The Next Millionaire Next Door – Podcast #190 | White Coat Investor
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Podcast #190 Show Notes: The Next Millionaire Next Door
We can learn a lot from the research examining how self-made, economically successful Americans became that way. Our guest this week is Dr. Sarah Stanley Fallaw. You may not be as familiar with her name as you are that of her late father, Thomas Stanley, author of The Millionaire Next Door. They were involved in research examining these economically successful Americans and co-wrote The Next Millionaire Next Door. Much has changed from the first millionaire book. A new generation is hearing from self-proclaimed experts in personal finance due to the proliferation of financial blogs and podcasts, like WCI. In this episode, we talk about the concept of a millionaire. Though the name and image haven’t changed, a million dollars is nowhere near what it used to be. We discuss the decisions, behaviors, and characteristics of the new millionaire next door and how they align with the discipline of building wealth. The main lessons of her work seem to be that millionaires are mostly self-made, surprisingly frugal, and spend time doing things that build wealth. We talk about each of those things in this episode.
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob today by email [email protected] or by calling (973) 771-9100.
Quote of the Day
Our quote of the day comes from Warren Buffet. He said,
“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”
I certainly agree with that. Patience is a requisite quality for a successful investor.
The Next Millionaire Next Door
Dr. Sarah Stanley Fallaw has a PhD in industrial psychology and was working on the book The Next Millionaire Next Door when her father died in 2015. We talked about what it was like to be the child of Thomas Stanley. She was in college when he published The Millionaire Next Door. They talked about his work but certainly didn’t really recognize the importance of the work and what was going to happen with the book. He would send her faxes on how it was rising on the New York Times bestseller list.
She had watched her dad conduct these huge surveys, with stacks of paper surveys sitting on the dining room table. He would send out paper surveys with dollar bills that he would include as the incentive. If people didn’t want to complete the survey, they actually would not keep the dollar bill. That is pretty amazing.
When they began to talk about the latest book, she was really focused on email surveys. He had a harder time giving up the paper surveys. But they did find out that they had the same response rate to an email sample as a paper version of the survey.
The Next Millionaire Next Door is not necessarily a sequel. It’s not necessarily a second edition. What is the premise of the book compared to the original?
“I think there are a couple of points related to that. The first is simply that this path or these paths that are available to individuals to actually achieve financial success are still there. And I think that, again, if you think about the critics of The Millionaire Next Door, and there’s certainly a lot of that, that there is criticism that’s warranted to some extent. But some of it had to do with the idea that the book was published in the 90s, and things were really great then, and that kind of thing.
What we were hoping to do is demonstrate that the same characteristics and a lot of the same habits and behaviors that allowed people to build wealth and transform and come into wealth back in the 90s, or the 80s when some of his research began, are still true today. And that’s what we find. Certainly, we found that in the research that we did, as well as the research that I continue to do. Even looking at populations like emerging affluent or mass affluent individuals. So, you still see the same characteristics allow people to transform and come into wealth.”
Concept of a Millionaire
Obviously, a millionaire is someone who has a net worth of a million dollars, not someone with an income of a million dollars a year. But The Millionaire Next Door was published in 1996. In order to have the same buying power today as a millionaire had in 1996, you would need $1.66 million.
A millionaire was originally a French term from the 1700s, but our image of what a millionaire is probably comes from the gilded age, the 1920s, maybe the creation of Monopoly in 1935, with the guy with the top hat and monocle. A millionaire in 1925, though, is the equivalent of someone with a net worth of $15 million today. This idea in our popular consciousness is quite a bit different from what today’s millionaires are. How does that fact, the fact that the name and image hasn’t changed, but that a million dollars is nowhere near what it used to be, affect how we discuss this subject?
“I think a lot of it has to do with language. It’s easy to talk about a millionaire. That’s very descriptive. I understand what that means, and it has a marker. It has a number assigned to it. So, I think that’s part of the reason that it sticks around today. But I do think that you’re right. It’d be in terms of whether or not that’s right for you as an individual. Do I need to achieve millionaire status or do I need something that’s a lot higher than that in order to sustain me and sustain my lifestyle into my retirement years, for example.
So, I think it is kind of, I guess, arbitrary or really up to the individual, what financial success means to you or to anyone. But again, I think that term sticks around. It’s popular. It’s searched for a lot. We know that. And so, I think that’s why it continues to be something that we use, even though we know that it may take much more than that, for example, to fuel all kinds of plans that you have for your life.”
In 20 years or 50 years a million dollars will become worth even less. Today we malign the millionaires and billionaires but will we still be talking bad about the millionaires in a few more decades? It makes me wonder. But the main lessons from her work seemed to be that millionaires are mostly self-made, that they’re surprisingly frugal and that they spend their time doing things that build wealth.
Recommended Reading on the Blog:
Everyone Should be a Millionaire
Millionaires are Mostly Self-Made
Dr. Fallow’s survey showed that 80% or so of millionaires basically received no inheritance. They’re self-made. They feel that a large part of their success was due to their own hard work. But surveys of the general population show that people, in large part, think success is mostly due to luck. That disagreement is perhaps the greatest difference between our two political parties. As usual, the truth probably lies somewhere in the middle, but, in her book, she says that it’s a myth that you are your group. And by that we’re referring to where you were born, the color of your skin, your gender, etc.
It says, “Believing in that gives you an out to explain why you cannot get ahead”. So, I wanted to ask Dr. Fallaw what are her thoughts on this crucial subject. Why are the rich, rich and the poor, poor? How much of that can be attributed to hard work and ability and how much should be attributed to circumstances, discrimination, privilege, and luck? It is a fiery topic, for sure, but she had a couple things to say about it.
“First of all, what we know is that those of us who really view financial success as something that we can control, that’s up to us, that we know that if I work hard or if I am able to be disciplined about my finances, will be more successful than those that believe that something else or someone else controls their financial success.
That’s what we call locus of control in psychology and it does correlate with building wealth and net worth. So, we know that that’s the case, and that’s why that myth of, “Well, if I’m in a certain group, and my group looks like this in general, I can’t get out of this.” That is one of the things that certainly is a myth.
I think my father certainly was very aware of the fact that if your income level is at the poverty level or something like that, it’s going to be extremely difficult for you to pull yourself out of that and become a millionaire. I think those are the kinds of things that people get stuck on. And he certainly recognized that, and I do, as well.
I think the difference, like I said, comes in when we’re using some of these things as sort of crutches for why we can’t do things. We know what it takes to build wealth. We know what it takes to sustain wealth from a behavioral perspective, but a lot of us just don’t want to do those things. And that’s the hard part.
But I think it’s naive to not recognize the fact that there are challenges that each of us has because of those factors. We absolutely do need to recognize them. And so it may be harder for some to overcome those, but in general, what we know is that if you have this mindset that you can actually impact what happens to you, the likelihood that you’ll be successful is higher.”
There is only one of those you can affect. You can’t affect your circumstances. I mean, you can vote at the ballot box and you can protest and you can work for societal change, but when it comes down to your personal finances, the only thing you can do anything about is your discipline and how much you work. Maybe what we should say is that that locus of control is a necessary, but not sufficient, trait to build wealth. You have to have it, but it’s not everything.
