviors that were required with respect to building wealth, and over the past few years, she’s taken the research behind her and her father’s work and created this amazing technology platform that has become DataPoints. Sarah and I have a great conversation breaking down the six behavioral factors that they have scientifically proven factor into the likelihood of success of transforming your income into net worth, and as she states, they measure the patterns of behaviors that can impact the financial success and actual building wealth, and these important factors of building wealth on your own and maintaining wealth. It eliminates the notion that the only way you can become wealthy is to have it pass down from generation to generation.
These sets of behaviors and experiences that they’ve shown to relate to net worth, regardless of your age, your income, your percentage of wealth that has been received through gifts or inheritance, and I find it fascinating that the thing that surprised Sarah the most when we were talking, when I asked her this was when she lays out all the research and she sees all the data laid out, it really only boiled down to just a few things. It was discipline, spending time learning and increasing your financial acumen, actually caring about your finances and being able and willing to do the things required to build wealth, regardless of how tough it may or may not be.
To basically sum it up, that was a long-winded way of saying that there’s no black box. There’s no magic pill. It’s simply just hard work, dedication and increasing your financial knowledge that will actually allow you to transform your income into net worth and building true wealth, and while my firm Physician Wealth subscribes to the tools that DataPoints offers, they’re not readily available to the public but Sarah gave the Financial Residency community a huge gift for the new year. It was the ability to take the shortened versions of these three assessments and so I’ll be posting the links in the Financial Residency Facebook group, our community group, so make sure you go there and take them and leave a comment and let us know how you like them and what they told you, and hopefully you learn something about yourself.
Sarah also just finished up her new book, which will be released in 2018, so be on the lookout for it and while she couldn’t go into too much detail on it, it will basically be looking at the behaviors in The Millionaire Next Door 20 years after the fact and seeing how those measurements that her father had started with and created in 1996 when the book first launched, to see how those have held up over the test of time and I really, I just can’t wait to read this. It’s going to be a must read in 2018, so be on the lookout for it.
Also before today’s show, I want to make sure to announce this important disclaimer. I am a fee-only financial planner and a fiduciary for my clients, but let’s be honest, I don’t know you or anything about you. The show is for educational purposes only and shouldn’t be taken as legal or financial advice. Please consult your attorney, CPA or your fee-only financial planner before you take any action or make any important financial decisions.
Speaker 2: Here is this week’s digestible tip.
Ryan Inman: The brand new year and you set 1,000 goals that you want to crush going into this year. You’ve got this like either mental note of what you want to accomplish or you’re one of the few people that actually write down your goals but the odds are is that there’s way too many of them, and what realistically happens unfortunately is that you’re going to complete just a few of them and many are going to be left without that nice little pretty check mark next to them or crossed off that list, and to make an even sadder revelation, the goals that you actually really want to accomplish, they’re called the BHAG goals or those big hairy audacious goals, the ones that you really want to do, those are usually the ones that are left undone.
My tip is to create one goal that you really want to accomplish this year. Make it a stretch goal, something that you might not actually be able to complete in just a year’s time, and then take that goal and break it into smaller goals, ones that could be completed in let’s say six months. Then take those smaller goals and break those into more manageable goals, maybe in a one month or a three month period that could be accomplished. Here’s a quick example. Say I wanted to lose 50 pounds, which let’s be real, I probably should. That’s a pretty tough stretch goal. If I could break that into a smaller goal, let’s say 25 pounds over the next six months, then that doesn’t sound as crazy or tough to do, and then I break it into smaller goals, well I need to lose then eight pounds in a quarter. That’s two to three pounds in a month. Heck, that’s less than a pound a week. Can I do a pound a week? Yeah. It seems pretty easy.
All of a sudden, that goal that seemed insane, seems quite manageable, so figure out what that one goal is and break it into smaller and smaller, manageable goals. Write it down, actually write it down and you’re going to accomplish it.
Ryan Inman: Sarah, thank you so much for being on the show.
Sarah Fallaw: Thank you for having me.
