How to Solve Your Money Emotions and Achieve Financial Freedom

You couldn’t pay me to own a yacht, but they do look real fancy.

I recently read MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins. The book shifted my thinking and emotions around money to such an extent that it warrants a post. While the book does get into technical details regarding types of investments, asset allocation, and diversification, the most impactful sections are those that address the big emotional and value questions around money, such as:

• What is money for, for you?
• What emotions do you have around money and the accumulation of wealth? Guilt? Anger? Greed?
• What is enough for you, in terms of a savings/total assets amount? Why?
• What level of financial security or financial freedom is your ideal?

Sometimes I’m critical of Robbins because he rarely addresses social change. His response to adversity and problem-solving is always personal. This book is his response to Wall Street shenanigans and outright crime leading to the 2008 financial crisis. Robbins states several times that he was deeply influenced by the documentary Inside Job. While my own response to the film was on a social/political level (call for more financial regulation, put the Wall Street crooks in jail, and institute a Robin Hood tax on financial transactions), Robbins responded by writing a book that increases the financial power of the individual, and steers the readers towards investment strategies that will benefit them and not their broker or mutual fund manager (this book is a mutual fund manager’s worst nightmare). Even though the tools offered don’t address Wall Street crime or massive wealth inequality, they do empower the average hard-working U.S. citizen (and that’s a good thing).

The Basics — Getting Rich Slowly with Compound Returns

Much of the advice Robbins offers is not new, but he explains and supports his recommendations thoroughly and effectively. The first two sections of the book cover the following:

• Deconstruct and get clear on your emotions and intentions around money
• Set up an automated savings plan of at least 10% of your income
• Understand how compound interest works, and how investment returns will almost always beat earning money by working in the long run
• Educate yourself re: which investment vehicles to avoid, especially managed mutual funds

Robbins takes the managed mutual fund industry to task in the book, and offers evidence that 96% of managed mutual funds fail to beat indexes like the S&P 500. He exposes advertising tricks used by mutual fund companies, like averaged returns. Let’s say your mutual fund goes down 50% one year, then up 30% the next year, then up 41% the year after that. The fund would advertise an average return of 7% ((30+41-50)/3). So if you invested $1000, you might think you would have a fund value of $1225 (3 years of compounded 7% interest). But your actual fund value would be $916.50 ($1000 x .5 x 1.3 x 1.41). I have fallen for that one myself, chasing “high performing” mutual funds that were in fact just fund managers that had been lucky for a few years running and therefore became the funds advertised (I write more about my various investing mistakes in this post).

Robbins also breaks down the various fees charged by mutual fund companies, and demonstrates the devastating cumulative negative effects of “small” fees over multi-decade periods. I won’t get into the details here, but it made me relieved that I switched from managed mutual funds to low-cost indexes (including SPY, with an expense ration of only one-tenth of 1%) years ago.

How Much Do You Really Need (or Want)?

In Section 3, Robbins helps the reader clarify how much money they will actually need to realize the kind of future they want. I had a number in my head and ended up significantly revising it downward after I took a hard, detailed look at what kind of lifestyle makes me happy, and what it will take to maintain that lifestyle in the long-term.

Throughout this section Robbins continues to emphasize that the ideal approach to money emphasizes emotion over accumulation. What kinds of feelings and experiences do you want to have? How much money is actually necessary to achieve those dreams? Though Robbins is a capitalist through-and-through, and very “pro-wealth,” he steers the reader away from trying to accumulate money in order to meet the core human needs of significance/respect, love and connection, and other needs for which the accumulation of money is an indirect and unreliable means. Though money has its uses, it’s not a great way to find love, and great wealth may even impede success in that area (do they love you for your personality or your bank account?). Nor is the accumulation of wealth a great way to gain the respect and admiration of your peers; it’s just as likely to earn their scorn and envy. Instead, Robbins suggests that what money is for is maintaining a lifestyle that gives you pleasure, providing comfort and security, and contributing to social and charitable causes.

