74. Tim Harford Makes The World Add Up
This week, I speak to Tim Harford, “the Undercover Economist”, Financial Times columnist, BBC broadcaster, and the author of nine books and the presenter of BBC Radio’s “More or Less” and “How To Vaccinate The World”.
Growing up in what Tim describes as ‘a very British way’, the topic of money was one rarely discussed in the Harford household. The cost of living was a lesson learned during Tim’s teenage years and early adulthood that was not void of a few trip-ups along the way.
Tim’s personal stories of progress, years of research and recognition as an expert in his field offer a unique and insightful perspective to our ongoing discussion about the journey to mastering our money, worrying less, and living more.
You can check out Tim’s latest book, How To Make The World Add Up, by clicking here.
Episode Transcript
0:05
Hello, and welcome to the real money stories podcast. I'm Jason Butler. And I invite you to join me as I have intimate money conversations with people from all walks of life. Whether you're just starting out on your money journey, or well down the track, there's bound to be something you can learn from these stories about taking more control of your money, so you worry less and enjoy life more. Real Money stories is sponsored by Vanguard, bringing value to 30 million investors worldwide. Visit Vanguard investor.co.uk For more details, and remember, the value of investments can go down as well as up and you may get back less than you invest in. Hello there. Thanks for joining me for this week's episode. Coming up, I respond to a reader's comment on my rent versus buying property blog. Some ideas for increasing your income should you sign up for a monthly subscription for a new electric car. I have a book recommendation for you for young people. And I've got a fabulous interview with leading economist author and broadcaster Tim Harford, who shares his own money insights, including how he responded and handled the stock market crash of last year. Now, last week was a big milestone in the butler household, we finished building a house in part of our garden. The builds taken just over nine months from the demolition of two old wooden outbuildings. But the planning for it started about two years ago. It's been quite a steep learning curve. And I've really enjoyed the process. And I'm really pleased with the outcome. And we intend to let the property as a holiday home just as soon as the COVID restrictions is hopefully next month in April. So fingers crossed that all that pent up demand for a UK holiday will translate into plenty of bookings. And I'll let you know how we get on with that in a future episode. You'll be able to read my full length Financial Times feature about myself build journey in the weekend ft in the beginning of April. And you can watch each stage of the build on my YouTube channel at Jason Butler financial wellbeing, or via the video page on my website at Jason hyphen butler.com. If you're thinking of building your own house, and you have questions that you'd like me to answer, do email me at inquiries at Jason hyphen butler.com. And I'll do my best to help you.
Now a few weeks ago, I wrote a blog called the truth about renting versus buying where I examine the pros and cons of renting versus buying a home. And why am when it might make more sense for you to rent your home, but invest in other property elsewhere. Now we've only just activated the ability for people to leave comments below my board blogs and several readers have listened very thoughtful comments on this particular blog. And this is what someone called Tom said, Hi, Jason, great post. I'm in my mid 30s. And I've always lodged very cheaply. I've never paid more than 250 pound a month in rent Crikey. I don't know where he's, he's staying. But that seems a good deal. I've always been a saver. But I really got serious about saving and investing about four years ago, and have grown a pot of money that would allow me to afford a deposit on a house. But the question for me has always been whether I want to take out a mortgage and buy a house. The money I have in my stocks and shares ICER is almost sacred to me. And I'd have major reservations about using a chunk of it on a deposit. I think I do anything I could to avoid giving my money to a lender, unless I knew for certain that it would put me in an even greater financial position in the long term. I've not seen any evidence so far that buying a house will be the returns I get from maximizing my investing potential by keeping monthly outgoings low and investing regularly in globally diversified index funds. So very thoughtful point. And I do make the point in the blog about the different sort of camps, different schools of thought on this. And I wonder if Tom's got a family and other considerations because when you get into a relationship and perhaps start a family, other things come in that can change your thinking. But this is the response I gave him. I said well done Tom on building your investment capital. Once you get to a certain point, annual returns on average should be larger than your ongoing contributions. And this is the concept when you get your capitals to a certain size that the annual returns you can make and it will then dwarf the ongoing contributions you can make. But in the early years, it's the amount you add will normally be higher than the investment returns. But do remember that having a spread of investments including physical property does reduce risk without necessarily reducing returns. It might make sense to buy an investment property with modest borrowing if you can buy it for a keen price and add some value. So for instance, turning a loft into a habitable room a bedroom or a study. And also if you can get a gross yield of over 10% so check that one out. That caught the truth about renting versus buying a property as over on one website at Jason hyphen butler.com. This week's blog on my website is called the buckets and spades approach to wealth, where I draw analogies between myself build project and building financial wealth. And one point I make is that sometimes when you can't cut expenditure any more, you need to increase your income, you need a bigger financial shovel. So here are some ideas that I had, can you learn a new skill to increase your value and employability? I gave a link for that. Can you do overtime without detrimental effect on your health? Could you negotiate a promotion or salary raise? And I gave a link to how to go about doing that? Do you need to change your career or job to get what you're worth or need? And I gave a link to some suggestions for to change career there. Could you take a side hustle or take a second job. And also are you getting all the state benefits to which you're entitled and quite often people don't realize their changing circumstances may mean, they are entitled to more benefits, or it could be that their tax position has changed. And certainly with a budget, we're going to be drawing lots more people into different bands. So check that one out. So head over to the blog. Now, to access all the useful links are provided for those ideas and see if you might be able to increase the size of your own financial shovel. Now if you're like me, you've probably got several subscriptions, whether that's Netflix or apps