“It certainly is part of it, but it’s also the frugality piece. We see that consistently, whether we’re talking about those that are making six figures or those that are just out of school. Those that are able to live below their means tend to be better at accumulating wealth over time. So, it certainly is kind of that mindset, but it’s also those frugal behaviors that lead to transforming income into wealth. And again, that has a lot to do with conscientiousness and discipline and some of those things that aren’t so fun to talk about, but they work, and that’s the hard part about it.”
Frugality
When I hand a book, whether it’s Dr. Fallow’s book, or her father’s book, or whoever’s book, a book from the millionaire series, to someone, the main takeaway I want them to get from it is perhaps best said by Morgan Housel. I paraphrase a little bit, but he said, “Everyone thinks or says they want to be a millionaire but what they really want to do is spend a million dollars.” You become a millionaire by not spending a million dollars that you could have spent. Her work has shown that real millionaires don’t wear flashy clothing or display expensive watches or drive sports cars. So I asked, what are her favorite statistics about the frugality of millionaires?
“Yeah, I think that one of them is definitely what they learned from their parents. Part of my area of research when I was in grad school was looking at life experiences and how that impacts what we do today. So, what are the kinds of life experiences that you have as a child or as an adolescent, and how does that lead to your career success and things like that.
Again, I think it’s about 70% or so of millionaires report that their parents were frugal. So, they saw these frugal behaviors modeled at home. And again, whether that was causal or not, they tend to also be frugal today. We do see that in maternal frugality. So, if your mom was frugal, that predicts your net worth above and beyond age and income. In other words, it’s a significant factor in predicting your net worth if you had a frugal parent at home.
Is it a parent or is it specifically a mother? She said that paternal was not quite as strong. She suggested that might have been because the research was from several years ago, and traditionally the mother was at home.
“In that same study, thinking about careers and physicians, we also found that the mom’s influence on careers was also high, so that helped with job satisfaction and things like that later in life, as well. So, you have a mom that’s asking you about what you want to do and nagging you to join groups and things like that. That’s a good thing, even if it feels annoying when you’re growing up.”
Millionaires are driving Toyotas, Hondas, Fords, and BMWs. Very few are leasing cars. I think it is David Bach that talks about The Latte Factor most famously, where he says you skip a latte every day and it adds up to a gazillion dollars by the time you’re 60. I asked Dr. Fallow for her thoughts on the big pieces in your financial life: the mortgage and the big rocks versus the little rocks, the daily lattes and the little decisions. What does she recommend to someone trying to build wealth? Should they focus on the big stuff or do they need to be generally frugal with everything?
“I think that when you think about the big decisions that often leads to the small ones. And so, for example, if my husband and I decided we’re going to move to a certain kind of neighborhood, right? It was in a certain kind of school district where everyone’s driving certain kinds of cars and they’re all sending their kids to private schools, or what have you.
And again, that’s fine, but you have to recognize that that leads to other lifestyle choices and lifestyle influence, really. Obviously, if you save a certain amount of money every day by not having that latte over time, that’s going to help you. But you kind of have to ask yourself, “Well, why am I buying a latte in the first place? Is it because everyone around me is always going out to dinner and out to lunch and out to breakfast? Is it my coworkers? Is it my neighbors? What is it that’s influencing me to do that?”
Part of his research, and part of the side of the research that I really enjoyed, was that influence piece. Where you plant yourself, where you buy your home or rent or live or what have you, influences a lot of other decisions.”
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FIRE Movement
Now the whole FIRE movement was kind of born in between her father’s book, The Millionaire Next Door, and this book. What are her thoughts on that?
“What is interesting about that is the fact that it illustrates a different path to building wealth. A lot of people think, “Oh, The Millionaire Next Door. I don’t want to be frugal. I don’t want to live like that”. But there are a whole host of different paths that were spelled out in that book, as well as the current one, that illustrate that if you have a super high income, or even if you have multiple income streams, there’s a way to retire early. I think that the FIRE community, and certainly that movement, illustrated that there are multiple ways to achieve financial success. There are multiple definitions of financial succes, as well.”
Live Like A Resident
Now the original book had a whole story of Dr. North and Dr. South. That was really formative to me and I think many other financially successful physicians. I even discussed that in my original 2014 book. Most of my listeners are doctors. Most of whom at some point in their early thirties, went from an income of something like $50,000 as a resident to something like $200,000 to $500,000 a year as an attending physician. What advice does she have for them in regards to the role of frugality in their success?
“What I would say is that we have patterns of behaviors. We have patterns and habits that we do without thinking. And if you can sort of establish a pattern within your life and within your household of generally living below your means early on, you can sort of sustain that habit, even when you have a large increase in income.
What’s really hard is, I would say, to always be spending and spending to your limit, and then move into a frugal stage, let’s say four or five, six, seven, eight years into having that really high income. In other words, it’s going to be a lot harder because early on you might decide, again, like we were talking about before, you might decide to purchase a home that’s a little bit of a stretch at the time. And then that leads to a whole host of other decisions.
So, I would say establishing those patterns of being frugal, even if it’s maybe not the funnest thing to do, when you are early on in your career will allow you to keep those behaviors later in life, as well.”
It sounds like she would say keep living like a resident for two to five years after you become an attending. Sounds like pretty good advice.
Recommended Reading from the Blog:
Activities that Build Wealth
Millionaires tend to spend time on activities that build wealth. They work a lot of hours. I think they work about 20% more than non-millionaires. They love their profession or business. They often have hobbies that make money. They often manage their own investments. How important does she think it is for a doctor who wants to be financially successful to, number one, love their work, and, number two, manage their own investments?
“I think that when you think about loving your work, that just allows a whole host of wellness and health related benefits. So, I’m not stressed. I enjoy what I’m doing all day. It also allows you to maintain that income level. Now, I would say that with physicians, that’s probably a little different, right? After all that schooling, the likelihood that you would drop out of that profession is probably low, but loving what you do every day obviously has a lot of benefits outside of just the financial benefits.
In terms of managing your own finances, certainly, if you have the interest and you’re able to put processes in place, you maybe have a good support team at home. I think that that’s perfectly fine. And I think that a lot of people can do that. My husband’s a great example. He is a tax attorney, long suffering tax attorney, loves personal finance. We do our own finances, and he does them, but I’m a liberal arts major. And doing the same thing over and over again, it would be mind numbing to me.
And so, if there were two of us in the household like that, that were more creative and more big picture thinkers, it would be bad for our finances. That’s when it would make sense to have someone, especially if we had the income, to manage it for us. But again, if you have the interest and the time and the support at home to do that, then certainly I think that that’s something that you could do.”
You do have to be detail oriented. We discussed the concept of planning and monitoring. If you’re high on those, you will be able to build wealth. If you’re not, it’s going to be harder for you to manage your own investments.
Economic Outpatient Care
Thomas Stanley coined a term that’s become somewhat famous. I don’t know how descriptive it is, but it’s come to have a certain meaning. He called it “economic outpatient care.” It is a factor that a lot of my readers really worry about. They want to help their kids not have as hard of a path as they had, but they also don’t want to ruin them with their money. What guidance can she give on the best ways to avoid ruining your kids with your money?
“The best way to describe that is really financially supporting your children into their adulthood and supporting their lifestyle. So, for example, if you are funding your adult child’s membership at a country club, or you’re making the purchases of cars for all of your adult children, something like that, when they are working and they have wherewithal to do it themselves.