With this in mind, Robbins talks the reader through steps to come up with a detailed “goal budget” that includes basic expenses, travel and “fun” categories, giving goals, and so forth. Since my own “ideal life” does NOT include private jets, owning islands, $1000+ bottles of wine, maintaining an entourage, or passing on a huge inheritance to my daughter, I discovered that I was already on track to meeting my own version of financial security and freedom.

The Buckets — Allocating Your Savings

So once you’ve put aside some money, what do you do with it? The short answer for young people is:

• pay off your high-interest debts as quickly as possible
• put some aside for an emergency fund (money you could live on for at least a couple months if your income streams dried up)
• buy into a low-cost index fund on a monthly or quarterly basis (something like SPY, which tracks the S&P 500, or the Vanguard Balanced Index Fund Admiral Shares which is 60% stocks and 40% bonds)
• put some in a “fun bucket” (save for a toy, vacation, etc.)

The exact amounts and percentages will depend on both your current financial situation and your emotional state. In terms of the latter, how stressed out do you get when your investments takes a hit? Are you going to freak out and sell low if your portfolio takes a 30% hit in value in a single week? (If the answer is yes, you should be invested in stocks and bonds as opposed to only stocks, even if the latter will give you a higher probable return in the long run.) These topics are all covered in Section 4.

Ideal Diversification and Lifetime Investment Income

In Section 5, Robbins delves into the details of ideal asset allocation across different investment classes (stocks, bonds, inflation-protected bonds [TIPS], commodities, gold, etc.). Factors that will influence these allocation decisions include risk tolerance, age, investment goals, and so forth. In this section Robbins unveils the “All Seasons Strategy” — Ray Dalio‘s ideal investment allocation. This somewhat conservative allocation (including long-term treasury bonds, short-term treasury bonds, stocks, commodities, and gold) has performed extremely well in all four market types (bull market with rising inflation, bull market with falling inflation, bear market with rising inflation, bull market with falling inflation).

The most interesting part of this section are considerations for retirees or other people who need to start getting their money out of their investments in a structured way. I won’t get into the details here, but the advice is excellent.

Investment Gurus (Their Actions Don’t Always Match Their Advice)

Section 6 is a series of interviews with various investment and finance geniuses including Carl Icahn, Warren Buffett, Paul Tudor Jones, Ray Dalio, Mary Callahan Erdoes, and Charles Schwab. I’m still reading this section, but one thing I’ve noticed is that the investment actions and successes of these icons doesn’t always match the advice they give out. Investment gurus often say “don’t try to time the market” (and Robbins echoes this advice). But these personal histories of these billionaires almost always involve buying low and selling high, time after time.

The question that I’m still considering (and the subject of my next post) is: Are there ways to quickly and accurately evaluate if a given sector or asset class is “cheap” or “low”? When is gold cheap? When are US Treasury bonds cheap? When is the S&P 500 cheap? When is real estate cheap?

The answers to the seemingly simple questions can be counterintuitive. When we bought our house in Oakland in 2001, the amount we paid seemed extremely high. It turned out to be the best investment we’ve made to date. Housing prices have doubled since that time. Could Oakland real estate still be cheap (and therefore a good investment)? Maybe so. Housing prices in London have doubled every ten years for the last one hundred years.

The question I will try to answer in my next post is “How Should You Invest a Lump Sum?” (from an inheritance, pay bonus, or other windfall, or simply because you’ve been terrified of the stock market and are 100% in cash). Should you immediately buy in according to your determined asset allocation plan? Or does it make more sense to buy in gradually, purchasing “cheaper” assets first. I’ll share the simple metrics I’m currently using to evaluate each asset class, and also ask for your feedback.

What If You Are Living Paycheck to Paycheck, or Don’t Have an Income Source?

I’d like to acknowledge that many of my readers might not be a situation where any of this seems relevant. Your budget might be so tight that even putting away 1% is a stretch, and it’s a struggle simply to not fall deeper into debt. In that case my earlier post Creating An Economic Plan might be helpful. Life is long, and a five year plan that considers where you want to be (based on both your desires and your responsibilities), your own temperament, and economic demand might dramatically change your life. However I’d still recommend the Master the Game (or one of his earlier books, like Awaken the Giant Within) to get clear on your values, goals, and what you want to contribute to the world in this life.

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