Ryan Inman: Absolutely. I’m thrilled and super excited to have you on, so as you know, we talk to young physicians. That’s basically the listener base. What I want out of our conversation here is to really talk about and let them walk away with some really actionable thoughts on building wealth or true wealth potential, so if you could, can you describe the behaviors around really building true wealth?
Sarah Fallaw: Absolutely, so in terms of the kinds of things that really anyone would have to engage in in order to meet any goal, so think, when we think about the things that are important to building wealth, they include aspects that really are related to things like discipline so we cover those with a measure called frugality, so we look at really the ability to spend in a way that’s conducive to building wealth, also things like focusing, being able to attend to kind of the minutia of financial management, also spending time planning. Those tend to be kind of the things when you think about when we know or rather when we’re studying and then understanding somebody’s ability to build wealth long term.
Ryan Inman: Got you. Are those like the key characteristics or factors when you’re looking at like will someone be successful, will they be able to achieve true wealth?
Sarah Fallaw: Right, so really we look at those three that I mentioned as well as things like confidence in financial decision making, so the ability to make wise decisions and not necessarily be overconfident and try to beat the market for example. The other ones that are really important in terms of their ability to predict net worth long term include aspects that we call responsibility or aspects of responsibility, so individuals that view themselves as able to impact their financial success tend to be more financially successful. That sounds pretty straightforward but that’s in comparison to individuals or really any of us that think that other things are impacting us so okay, well I can’t build wealth because of this or the economy’s bad so I’m not going to be able to meet my financial goals, so individuals that view outside elements as impacting their ability to build wealth often struggle to do so, and there are other areas as well like social indifference and we can talk about that one and that’s really, the viewpoint that I know, and again especially if we’re talking about physicians, I know that maybe my colleagues or maybe folks that I went to school with are driving and buying and wearing certain things but I’m not going to do that.
I’m going to be indifferent to what’s going on in relation to consumer behavior and we know that that predicts net worth as well.
Ryan Inman: That’s the concept of the keeping up with Joneses, right?
Sarah Fallaw: Yes, exactly, yeah.
Ryan Inman: What I’d like to do, we will definitely talk about each one of these is I’d like to go through each factor and why these factors were chosen and kind of how each one maybe interrelates or not to give strengths and weaknesses on will someone who displays these three factors are more likely to experience true wealth versus someone who necessarily maybe only has one of those three in the part that you were talking about, the core foundation. If you don’t mind, can we tackle each one of those things? I know we talked about a few of them but let’s maybe just start with frugality and kind of go from there.
Sarah Fallaw: Yeah, absolutely. That’s perfect. Two, you know I should mention that really when we’re looking at the factors that we studied and these are the same concepts that came out of The Millionaire Next Door and I then studied for a long time, the really factors that are important in building wealth on your own and maintaining that wealth, so imagine again that you are someone that doesn’t have an inheritance, that wasn’t given a trust account, that doesn’t have any inheritance coming or anything like that, so when we think about these factors, we’re thinking about it in the context of I’m trying to build wealth on my own. What are the characteristics that I need to exhibit? What are the behaviors I need to engage in to do that on my own?
I just wanted to bring that up too, but yeah we can start with frugality. For sure, that clearly was one of the main, I guess the most interesting pieces that came out of the work that my father did for the many years that he studied self-made Americans and it’s a focus and a behavior on just really being committed to spending in a way again like I said that’s conducive to building wealth, adhering to a budget, not spending frivolously and that really is one of the key factors and being able to transform income into wealth.
Ryan Inman: Yeah, I believe he called it the cornerstone of wealth building, right?
Sarah Fallaw: Yes.
Ryan Inman: If someone necessarily, I mean there’s all sorts of levels of frugality, right?
Sarah Fallaw: Sure, absolutely.
Ryan Inman: Does it mean that you truly have to be like the most frugal person possible to build wealth or is it just some behaviors within, because frugality is kind of a big thing. Is it just some parts of frugality in your life or does it really need to be shown throughout your whole life?