I certainly understand that. My dad grew up in a blue-collar neighborhood in New York and he didn’t want us to have as hard a time as he did. But I think you have to recognize that, in order to build and sustain wealth on your own, you’re going to have to have some of that hard work, some of those hard knocks life lessons, whether you get them when you’re younger or older. It’s better to get them younger, by the way.
And so, I think that there is a balance. There’s a balance between enjoying the money that you have with your children today, but then also setting them up so that they understand that that is your money, you and your spouse’s money, and that when they grow up, it’s not that they’re going to move into a home that looks just like yours.”
Having these conversations early could be useful in helping them understand what they are going to have to pay for. It is hard to tell your children no. But if they can build that discipline and hard work ethic early on, it will benefit them in the long run.
Dr. Sarah Stanley Fallaw did say they have seen examples of extreme frugality backfiring.
“In some of the open-ended comments that we threw in a study back in 2013 and 2014, we looked at some of the ramifications of that extreme frugality. Like, even though we know that we can afford to buy soap, we’re going to use only soap that we got at hotel rooms. Those can have some damaging effects, too, depending on how it goes. And especially if there’s not a lot of great communication in the household and things like that, that can lead to adult children wanting to spend everything.”
In her book she said rule number one for raising productive adults is to never tell your children that you are wealthy. How can you possibly enjoy any of your wealth without your kids cluing into it?
“I think that it goes back to what we know about life experiences. And what we know is that those millionaires tend to have frugal parents. So yes, you can enjoy the hard-earned money that you’ve made and that you’ve saved. But the difference is, I would say, if you look back at The Millionaire Next Door, and you look at that chapter that has Dr. South in it, you see how my father describes the kinds of spending that he was doing. It was out of control.
There’s a difference between enjoying it and simply not being responsible with it. I would say there’s a difference between being able to enjoy it and simply wasting it.”
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Investor Characteristics
We talked about investor characteristics and how they play into the decisions that investors make, whether they make good decisions or maybe decisions that aren’t so great. What characteristics should investors strive to develop in themselves or try to identify in themselves?
“We look at what makes a good investor from a competency perspective. Like, if you were going to hire, let’s say, an assistant to work with you, you’d want them to have certain competencies. Well, it’s kind of the same when we are talking about investing. So, we look at investing like a job, a specific job that you have to do within your household, especially if you’re managing it yourself.
The five key characteristics that we consider are things like being confident in your investing decision-making. That includes being knowledgeable, reading, learning. We know that only about 18% of us learn how to invest from our parents. So, it’s got to come from somewhere. You’ve got to build that knowledge.
The other piece, that physicians tend to not struggle with, is that volatility composure. So, volatility composure is the emotional side of investing. It’s the ability to keep your cool, no matter what’s happening around you. And you can think about how that plays out on the job, but it certainly is the case when we’re talking about investing and we’re watching the markets or we know what’s happening.”
Dr. Fallaw said, in March and April, they had advisors share with them that the people scoring low on volatility composure ended up being the ones that called their advisor worried about what was happening. That is the emotional side.
“Certainly risk personality and preference. Those are two different components, but you’ve got to have some preference for having risks within your portfolio, in order to take advantage of investments. Risk personality deals more with wanting to have sort of exotic investments versus more traditional investments.
And then the last piece is sort of this judgment. So, am I a long-term investor? Do I recognize the value in investing and not touching things? Or am I more of a short-term investor? Do I really look at investing as something that is a day by day, hour by hour kind of activity? Typically, those that are more of the long-term persuasion tend to be more successful over time.”
I hope physicians are becoming better and better investors as time goes on. Some of the criticisms that have been leveled at them is that they are more confident than they should be sometimes, that the knowledge lags the confidence.
In my experience, I almost see the opposite, sometimes, where the confidence is about a year behind the knowledge base. They realize, “Yeah, I could have done this myself a year ago”, but they weren’t quite confident enough to do it. But I think the stereotype is the classic general surgeon stereotype: sometimes right, sometimes wrong, but never in doubt.
Ending
Dr. Fallaw’s final words of advice,
“If you can establish this early, that will allow you to take that great income that you’re making and transform it into wealth that you can enjoy, your family can enjoy, for the long-term. If you’re not there today, the good thing is you are in control. You can change your behaviors. It’s not always easy, but there are ways to do that.”
You can learn more about Dr. Sarah Stanley Fallaw’s work at DataPoints.
Full Transcription
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 190 – The Next Millionaire Next Door.
Dr. Jim Dahle:
This episode is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob. You can email him at [email protected] or call him at (973) 771-9100.
Dr. Jim Dahle:
All right. We’re dropping this on Christmas Eve. So Merry Christmas to those of you who celebrate Christmas, happy holidays, and whatever holiday you celebrate. If you’re in the US your kids, or you may have some time off due to the holidays, and I hope you enjoy that.
Dr. Jim Dahle:
We’re recording however on December 3rd. There is a big difference between December 3rd and December 24th, I hope the big difference is not in the pandemic getting worse. I’m super excited about vaccines coming up. I may even have a vaccine by the time this drops, which I’m pretty excited about. But hopefully that will be a turning point as we start distributing these vaccines in this pandemic.
Dr. Jim Dahle:
In the meantime, hang in there. There’s light at the end of the tunnel. The tunnel is probably longer than we think it is, but hanging in there. Your job is going to get better over the next year. So, if you’re feeling burnt out on having to put PPE on every time you go see someone or worried about taking something home to your family, hang in there, it’s going to be over soon.
Dr. Jim Dahle:
Let’s do our quote of the day. This one’s from Warren Buffet. He said, “The market is the most efficient mechanism anywhere in the world for transferring wealth from inpatient people to patient people”. And I certainly agree with that. Patience is a requisite quality for a successful investor.
Dr. Jim Dahle:
If you have not yet heard, we have a conference coming up. We call it WCI Con, but its official name is The Physician Wellness and Financial Literacy Conference. This year due to the pandemic, we’re going to make it a virtual conference, but it’s still live. It’s going to be March 4th through 6th, and yes, everything’s going to be recorded and you’ll have access to it even if you can’t see a given presentation.
Dr. Jim Dahle:
This is going to be an awesome conference. Part of the reason why is because it’s virtual. Because it’s virtual we have the ability to do some things that we can’t do in a live conference, like put in 50% more content into the conference. And so, it’s got tons more than any other conference we’ve ever had. I think it’s going to qualify for 17 credit hours of CME.
Dr. Jim Dahle:
And I think it’s over 50 hours of content in this conference for less money than the last conference we had. We don’t have to buy overpriced hotel food, and we don’t have to fly all the speakers out to Salt Lake. The price definitely comes down somewhat. And so, it’s been great to be able to put this together.
Dr. Jim Dahle:
If you want to register the link is whitecoatinvestor.com/conference. So, check that out today if that’s something you think you would like to have. It’s qualifies for CME. You can use your CME funds. If you’re self-employed, you can write it off as a business expense. It’s going to be really good.
Dr. Jim Dahle:
All right. We’ve got a special guest today. Let’s get into the interview.
Dr. Jim Dahle:
Okay. Our special guest today on the White Coat Investor podcast is Dr. Sarah Stanley Fallaw. She has a PhD in industrial psychology, but that you probably know her best, from the series of books that she and her father have been working on. Her book out most recently is “The Next Millionaire Next Door”. Sarah, welcome to the White Coat Investor podcast.
Dr. Sarah Stanley Fallaw:
Thanks for having me. I appreciate it.
