Leverage, Luck, and Living Well:
A Conversation with Financial Columnist Scott Burns By J.D. Roth
During the first week of July, I had the privilege to chat with financial author Scott Burns. What was intended to be a brief interview about his new book, Spend ’til the End [my review] lasted for nearly two hours. Burns was fascinating.
It has taken weeks to edit this conversation into something digestible for the web. It’s still quite long, but I hope it’s as interesting to you as it is to me.
You can find my complete interview with Scott Burns elsewhere, if you’re curious. The complete version contains thoughts on the future of publishing, the future of Social Security, and the future of investing. What follows is the “greatest hits” abridged version.
Read More Link On Right
J.D. Can you give my readers a brief history of your background?
Scott I got very curious about money just in the course of my childhood. The first ten years of my life, I lived and shared a rented room — at one point in a house without plumbing — with my single mother. By the time I graduated from high school, I was a millionaire’s stepson. My economic experience runs the gamut.
I started writing about personal finance because one night my first wife and I were going to a dinner party, and she said, “Scott, I’ve heard you explain the economics of buying a house as many times as I want to. Could you just write it up so you can hand it out?” We were all in our twenties — it was a time of real mobility. Everybody was buying a house and doing all kinds of things that were brand new.
I started writing about people and money then, and it was just a wonderful, natural event. I thought, “Wow. I was meant to do this.”
J.D. You’ve been writing about personal finance for a long time now. I’m curious if you’ve noticed things that have changed since you’ve started. Is the advice that you were giving in the late 1960s still relevant today? And what sorts of changes have you seen over the past 40 years?
Scott Unfortunately, it hasn’t changed enough, because the basic issues don’t change. And because people approach the economic issues in the same — and repeatedly wrong — way.
Things haven’t changed and you still have the same kind of spread of information conveyance. You have wonderful writers like Andy Tobias. Andy can’t make anything complicated. He’s just a wonderful writer. I’ve envied him from the get-go.
J.D. He has a great, personable approach. I like it.
Scott Yes. He’s an easy read. He gets to the essentials very quickly, and he doesn’t try to complex it. Lots of people, they want to make things complicated, either because they want to make a living by making it complicated, or because they want to demonstrate how smart they are to others who don’t understand it.
The task of a personal finance writer is to write things in an non-intimidating way so that you can reach the broadest number of people without degrading your content. If you insist on dumbing down — the usual route used to degrade the content — and, that doesn’t work.
What we need is to be as lucid as humanly possible, have some amount of levity so that people won’t feel that they’re being punished, and get people to say, “Oh, money! This is another tool for adaptation! This is another way that I can improve my life. This is another way that I can escape having a life that consists of a long series of unpleasant surprises.”
If you really start to look at the big difference between people who have mastered their economic lives, it’s that they have fewer unpleasant surprises in their lives. A lot of us, probably most human beings — I don’t know that you can get through your life without some amount of unpleasant surprises — but if you can at least eliminate the money unpleasant surprises, that’ll make you better prepared to deal with divorce and the other traumas that life holds.
J.D. You were talking about how the personal finance advice really hasn’t changed that much over the past 40 years, and I know that’s something you’ve addressed in Spend ’til the End.
One thing that you didn’t talk much about in the book is the notion of behavioral economics, which I know has been around since the mid-70s at least. But it only seems to be gaining prominence over the past few years. I often say that managing money isn’t about understanding the numbers, because anyone can understand that if you spend more than you earn, you’re going to end up in debt.
But managing money is more about managing yourself, managing your mind, because it’s your relationship with money…
Scott Yes, it is, although I wouldn’t go as far as you just did, saying that everybody understands that you can’t spend more money than you earn.
As a matter of fact, I would say that that is one of the most favored American illusions. We’re witnessing it right now with the housing crisis. For all of my professional life, and beyond that, buying a house has been a way to consume and grow your personal wealth at the same time.
Back in the 1970s, I wrote a column for Vogue magazine that was about just that. You could buy a home in a vacation area where real estate was appreciating rapidly, and you would take money out of your income pocket, and you would pay for the bills of the house, but the money would magically reappear in the increased value of the house.
And that’s exactly what happened with the house I owned on Cape Cod. I took money out of one pocket, but when I eventually sold it, I got back way more than I’d ever spent on the house or its mortgage. And that was what was behind thinking like that, which works some of the time…
J.D. Sure. Careful use of leverage.
Scott Careful use of leverage and steadfast faith in the ability of our politicians to create ever-increasing amounts of inflation. You just go with those articles of faith. You can do well, as long as you can make the payments. There are always people who think that they can get rich by borrowing. And you may happen to do better by borrowing, but you’re probably not going to get rich.
I had a life lesson in that. My stepfather was worth over a million dollars in the early 1960s. By the time he died, we were qualifying for Medicaid, because he believed that no dollar should go unborrowed. He was unfailingly generous with all of his boys, including me, but he was a high roller. He would buy whatever and then trust that it would work out. Well, it didn’t work out.
J.D. To me, this is a real philosophical difference that I encounter in my reading. On one end of the spectrum you have people like Dave Ramsey, who talk about how all debt is bad and you shouldn’t carry any debt.
And on the other end of the spectrum you have people like Robert Kiyosaki who argues that debt lets you leverage and buy more than you would be able to otherwise, and that you should have as much leverage as you possibly can afford.
I tend to side more with the “no debt” people, but I can understand the use of some leverage. Obviously buying a house is an excellent example — at least, if you’re not buying too much house.
Scott There’s only one useful thing that Robert Kiyosaki has ever written. In one of his early books, he has a quadrant, and he divides assets up into consuming assets and earning assets.
What you and I are talking about is the illusion of wealth that people get and the satisfaction that they get thinking, “Well, I’ve invested in my home, and it’s going to make me rich.” It will make them feel rich, but it isn’t what all of us eventually need, which is a large portfolio of earning assets.
The house is a consuming asset, and the only way you might benefit from its appreciation is by selling it. So, that’s a very useful thing. But then, [Kiyosaki] takes that to the furthest extreme by saying you borrow as much money as possible to buy earning assets. Well, it don’t always work!
J.D. And often you have to be able to borrow far more than the average person can afford. I read and reviewed his most recent book, and his examples drove me crazy. He’s talking about borrowing money to purchase a $17 million dollar apartment complex. Well, that’s fine if you can afford to borrow $17 million dollars, but I’m an average guy. I can’t afford that. What can I borrow to…
Scott Yeah, but you could afford it if you had $3.4 million of debt.
J.D. Exactly! I feel like his advice is often lacking practical application for the average middle-class person. But I have to give him credit: he does get people thinking, even me. Even while I’m sitting there disagreeing with him and scrawling large rebuttals in the margins of his books, he’s got me thinking.
Comments may be made at the end of Part 2 Thank You