Sarah Fallaw: Well, I think there are a couple of different things I’ll say about that. First, what we know is that if we know and from the research that we’ve done, we know that individuals that grow up to be financially successful often had parents that were frugal but at the same time, those parents often were communicating why they’re being frugal so it wasn’t, we’re not going to do everything that our neighbors do. Here’s why we’re not doing that. We have these other goals. We have these other financial goals, so we’re educating them along with being frugal and demonstrating that, so even if someone obviously didn’t grow up in an environment like that, they can still change their ways and certainly that’s why we are committed to working with advisors for example that really want to help their clients improve behaviors.
This one in particular is one that can be improved over time but you asked the degree to which you have to be frugal. I mean of course that depends on what your lifestyle is and how quickly you want to reach your goals, so do you have to give up your Starbucks? I don’t know. It just depends on where you are today and how quickly you want to reach your goals. It’s also an attitude, so we measure it behaviorally but certainly it’s an attitude as well but that attitude has to be displayed through behaviors in order for it to be effective.
We have friends and acquaintances that will say, well I’m very, very frugal but then you know that they’re spending above their means in places that don’t really make sense, so it really does depend on the behavior and on your situation.
Ryan Inman: That makes perfect sense. I was kind of referring to the person that not necessarily just doesn’t go to Starbucks because it costs $4 or $5 and could make it at home for $1. I was more thinking along the lines like consistently spending or overspending, shopping for the best deals and making sure that is it all aspects of their life have to be frugal or is it those big important things like buying a car and things like that?
Sarah Fallaw: Right, so let’s take the example of even where you live, so starting with that and what we know is that when you make the decision about where you’re going to live, that can ultimately impact all of the other spending decisions because of the influence of other people around you. While certainly it’s small things, these big things are important and not necessarily the car portion of that but really where you live can really influence the rest of all of your spending decisions. From that perspective, thinking about where you either rent your home or purchase your first home, that can lead to trickle down spending if you will that can impact your ability to build wealth long term.
The big things matter certainly but then consistency in spending later with those smaller purchases matter as well.
Ryan Inman: I love that you put in consistency because I think that is something that most people will have a big challenge with when it comes to frugality is you might be frugal every once in a while, you might be frugal for a few months and then all of a sudden, Black Friday comes and you’re like oops.
Sarah Fallaw: Exactly, yeah, yeah and when you think about dieting or trying to run a marathon, you can’t just wake up and run five miles to start training if you haven’t done that in years. It’s a slow process and it has to be, as you said, as we’re saying here, done consistently for it to be effective.
Ryan Inman: That’s a great analogy. I’d like to go to the next one. I believe we’re talking about confidence and what exactly do you guys define as confidence, because I would think it would be different than what I know that you guys mean from it.
Sarah Fallaw: Yeah, so really here we’re talking about confidence in financial decision making. Certainly that can be related to just your overall self esteem and that kind of thing, but here we’re really talking about being even a leader in your household related to financial management, also having knowledge and spending time on those things so that’s generally what relates to confidence in financial decision making. It really covers things like being comfortable in making large scale financial decisions and not second guessing yourself and that kind of thing. We tend to find those that are confident, again are able to build wealth long term and I think I mentioned this earlier but we can spend a little bit of time on this too because it’s a fun one to talk about, the overconfidence thing so I think the Bitcoin factor that we’ve talked about before, so if you’re very overconfident, then you have a tendency to assume that you can beat the market for example in investing and that kind of thing.
That’s not what we’re talking about here. What we’re really talking about here is having what we often call effective confidence, so enough confidence that allows you to make decisions for your household that will ultimately lead to financial success long term.
Ryan Inman: Perfect, so it’s not referring to overconfidence in the sense that you’re saying I’m smarter than the rest, I can beat the market.
Sarah Fallaw: Exactly.
Ryan Inman: You’re talking about what areas of your financial life, not just investing that you view yourself as confident or not as confident, the emotional side of it.
Sarah Fallaw: Right, exactly, yeah, and I think that’s one again to remeasure thing behaviorally and the way that we see individuals improve in this area, especially if they don’t have any knowledge about financial management is to study. Essentially, in some ways it’s like being in school again but it’s studying, it’s reading, it’s obviously talking to financial professionals and building that knowledge so that you have the confidence to make decisions that are in line with your long term financial goals.