Dr. Jim Dahle:
So, what was it like growing up as the daughter of Thomas Stanley?
Dr. Sarah Stanley Fallaw:
Well, it was definitely a great childhood. If you have ever seen him speak or see him on old recordings of Oprah or anything like that, he was a lot of fun to be around. He was a great teacher. He was very much focused on making sure that we knew the value of hard work. I think that came from his background and he really had a fun part and show that to his students and certainly to us as kids as well.
Dr. Jim Dahle:
Well, I’m sorry for your loss.
Dr. Sarah Stanley Fallaw:
Thank you.
Dr. Jim Dahle:
There’s a loss to all of humanity, but probably largest to his family members.
Dr. Sarah Stanley Fallaw:
Oh yeah, absolutely. It’s definitely taught me even though I do have a PhD in psychology. You don’t know grief until you go through it. And so, I think that that was certainly eye opening for me. Absolutely.
Dr. Jim Dahle:
So, his book came out. What was it, 1994? How old were you when the book came out?
Dr. Sarah Stanley Fallaw:
Yeah. So, he had written books prior to The Millionaire Next Door. They were mostly focused on helping financial services professionals find affluent clients. He was a marketing professor, that was really his focus. The Millionaire Next Door came out in 1996. So, if you recall, I live in Atlanta, we live in Atlanta, I grew up here. That was when the Olympics were going on.
Dr. Sarah Stanley Fallaw:
So, I think the book came out that fall. And I was a sophomore or junior in college at the University of Georgia and the book came out and it was just something else. Another thing my dad was doing. It’s just like he has work and I knew about it and I certainly was involved a little bit in it here and there growing up. But we really didn’t recognize certainly the import and kind of what was going to happen with that book when it came out.
Dr. Sarah Stanley Fallaw:
But it was fun, he would send me faxes, like with the fax machine of how it was rising on the New York Times bestseller list. Even though I knew that was important, I had a lot going on, I was in college and probably didn’t give it the respect that I needed to back then.
Dr. Jim Dahle:
I think probably less of an impact it may have had on you already being away from home than if you had been in the house still when that happened. So, your degree was in industrial psychology. What interested you enough about that to get a PhD in it?
Dr. Sarah Stanley Fallaw:
Yeah, great question. I started off on the clinical side of psychology. I began studying and looking at different kinds of abuse and was thinking about being a clinician. And what I recognized was I was very good at diagnosing with assessments. I liked the assessment side. I liked the survey research side of psychology and couldn’t really again, I don’t know how you do what you do, but I couldn’t really handle that emotional side of it. That was not going to be something that I was going to have a lifelong career in.
Dr. Sarah Stanley Fallaw:
And then I did recognize that I enjoy the side of understanding personality and attitudes and values and all those things. So that’s what led me do industrial psychology. My professor at the time suggested I check that out and recognized or found out that there’s a whole division and discipline within psychology that helps organizations primarily hire individuals. That’s kind of one of the focus areas. And that was my focus area as well as psychometrics.
Dr. Sarah Stanley Fallaw:
So, that’s how I went into that field. And again, I had some experience with survey research, watching my dad conduct these huge surveys. We’d get stacks of them back on the dining room table and things like that.
Dr. Jim Dahle:
Literally paper surveys.
Dr. Sarah Stanley Fallaw:
Yeah. Paper surveys, with dollar bills that he would send out as the incentive, like real dollar bills. And some of them came back. If they didn’t want to complete the survey, they actually would not keep the dollar bill. It was pretty amazing to see that.
Dr. Jim Dahle:
Now your work at least partially is intertwined with that of your fathers. What’s the biggest professional disagreement between you two?
Dr. Sarah Stanley Fallaw:
Well, I would say when I started my business and went out and went away from the HR side, which is where industrial psychologists mostly work. I began thinking about how psychology could impact or at least be used to understand how someone would build wealth on their own.
Dr. Sarah Stanley Fallaw:
If you think about The Millionaire Next Door, the whole premise there is some folks really are able to transform and come into wealth and others have a more challenging time with it or aren’t able to do it at all. So, I think the biggest disagreement we had when I began that route came from a couple of things.
Dr. Sarah Stanley Fallaw:
One was related to the openness that financial services would have to this really cool research I was doing. He said that they would eat me alive. And I think to some extent he was right. We started DataPoints probably four or five years ago and it’s taken a while to get to where we are today. So, I would say he was probably right about that one.
Dr. Sarah Stanley Fallaw:
And then when we began to talk about the latest book, I really was focused on email surveys. Like we cannot send out paper surveys, that’s just not going to work. Nobody does that anymore.
Dr. Jim Dahle:
Did you have to introduce them to Survey Monkey or something like that?
Dr. Sarah Stanley Fallaw:
Right, right. Exactly. I’m like we have this whole platform. He was pretty focused on that. And I think primarily because if you think about again, millionaire populations are really higher than that in terms of net worth. Those tend to be older folks and so that was the thought there. However, we did find out and unfortunately, I wasn’t able to share this with him, that we had about the same response rate to an email sample, as well as a paper version of the survey. So, I will say, well, there was like sort of a truce there on that one.
Dr. Jim Dahle:
The Next Millionaire Next Door is not necessarily a sequel. It’s not necessarily a second edition. What is the premise of that book compared to the original?
Dr. Sarah Stanley Fallaw:
Yeah. I think there are a couple things related to that. The first is simply that this path or these paths that are available to individuals to actually achieve financial success are still there. And I think that again, if you think about the critics of The Millionaire Next Door, and it’s certainly a lot of that, that there’s criticism that’s warranted to some extent. But some of it had to do with the idea that the book was published in the 90s and things were really great then and that kind of thing.
Dr. Sarah Stanley Fallaw:
What we were hoping to do is demonstrate that the same characteristics and a lot of the same habits and behaviors that allowed people to build wealth and transform and come into wealth back in the 90s or the 80s when some of his research began are still true today. And that’s what we find. Certainly, we found that in the research that we did, as well as the research that I continue to do. Looking at even populations like emerging affluent or mass affluent individuals. So, you still see the same characteristics allow people to transform and come into wealth.
Dr. Jim Dahle:
Now, it seems like your father’s work was originally aimed at teaching companies and individuals how to market to millionaires to the affluent. But somewhere along the way, the focus seemed to change to teaching individuals how to become millionaires. Do you see that transition in the work too? And if so, how do you explain that? Was it just from the popularity of The Millionaire Next Door or what explains that transition?
Dr. Sarah Stanley Fallaw:
Yeah. So again, early on, he had three books that were very much focused on marketing and sales professionals. And so, like you said, they were really designed to help people find wealthy individuals, but part of that work. And again, I wish he was here to explain this better than I can, but part of that work really centered on the different kind of faces of the affluent.
Dr. Sarah Stanley Fallaw:
So, there are some individuals that again, they inherit all their wealth and they live in million-dollar homes and so forth. That’s one sort of group, but then there was this small subset of millionaires and affluent individuals that he found that he deemed the blue-collar millionaires. How did these folks that are in scrap metal dealers and other kinds of like crazy businesses that we would never think would be millionaires, ended up being millionaires?
Dr. Sarah Stanley Fallaw:
And so, he really ended up focusing on that particular sample as well as other business owners and other professionals to look at how they actually did that. How did they do that on their own? Because that’s a different kind of group than, “Okay, my family owns half of South Georgia” or something like that. So that’s where he made the transition. It was from finding that group and finding how interesting that group was. And then saying we can help, there’s a way to share this with others.
