Paula Pant: A Different Path to Financial Independence

Our guest on the podcast today is Paula Pant, host of the popular Afford Anything podcast. She is also the founder of affordanything.com, a personal finance website. Paula is a frequent public speaker and is a leading voice in the “Financial Independence, Retire Early” movement, better known as FIRE. She is a graduate of the Honors Program at the University of Colorado at Boulder.

Background

Bio

Afford Anything

Afford Anything podcast

FIRE

“Why the FIRE Movement Is Misunderstood,” by Paula Pant, affordanything.com, Oct. 17, 2018.

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas Stanley and William Danko

“Tanja Hester: The Pandemic Will Stoke Interest in Early Retirement,” The Long View podcast, Morningstar.com, June 3, 2020.

“The Great Resignation: Why More Americans Are Quitting Their Jobs Than Ever Before,” by Bill Whitaker, cbsnews.com, Jan. 9, 2022.

“Ask Paula: FIRE Vs. FOMO—How Do You Balance Between These?” Afford Anything podcast, affordanything.com, Jan. 11, 2022.

“The FIRE Take on Wall St. Bets, GameStop, and Meme Stonks,” by Paula Pant, affordanything.com, Jan. 29, 2021.

Mindful Spending

“Your Money Should Make Buckets of Excess Money,” by Paula Pant, affordanything.com, Feb. 25, 2011.

“Ramit Sethi: How Can Couples Make Peace Over Money?” The Long View podcast, Morningstar.com, Nov. 30, 2021.

Advice and Investing

“Income Producing Properties With Paula Pant of Afford Anything,” Martinis and Your Money podcast, martinisandyourmoney.com, Sept. 10, 2021.

“Ask Paula: How to Make Smarter Real Estate Decisions,” Afford Anything podcast, affordanything.com, Oct. 4, 2021.

“Why Index Funds Are a Good Investment--With Paula Pant,” Marriage, Kids, and Money podcast, marriagekidsandmoney.com, Oct. 5, 2020.

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Paula Pant, host of the popular Afford Anything podcast. She is also the founder of affordanything.com, a personal finance website. Paula is a frequent public speaker and is a leading voice in the "Financial Independence, Retire Early" movement, better known as FIRE. She is a graduate of the Honors Program at the University of Colorado at Boulder.

Paula, welcome to The Long View.

Paula Pant: Thank you so much for having me here.

Benz: We're thrilled to have you here. So, we want to talk about your journey and the FIRE movement. In contrast with a lot of other people in the "Financial Independence, Retire Early" movement, you didn't attain financial independence at a young age by banking a big share of a high salary. Can you discuss the key steps on your own journey to financial independence?

Pant: First of all, when I started this journey, I did not set out for a goal of financial independence. I wasn't familiar with that terminology, with that concept. So, when I began, I was, quite honestly, very scared, very anxious, and I wanted to build a financial safety net for myself, such that in the event that I couldn't find work, or I had some sort of medical emergency, or some family issue come up, I just wanted to make sure that I would be OK. And so, that was very much what I set out to do.

Now, I graduated from college in 2005, and I started working as a print newspaper reporter. I was the last person in the world to get the memo that print newspapers were not going to be exactly the way of the future. But my starting salary in 2005 was $21,000 annually. And that was not a lot of money. So, that was very much the source of a lot of my anxiety. And it spurred me to develop side hustles, to do additional work during the evenings and weekends, and to bank all of that after taxes, and put it aside. And initially, I didn't know quite what I would do with it. But over time, of course, I got raises, and eventually I left and started my own business. And so, my income certainly grew beyond my starting salary. But the ethos of aggressive saving and the ethos of valuing the psychological comfort that comes from watching your portfolio balance grow as opposed to disposable or discretionary spending, that ethos really stuck with me, and that was what fueled the journey.

Ptak: These days, there's no shortage of websites and other resources for people who want to find financial independence and retire early. But when you embarked on your own journey, which you just described, there weren't that many resources. What were your main sources of inspiration and particularly information? I think that you talked about what inspired you, but maybe what guided you as you made your way?