Ryan Inman: You mentioned a few things. One is not having the necessity of a financial acumen, not having enough financial knowledge and to go study and read up and I would highly suggest that anyone listening, obviously I’m trying to help you through the podcast and some of the other content I’m creating but go research and pay attention to your finances. Learn what you can before you talk to anyone that could potentially help you manage or sell you some insurance or anything. Read up, study up, become more confident in this and I believe this is where you’re going with this confidence thing. Become more confident so you know a little bit about what you’re talking about and you also know how to protect yourself from someone who is knowing that physicians don’t really have a lot of financial knowledge. You never took any courses during college or training or med school that really helped you out in this.
Even though I think they should, it’s well known that they didn’t and that most physicians come out without really any financial knowledge so read up, study up, pay attention, gain confidence in this. One other point I wanted to bring up Sarah was working with clients at Physician Wealth, the clients that are married tend to have a household, I think of it as household CFO. One person is responsible for the finances and the other person almost checks out and I’m wondering do you think that’s, and I now we can talk next about responsibility but do you think that’s somewhat to do with confidence as well?
Sarah Fallaw: You know, I think that that has to do with a couple of different things. I think that number one, it depends on the couple, especially if it’s dual income. If the household CFO is taking care of everything and the other member of the household is really focused full time and maybe working many, many hours, it just may be a lack of time and a lack of energy to take on anything else within their household, so I could see that as part of it as well. Another piece is that it’s maybe a lack of interest so for total disclosure, finances from a how do I get into my, rather how do I balance a checkbook and all the mechanics of it is not something that I’m interested in in terms of my hobbies or things that I like doing so I’m more on the artsy side, if you will, so it could just be a lack of interest, but I take obviously because of the work that I do, I take an interest in it and want to learn now and luckily have had resources to do that, so it could just be a lack of interest but there are a couple of different reasons why somebody might check out, if you will.
You don’t want that of course and certainly for individuals who have ever experienced a loss in their life, so where one member of the household passes away, maybe that was the household’s CFO, being able to have the knowledge and the skills within this particular job if you will is really important.
Ryan Inman: I’m curious because you self diagnosed yourself as somebody more artsy and not super interested in the aspects of personal finance. If a physician was like you but not married to someone that does like it, they’re kind of their own CFO if you will, how do they go about understanding the behaviors that are causing or potentially could cause them to not have true wealth potential or not really build wealth?
Sarah Fallaw: Right, yeah, just to clarify, so I think there’s a difference in the day to day management, paying bills, that kind of thing and overall financial health of the household. That strategic view of what’s going on from a financial perspective, so when I was self disclosing, now I feel like I’m in the therapist’s room but I have that, I want to know what’s going on from a strategic perspective but I’m maybe not interested in balancing things and all of that. That’s not something I’m interested in, but there are two different aspects to that household financial manager role, but if you have a household and you’ve heavily worked with folks like this, where both parties aren’t, maybe that’s not their skillset and their interest areas, I think that what’s been helpful for me is for someone, whether that’s someone in your household again, if that’s not the case or a professional to help and demonstrate what those long term goals are, what do you want to do with your life and how is money allowing you to be able to do that? Even in starting our own business, that becomes very important to us to understand those big long term goals and then the individual behaviors that allow us to get there, well those are things that we have to improve on or be aware of those within each of us.
I say us, I’m referring to our household financial manager or officer, if you will.
Ryan Inman: Yeah, I didn’t mean to put you on the spot there, diagnosing and all that but I think it’s really interesting and it was almost like you can outsource some of it but you can’t outsource everything, so even if you’re not really interested in this, in order to achieve the goals that you want, you will need to do some research and some study to gain more confidence and I think this segments perfectly into responsibility and taking some responsibility so that also could seem quite generic but I was wondering if you could discuss the next factor of responsibility.
Sarah Fallaw: Yeah, so this one in particular, I think maybe goes hand in hand with that aspect of oh I’m just going to let someone else take care of this and I don’t need to think about this. It also goes along with self esteem in that some individuals feel that they just really can’t do anything to improve where they are. This is just how I am. I can’t change but those who have sort of an effective level of responsibility, we tie this factor to what’s known in psychology as locus of control. There was actually a paper recently that looked at that as it relates to financial behaviors but those who have a really high internal locus of control believe that they can impact their success, so I think and again some of the data that we’ve seen so far, looks like or rather those who can go through medical school for example and make it through and go through residency tend to have a higher, if you will, locus of control.