Dr. Sarah Stanley Fallaw:
I remember him sharing a story. He was getting on a plane. I think it was snowing in New York back when you could actually get three different tickets on three different airlines to travel. And I think someone came and sat near him or in the area where he was sitting to get home. And again, during an ice storm, the way that he described this person was simply that he looked tired. He continued to work. He continued to be away from his family, and he kind of went through that. How can we help that person recognize that even with this super high income you can spend it all and not have anything to show for it and have to continue that lifestyle?
Dr. Sarah Stanley Fallaw:
I think that was part of the reason that he wanted to highlight that in The Millionaire Next Door. And that’s really when, like you said, he sort of transitioned to looking at millionaires specifically how they in terms of those prodigious accumulators of wealth, versus those under accumulators of wealth, we’re able to do just that.
Dr. Jim Dahle:
Now we are transitioning into my audience here – Those with high incomes that don’t necessarily have high net worth at all. Let’s talk about the concept of a millionaire for a minute. Obviously, a millionaire is somebody who has a net worth of a million dollars, not somebody with an income of a million dollars a year.
Dr. Jim Dahle:
But The Millionaire Next Door is published in 1996. In order to have the same buying power today as a millionaire had in 1996, you would need $1.66 million. So, a millionaire was originally a French term from the 1700s, but our image of what a millionaire is probably comes from the gilded age, the 1920s, maybe the creation of monopoly in 1935 with the guy with the top hat on it.
Dr. Sarah Stanley Fallaw:
The Monocle, right?
Dr. Jim Dahle:
Yeah, that’s right, the Monocle. A millionaire in 1925 though is the equivalent of someone with a net worth of $15 million today. This idea in our popular consciousness is quite a bit different from what today’s millionaires are. How does that fact, the fact that the name and image hasn’t changed, but that a million dollars is nowhere near what it used to be affect how we discuss this subject?
Dr. Sarah Stanley Fallaw:
I think a lot of it has to do with language. It’s easy to talk about a millionaire. That’s very descriptive. I understand what that means and it has a marker. It has a number assigned to it. So, I think that that’s part of the reason that it sticks around today. But I do think that you’re right. It’d be in terms of whether or not that’s right for you as an individual, do I need to achieve millionaire status or do I need something that’s a lot higher than that in order to sustain me and sustain my lifestyle into like my retirement years, for example.
Dr. Sarah Stanley Fallaw:
So, I think it is kind of I guess arbitrary or really up to the individual, what financial success means to you or to anyone. But again, I think that term sticks around. It’s popular. It’s searched for a lot. We know that. And so, I think that that’s why it continues to be something that we use, even though we know that it may take much more than that, for example, to fuel all kinds of plans that you have for your life.
Dr. Jim Dahle:
Yeah, for sure. And I wonder in 20 years or 50 years when it’s worth even less, a million dollars will become worth even less. Today we malign the millionaires and billionaires but will we still be talking bad about the millionaires in a few more decades? It makes me wonder.
Dr. Jim Dahle:
But the main lessons your work seemed to be that millionaires are mostly self-made, that they’re surprisingly frugal and that they spend their time doing things that build wealth. So, I want to talk about each of those subjects in turn.
Dr. Jim Dahle:
Your survey showed that 80% or so of millionaires basically received no inheritance. They’re self-made. And they feel that a large part of their success was due to their own hard work.
Dr. Jim Dahle:
But surveys of the general population show that people in large part think success is mostly due to luck. And that disagreement is perhaps the greatest difference between our two political parties. As usual, the truth probably lies somewhere in the middle, but in your book, you say that it’s a myth that you are your group. And by that we’re referring to where you were born, the color of your skin, your gender, et cetera.
Dr. Jim Dahle:
And say, “Believing in that gives you an out to explain why you cannot get ahead”. So, I wanted to ask you what your thoughts are on this crucial subject. Why are the rich, rich and the poor, poor? And how much of that can be attributed to hard work and ability and how much should be attributed to circumstances and discrimination and privilege and luck?
Dr. Sarah Stanley Fallaw:
Yeah, that’s a fiery topic for sure. I’ll say a couple things about that. So, first of all, what we know is that those of us who really view financial success as something that we can control, that’s up to us, that we know that if I work hard or if I am able to be disciplined about my finances, that I will be more successful than those that believe that something else or someone else controls their financial success.
Dr. Sarah Stanley Fallaw:
That’s what we call locus of control in psychology and it does correlate with building wealth and net worth. So, we know that that’s the case, and that’s why that myth of, “Well, if I’m in a certain group and my group looks like this in general, I can’t get out of this”. And so again, that’s one of the things that certainly is a myth.
Dr. Sarah Stanley Fallaw:
I think that you’re right. I think that there’s a combination. I think my father certainly was very aware of the fact that if your income level is again at the poverty level or something like that, it’s going to be extremely difficult for you to pull yourself out of that and become a billionaire, a millionaire. I think those are the kinds of things that people get stuck on. And he certainly recognized that and I do as well.
Dr. Sarah Stanley Fallaw:
I think the difference, like I said, comes in when we’re using some of these things as sort of crutches for why we can’t do things. We know what it takes to build wealth. We know what it takes to sustain wealth from a behavioral perspective, but a lot of us just don’t want to do those things. And that’s the hard part.
Dr. Sarah Stanley Fallaw:
But I think it’s naive to not recognize the fact that there are challenges that each of us has because of those factors that we don’t have to recognize. We absolutely do need to recognize them. And so it may be harder for some to overcome those, but in general, what we know is that if you have this mindset that you can actually impact what happens to you, the likelihood that you’ll be successful is higher.
Dr. Jim Dahle:
Yeah. I’ve always wondered. Even if it’s impossible to ascribe a percentage of your success to your circumstances versus your work and ability, there’s only one of those you can affect. You can’t affect your circumstances. I mean, you can vote at the ballot box and you can protest and you can work for societal change, but when it comes down to your personal finances, the only thing you can do anything about is your discipline and how much you work.
Dr. Sarah Stanley Fallaw:
Yeah. That’s a great point. I was talking to one of our clients that works with us and who works with clients, was sharing with me that their clients scored low on that factor that I just mentioned, which is that control factor. And they felt like it didn’t demonstrate how much they’ve grown since they’ve been an adult and working into how to manage their own finances and that it didn’t really reflect them, they didn’t feel like. But at the same time when we take the attitude that things around us are more important than what we’re actually doing, I think that that is where people get tripped up for sure.
Dr. Jim Dahle:
It’s kind of a toxic mindset that prevents you from building wealth.
Dr. Sarah Stanley Fallaw:
Right. Exactly.
Dr. Jim Dahle:
So maybe what we should say is that that locus of control is a necessary, but not sufficient trait to build wealth. You got to have it, but maybe it’s not everything.
Dr. Sarah Stanley Fallaw:
Right. I mean, going like you said, again, millionaires and those that tend to be financially successful, for you that don’t want to use the “millionaire” term. It certainly is part of it, but it’s also the frugality piece. We see that consistently, whether we’re talking about those that are making six figures or those that are just out of school. Those that are able to live below their means tend to be better at accumulating wealth over time.