Pant: Well, there were many resources. Certainly, the concept of financial independence wasn't as popular at that time. But I quite honestly think of financial independence as a new framework or a new dressing for a very old or classic concept--that concept being sound personal finance, sound personal financial habits. And so, even before financial independence came into the zeitgeist, we've long had sources of information about how to manage money well, starting with the books like The Millionaire Next Door, Money magazine, Kiplinger magazine. Those were all sources of reading that I engaged with even as early as high school and college. So, that was a big piece of what fueled me. And again, if you get away from thinking of financial independence as some type of binary yes/no, you've either crossed the deadline or you haven't, if you break away from that and frame it as motivation to get your personal finances in order, such that you can have a large portfolio balance that can provide if you need it, a stream of residual income, then the conversation takes a shift. Then you're basically following all of the classic principles of personal finance, but just amplifying them a little, turning up the dial on that savings rate.

Benz: What are some examples of the side hustles that you engaged in while you were still working?

Pant: I was a print newspaper reporter. And so, the first thing I did was write freelance articles for other magazines and for websites. Initially, it was primarily print magazines. And I found that the best-paying jobs were the ones that were for trade publications, industry publications, the B2B publications tended to pay a lot more than magazines that had a large consumer-facing presence. But there was honor and glory in having a byline there, but there wasn't necessarily a lot of income in having a byline there. So, that was how I started. And from that point forward, I transitioned into writing articles for other websites. And again, as I did that, what I found was that consumer-facing websites with a large brand name didn't tend to pay as much. But there were certified financial planners and accountants. There were people who had small businesses, who started needing website content, and they had a shop of maybe three people. They couldn't have an in-house person who purely created content for their websites. And so, I began creating content for them. And over time, that actually expanded into realizing that they needed not just a writer but comprehensive content management. So, there were many iterations of how that scaled.

Ptak: Do you think FIRE needs a rebranding? Because it seems like a lot of the most successful and happy people in the movement are extremely productive and perhaps not even technically retired? Is the FI piece the more important piece in your opinion?

Pant: Absolutely. If I could wave a magic wand and get rid of the RE piece, Retire Early, and keep only the FI component, I would love to do that. If you break the concepts apart--if you separate that conceptually from the RE--FI, financial independence, is the concept of having sufficient investments such that you feel a sense of safety or personal satisfaction. So, I defined financial independence as the point at which your potential passive income, typically through investments, is enough.

Now, how much is enough is a very personal question. There are some people who would define enough as it's enough for a bare bones safety net existence, such that if the worst were to happen, if some black swan event took place in your life, you would know that you would be OK, you could cover your basic bills. For some people, that's their barometer of enough. For other people, they want a higher threshold. They want enough such that they could live a luxurious life and to take European vacations every year. So, that question of how much is enough is certainly an open-ended question among everyone. Every person has a different personalized answer. But the idea that your potential passive income, typically through investments, is enough. That is the core concept of financial independence.

Now, there's nothing within that concept that necessitates quitting your job. So, a person could reach financial independence and know that they have enough, and then, from that point forward, there are a multitude of options that they could pursue in terms of how they manage their time and energy. One possible option would be to retire or to quit work or to make a midlife career change. Certainly, that's one of many options on the table. But frankly, they could do anything. They could go back to school. They could join the circus. They could become a professional scuba diver. If you think about it, the idea of overemphasizing one of many options to such a degree that it becomes baked in and often conflated with the precursor to having those options. I think that's the inherent problem in associating the FI with the RE together. And when you split them apart, you find the FI is the foundation, it's the precursor, and the RE is just one of a multitude of choices.

Benz: Thinking about younger people in FIRE and this whole idea of saving and saving and saving for something that might happen in your 60s--do you think it would be easier to engage young people in the idea of deferring gratification and saving if the payoff weren't so far into the future if we were talking to them more about: saving could buy you flexibility in your 30s and 40s, or whenever in your life you may want to take advantage of that flexibility?