They are able to say I can get through this. This is a long term process and I have the skills that will allow me to do that long term. Many of the physicians for example and the data that we have, they tend to be a little bit on the higher side on responsibility. If you can take that, believe that you can do things and apply it to financial management, that’s how you can become more effective at it and build wealth long term.
Ryan Inman: Yeah, so this is really talking about responsibility but there’s positive and negative to this, right? Responsible goes I busted my ass and I worked harder than everyone else. I’m here because I worked hard or the other side of it is that’s not my fault because the economy’s bad or the government did this or they’re going to do this. Am I right?
Sarah Fallaw: Right, right, yeah exactly.
Ryan Inman: Just wanted to recap that there’s good and bad.
Sarah Fallaw: Yeah, the high side is I can do this and I’m going to impact my financial success. Being low on the scale or the low on that factor is exactly as you said, other things are impacting me. Other things are impacting my luck in life, if you will. From a psychological perspective, if we were talking about individuals who or we’re talking about clinical issues, we would say that they may have exhibited some learned helplessness that they’re saying I just can’t do this. I’m not going to be able to meet my spending goals or adhere to a budget, that kind of thing and really being able to turn that around and saying okay, if I make these small steps, I’m actually going to impact my financial success long term but it’s going to require me to be disciplined but there are things that I can do on my own to impact that success.
Ryan Inman: We’ve talked about confidence and we’ve talked about responsibility. The next one down the list of factors here and I guess they’re in no order, right?
Sarah Fallaw: Right.
Ryan Inman: In no specific order but it’s planning and monitoring. Can you dive into this because I know that this concept was throughout the book in The Millionaire, so if you could dissect this if you will.
Sarah Fallaw: Definitely, so this is kind of the opposite of what we were talking about before. This is really being attuned to what’s going on in terms of your financial life, really planning, anticipating what you’re going to need in the future and really monitoring what’s going on, monitoring your financial health if you will and individuals that are able to do that, that can set aside time each week or each month depending on what’s needed, that can set and meet goals related to financial management and have an understanding of how they are from a financial perspective, from again checking in on their finances tend to be better building wealth long term and I go back to the example of running a marathon or a half marathon or a 5K if maybe you’re not a runner, but the same things apply.
That’s definitely something that is a factor that can impact your ability to build wealth.
Ryan Inman: You mentioned time, like setting aside time to do whatever it is, budgeting or to review insurance or to read up on insurance or whatever that might be, is there and I’m just trying to think of actual things for the listeners, is there a certain amount of time that research maybe has shown that if they dedicate X amount of hours per week or per month, that they are more likely to be successful?
Sarah Fallaw: That’s a great question. I don’t think there’s a set time. What we do know from the research, even the last or the latest study that we just completed that’s going to be part of the new book is that typically, those who are prodigious accumulators of wealth, so you may remember that phrase and those that really are able to transform their incumbent wealth tend to spend about two to three times more per month in terms of hours on financial management than under accumulators. We don’t have a magic bullet in terms of the actual number but we know that those who spend more time tend to be more financially successful.
Ryan Inman: It’s more like educating yourself and building that confidence, taking the responsibility for it, putting a plan in action and then actually committing to the plan.
Sarah Fallaw: Exactly, yeah, scheduling time to do it each month, exactly.
Ryan Inman: Actually go through it even if it’s not the most fun thing. The people who don’t necessarily nerd out on this like I do, they’re not excited to go like oh, what did I spend this month? Was it over, under or what can we do better? Some people don’t like that and that’s okay but it’s the commitment to actually setting the time aside to still review it and maybe some extra time to become a little more financially educated.
Sarah Fallaw: Yeah, exactly. That’s something that we’ve seen consistently over time, so even that kind of research was done back in 1996 and know that those accumulators of wealth, those who can really transform incumbent wealth spent I think it was about somewhere around 10 or so hours each month to studying and planning for investment really the decisions versus those who are under accumulators of wealth spend about five, so it was about twice as much time that prodigious accumulators of wealth did that.