on your phone. But how about the idea of having an all electric car or monthly subscription? Well, that's the service that's now being provided by a new company called on to that o n t o. And basically, you can choose from a wide range of cars from very small to very large. And for an all in monthly fee, you get the car use of the car, all insurance covered maintenance, servicing tires, breakdown, cover congestion charges that applies, and you get 1000 miles per month allowance. And you can pay a bit more if you want more announced. And the beauty here is that you don't have to make any big long term commitment, you don't have to pay a big deposit, you just pay a delivery fee of just under 50 quid. And if you want to give the car back after the first three months, you can give it back at any time with one month's notice. So So essentially, the idea here is to give people the use of nearly new, they're not new, but they're nearly new, all electric cars for all in price, but without a big upfront financial commitment and without having a long lease arrangement. So how about you then now let's just look at the prices. So if you wanted a Renault, Zoe 135, which is quite a small car that covers a range of 190 miles, that's an all in price of 389, you could have a model three from Tesla Tesla Model three, the basic version is 799. If you want the long range version of 280 miles on a charge that's 999. So just under 1000. And if you fancy a Jaguar I pace, you can get one of those little lovely ones for 1299 pounds. And there's a whole range of cars that you can choose from. Now, I suppose on the face of it, this sounds quite an interesting idea here because you can get to use, you know, an all electric car, you don't own it and have all the drama of it, you've got an all in face, there's no there's no sharps when it comes to servicing and breakdowns or batteries going wrong. So that's good. And insurance as we know it can be quite expensive. But with this arrangement, you're you're benefiting from on tos fleet insurance. Now, you've got to be between the ages of 25 and 85. You can't have more than six points on your license. And you know, there's some other restrictions and stuff. But on the face of it seems quite a good deal, isn't it? And I suppose compared to lease deals and higher purchase, I'm a bit more agnostic toward this. But I would always say, you know, do you need to have an almost new electric car? Can you afford that payment, even if you can give them a month's notice there's still a large amount going out each month. And if you're, if your monthly payment for having this car is equal to or higher than the amount you're putting into your long term retirement planning or investing planning or debt repayment strategy, then I would question whether you should even think about it. But if you've got stable income, if you are putting money aside for retirement and you're debt free, and you've got your emergency fund, and if you fancy having a new newish electric car, certainly worth having a look at so check that one out. And I suspect that electric car ownership is going to be a thing of the past and I do think this fractional or this leasing or sorry, rather subscription approach is probably going to catch on in the fullness of time. But again, the old principles of don't have monthly payments that suck the life out of your wealth building capability. Still, how good whether it's a subscription that you can get out of, or at least that you can't. Now this week, I've got a book recommendation for you. It's called a generous kids, helping your child experienced the joy of giving. That's by Coleen O'Donnell and Lynn bye Now, there are lots of interesting ideas. It's quite a small book. But it's quite an easy book to read. It's got lots of ideas for helping children and young people develop the mindset and habits of being generous. And I use a lot of the ideas in this book to help wealthy families, a handful of families each year to help them prepare their heirs for their inheritance, because you're trying to get them to think beyond their own needs. But I think the principles and practices are useful for any family looking to bring up well rounded individuals. As I said, it's very easy to read, and you can dip in and out of different chapters based on different age groups.
And I've just added another money explainer video to my YouTube channel. This one is called How to get and stay out of debt. So do check it out and share it with anyone you know who might benefit from it. And do make sure that you subscribe to my YouTube channel and click the bell so that you get to know about new content as soon as it comes out. I'm investing a lot of time and money into really expanding my YouTube channel so that I can reach more people and help them master money, worry less, and live more. So do check that out on the YouTube channel or via my website. Okay, let's get on to this week's interview. Tim Harford is a trained economist, and a well known author, speaker, BBC broadcaster, and Financial Times columnist who focuses on the everyday application of numbers and economics. So I was really keen to find out about his own relationship with money, and what he's learned about financial decision making.
Mr. Tim Harford Hello, Tim.
Hello,
it's great to finally speak to you. I always feel like I know you because of your work. But obviously, but I don't. So I'm really excited to be able to have a short time to speak to you. So for those people who don't know you, and that's probably about four people listening, do you want to just explain kind of your what you do is your day job. And you're kind of you're interested in in numbers and statistics.
11:57
Sure.Him So I'm a columnist for The Financial Times right for the the FT magazine every Saturday. And the column is called the undercover economist, which probably tells you a little bit about where I'm coming from. I'm an economist and I write about the economics of everyday life. I've also written a whole bunch of books. The first one was called the undercover economist. And the most recent is called How to make the world that up 10 rules for thinking differently about numbers. So that's really trying to help people think through all of the bewildering claims that they see all around them every day on social media, in the newspapers on TV. So so that's the writing. But I also do a lot of broadcast work. At the moment, I'm recording a program for radio for called How to vaccinate the world that's running every week. We started about five weeks ago. So that would be beginning of end of November, beginning of December. And we'll just keep running until we vaccinated the world I think we'd so we're just following that rapidly unfolding story. I also present a radio four world service program called more or less, which is a bit like the book how to make the world out not about numbers, and how to think about numbers, how to think clearly about numbers. And I've got an American podcast, too called cautionary tales. That's where I really kind of have fun. And stories of catastrophe, fiasco disaster, some of them are funny, some of them are tragic. And in each case, I'm trying to use ideas from social science, to learn lessons, how can we prevent this terrible thing? Or sometimes this very funny thing? How can we stop it from happening again.