Pant: Certainly. I think the reason that FIRE, that that full acronym, including the RE, has caught on is because of the fact that when you're in your 20s or 30s the idea of taking care of your future self, that future self being in their 60s or 70s, it seems so far away and so nebulous that it isn't highly motivating for a lot of people. And similarly, the idea of building out a safety net to protect against some type of personal calamity, that's not something that a lot of people want to think about. People tend to have that cognitive bias in which they believe that bad things won't happen to me. And so, when you package the idea of aggressive savings in terms of the carrot rather than the stick in terms of the goal rather than the fear, that's what the RE component of FIRE promises. It's that aspiration of, “Hey, you know what, you can retire, you can have all the freedom in the world.” And that's what gets people excited about following the core principles of personal finance.

Ptak: While people like you and Tanja Hester are certainly prominent in the FIRE movement, it's generally pretty male oriented. Why do you think that is and what will it take to make it more diverse?

Pant: Well, I would have two answers to this. The first is that there is a bit of sampling bias in that if you go to a FIRE meetup or a FIRE community, in which the people who are there are not content producers, or content creators, but rather they are people who consume information about FIRE, the gender split seems to be fairly 50-50. But if you look at the people who are writing about it, or podcasting about it, or YouTubing about it, there does tend to be a lot of male dominance in there. And so, that sampling bias of seeing those who are most visible in the FIRE community, that's distinct from the actual members of the community on the ground, the people who are in Facebook groups but who are largely anonymous. So, that's one aspect of my answer to the question.

But of course, that opens up that second-order question of why is it that the most prominent people in the community tend to be predominantly male? I think the stereotype of FIRE being a bunch of white tech bros comes from the fact that some of the most prominent people in the community match that description. I think the advice that they write presupposes a high income, presupposes a six-figure income or often a dual-income household in which both people are making six figures. And that has been the groundswell of the movement. And it's much easier to write about that if you are a knowledge worker who has a high income, and you can write content that admonishes people for overspending. It's quite easy to write content that says, “Hey, just don't spend as much and put that money into investments instead.” And lather, rinse, repeat, and voila, in 10 years, or 15 years or 20 years, you'll have this massive portfolio balance.

There isn't any fear of failure when you do that. Because when the focus is consumption, and specifically reducing consumption, then there's no need to press people to become producers. All you're telling people to do is become less of a consumer. And by virtue of delivering that message, you aren't asking your audience to go out and do something that's scary, something where they risk failure, something where they risk investing a lot of time or capital into a project that won't pay off. When you keep the conversation purely around discretionary spending, the conversation revolves around elements that are tangible and visceral and easy to execute, relatively easier to execute.

By contrast, if you have people who are speaking specifically to a low-income or middle-income crowd, or speaking to people who have maybe taken time away from their careers in order to raise a family, when you're speaking to those members of the audience, oftentimes the message that you have to deliver is, “Here's how to build a side hustle; here's how to start your own entrepreneurial gig; here's how to think about how to manage your time and how to manage risks; and here's how to deal with all of these constraints; and here's how to produce such that you can drive your income from $60,000 or $70,000 a year up to $120,000 a year, and then save that gap.” And that's a much harder message to deliver because when people hear it, they automatically think, “Well, there's two steps for me: first, I have to double my income and then I have to learn how to save and invest it.”

Benz: I wanted to ask about this pandemic period. We've seen a wave of people quitting their jobs over the past year plus. It's been called the Great Resignation. What's prompting it in your opinion? And is it related to FIRE?

Pant: I think as jobs have become remote, people now have more options, specifically knowledge workers. The pandemic has had a bifurcated effect on different segments of society. And so, that segment of society that tends to be educated knowledge workers, whose jobs can be remote, and who primarily interface with technology, with their computer all day at work, all of a sudden, due to the prevalence and the normalization of remote work, they can live anywhere, and they can do anything. And so, it allows people to have much greater flexibility and many more options in terms of what jobs they choose to accept. And so, I think the Great Resignation is reflective not of a permanent exit from work, but rather a shift as people move from jobs that were available to them based on their geographic location to jobs that are available to them remotely from anywhere.