Ryan Inman: Everyone’s going to be different, right? Some people have some really basic financial planning needs and some have some very intense complicated stuff, but in general, you’re saying that people who tend to be more successful spend about twice the amount of time on this and commitment on this than those that aren’t as successful.
Sarah Fallaw: Exactly, yeah.
Ryan Inman: Awesome. We’ve got two more left of the factors of building wealth, and the next one is focus.
Sarah Fallaw: Right, right. This is, the example here is how many times do you check your phone a day. In some occupations, that is absolutely required and you have to do that but really, this is can you focus. When you set aside that time to study and plan and really understand what’s going on with your financial life, are you distracted? Are you checking out Facebook? Are you doing other things within your household? Are you not really paying attention? It’s really using that time wisely versus being distracted from your goals.
Ryan Inman: I think that’s fascinating and what comes to my mind first that I’ve wanted actually to ask you for a while is people that score low on focus, and this might be people who multitask, and they might be efficiently multitasking but still you’re not focusing on the issues, or what about the people who have ADHD? Are they just doomed forever in building wealth?
Sarah Fallaw: No, I don’t think so. Certainly, they may score low on this. We’ve heard that before but no, the idea here is even if maybe you’re a multitasker in general and you tend to move from thing to thing really quickly and you want to be doing a lot of things at one time, really focus and get the most out of that time. We’re all very busy but if that’s important to you and we know that time spent is actually going to help you as you’ve mentioned, build knowledge, build confidence, then using that time effectively is really the way in which you would improve in this area and you’re not doomed. I get distracted too.
My husband will say things like oh, there’s a rabbit. I’ll turn my head but it really is using that time effectively and being focused on the goal at hand. It’s really like studying, quite frankly, for an exam or anything like that.
Ryan Inman: I think that’s a really good distinction to make right there is that it doesn’t mean that in every aspect of your life, if you had, if you’re great at multitasking, that might be okay but when it comes to specific financial topics, whether we’re talking about the time and everything, when you set up aside that time, it’s really important to be focused during that time to remove the distractions. You can be multitasking everywhere else but in order to have a higher likelihood of achieving true wealth, then they need to be focused when they’re talking or looking at their finances.
Sarah Fallaw: Exactly, yeah.
Ryan Inman: Got it.
Sarah Fallaw: That’s exactly right.
Ryan Inman: That kind of transitions us into the last one here and this is the one that I am the most curious about because at the time that the book was written, social media did not exist, so we’re going to be talking about social indifference and so I really like to have you give kind of a high level what you’re referring to here for maybe those that haven’t read the book and then I want to highlight this in a little bit and understand how social media either influences positively or negatively social indifference.
Sarah Fallaw: Yeah, that’s a great intro to one of the main pieces or themes if you will in The Millionaire Next Door was this ability of those who could transform incumbent wealth to ignore really what was going on around them, not worry about the car that their neighbor just bought or the fact that their friend’s children went to some private school for example, not that there’s necessarily anything wrong with that but really ignoring the trends around them and doing things differently. That was really a theme throughout the book. Another piece of that of course was the fact that many people who were spending and I guess hyper consuming, if you will, often had very high incomes but didn’t have any net worth whatsoever and any wealth really.
Again, fast forward to now where what our friends are doing, where they’re vacationing or the kinds of birthday parties they’re having for their children, they’re all broadcast and you can have access to them at any time. What we found with this factor just as was mentioned in The Millionaire Next Door is that individuals who are indifferent, which that maybe sounds negative but it’s a good thing when you’re trying to build wealth, those who can ignore all of that noise, if you will, about what others are doing, are better able to transform incumbent wealth, so we see that consistently, whether we’re talking about high net worth, high income people, if we’re talking about individuals that are making between $25,000 and $100,000 up to high income earners as well, it’s fairly consistent, so yeah, it’s a really interesting one.