13:41
And just interestingly, out of your last book, what I really found interesting was that each of your chapters is really I call it common sense when you think about it. But one of the things you talked about was that if something doesn't, doesn't add up, it doesn't make sense to you go beyond the kind of the, the, the hyper bowl the headline and think beyond it, it was just a simple thing. I mean, you know, it's obvious, but the way you put it, and you've you gave lots of examples of it. It just makes you, the more you can question things. And the more you can think of things from a different perspective, it just means that you'll make better decisions, just cell phones here, and you'll be bit more well informed. Yeah, there's,
14:17
I think there is a connection here. And we'll get to it to the way to think about money. Because one of the key messages of how to make the world add up is a lot of it is actually not that complicated. But it is fraught with emotion, a lot of people trying to sell us things, or people trying to persuade us of things, and other people trying to pull us into arguments for their own purposes. And very often people think about statistical claims as a kind of weapon in some kind of political battle, some kind of argument. And that's understandable. I you know, we're all humans and you know, politics is everywhere, but it's not very helpful if you're really trying to think clearly see the truth and make the right decisions. So one of the things I'm encouraged urging people to do is to notice their own emotional reaction to claims and add in before you mash your finger down on the retweet button or your sharing or you just notice how am I am I having a reaction to this? Am I am I thinking this is fake news? Am I in denial? And I thinking all this proves I was right all along? Is this zinger I want to sort of throw at the other side. Not all of those sorts of, I think perfectly understandable and perfectly human, but they're not helping you think really calmly and clearly about what's true and what isn't.
15:35
And at the end of the day, as I've explored in, you know, the 1000s of people I've interviewed over 30 odd year career and literally in the podcast series, is that essentially a two dominant emotions are driving everything we do, isn't it, there's a desperate need for safety. And that involves connection and being wanted and accepted and stuff, and also the need for control. So that's, that's fun. That's fulfillment, meaning and stuff. So if we understand right at the root of it, there's those two principal causes, then again, we can realize that we're human, we're not perfect. We do make mistakes, and that's okay. It's just navigating it. So, Tim, I'm fascinated to know kind of what your kind of upbringing was and your introduction to money as such, you know, the whole role of money in life and what you can remember about that, and how that shaped your, your early adult beliefs about money?
16:27
Sure, well, I think I was brought up in a very British way, which is that my parents didn't really talk about money. I think we were sort of proper middle class family, my dad worked all his life. For the same company, a computer company originally called Burroughs and later called unisys after a merger. Now they didn't fit in mainframes for the for the Metropolitan Police or for banks in the 1970s and 1980s. So it was it was a good solid job, reliable job. But not massively well paid. My my mother didn't work when, when I was a child, she was she was a full time housewife. She had a nice sideline and being a computer hacker, I mean, she loved taking computers apart, taking software apart herself. Yeah, fun, just for fun. But she was very interested and engaged in that and very smart, but not not doing paid work. So I think we, you know, we had enough money, but we didn't have a load of money. I remember one year, I had set my heart on a Lego space cruiser supposed to be around 1979 1980. And my, my dad sitting me down on his knee and saying, Well, you know, you might not get that the boilers broken down. And it's expensive to fix. And we'll have to see. Now, I did get it. And I don't know whether it was a shot across the bows to tell me not to be too greedy. Or whether they were genuinely worried they might not be able to afford this thing. And possibly my grandparents chipped in instead. But that's a conversation I remember having about money, which was, you know, here's the thing you want, and it and it's quite expensive. And we've got some money worries. And you might not might not get it. But at the same time, as I say, No, I did get it. The money worries obviously weren't that significant. But I never knew how much my father made for example, never discussed salary never discussed his his pension or his, you know, his savings plans. The other conversation remember having was was I've got a National Savings Account opened and this older listeners will remember us have this kind of these little books and everything would be written down how much money you have. And I remember him talking me through compound interest. And he he said, Oh, imagine you got compound interest of, of 10% a year. And that must have been about probably 1011. I wasn't that old. But he did the math for me. And he showed me the maths of compound interest. And actually how, how quickly 10% interest a year would turn 100 pounds into 300 pounds. I was very impressed by this. Obviously 10% interest rates are a thing of the past, but the less. Yeah, yeah. So So there were a few. There were a few kind of, I think moments of good, common sense that I remember, but it wasn't, wasn't discussed a lot.
19:42
Now, as you know, childhood does influence a lot of our early adult beliefs, even if we then update and change them into something I'm very keen to get people to do. But can you remember messages that related to sort of money work earning spending, like for instance, mine I used to say, well, money doesn't grow on trees, or do you think I'm made of money? So that created in me scarcity, right? It created an anxiety me that there was never going to be enough and that we were always going to like we were against that that security thing. I'm just wondering if there were any subliminal messages, particularly from your, your, your hacker mum about money, because clearly, often in those days in the 70s, when you were put to one of them as a home carer who had to manage the budget, they could be have a different kind of reaction emotionally to money than perhaps the primary breadwinner if that if that was how the family was organized. just wondered if there were any other messages that you remember hearing?