Ptak: What do you say to the assertion that the FIRE movement is a bull market phenomenon and if balances drop, a lot of folks will be spooked back into working? Do you share that concern?

Pant: I think that that concern is true but only for a minority of people who are in the FIRE movement. So, I think that is more of an edge case than the main case. Of course, edge cases always command headlines, and they become salient. But it is true that in a bull market people tend to be more optimistic. People take the fact that we've been in a bull market and project it into the future and start to think that the stock market is a high-yield savings account. And it takes a recession to dial in some reality. And when that happens, the next major recession that we have--so, we had a minor one in 2020, we had that market decline at the beginning of the pandemic. But every recession is different when it comes to its duration, its severity, and of course, when we talk about multiple recessions, also its frequency. And many younger people have not seen, especially those who missed the Great Recession of 2008-09, have not seen a recession with a long duration and heavy severity.

And so, the next time that happens, I think the majority of people who are in the FIRE movement, as well as the majority of people who follow general personal finance principles overall, will perhaps be more attentive to the size of their emergency fund, they may be more accepting of low-volatility assets, which right now, people often want to dismiss as low-producing. I think that certainly there might be some impacts in asset allocation and in emergency funds. But I don't see a majority of people panicking and scrambling to go back to work. The notion of permanently resigning from your job is even in the best of markets so scary that I see people in the FIRE movement run spreadsheet after spreadsheet after spreadsheet and go into analysis paralysis and suffer from what we call “just one more year syndrome,” where they want to work just one more year so they have that little extra cushion, and sometimes that repeats for two or three or four years.

Benz: I wanted to switch over to discuss mindful spending. You discussed earlier in the conversation this concept of enough and that figures really prominently in your work. Your podcast is called Afford Anything, and the tagline for it is, “You can afford anything but not everything.” So, how would you urge people to conduct an audit of what they want to do with their money, how they can spend more mindfully and in a way that aligns with their values and their passions?

Pant: So, the first thing that I would urge a person to do is to sit down and list what your core values are. And this is not a financial exercise, it's purely a what do I value in life? Do I value my friendships? Do I value my family? Do I value my health? What are my, say, top three to five values? Where do I want to put the focus of my life? And once you've clarified what these values are, and then importantly, also what these values are not, that gives you a North Star from which you then know how to allocate all resources, not just money, but time, focus, energy, attention.

So, the first step I would say is taking some time to really sit down and clarify what you value, and if you're part of a couple, doing this together as a couple. And the second piece is to then make a list of all of your goals--your big, overarching life goals--and start timelining those out. Draw a big horizontal line that represents your life, and say, “All right, what do I want to do, by when?” And ballpark how much-ish will this cost. And once you have that timeline of, here are all of my goals in the big picture--I'm not talking about I'm going to save up to go to Greece next summer--but big picture, here are the major things that I want to achieve over the span of my life.

Once you've laid that out, and you're looking at that in the context of your values, I think that gives you the broad parameters of here is how much I would want to have in retirement accounts, in traditional retirement accounts that are difficult to access prior to 59.5. Here's how much I want to have in those buckets, and here's how much I want to have in the types of investments that I could reasonably access within, we'll say, three to seven years. Those not long term, but not ultrashort term. Here's how much I want to have in that bucket. And here are the things that I'm spending on right now that don't actually reflect what I value, and in some cases, are antithetical to my stated values. Once you've outlined the objective--which is timelining your goals--and the principles that will guide you as you go to achieve that objective--which are your values--those two work in tandem to help you make the tactical decisions around how to spend and how to invest.

Ptak: One impediment to mindful spending for some people is surely the Instagram culture that we live in where we see others' vacations and beautiful homes and we might feel like we need to keep up. What tips do you have for people who want to spend mindfully for tuning out that kind of noise?