Just as an example, today on Facebook, on a group, a community group within the area that I live, one of the folks on there was talking about how she’s so excited about Bitcoin and that if anybody wants to know about how she’s making money with it to let her know and I thought to myself this is a great example of sometimes why you have to ignore what’s going on around you anyway, so that particular aspect of building wealth.
Ryan Inman: Physicians, society kind of puts this thing on them, it’s like you’re a doctor, you must drive a $100,000 car and live in a 6,000 square foot house and all these other kind of social pressures that they feel and if we’re talking about just keeping up with the Joneses, like they’re almost keeping up with what the society thinks of them and what they should have and so in your research, how do doctors fare in social indifference?
Sarah Fallaw: We typically see them scoring lower than our average, and they’re typically in that low category when it comes to social indifference and I think that’s because kind of what you said and what was alluded to in The Millionaire Next Door, which is there’s this role that they’re supposed to play as doctors, and we see this too as executives or as an attorney or something, some other type of professional role that’s very well defined, just as you said that they’re supposed to have a certain kind of car and live in a certain kind of house and so I think some education would be really helpful. That’s not the uniform, if you will, of someone that’s going to be able to transform income into wealth long term and it will actually hinder them. This piece is really important particularly for physicians.
Ryan Inman: Yeah, and I see how social media can influence this and correct me if I’m wrong but I feel like with social media, everyone posts all the positive, fun, sometimes expensive things that they’re doing. No one says like, oh man, I should have gone to find my wife and I was probably wrong and she’ll tell you I was always wrong but I got to find my wife and it’s White’s third birthday and look at all the cool stuff we’ve got him or we’re traveling to Fiji. You’re seeing all these positive things all over, you’re just bombarded. Is social indifference not just around physicians but like in general? Is that getting lower, like people are feeling like they need to keep up because they’re seeing this on social media all the time?
Sarah Fallaw: Right, you can definitely see that in the research that’s been done, for example with team buying behaviors and individuals that are growing up with this so that is to say they’ve never known a world without social media. We certainly know that it’s changing in terms of the research that we’ve done. We see it across all income levels, all net worth levels and really all job types as well.
Ryan Inman: Yeah, and we talked just before we started recording on this, this tweet that was Mind Your Own Business.
Sarah Fallaw: Yeah, exactly. An undergrad student at a university where a graduate student in industrial psychology is teaching had said that that’s really the best advice or the main thing that’s important in building wealth is minding your own business and I kind of took that to mean ignoring what’s going on around you and really keeping to the business of building wealth and meeting goals, so it was a great quote.
Ryan Inman: Yeah I think it was. That’s why I wanted to bring it up here and I want to switch a little bit to kind of round this out, so let people know what you’re working on. You have a company called DataPoints, which I at Physician Wealth subscribe to. I absolutely love the work you guys are doing there. I’m just curious if you can give us the behind the door scene on what are the trends you’re seeing and what is your data showing you?
Sarah Fallaw: Yeah, so I’ll talk a little bit about the latest study that we’re working on, which is a large scale study looking at investor related decision making, things like being composed and financial acumen. We asked recently and in this last study, we asked the question imagine a friend of yours was going to invest 50% of their savings into the US stock market, what would you tell them? Then we were looking at some of the word cloud that came out of that because it was an open ended question. It was just really interesting to see things like good luck, not in a friendly tone, more like a sarcastic tone and things like risky.
The perceptions of how individuals are viewing investing right now is really sort of a hot topic, particularly for millennials and Gen X and Gen Y folks and so part of the research that we’re doing is looking at again composure and acumen, kind of across all ages and all net worth and income ranges and we’re seeing that there is in fact a relationship between what you prefer from an investment perspective and really what your capacity is to take on risk with your level of knowledge about investing. I think going back to what we were talking about earlier, it’s in everyone’s best interests to spend some time to know the basics and even beyond the basics of financial management.
Ryan Inman: Yeah, I think that’s fascinating. It’s like your need to take risk and your ability to take risk and I’m curious, because you say it was kind of a hot topic right now with investing. Do you think that’s because as they come into working age and they’ve seen this gigantic bull market and market highs, they’re showing an interest in it. Is there anything we could tell from the data from that?