Dr. Sarah Stanley Fallaw:
So, it certainly is kind of that mindset, but it’s also those frugal behaviors that lead to transforming income into wealth. And again, that has a lot to do with conscientiousness and discipline and some of those things that aren’t so fun to talk about, but they work and that’s the hard part about it.
Dr. Jim Dahle:
It’s a great segue into what I want to talk about next. When I hand a book, whether it’s your book or your father’s book, or whoever’s book, a book from the millionaire series to someone, the main takeaway I want them to get from it is perhaps best said by Morgan Housel. And I paraphrase a little bit, but he said, “Everyone wants to be a millionaire. Everyone thinks they will or says they want to be a millionaire but what they really want to do is spend a million dollars”. And you become a millionaire by not spending a million dollars that you could have spent.
Dr. Jim Dahle:
Your work has shown that real millionaires don’t wear flashy clothing or display expensive watches or drive sports cars. What are your favorite statistics about the frugality of millionaires?
Dr. Sarah Stanley Fallaw:
Yeah, I think that one of them is definitely what they learned from their parents. Part of my area of research when I was in grad school was looking at life experiences and how that impacts what we do today. So, what are the kinds of life experiences that you have as a child or as an adolescent, and how does that lead to your career success and things like that.
Dr. Sarah Stanley Fallaw:
Again, I think it’s about 70% or so of millionaires’ report that their parents were frugal. So, they saw these frugal behaviors modeled at home. And again, whether that was causal or not, they tend to also be frugal today. We do see that maternal frugality. So, if your mom was frugal that predicts your net worth above and beyond age and income. In other words, it’s a significant factor in predicting your net worth if you had a frugal parent at home.
Dr. Jim Dahle:
Is it a parent or is it specifically a mother?
Dr. Sarah Stanley Fallaw:
Yeah, we looked at maternal and paternal. So, this was a study we did a couple of years ago. And I think that paternal was not quite as strong.
Dr. Jim Dahle:
Interesting. That’s an interesting statistic.
Dr. Sarah Stanley Fallaw:
Yeah. I think that’s primarily because is more traditional and again, the study was done a couple of years ago, the mom was the one at home traditionally. And so, I think that that’s why it was important.
Dr. Sarah Stanley Fallaw:
In that same study, thinking about careers and physicians, we also found that the mom’s influence on careers was also high, so that helped with job satisfaction and things like that later in life as well. So, you have a mom that’s asking you about what you want to do and nagging you to join groups and things like that. That’s a good thing, even if it feels annoying when you’re growing up.
Dr. Jim Dahle:
Interesting. So, what are millionaires driving? Are they still driving an F-150?
Dr. Sarah Stanley Fallaw:
Yeah, so that changed a little bit. I think it’s Toyota and then Honda and then Ford mixed in there. BMW was number four. Because not only did my father have tons of stats and statistics, but now again working in the field that I work in, we’ve got things floating around, but yes, I believe that’s the correct order.
Dr. Sarah Stanley Fallaw:
So, it’s still the case that they’re driving these sorts of modest, if you will, types of cars. Very few of them lease vehicles. And when they do, and you can see this, I think that we talk about this in the book that those cars tend to be a lot more expensive. So, they’re leasing kind of luxury vehicles. And again, when you think about not only you driving something, but your spouse, and then maybe eventually your teenage kids, that can be a real trick in terms of accumulating wealth as well.
Dr. Jim Dahle:
I think it’s David Bach that talks about The Latte Factor most famously, where he says you skip a latte every day and it adds up to a gazillion dollars by the time you’re 60. What are your thoughts on the big pieces in your financial life? The mortgage and the big rocks versus the little rocks, the daily lattes and the little decisions. What do you recommend to someone trying to build well? Should they focus on the big stuff or do they need to be generally frugal with everything?
Dr. Sarah Stanley Fallaw:
Yeah. So, I would say maybe have a little different take on this and maybe I’m way off of what you want to focus on here. But I think that when you think about the big decisions that often leads to the small ones. And so, for example, if my husband and I decided we’re going to move to a certain kind of neighborhood, right? It was in a certain kind of school district where everyone’s driving certain kinds of cars and they’re all sending their kids to private schools, or what have you.
Dr. Sarah Stanley Fallaw:
And again, that’s fine, but you have to recognize that that leads to other lifestyle choices and lifestyle influence really. Obviously, if you save a certain amount of money every day by not having that latte over time, that’s going to help you. But you kind of have to ask yourself, “Well, why am I buying a latte in the first place? Is it because everyone around me is always going out to dinner and out to lunch and out to breakfast? Is it my coworkers? Is it my neighbors? What is it that’s influencing me to do that?”
Dr. Sarah Stanley Fallaw:
Part of his research and part of the side of the research that I really enjoyed was that influence piece. Where you plant yourself, where you buy your home really has, or rent or live, or what have you, influences a lot of other decisions. When you ask that question, that’s immediately what I thought of.
Dr. Jim Dahle:
Now, a lot of times when people hear this stuff, the first time I read The Millionaire Next Door, there was a lot of surprises in that book to me. I surprised that these people that have a lot of money don’t necessarily spend a lot of money. What’s it like to see that light in people’s eyes when they realize that their ideas about what millionaires do or have is completely wrong?
Dr. Sarah Stanley Fallaw:
That’s funny because now the folks that we tell this story to, if you will, a lot of times our kids or the friends of our children. A lot of people, certainly since The Millionaire Next Door came out, but also all the other books out there that talk about frugality and things like that. I think that’s where we really are able to sort of influence now is with our children.
Dr. Sarah Stanley Fallaw:
It is telling them just because your friend just got the iPhone 12 doesn’t mean that they’re wealthy. It means that they spend money. And so that is eye opening to them. And it’s a hard lesson to learn, especially when everyone’s walking around with the newest, latest and greatest gadget. So it is really interesting to see that reaction.
Dr. Sarah Stanley Fallaw:
I think that we continue to see or continue to get feedback from folks that have read The Millionaire Next Door for the first time. Maybe they didn’t read it back in the 1990s or whenever, that will share with us how eye opening it was, that will share with us that, “Hey, my parents did this and this is why they were able to send me to college and this has led to me being successful”. So, I think that those are some of the things that continue to be, I guess kind of supportive of this research and the work that I’m trying to continue to do.
Dr. Jim Dahle:
Now the whole FIRE movement was kind of born in between your father’s book, The Millionaire Next Door and this book. It was kind of been born and grew up. Do you have any thoughts on the FIRE movement?
Dr. Sarah Stanley Fallaw:
Yeah. I think that what’s interesting about that is the fact that it illustrates a different path to building wealth. A lot of people think, “Oh, The Millionaire Next Door. I don’t want to be frugal. I don’t want to live like that”. But there are a whole host of different paths that were spelled out in that book, as well as the current one that illustrate that look, if you have a super high income, or even if you have multiple income streams, there’s a way to retire early.
Dr. Sarah Stanley Fallaw:
So, I don’t have any, I guess, problem with it. I know a lot of folks would say, “Oh you can’t do that or you shouldn’t. It’s not good to just stop working”. And I don’t think anyone that’s really in the FIRE community would say I don’t do anything all day. I just sit around and drink lattes. So, I think that the FIRE community, and certainly that movement illustrated that there are multiple ways to achieve financial success. There are multiple definitions of financial success as well.