20:37
Yeah, it's a it's a, it's a good question. Because I think the answer is no, I think I was quite well shielded from the subject. And that I think, in and of itself is interesting. It wasn't it was not a thing I thought about very much. It was not a thing I worried about very much. It was a sort of this is what, yeah, this is something grownups too, and you don't need to concern yourself. And I had, you know, I had pocket money, and my parents discussed how much pocket money I would have later had a paper around. And so you know, there was, it was sort of this this discussion of budgeting funds in this little toy world that I inhabited as a child. You know, how long would I have to save up to pay for something? But no, I don't remember a lot of that the kind of messaging you discuss, discuss. I do remember being struck by the fact that my my wife always says, oh, her dad always used to say, every day is a holiday. You can't take it with you. He had this attitude. And by the way, it was perfectly sensible with money, had a good pension, retired with a very nice, you know, comfortably sized house in in the Lake District. You know, there's no, he wasn't a spendthrift kind of person. But, but he always had that messages that you know, you could, you could be too frugal, you can save too much. And you you could regret that and you needed to live a little bit and, and enjoy that. So I was struck by the fact that I was getting this these messaging these messages as an adult from my wife, remembering being told that as a child, but I was thinking, I don't remember being given these, these little Proverbs.
22:19
Now, interestingly, the first bit of agency that children get often is their allowance, pocket money, call it what you will, whether they do chores for it, or they get it just given to them. Did you did you carefully, sort of save it and then build up for something? Did you spend it soon as you got it? Or did you do somewhere in between?
22:37
I used to save it up. I used to save it. Oh, yes.
22:41
Experiment, you deferred gratification. The marshmallow experiment? Yeah.
22:45
I did defer gratification, or at least that's how I remember things. Although one thing I do remember is basically swimming. Every week, I was quite a serious swimmer, by the standards of the 1980s. Not by by today's standards. I mean, kids I know who swim but light bulbs are up at four o'clock every day. I was feeder, I used to go to Swim Club, I used to be quite keen swimmer.
We
used to get 20 pence from that, which was the locker money, I used to be able to keep the locker money after I got it back from the locker, he says put it in the vending machine and buy a chocolate bar. And a chocolate bar back then was about 15 pence at so it was kind of the perfect price. And I did spend that I didn't and I could have kept it I could have saved it. So that's an interesting sort of little insight into the kind of mental bracketing I think a cake very occasionally if I had something I was really desperate to buy, I'd save up the 20 pencils as well. But mentally I felt no this is your your exercise you're you're tired out there sweets right there, you've got the money. And that money is for spending on sweets. And the money you get every every week as pocket money. That's not for spending on sweets as for saving up for toys and book.
24:02
You're actually you're you're illustrating there something which we know from all the research shows that people think differently about the money based on size, the amount, they think differently, and also where it's coming from sort of source of the money. And the relative size means whether it's buying a house or whether it's just buying a pair of shoes versus you've inherited it or you've earned it. That's interesting. So I must just be honest here and say that my pound pocket money I used to get and 1980 I used to go straight over to the off licence, get a fizzy drink and three chocolate bars, eat and drink it all till I felt ill. I don't know why. But I did that for two years. And then I thought this is not working for me because I've got no money. So there we go. That's probably a precursor. If we'd have done the marshmallow study, and if anyone wants to know about that the marshmallow study was done many many years ago, where they put children in a room and they said here's the marshmallows. If you don't touch one, you can have you can have another one. Or but if you eat one, there's no more and they showed that the ones that could hold out the longest and not have not have immediate marshmallow and wait for the second one they did better in every mode and knife, but they're still charged for assault.
25:08
So I should, I should say on the search of the marshmallow experiment to two quick things. One is Walter Michelle, who is the psychologist who conducted that study, one of his students is Maria konnikova konnikova. And Maria is a wonderful writer about ideas in psychology. She wrote a book about confidence tricks. And her latest book is about poker. It's called the biggest bluff. And it's just a great book ever. She, she's a professional psychologist, professional writer who takes up poker, because she thinks it'll be interesting. And it's such a roller coaster ride, it's about about psychology and about the emotional component of poker, which I think is not unrelated to the emotional component of making other decisions. And the other thing is just a no, this is not a political podcast. But I just saw this morning on Twitter, somebody speculate on how Boris Johnson would do on the marshmallow test. I just said, just imagine, just imagine the psychologist explaining the rules, and they're looking up and Boris Johnson's already cramming them. So yeah, there's something. Something very true about that. Well, anyway,
26:21
yeah. As I say, I don't think if if he was younger, I'd want him to be taking my daughters out. But there we go. Let's put that to one side. So um, yeah, interesting. So you mentioned about you had a paper round. So this thing is, so your first agency was the pocket money, then you moved into having a paper round? Or like anyone did? How did you sort of do that transition from being Reliant wholly on your parent to then eventually moving into the world of work? And what role did that kind of childhood working for money playing that?