Sarah Fallaw: Yeah, I think that what we’re seeing is a little bit of in some ways sort of the opposite, so we’re seeing individuals that are a little bit more apprehensive. I think that goes back to the good luck comment, a little more apprehensive about investing, primarily because they were very attuned to what was going on in 2008 and 2009, so there’s some apprehension about that in the market or rather in certain age groups if you will. What we’re seeing too that related to investor knowledge, there are certain things that are still kind of myths about investing that are still holding true. For example, we continue to see individuals that will agree with the statement that anyone can beat the market, that kind of thing, and so those continue to abound even if people are apprehensive. We have these two things going on where we’re seeing people apprehensive about investing their own money but yet there still are old views, myths about investing that are still around and I think that education can help with both of those things.
Ryan Inman: Yeah, the internet, Google, all of that is your friend in this. There’s not necessarily always great information out there but there are some key resources that are really good at presenting this information. One last thing on this is out of all your research and all the expertise that you have, what is the most surprising thing that you found out while doing this research about wealth potential or wealth building?
Sarah Fallaw: I think one of the most I guess straightforward things that I found and maybe it’s not that exciting is, and I go back to the example of setting any kind of life goal even before I began this research, of course I knew that there were individuals who could build wealth on their own but to see it laid out that it’s almost as if there are steps to do this but they’re not easy and they’re not straightforward and they require us to really look at ourselves and say can I really do this or where am I going to fall short and then am I willing to make the change to meet those goals? That’s not really a research answer but I think that that’s what was most interesting about the work is that it’s there. It’s in black and white if you will. It’s not a mystery. It’s discipline and spending time learning that it’s just whether or not people are going to be able and willing to do the things that they’re required that can impact how they build wealth.
Ryan Inman: You’re telling me there’s no black box and my mind is blown.
Sarah Fallaw: There are a lot of those but I don’t know how much time we have to talk about this.
Speaker 2: Now it’s time for the Curbside Consult.
Ryan Inman: What are the top tips that you would have for physicians that are transitioning from residency to being an attending?
Sarah Fallaw: I think this goes back to the sort of massive increase if you will in income that comes from that transition. That’s what I think about when I think about that transition phase. I think that my advice would be to celebrate, but not celebrate everyday, especially if you are someone who enjoys celebrations to say all of a sudden, well even though I have this high income, I’m just going to all of a sudden not go out to eat. I’m not going to do anything. I think making sure that you take time throughout your life if you will to celebrate small wins but not do that every single day, I think that’s what trips people up. It’s like okay I’ve got this income. I can go shop, oh yes and I can go do this, oh yes and we can go on this vacation and we can buy this car. I think acknowledging the success that you’ve had and moving into that phase is something to celebrate but people get tripped up when they decide that that’s the norm, that every day’s going to be a celebration of where we are. I don’t know if that helps or if that’s too psychological.
Ryan Inman: I think that’s perfect and I look at it and there’s the White Coat Investor talks about living like a resident for three to five years after becoming a resident, and I look at it as lifestyle creep. You’re going to have some. Don’t let it go nuts. Just how much is in moderation and I actually have an article I wrote on Kevin MD and I’ll post it in the show notes that talks just about this is how much lifestyle inflation is too much.
Sarah Fallaw: Yeah, exactly.
Ryan Inman: Perfect answer.
Wow, what a great interview with Sarah. Man, Sarah, thank you again so much for being on the show. I really hope you guys were able to take something of value out of that interview. I’m always impressed every time I talk to Sarah about what she’s working on and what the data’s telling her and really I can’t wait for the next book to be out. Honestly, I can’t even believe it’s been 20 years since The Millionaire Next Door was released. Time seriously flies.
What was supposed to be released over the holiday was a show with my wife Taylor and I, but with two sick kiddos and that turned out, that got us both a bit under the weather, we weren’t actually able to record the show and I’m really sorry about that. As always, I really appreciate you guys all being here. I know that there’s a lot of things competing for your attention and I’m honored that you allow me to join you for part of your day, whether that’s on a commute or in the gym or wherever you listen to the podcast, so thank you so much for being a part of this community and I wish you a happy and prosperous new year.