Pant: Curate your feed. So, think of all of social media as nutrition that you're putting in your body, except in this case, it is content, it's information that you're putting in your brain. And so, in the same way that you curate the foods that you eat--there might be certain types of foods that you don't eat, that you restrict entirely, and other types of foods that you only have on occasion, and you do that for the sake of your physical health. In the same way, you need to curate the inputs that come to your mind for the sake of your mental health. So, if you find yourself seeing a lot of discretionary spending on Instagram, the kind that makes you feel less than and makes you feel as though you need to level up every element of your life and makes you feel that in a negative way, well, get rid of those, get rid of those negative influences. And curate your feeds with only the things that motivate you, that inspire you, that educate you, and that make you move in the direction of becoming a better person than you are today.

Benz: Speaking of social media, I saw that you recently queried your Twitter followers about the expenditures that had delivered the biggest payoff or were worth it to them. Were there any commonalities in those responses as you read through them?

Pant: No, in fact, I was struck by the diversity of responses. It goes to show the old adage that personal finance is personal. The things that people tended to value, it ran the gamut from expenses that could preserve time or create convenience, to expenses that deepened relationships—like flying home for the holidays--to expenses that just at a personal level provided that minor indulgence that made a person feel good, like, a really soft pair of shoes or nice home decor. So, I think the sources of comfort that people find vary wildly. And as a result, the spending that people have in pursuing that comfort varies just as wildly. Some people find it in a nice restaurant meal. Some people don't care about that at all.

Ptak: We recently discussed the concept of mindful spending with Ramit Sethi, specifically how couples can get in sync on the best uses of their money. Do you have any tips to share on that front?

Pant: The root of it comes from that value assessment. If a couple has wildly different ideas about how to spend their money, then it may point to underlying values that are not the same. So, for example, if one person wants to spend freely on every social invitation that they have; they want to go out every Friday and Saturday night with all of their friends; they want to host parties at their home, where they invite everybody that they know; when their friends invite them to go take trips together, they always want to say yes. That's probably a person who has a high degree of value in their friendships and their social relationships and their social ties. And it doesn't even have to be reflective of their closest friends; it might be a person who values weak social ties as well. And if the other partner finds that type of spending to be wasteful, that might be reflective of the fact that that other person either doesn't have as strong of a value on friendships and social ties, or that person maybe only values a few select close social ties but does not value weak social ties to the same degree.

And so, that on the surface might look like—in the context of a couple--it might look like an argument about spending: “Well, geez, you keep going out on Friday and Saturday night. You are racking up this big bar tab.” It sounds like it's a conversation around discretionary spending, when in fact, what's underlying it are the reasons, the values behind why a person wants to spend on X and the other one doesn't and would prefer to harness that money and spend it on Y.

Now, one thing that I'll add to that is that the way that a couple discusses discretionary spending and the values that underlie it is very different from the way that a couple would discuss investing. Because a difference in the way that a couple might discuss the investments that they share, those might not necessarily reflect values differences. Those may simply reflect a difference in risk tolerance. And that difference in risk tolerance is often borne out of personal experience. So, both of those conversations need to be had because it's equally problematic when you have a couple that have wildly different risk tolerances, and that is a separate conversation distinct from the spending conversation that isn't necessarily a values conversation. It's more of a how do I find a sense of safety, how do I find a sense of comfort, how do we both as a couple decide what is a manageable level of risk and where do we put the boundaries or parameters around that?

Benz: I wanted to switch over to discuss a little bit more about your FIRE journey. A big part of it has related to purchasing rental properties. And I guess the question is, who's cut out for this type of endeavor and who's not? It seems like that this whole thing of passive income through real estate is a big piece of FIRE, at least for some FIRE proponents. Can you talk about that?

Pant: Sure. I think in any type of portfolio-building your contributions are going to be the single biggest determinant of the success of your portfolio. So, you need to be making big contributions consistently over a long period of time, over at least a decade or more. And so, whatever type of asset you find yourself enthusiastic about is likely going to be the best one for you, not necessarily because it's mathematically best, but because it provides that level of enthusiasm, motivation, engagement that's going to keep your head in the game, and it's going to have the behavioral consequences that will inspire additional contributions.