26:53
Well, it's a it's a slow and steady thing, isn't it? The paper and by the way, I would, I guess, it's not so much of a job these days with with the way that we get our news on the internet. But I find it was a fantastic job, because you got exercise every morning, you also got to read all these different perspectives, because you'd read the newspaper, at least the front pages and the back pages, you read the newspapers as you were going around the state where I lived, and you'd realize, Oh, these these newspapers got very, very different takes on the world, some really great education. That's that's a separate thing. So yeah, I mean, having that sort of job was a great transition, because you had to take responsibility for what you're doing. It dramatically increased the amount of money I had available. I think I was paid a pound 20 a day, streaming in the late 80s, early 90s pound 20 a day, and it was probably for about a half an hour, 40 minutes work. So then you're sort of talking a fiver a week, and I my pocket money was probably a pound a week at the time. So this huge increase in how much money I had in my piggy bank. But obviously, a fiver a week, even in 1990 is not a lot of money. So the for the big stuff, you're still dependent on your parents, but it was it that was a good, a good transition. And the there was, I think it was nice to sort of there was a gradual kind of move away. So when I went to to college, my parents was responsible for my maintenance grant. At the time, this was the college fees were paid, but your living expenses weren't unless you your family had a low income. So my, my parents gave me a monthly allowance, and told me to sort of figure it all out. But of course, if I if I got into tricky this other little things, like I think they gave me a special kind of phone card. So I could I could make phone calls cell
28:59
phone cards, you go back a bit there.
29:01
Yeah. But the bill would be bill would be sent to them. So and I had a credit card for emergencies that I didn't use, but I did have it. You had it
29:11
really,
29:12
you know, I was given a credit card with I think a children 50 pound limit. So not you know, not going to break the bank. Yeah. But But I think there was there was a I think there was a moment where my senior my little sister had younger sisters and one of them was quite a lot younger. And she came to see me where I was going to university. And my dad said Oh, you can you know, you can buy her something with the credit card, family, that sort of thing, but I hardly ever used it. And, but it's it is funny, the stumbles you can make over money. One moment I really remember I was probably 2425 finished my master's degree I'd had worked for a year already as a as an economics lecturer. And I moved to London, got a job in a management consulting firm. And almost the first thing that happened is I got an income tax bill for, I forget about 3000 pounds, I didn't have 3000 pounds. And I didn't really expect to receive the income tax bill and I hadn't, I just wasn't ready for it. And I had some money in a savings account. But it was a 90 day notice period or a 30 day notice period, as I forget to remember calling my dad and saying what am I going to do. And he said, I'll, I'll give you that money, and you can pay me back. Now that's, that's a very fortunate position to be in. I mean, I realize I'm only borrowing a few 1000 pounds, and I'm only borrowing it for a few weeks. But I could really have stumbled there. And it was over something that you would think was, you know, was was a simple thing. But it's at first contact with the tax system and the bureaucracy and realizing, Oh, hang on a minute. This, I didn't see this coming. I didn't see any of this coming. And this is somebody with you know, I've been studying as an economist for six years by then, and had a perfectly well paid job. That adulthood still trips you over, doesn't it?
31:05
Yeah. And interestingly, in all my work and research over the years, I found that people who there is a correlation between people who are numerous, and those who are better with their money. But as we know, there's the emotional component. So it doesn't necessarily follow. So if you're listening to this, and you find that my numbers and statistics, it's not your strong points, or you didn't like maths at school, it doesn't necessarily follow it just means you have to be a bit more cautious. So I'm interested to know, to what extent do you think your economics training equipped you to make smart money decisions, or at least intentional and sensible ones that minimize downsides and maximize your well being and happiness?
31:43
I think economics helps a lot. To be honest, I mean, one thing it does is it makes it easier for you to find a job, it's quite a well paid degree. So it's a lot easier to look sensible about money if you've got some money. And that's the first thing I'm always always need to recognize that that privilege. But there's another thing that economics teaches you is it will tell you the optimal way to approach a lot of financial calculations. And it will also through behavioral economics tell you a lot of the mistakes that people make. And I think that that dual approach is very powerful. Because you simultaneously have a benchmark, like if I was Spock, from Star Trek, this is what I would be doing. At the same time, oh, I recognize this mistake that I'm making while I'm making it. This is this is a very common kind of bias that a lot of people have in their behavior, and I can see it in my own behavior. So those things I think are very, very helpful. A couple of things in particular, I think, have helped me. I've been perfectly comfortable investing in the stock market. I've also not tried to be too clever about investing in the stock market, I tend to be an index fund kind of person. Because economics teaches us that you can't beat the market
33:07
now. neuroscience. Yeah,
33:09
yeah. I mean, now I know that some people can beat the market, some people do build beat the market. And the efficient markets hypothesis that comes out of economics isn't right. But it's not very far wrong, either. And I think treating it as approximately right, and being skeptical about your own ability, or the ability of high paid advisors, to beat the market, I think, is a good start. But you also learn about something called the equity risk premium. It's changed a bit over the last few years. But when I was a student was a big puzzle. The puzzle was, how come people make so much money just putting money in the stock market and leaving it there? This seemed to earn this extraordinary rate of return relative to other assets. And it was it was it was called the equity risk premium puzzle. Most people didn't understand it. It's sort of gone away a bit because stock markets surged, and I've stayed pretty high for a long time. But that was a that taught me Oh, you know, there's kind of money lying around if you've got the confidence to put a bid into the stock market. And the third thing is just an awareness that there are a lot of people trying to sell you insurance for small things that you don't need to have insured. So when you show up, remember when we used to have those things called holidays, I used to fly places here. Last year, yeah, well, maybe the distant future as well who knows but when you rent the you go and you rent a car, they will try to sell you kind of insurance on the insurance. Legally speaking you have to have insurance, but then they'll say well, but if you crash you got an access and the access will be really scary. So we'll send you will send you insurance for the little bit of insurance that you don't have. Or I remember getting. I bought a fax machine for one of my first jobs and they were trying to sell the insurance for the fax machine. But why would you sell me a dodgy fax machine?