Dr. Jim Dahle:
Now the original book had a whole story of Dr. North and Dr. South. And that was really formative to me and I think many other financially successful physicians. I even discussed that in my original 2014 book. Most of my listeners are doctors. Most of whom at some point in their early thirties, went from an income of something like $50,000 as a resident to something like $200,000 to $500,000 a year as an attending physician. What advice do you have for them in regards to the role of frugality in their success?
Dr. Sarah Stanley Fallaw:
Yeah. So, what I would say is that we have patterns of behaviors. We have patterns and habits that we do without thinking. And if you can sort of establish a pattern within your life and within your household of generally living below your means early on, you can sort of sustain that habit, even when you have a large increase in income.
Dr. Sarah Stanley Fallaw:
What’s really hard is I would say to always be spending and spending to your limit always, and then move into a frugal stage, let’s say four or five, six, seven, eight years into having that really high income. In other words, it’s going to be a lot harder because early on you might decide, again, like we were talking about before, you might decide to purchase a home that’s a little bit of a stretch at the time. And then that leads to a whole host of other decisions.
Dr. Sarah Stanley Fallaw:
So, I would say establishing those patterns of being frugal, even if it’s maybe not the funniest thing to do, when you are early on in your career will allow you to keep those behaviors later in life as well.
Dr. Jim Dahle:
So, you would say it is pretty good advice for me to tell them they should keep living like a resident for two to five years after they get out.
Dr. Sarah Stanley Fallaw:
I think that that is very good advice. Yes, exactly.
Dr. Jim Dahle:
Not to put any words in your mouth.
Dr. Sarah Stanley Fallaw:
Yes, I agree.
Dr. Jim Dahle:
Millionaires tend to spend time on activities that build wealth. They work a lot of hours. I think they work about 20% more than non-millionaires. They love their profession or business. They often have hobbies that make money. They often manage their own investments. How important do you think it is for a doctor who wants to be financially successful to number one, love their work and number two, manage their own investments?
Dr. Sarah Stanley Fallaw:
So, I think that when you think about loving your work, that just allows a whole host of wellness and health related benefits. So, I’m not stressed. I enjoy what I’m doing all day. It also allows you to maintain that income level. Now, I would say that with physicians, that’s probably a little different, right? After all that schooling, the likelihood that you would drop out of that profession is probably low, but loving what you do every day obviously has a lot of benefits outside of just the financial benefits.
Dr. Sarah Stanley Fallaw:
In terms of managing your own finances, certainly if you have the interest and you’re able to put processes in place, you maybe have a good support team at home. I think that that’s perfectly fine. And I think that a lot of people can do that. My husband’s a great example. He is a tax attorney, long suffering tax attorney, loves personal finance. We do our own finances and he does them, but I’m a liberal arts major. And I doing the same thing over and over again, it would be mind numbing to me.
Dr. Sarah Stanley Fallaw:
And so, if there were two of us in the household like that, that were more creative and more big picture thinkers, it would be bad for our finances. And so that’s when it would make sense to have someone, especially if we had the income to manage it for us. But again, if you have the interest and the time and the support at home to do that, then certainly I think that that’s something that you could do.
Dr. Jim Dahle:
You got to be detail oriented though.
Dr. Sarah Stanley Fallaw:
Yeah. Again, we go back to this concept of frugality. There’s another component called planning and monitoring. If you’re high on those, you will be able to build wealth. And if you’re not, it’s going to be harder for you to track too. Again, it’s a component of conscientiousness and you want your accountant to have conscientiousness and you certainly need it as well if you are managing your own financial life.
Dr. Jim Dahle:
Now, your father coined a term that’s become somewhat famous. I don’t know how descriptive it is, but it’s come to have a certain meaning. He called it “economic outpatient care”. And it’s a factor that a lot of my readers really worry about. They want to help their kids not have as hard of a path as they had, but they also don’t want to ruin them with their money. Can you explain a little bit what economic outpatient care is and give some guidance to the best ways to avoid ruining your kids with your money?
Dr. Sarah Stanley Fallaw:
Yeah. The best way to describe that is really financially supporting your children into their adulthood and supporting their lifestyle. So, for example, if you are funding your adult child’s membership at a country club, or you’re making the purchases of cars for all of your adult children, something like that, when they are working and they have wherewithal to do it themselves.
Dr. Sarah Stanley Fallaw:
I certainly understand that. I think my dad grew up in a blue-collar neighborhood in New York and he didn’t want us to have as hard a time as he did. But I think recognizing that in order to build and sustain wealth on your own, you’re going to have to have some of that hard work. Some of those hard knocks life lessons, whether you get them when you’re younger or older, it’s better to get them younger by the way.
Dr. Sarah Stanley Fallaw:
And so, I think that there is a balance. There’s a balance between enjoying the money that you have with your children today, but then also setting them up so that they understand that that is your money, you and your spouse’s money and that when they grow up, it’s not that they’re going to move in into a home that looks just like yours.
Dr. Sarah Stanley Fallaw:
Even having those conversations early could be useful and helpful. Helping them understand what they’re going to have to pay for and being okay saying “no”, that’s really challenging, especially for those who maybe had it tough, had to pay their own way through school.
Dr. Sarah Stanley Fallaw:
It’s hard to say “no” to their child because they feel like, “Oh, I’ve done all this hard work. Why should they have to do it now?” But it is the case, again, that if you can build that discipline and hard work ethic early on, it will benefit them in the long run. Even if it’s hard to do in the short term.
Dr. Jim Dahle:
Do you think it’s important to put them through some hard times, even if they’re a little bit artificial? Let me give you an example. I got a 16-year-old now and when it came time for her to learn to drive, we went out and bought an $800 car for her to learn to drive in and drive to high school for as long as it lasted, which was about a year.
Dr. Jim Dahle:
And it is a little bit artificial. Obviously, we could have bought something that was much more expensive. She knows that, we know that, all my listeners know that, but we decided to do it anyway. Do you think there’s any value in that or do you think we’re just playing games?
Dr. Sarah Stanley Fallaw:
Yeah. That’s a great question because I have a 15-year-old, so I’m glad to hear that was your experience. It really depends. I think that if you manage their expectations the right way, and she probably already knows that you are focused on being frugal to some extent, and not necessarily providing every luxury to your children. She’s probably already aware of that.
Dr. Sarah Stanley Fallaw:
I don’t know. I guess I would ask did she have a good experience with that? Did she learn anything? Those were the kind of success measures I would maybe put in place for doing something like that, having that artificial kind of experience.
Dr. Jim Dahle:
Yeah. She certainly rattled off the five things I wanted her to learn from the experience. I’m not sure we really know if it works until you’re 30 or 40 though. So maybe the jury is still out for a while.
Dr. Sarah Stanley Fallaw:
I will say though, you can see examples of extreme frugality backfiring. And so, in some of the open-ended comments that we threw in a study back in, I think it was 2013 and 2014 that we did. We looked at some of the ramifications of that extreme frugality. Like even though we know that we can afford to buy soap, we’re going to use only soap that we got at the hotel rooms when we used to go to hotel rooms, that kind of thing.
Dr. Sarah Stanley Fallaw:
And those can have some damaging effects too, depending on how it goes. And especially if there’s not a lot of great communication in the household and things like that, that can lead to adult children wanting to spend everything. I don’t know. We’ll have to see. We’ll check back in a few years and see what it ended up doing.