And so, to each person who wants to pursue financial independence or who generally wants to build a healthier portfolio, one of the first questions I would ask that person is, “If you had a bunch of magazines laying in front of you or a bunch of different tablets with different websites open, which one would you pick up? Would you pick up the article about cryptocurrency? Or would you pick up the article about real estate? Or would you pick up the article about index fund investing or individual stock-picking? What excites you?” And once you first answer that question of what type of investing do I find exciting--this goes back to the risk-management conversation earlier--then you can build your parameters over what percentage of my portfolio do I want this fun investing to occupy? But first defining what you find is fun, that can be the lead in to inspiring a person to make more contributions than they otherwise would have.

This happens, by the way, often when the market declines. I often get questions from listeners to my podcast, who will say, “I know that I'm not supposed to time the market. I know I'm supposed to just keep everything automated. But check this out. There's a big market decline. I'm really, really excited about the prospect of picking up stocks that are on sale. So, how do I square the circle? How do I drive the idea of not market timing with my enthusiasm around buying the dip?” And my response to that is, “If your enthusiasm around buying the dip spurs you to make more contributions than you otherwise would have--so, in other words, you're still making your normal contributions, and they are happening in the normal way that you've already set up. But you have this additional money that you otherwise would have spent on beer and ice cream that you are now spending on buying the dip, because you're really excited about what's happening in the markets, that's great.” And that's an example of choosing some asset or some event that spurs the extra contributions that adds fuel to the fire and gets you to that financial independence faster.

Ptak: More broadly, what sort of ratio of liquid investment assets like stocks, bonds, and mutual funds relative to real estate investments is a reasonable target? How can people ensure that they're striking a healthy balance?

Pant: I don't think there's a one-size-fits-all formula for everyone. I would say that when we talk about the percentage of your portfolio that would be dedicated to real estate investments, that question itself is split into how much of that is principal or equity that's on your balance sheet versus how much of that is debt or leverage.

So, when you zoom out of that and go to the overall question of how much of my portfolio should I hold in stocks, bonds, index funds versus in real estate? That question, when you have the real estate that you hold yourself, not a REIT, but real estate that you directly own, that question is inseparable from the second-order question of “And what is the ratio of equity to debt that I hold?”

Again, I don't think there's a certain magic number, but I'll tell you my own journey. I tend to be pretty conservative when it comes to mortgage debt. And I wanted to contain my entire portfolio to have no more than as an aggregate a 50% debt to equity ratio. So, across all rental properties that I owned, I made sure that I always had $1 of equity for every dollar of debt. And over time, I actually paid that off. And now, all seven of my units are free and clear. There are many people who would say mathematically, that's a mistake, because certainly I could get a very low fixed-rate mortgage and arbitrage the difference. I 100% understand the math behind that argument. And to your question, that same person could equally argue like, “Now that you have these properties paid off, when you look at your aggregate portfolio, given the fact that you've paid off these properties, the ratio of equity that you hold in these seven units compared to the value of the investments that are in brokerage accounts, you seem to be very, very heavily tilted toward real estate.” Yeah, absolutely, absolutely.

But that's all part of overall risk management. So, in my own case, knowing that I have no mortgages on any of my properties, means that I have reduced the level of risk that I'm exposed to. And that knowledge allows me to tilt the investments in my brokerage account more heavily toward equities. Personally, I have an all-equity portfolio. I have a barbell allocation. So, I also have a heavy cash allocation. But I have an all-equities portfolio. And part of the reason that I psychologically feel confident about doing that, and I don't panic whenever there's a dip, is because I know that in these other elements of my portfolio, I have safety. I know that in the real estate element of my portfolio, I'm not carrying any debt. And I know also that I have a heavy cash allocation.

And so, broadly, what I'm saying is that managing risk in one area of your portfolio, even if it seems a little too conservative for your age, or your timeline, that de-risking in one element of your portfolio can help you add additional risk and other elements of your portfolio. And if you think of my entire career, my business, the fact that I run my own business as essentially another element of my portfolio, having a low level of risk in real estate and a heavy cash allocation, those conservative anchors in my portfolio, allow me to have not only heavy equities exposure, but also to accept the risks of being a small-business owner. And so, going back to your original question, which is, what's the ideal balance? I think that the ideal balance needs to be contextualized in terms of not just what's the equities to real estate split, but also, what is the overall risk composition of not just your investable assets, but also your career, your business, all of the ways in which you grow your wealth and make money including the income side of that equation.