35:02
Why would you, but it's not my
35:04
thing is gonna break down. But Same thing with mobile phones, you're gonna mention I mean, lots and lots of things. And there's a very clear behavioral economics account of this, that we, we have a disproportionate anxiety about any individual risk that you could possibly pin down making, what the moment you highlight it, people get all fancy that was, of course, if you take a step back, you say, well, the risks to the risks that I get a 2.1% salary increase instead of a 2.2% salary increase the risk of my stock market portfolio falls 1%, today, rather than rises 1%. Today, I mean, there's a much bigger risks than your mobile phone needs replacing for most people. And for most people, they shouldn't be buying insurance for these little individual risks, they're going to be massively overpriced. And take that risk, you need to sort of step back and be a bit Zen about it. And to know that occasionally, you will, you'll have to reach into your pocket and pay to replace something that you could have insured, and you'll have to be fine with that as just that's part of the mix. But
36:16
it's interesting because I teach the eight money milestones, which is a framework for understanding money. And milestone six is have the right, human insurances. So the biggest single risk working people have is an interruption to their income, through illness, disability, or redundancy. Now, redundancies is something you have to protect through being relevant skills, adaptability, being well, mentally and physically etc. But income protection insurance, which is you know, we will take over paying you your income, if you cannot work for a prolonged period, is to me, it's the same as having oxygen and food and water. And but it's something that people can't understand. And it's quite expensive, relatively, but even 951 years of age, I pay 100 pounds a month to insure 50,000 pounds of income, even though I've got assets, and I don't really need it. Because, for me, that's a risk I'd like to insure against. I don't need it. But I think it's a good point, because there's a good chance I've seen people with it's happened, but younger people where their human capital, their ability to earn and their ability, therefore, to pay off debts and build. So they just don't seem to see that that and it's a very underinsured area because people compartmentalize it and don't don't think it's going to happen to them. Whereas the mobile phone is something they're seeing all day, and they're connected to it. And they don't like the idea of losing their mobile phone, but their income, who cares?
37:34
Yeah, I my, my incomes insured, I forget the exact the exact details, but are you against illness? And that's those sorts of interruptions. And it is, as you say, really, really expensive. But I think
37:48
but that tells you something.
37:50
Yeah, it tells it tells you that the Actually, these are very large sums of money at stake. And it's not a trivial risk. Yeah. And this is, you know, it's a competitive market, this insurance is provided in. So if it's expensive, then it's expensive, because it's valuable. Yeah. Whereas, incidentally, if someone's trying to sell you mobile phone insurance, it's usually the person who's also selling you the mobile phone. So you're not in a competitive market there. you're you're you're a captive audience. So yeah, so I don't insure my mobile phone or fax machine to don't insure
38:24
fax or any
38:27
back in the day. Like You I do, I do insure against critical illness and and loss of income.
38:35
Yeah, absolutely. So so I think that's a really interesting one. But I'm interested to know if you're prepared to share it because I share all my blow ups in the past I've ever had, because I think as long as we can learn from it, and we can be honest, I'm just wondering if there's anything you look back on a financial decision that you realize with hindsight was not a good one. And what you learn from that?
38:55
Well, I am very struck by my decision making during the early weeks to pandemic trying to figure out you remember some of the suddenly this realization the lockdowns are coming the stock market kind of crashed and then it bounced back quite quickly. And I remember watching my own decision making at the time and trying to figure out and there were a couple of different things going on there was viewing my portfolio so I had a bunch of shares in ISIS reviewing that and trying to figure out if I missed the window to sell, you know, if I if I sell Now am I gonna sell at the bottom all of this, but there's a separate thing, which is some of my income was interrupted. So I was about to publish a book, the book was going to sell into the middle of this lockdown. Normal destroy craft books or the book festivals are just closed down. So I was thinking Well, that's going to be bad. And I'm wondering what the likely future for my job was. And I also make money giving talks. Well, that wasn't happening. Yeah. So all those talks will be all those talks being canceled. So I was sitting there simultaneously thinking about what the market itself was doing. But also try to think about how that tied into my, you know, my wider kind of earning power. I don't think I got it right. I don't think I got it dramatically wrong, either. I think I should have sold earlier, because I had privileged access, not confidential access. But I was talking to the epidemiologists, early on because of my job. And they were telling me what was coming. And I was believing them and yet not knowing I was able to turn that into action. And I felt I could have been a month ahead of most people. And I was three days ahead of most people. And so I sold too late. But I, but after I'd sold, and I was happy with the decision. Basically, what I said to myself was, okay, you've sold and you've lost 10%, if you'd sold a month earlier, you could have, you could have got 10% more of what you sold. But you've sold because now you need this cash cushion, you got a tax bill coming that you thought you were going to be paying, you had these various sort of sources of income that were coming in, we're firmly in the diary all contracted, they're all cancelled. So you need the money to pay the tax bill. You've got the money, it's in the ICER. But you're going to have to sell by the time the tax bill comes to you. So when do you sell? And so I sold? And I have to say I've probably sold pretty much at the bottom. But I said to myself, this is I'm happy with the decision. I can't guess where the markets gonna go.