Dr. Jim Dahle:
In your book you say rule number one for raising productive adults is to never tell your children that you are wealthy. I couldn’t tell if you are completely serious about that, but if you are, how can you possibly enjoy any of your wealth without your kids cluing into it?
Dr. Sarah Stanley Fallaw:
Great question. I think that it goes back to what we know about life experiences. And what we know is that those millionaires tend to have frugal parents. So yes, you can enjoy the hard-earned money that you’ve made and that you’ve saved. But the difference is I would say, if you look back at The Millionaire Next Door, and you look at that chapter that has Dr. South in it, you see how my father describes the kinds of spending that he was doing. It was out of control.
Dr. Sarah Stanley Fallaw:
There’s a difference between enjoying it and simply not being responsible with it. And so, maybe I don’t have children that are adult children yet. So, I don’t know the impact that we’ll have on our kids, but I would say there’s a difference between being able to enjoy it and simply wasting it.
Dr. Jim Dahle:
Let’s talk a little bit about investor characteristics and how that plays into the decisions that investors make, whether they make good decisions or maybe decisions that aren’t so great. What characteristics should investors strive to develop in themselves or try to identify in themselves?
Dr. Sarah Stanley Fallaw:
Again, we look at what makes a good investor from a competency perspective. Like if you were going to hire, let’s say an assistant to work with you, you’d want them to have certain competencies. Well, it’s kind of the same when we are talking about investing. So, we look at investing like a job, a specific job that you have to do within your household, especially if you’re managing it yourself.
Dr. Sarah Stanley Fallaw:
The five key characteristics that we consider are things like being confident in your investing decision-making that includes being knowledgeable. Reading, learning. We know that only about 18% of us learn how to invest from our parents. So, it’s got to come from somewhere. You’ve got to build that knowledge.
Dr. Sarah Stanley Fallaw:
The other piece that physicians tend to not struggle with is that volatility composure. So, volatility composure is the emotional side of investing. It’s the ability to keep your cool, no matter what’s happening around you. And you can think about how that plays out on the job, but it certainly is the case when we’re talking about investing and we’re watching the markets or we know what’s happening.
Dr. Sarah Stanley Fallaw:
If you think about March and April, we had advisors that were sharing with us, “Hey, the folks that were scoring low on this particular component ended up being the ones calling us and worrying about what was happening in the markets”. That’s the emotional side of it.
Dr. Sarah Stanley Fallaw:
Certainly risk personality and preference. Those are two different components, but you’ve got to have some preference for having risks within your portfolio, in order to take advantage of investments. Risk personality deals more with wanting to have sort of exotic investments versus more traditional investments.
Dr. Sarah Stanley Fallaw:
And then the last piece is sort of this judgment. So, am I a long-term investor? Do I recognize the value investing and not touching things? Or am I more of a short-term investor? Do I really look at investing as something that is a day by day, hour by hour kind of activity? Typically, those that are more of the long-term persuasion tend to be more successful over time.
Dr. Sarah Stanley Fallaw:
And again, like I said, we typically see physicians are very high on that volatility composure, which is very different than some of the other kind of occupational groups that we see.
Dr. Jim Dahle:
Well, I hope physicians are becoming better and better investors as time goes on. Some of the criticisms that have been leveled at them is that they are more confident than they should be sometimes. That the knowledge lags the confidence.
Dr. Jim Dahle:
In my experience, I almost see the opposite sometimes where the confidence is about a year behind the knowledge base. That they don’t realize, “Yeah, I could have done this myself a year ago”, but they weren’t quite confident enough to do it. But I think the stereotype is the classic general surgeon stereotype sometimes right, sometimes wrong, but never in doubt.
Dr. Sarah Stanley Fallaw:
They always know what to do. Yeah.
Dr. Jim Dahle:
Yeah, that’s exactly right. So, at any rate we should wrap up here soon, but you’ve got the ear of 30,000 to 40,000 high-income professionals, mostly doctors. Is there anything else you’d like to tell them that we haven’t already talked about?
Dr. Sarah Stanley Fallaw:
Well, that we haven’t already talked about? I can’t meet that, but I would go back to these patterns of behaviors piece. Meaning if you can establish some of those behaviors that are needed to transform income into wealth. Certainly, my father wrote about them. I write about them. You talk about a lot of them.
Dr. Sarah Stanley Fallaw:
If you can establish this early, that will allow you to take that great income that you’re making and transform it into wealth that you can enjoy, your family can enjoy it for the long-term. If you’re not there today, the good thing is you are in control. You can change your behaviors. It’s not always easy, but there are ways to do that. And so, I think that that’s part of what I would just leave everyone with.
Dr. Jim Dahle:
Awesome. And if people want to learn more about you, either your work as an author or your work at DataPoints, what’s the best way for them to learn more?
Dr. Sarah Stanley Fallaw:
You can visit our website at datapoints.com. I’m on LinkedIn and Twitter as well at Sarah Fallaw. So definitely reach out.
Dr. Jim Dahle:
All right. Dr. Fallaw, thank you for your time on the White Coat Investor podcast. We appreciate you coming on.
Dr. Sarah Stanley Fallaw:
Thanks for having me.
Dr. Jim Dahle:
Bye-bye.
Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. That’s one of the best parts of being a podcast host is you get to go out and just ask people that you want to learn more from and talk to if they’re willing to come on your podcast and every now and then they say yes. So, it was wonderful to talk to Dr. Fallaw about that. I hope you enjoyed it.
Dr. Jim Dahle:
Thanks to those of you who are leaving us a five-star review about the podcast. It really does help share it with other people. Our most recent one came in from Trentkeel who said, “The Authority on Physician (High Earner) Finance. Six out of five stars. The WCI Podcast is the single best source of financial information for high earners. The earlier episodes cover some of the basics more comprehensively, but I feel overall the podcast works best as a supplement (or introduction) to Dr. Dahle’s books (“The WCI: A Doctor’s Guide to Personal Finance” and “The WCI Financial Boot Camp”) as it goes into several deep dives on the nuances of investing, taxes, etc.
Dr. Jim Dahle:
Incorporating this podcast into your daily commute or workout will pay handsome dividends later in life, as you will most certainly be closer to financial independence much earlier than you would have been otherwise.
Dr. Jim Dahle:
Furthermore, as a high earner you are likely to be the target of many a predatory financial “adviser”, but if you stick to the principles Dr. Dahle has laid out, you’ll be able to see them coming from miles away.
Dr. Jim Dahle:
The WCI is simply the best, period. Listen to his podcast, read his books, and if you have an interest, take his course (“Fire Your Financial Advisor”). You’ll be glad you did. My only regret is that I didn’t learn of him sooner”.
Dr. Jim Dahle:
So, thank you for that, Trent. I appreciate that five-star review, and thanks to those of you who have left us a rating or a nice long review, like Trent left.
Dr. Jim Dahle:
Remember that WCI con 21, if you want to get the swag bag, you got to register before January 5th. That gives you time to do it using 2020 CME money or 2021 CME money. But if you don’t do it by the 5th, you can still register for the conference, you just won’t get the super sweet swag bag.
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community nation-wide and frankly a long-time sponsor and supporter of the White Coat Investor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to put them in place yet, contact Bob at drdisabilityquotes.com today. You can email him at [email protected] or you can call at (973) 771-9100. Tell him the White Coat Investor sent you. He will treat you well.
Dr. Jim Dahle:
Head up, shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
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