Benz: That's helpful. I wanted to ask a little bit about your equity exposure. It sounds like you're an index-investing enthusiast. Have you always been? It seems like for a lot of people, they end up being index fund true believers, but they only do so after they've stubbed their toe with some other equity strategy. How did you land there?

Pant: My very first investments were in actively managed mutual fund. I opened up an actively managed mutual fund that had a 0.6% expense ratio, which doesn't sound too high. But in the FIRE community, people who are listening to this would be dropping their coffee mug right now in shock and abject horror. So, yes, I started with actively managed mutual funds. And the more that I read, and specifically I read a couple of books from Jack Bogle. I started reading some Bogleheads books and forums and advice, the more I became an index fund enthusiast.

And in the FIRE community, generally, that tends to be the dominant ethos. In fact, the author, Morgan Housel, said it very well, when he said, right now, especially when you look at young people, when you look at millennials, and Gen Z, the tendency seems to be either FIRE or YOLO. So, you've got the segment of the younger generation that tends to be index fund enthusiasts. We are interested in FIRE; we're interested in financial independence. That's sort of one subset of people who are interested in money management. And then, the other subset is like the YOLO crypto crowd of risk everything. And, of course, I'm describing this as an oversimplification, and I'm describing two ends of the extreme. But I think, especially in the last year, year and a half, we've really seen people in millennials and Gen Z, who are creating TikTok around crypto--we call it Criptalk--and they're promoting some very, in my opinion, risky like go-all-in level of ideas.

And, by contrast, you also have the segment of people online, who take that very index fund-centric approach. I think that the fact that such distinct camps exist in the world of money management is probably analogous to how in the world of nutrition--you've got some people who are keto, some people who are paleo, some people who are vegan. You've got all of these people who are interested in the same goal, but they have different philosophies about how to get there. And people who are vegan, would have many criticisms of people who are paleo and vice versa. I think that's what's so interesting about this genre is that once you get into it, every person who starts to study money management at the individual level, has to ask themselves, “All right, which group do I want to be in? Do I want to be vegan or paleo or keto, or do I want to be YOLO, or do I want to be FIRE? Or do I want to be some other type of crowd?”

Ptak: So, we wanted to ask you about that for those who join team YOLO, so to speak, what's your take on that phenomenon, meme stocks and the like and more broadly, the engagement in the market that we've seen among some younger investors? Do you think this kind of experimentation is worthwhile, even if it might not end up especially well for a lot of these folks who are doing the experimenting?

Pant: I think so long as the experimenting is contained to a certain segment of your portfolio, and maybe 5%, maybe 10%, as long as the experimentation is contained to just that amount, then excellent, knock yourself out. The risk is, when people dedicate their entire portfolio or the bulk of their portfolio, or worse, when they start making risky bets on margin, that's where I really have some problems with it. I remember, during the GameStop saga, when the subreddit WallStreetBets was pumping the value of GameStop shares in January of 2021, I remember reading anecdotally some people who were talking about how they were spending their every dime of Grandma's inheritance on this. And I don't know, that might have just been Internet bluster. I hope that no one really did that. But I think that's where the YOLO crowd, the meme stock crowd, gets dangerous, when people don't have boundaries, don't have parameters, and risk money that they can't afford to lose, or risk money that they don't want to lose. Today, there are support groups for people who lost a lot of money in GameStop. It can be a very traumatizing thing to take on undue risk because you get swept up in a social media-fueled craze; you get swept up in that irrational exuberance and then, to realize only after the fact how risky those decisions were. And the trauma of that experience can permanently throw some people out of the market. There might be people who refrain from ever contributing to a 401(k) because they got burned by some meme stock. And I think that would be an absolute travesty.