41:56
But it's only the bottom team after the event. It's not the bottom at the time, you're looking at the bottom.
42:00
Yeah, absolutely. And I then said to myself, what you're going to do now is you're going to drip this back into the market, bit by bit, you're going to set up a regular debit. And slowly the money's going to come out of this. I've got a mortgage offset account. So that's earning perfectly reasonable net rate of return on setting a mortgage, slowly but surely, that's gonna go back into your ICER. And and you're not going to beat yourself up about it. And so I think I made with hindsight, not the best decision, but I think I was reasonably happy with my decision making. process. I felt that I had I given up some money for some peace of mind, made a strategy for what I was going to do afterwards. And it's been fine.
42:51
There's a well known economist called his his name Houseman his house when I'm trying to Ricardo Hausmann, Ricardo Hausmann. Yeah, it was a very alternative kind of writer, I got thinking the other day, you know, we stock markets being quite high, he makes the point very clear that when stock markets are at historic highs, even if they can still break new highs, expected returns going forward over the next 1015 years. Whatever measure you use to determine historic highs, that means the expected return going forward got to be lower. And the downside risk of you losing money in any short 234 year period is much higher. And I got thinking my pension pot is pretty, you know, getting buff getting near to the lifetime allowance. So fortunately. And I thought to myself, why have I got equity risk in this anymore? I don't need it. I just chopped out all of it into indexing deals, not because I don't want growth and then add to reorganize stuff. But just because I was gonna be penalized for tax purposes by taking all that risk. And I'm in the business. And I've been around for a long time and I've been counseling clients and i i'd let that equity risk build up in the wrong pot. So it's not so much. I think the thing is we we compartmentalize our money, you don't wait. And we are in danger sometimes of not looking at the hole and then realizing where the true risks are. So for me, there's a risk of having growth assets with upside in my pension pot. It's not the downside risk, because I'm not going to draw it for many years. But for me that that crept up on me when I realized that actually if there's more downside of losing money, and the upside means I get taxed. That's that's that's not a good thing. So even the best of us can suddenly flow into a situation where we need to reappraise our scenario, not based on a knee jerk reaction, but based on the fact that the environment has changed and the risks and the rewards are changing. And they're changing all the time, aren't they?
44:35
Yeah, they are. And you're absolutely right. I mean, if I were to come up to you and say, Look, I love you about heads or tails. Heads, you win 200,000 pounds and the government's gonna tax 60% of it, Tails, you lose 200,000 pounds. You'd go Well, that doesn't sound very good. Sounds like a really, really lousy deal. But if you're sitting there with with an equity stuffed portfolio and your at your lifetime pension limit that's based I mean, I don't know what the tax rate is, but it seems seems pretty high. That's basically the deal. You're, you're you've accidentally signed up for. So yeah, you're right, you need to keep keep reevaluating. And, and it is going back to that decision that I made with the with the tiny pants after swimming? Well, I would say, Well, this is the sweet money, and it's different from the pocket money. That's doesn't make any sense. But it's very human, we're always like that you could, it's easy to sort of get really, you might have 5000 pounds in an ICER and 100,000 pounds in a pension. And you're obsessing about the 5000 pounds in the ICER. Whereas in fact, all the risk is in the pension is very easy to to lose track of where the risk really is. And you do need to take a step back and say, what's the overall position? And does it make sense?
45:55
And I'm interested to touch on just you mentioned about your wife had a different kind of upbringing and money messaging and beliefs and scripts and stuff she was growing up sounds like her parents were a bit more sort of enjoy the moment enjoy the money? How have you as a couple managed to navigate the inevitable kind of tensions that happened in any relationship between decisions? And who owns what, and, and how you make big decisions versus small decisions? And who does the day to day? And who does the macro? And you know what I mean, it's just that how have you How have you managed to navigate that such that you, you, you make good decisions and minimize conflict and disagreement.
46:32
I think we've been very lucky, because we haven't had a lot of conflict. And the the various points at which things could have been difficult, I think we've, we've had some of the painful decisions taken away from us. So for example, we, when we first started dating, she owned her own home, and I didn't, and we just agreed I would pay her rent. And that would be the that's the fair way to do it. And we were both we met in the office. So we were both sort of earning similar amounts of money doing similar jobs that makes life easy. So for a while, it would just be you'd, you'd split bills, or you take it in turns. And you know, she owns vows, and I'm paying the rent, and then you just gradually transition to one, we've got a joint account, let's put more money in the joint account. When we got married, we just agreed I was going to pay her. I had some savings, I just pay her a lump sum. And a mustache, I forget exactly how we just sort of came up with a deal that just felt fair that you equalize the situation, we own the house together, and it was fine. And it was fair, and no one was taking advantage of anyone else. And then about the same time that we got married, I got a very tempting job in Washington, DC. She wanted to nurse to have a baby and she got pregnant fairly quickly. And so we had this situation where we both wanted to quit our jobs. She was pregnant, I had a job offer in the states so that she was then not legally allowed to work in the States. So then suddenly, we moved to the situation where I'm the breadwinner, she's she's at home with the baby. And there's and there's nothing to do about it. There's no if though, you know, that's not a choice anyone's made. That's just the American immigration system. And it was fine. So, you know, we didn't have to have any difficult conversations, because it was obvious that we needed a to open a new bank account in America needed to be a joint account, I'd be contributing all the money. And that was just the way it was, and that's fine. And so whenever we've had these, these big sort of life, you know, life changing decisions, all sorts of important moments in life. We've just we've always been able to just talk about it. And and it's been absolutely fine. I don't I don't think we've we've ever really had any struggles. And there's certain things that we agree that she he thinks about. So for example, we we have a almost a historical accident, accidental reasons. That house that she owned, we never sold. So we rent that out. So she manages that. I deal with the stock market stuff because I've been thinking about it for the last 30 years. And that's just fine. And then we keep each other informed as to who's doing what.
49:17
Yeah. And I'm just interested to know, bear in mind, you've done so much research, Tim and you've met so many interesting people. What would be your sort of top tips for anyone who's listening to this podcast to think about, let's say that they haven't saved as much as they should have done well, they spent and splurge more than they should have done or they didn't do as well at maths at school, they feel there's some sort of issue they've got what would be your, your sort of your best, your best advice to someone about how they can have a better relationship with money such that
they enjoy life more and worry less, what would be your top tips.
49:52
And there's so many really good books about this and everybody is coming from it from a very different angle. You've got the kind of the financial Independence retire early crowd, you've got the Motley Fool full crowd all I'll tell you how to invest, the people who I'll tell you how to save money there was. So I would hesitate to give any, any particular piece of advice, or there's even Pollock, who's got the financial advice in the back of a postcard, which is more designed for Americans. But it's, it's pretty good. So the loads of great resources out there, and everyone is going to need something different in a different time. But the one thing that I would say is, just as I say, in the first chapter of my book, just observe your own emotional reaction. If you think about your own feelings, because the feelings that you have about money are going to guide the kinds of decisions you make. So where are you? Were you just too, too keen, too greedy, too eager to get involved and do something or spend something wherever you overconfident? Were you scared? What what? What sort of corners of the financial rug Do you not dare to lift up and look at what's there, one of the conversations you're keen to have one of the conversations you're keen to avoid, just notice all of that. And once you've noticed it, I think you're in a better position to say to yourself, okay, this is the kind of advice I need, or these are the kinds of skills I need to build, or this is the kind of book I need to read. But there isn't those emotional reactions, they're, they're very easy to, to have, and to not even realize you're having them. So notice them.
51:30
And I think you make a good point there to end on is that being aware of stuff is the key to do making differences. caroled work, who came up with the mindset book, you know, growth versus fixed, just being aware of it makes you more of a growth mindset person. So being aware is good. And secondly, as you say, put some time in just a little bit of time into brushing up your knowledge, your experience, no talking to other people, you know, just find what works for you. So that's a great one. Look to your website, can you just give us a shout out on your website so people know where to get you when they want to book you for those talks?
52:03
Yeah, as you saw, the website is timharford.com. It's just my name. Just to say it's not Hartford. It's Harford, harford.com.
52:11
Yeah, absolutely. Great stuff. Alright, Tim, thank you very much for your time. It's been great having you on the show. And I look forward to reading your next book when it comes out and seeing you on stage somewhere. Terrific.
Thanks so much.
Great, guys. And he Tim really enjoyed that one. some really interesting observations there. He was talking about the efficient market hypothesis, which is this idea that the stock market kind of reflects all known prices, and is reasonably efficient. He said that, that is definitely not right. But it's not far wrong. With the inference really, that you can't really beat the market consistency. So you might as well just invest in index one doesn't stop you from seeing your money fall when stock markets fall. But it's the sort of the no brainer approach to investing. So I like that idea. He talks about the idea that lots of people trying to sell you insurance for inconsequential risks like your mobile phone or, or collision waiver on car, hire insurance, that sort of stuff, where really, you should just take that risk yourself, but but that people don't always invest and pay the right money for insurance for the big risks that they have, like re discussed income protection insurance, particularly when they're young. So that was an interesting point. So people are stressing about silly risks, and not the big ones. And that was a good one there. And he talked about coping with things that happened to you don't they like the COVID situation, his income suddenly dropped consistently. And suddenly, and he had to cash some investments in to be able to make a tax bill that he had to buy later in the year. But he he sold at the bottom, he still felt good about the decision. But as he said, You know, it was a big shock to him. So the big takeaway there, I think, is always plan for the worst, you know, what can happen always had the emergency fund, always have that extra money put aside, you know, could you cope with a drop in income for six months. So that was a good point. And you talked about the fact that we, we, we sort of compartmentalize our money based on where it's come from and what we're using it for. Whereas actually, what we need to develop is an awareness of the fact that we don't make really logical decisions, and we're being influenced all the time by other people. And he mentioned and I can firmly confirm that his latest book is really really worth reading, how to make the world add up really good book. They're so good, good guy that Tim has a regular column in the FT well worth looking at. He makes a lot of sense. And he's a nice guy. So but hope you enjoyed that one. That's another episode in the can. And thanks for joining me, and I'll see you hopefully again next week. Thanks for listening to real money stories with me Jason Butler. If you like what you hear, please do tell your friends. And more importantly, please rate us on your preferred podcast app, because it really does help us get the message out there. So until next time, good luck with your money journey. Real Money stories is sponsored by Vanguard bringing value to 30 million investors worldwide. Visit Vanguard investor.co.uk For more details, the value of investments can go down as well as up and you may get back less than you invested
Transcribed by https://otter.ai