So, to answer your question, to the extent that meme stocks, YOLO, crypto, all of that, to the extent that it provides enthusiasm within that section of your portfolio that you're OK taking risks in--great, awesome. I'm happy that you're taking the time to learn more about money, and I hope that more people use this as an entry point to learn more about money.

Benz: We have a fair number of financial advisors who listen to the podcast. What can they do, in your estimation, to better reach and serve their younger clients or the clients that they'd like to have? How can they reach out to them?

Pant: Be more text message-forward. It's funny how many people in their say age 40 and up, still use the phone, like the actual telephone. And that is not really something that the 40 and under crowd likes to do, unless we've texted first and scheduled a time for a phone call. So, I think being more text message-forward is one of many tactics that falls under the broader umbrella of talk to people in the way in which they want to be talked to. And the way to understand that is how are people talking to their friends? How do people communicate to set up plans to go to brunch on Sunday? If you follow those same forms of communication, no matter how they evolve--who knows how we're going to be talking to each other in the year 2027--but if you follow those same forms of communication that people use when they talk to their friends, if you do that as any business, that provides a low-friction way to communicate with the people with whom you're trying to communicate.

One of the problems that people face today is fragmented attention. And part of the reason attention is so fragmented is because there is no upper limit to the amount of digital platforms that provide inputs. So, for example, people can reach out to other people via direct messaging on Instagram, via email, via text, via direct messaging on Twitter, via WhatsApp. There's just this endless array for how people send and receive messages. And Facebook--I haven't even mentioned Facebook--Facebook messages. And when there are that many inputs and no upper limit to the amount of digital communication that can come through, most people have to start selecting. You can't just spend all day every day responding to this cacophony of inputs. And so, people tend to have a few favorite inputs, and then many others that they completely ignore. I have 163 unlistened to voicemails on my phone. If you call me, if you call my number, my voicemail box says, “Hi, I don't check voicemail.” And yet still, for some reason, over the years, 163 people have heard that message and left me a voicemail anyway. I have no idea who they are. But whoever they are, if they're a business, they're not getting my business.

Ptak: For our last question, we wanted to ask you about financial education. I think you're a financial educator at heart. We've spoken to a number of experts in fields like financial literacy, education, and there's a spirited debate about what does or does not work in financial education. What has experience taught you works?

Pant: Honoring that each person is on their own journey and not shaming or mocking people based on either where they've come from or what they want to do. Number one, many people feel shame around things that they've done in the past. Maybe they have credit card debt, maybe they have a very low credit score--mistakes they've made in the past that can be hard to admit, hard to own up to. So, starting from a place of acceptance, I think, that's paramount.

In addition to that, there are certain types of expenses that are more socially acceptable than others, and those tend to differ based on communities. So, there are certain communities where, and this is the cliche of the designer handbag, the fancy car. Those are the lauded expenses, the mainstream traditional “keeping up with the Joneses.” But there are, especially online, niche communities in which those types of expenses would be mocked in the FIRE community. For example, anyone with a fancy car would just be laughed at. But if you spend a bunch of money backpacking around South America and also drinking craft beer five nights a week, people applaud that even though the total spending might be comparable.

I think it's equally problematic to point fingers at one type of expense versus the other, or to say, “In our community, this is the spending that we reject, but this is a spending that we celebrate.” By virtue of having social signals that communicate that, what happens is that you take away a person's ability to choose, a person's sense of autonomy over the spending choices that they make. And so, as a financial educator, if you can remind people that they have that autonomy and that they're in a judgment-free zone, and that whatever they want to spend their money on, even if other people think that that is "a waste," that's fine. If they want to spend their money on golfing, or manicures and pedicures, or having a giant collection of troll dolls from the 1990s, whatever it is that they've decided they value, that's absolutely fine so long as the core elements of their personal finances are healthy and allow them to do that. So, I think that judgment-free education is hard to come by because there does tend to be a lot of judgment in the world of money. So, the more that you can create that space for people, the better.

Benz: Well, Paula, this has been such an illuminating conversation. We so appreciate you taking time out of your schedule to be with us today.

Pant: Absolutely. Thank you so much for inviting me on.

Ptak: Thank you so much.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)