Money Secrets of the Super Rich

Steve Pomeranz: Paul Sullivan writes the “Wealth Matters” column for The New York Times, and his articles have appeared in Fortune, Barron’s, The International Herald, and Food and Wine.  Today, he’s here to discuss his book The Thin Green Line: The Money Secrets of the Super Wealthy.

Hey, Paul.  First time having you on the show.  Welcome.

Paul Sullivan: Hey, Steve.  Thanks for having me on.  I appreciate it.

Steve Pomeranz: My pleasure.  You know, Paul, in a way, the title sounds like a get rich quick book, but, of course, we know that’s not the case.  What is the main theme?

Paul Sullivan: The title is a way for people to think differently about the choices, decisions, and behaviors they’re making around money.  If listeners kind of visualize a line not as something that’s horizontal or vertical, but as, say, the S&P 500 returns of the last 50 years.  Starts low, goes up and down a bit, but, in the end, it’s pretty high up there.

To me, being wealthy means you’re on that side of that line where you’re standing.  Doesn’t matter how much money you make.  You could be toward the beginning and have a very modest income, or you could be toward the top and make a ton of money.  The corollary to that is those people who are on the wrong side of the line—who are either walking beneath it at the lower levels, who at the very top have all outwards appearances of being very successful, the riches, the house, the cars, the trips, but really they’re living in a house of cards.  They’re making bad decisions and bad behaviors around money.  Essentially, you visualize them as the people who are either hanging on to that line with their fingertips or, actually, in free fall from that line, and they don’t even know it.

Steve Pomeranz: You’re making a distinction between being wealthy and being rich.  What is that distinction?

Paul Sullivan: That is a distinction that …if you’re wealthy, you’re going to be secure.  You’re going to control life.  If you’re rich, you may seem to have all the great things in life, but you’re not that secure, you’re not that financially secure.  At some point, life is going to control you.  I don’t know about you, Steve, but I like to have choices in life, and I like to be able to at least control the things that I can control.  That’s why I want to help people get on the wealthy side, the right side of the thin green line.

Steve Pomeranz: Wealth is really a psychological feeling, while rich is really a number?  Can you illuminate the differences there, too?

Paul Sullivan: Absolutely.  Rich or poor, that’s a number on a bank account statement.  It’s a number on a brokerage account statement.  As we saw in 2008, 2009, that number can change radically.  It’s not something we can always control.  The chapter I write on investing is called “Looking at Stock Quotes Can Be Hazardous to Your Wealth”.  The point of that is, people who obsess over where the DOW is going to close, where the NASDAQ is going to close, chances are, they’re going to make bad decisions.  They’re going to buy when they shouldn’t buy; they’re going to sell when they shouldn’t sell.  This is human behavior.  We’ve seen it time and time again.

What I try to do when I talk about the wealthy, the people—who it’s more than a number—those are people who have a sense of enough, whatever enough is going to be.  It’s not for me to say.  What is enough for one person may not be for another.  They’re able to do all the things they want to do in life and live, at leas financially, a life with far less stress than if they’re just focused on that number.  They’re focused, instead, on those choices and those behaviors that they can control.

Steve Pomeranz: Can we simplify this and say the old Ben Franklin thing?  Let’s say you have a dollar.  It’s a hundred cents.  You have a penny more, you’re happy, and if you have 99 cents, you’re miserable.  If you’re living from paycheck to paycheck, this is not being on the right side of the green line.

Paul Sullivan: Sure.  To be clear, there are plenty of people living in very affluent towns who are living paycheck by paycheck.  To them, it may be bonus to bonus.  In the chapter on debt, I talk about this town in Connecticut called Darien, which is always rated as one of the top ten wealthiest suburbs in America.  I kind of lay out and discuss a private financial life that was given to me confidence.  I lay out his life and you see how he would seem: He’s a high earner, million, two million bucks a year—  you’d think he has no problems—but the way he structured his financial life, with debt around multiple homes, with spending, all kinds of other things that are fantastic—I wouldn’t deprive anybody of any of these things, but he’s living a house of cards.  In his example, I think it was if interest rates picked up a percent or two, the debt payments would suddenly become onerous.  He was living a life in which he thought the present and the future would look the same, and that is just not the reality.

The one thing I can guarantee: The future is going to look different than it does.

Steve Pomeranz: I think anybody with any life behind them knows that.  You’re talking about the difference, and we saw a lot of individuals do this in 2006 and 2007 with their homes.  They were getting these adjustable rate mortgages at below market rates, and it was all on the promise that, hey, the appreciation in your home was going to continue, and you would be able to flip this at some time in the future and make up for the deficit, should even interest rates rise.  Of course, that didn’t happen.

In this case, you’ve got this person in Darien, Connecticut who’s living outwardly that beautiful lifestyle but who knows what’s really going on under the hood.

Paul Sullivan: You’re right, and those interest-only adjustable rate mortgages, IOARMs as they were called, they were just a vehicle.  They were just a device.  In theory, if you were the type of person who earned a salary throughout the year and then received some sort of sizable bonus at the end of the year, those mortgages might have made sense, but they’d only make sense if you had discipline.  If you looked, and you paid the interest all year long, and then at the end of the year you paid down a big slug of the principal on your mortgage, great.  It’s a good cash management tool.  Unfortunately, too many people didn’t use them that way.  They paid the interest, and when they got the bonus, they then bought a second home, or they took a wild vacation to Turks and Caicos, and they never touched the principal.  Well, then they found that even $3 million houses fall in value.  It’s not just those folks in Nevada and California that got pilloried during the housing crash.  Expensive houses fall in value, too.  Your $3 million house can go down to $2.2 million.  If you only put $400,000 down, suddenly that $300 million house is underwater, and you’re in a real pickle, to use the technical term.

Steve Pomeranz: It’s understanding, though, before you go in.  I’ll give you an example from your own book.  You had mentioned that when you were looking for a home, the realtor showed you an 8,000 square foot home.  It was affordable, kind of in a superficial way, right?

Paul Sullivan: It was affordable in what I call a mortgage banker way.  When they ran all the numbers, they could say, “You can afford this.” Both my wife and I looked at each other and said, “Really?  How are we going to afford this?” We just, fortunately, we didn’t feel comfortable.  We didn’t feel comfortable taking on that kind of debt and that kind of leverage.  We were fortunate for two reasons. 2008, 2009 happened, and that would have been very stressful to have had that giant mortgage payment.  We didn’t know anything.  We were going into this as first time home buyers, and we had no idea how much it cost to have an electrician over, have a plumber over, have somebody paint the house every five years.  All of these other expenses that a mortgage broker is never going to tell you when you’re buying a house, we were just totally ignorant of it.

We got lucky that we both have a pretty well-developed sense of enough, and thought, “As beautiful as this house may be,” as I say in the book—it was right around the corner from David Letterman’s old house, it was a nice neighborhood—as beautiful as it was, we didn’t need it.  The book isn’t about deprivation.  I’m not telling people, “Don’t have this, don’t do that.” I’m telling people to make choices.  The house we’re living in is great, and we love it, and it’s a little bit smaller, but we’re not all cramped into one room, so we’re still doing okay.

Steve Pomeranz: Yeah, and the quality of life is better, because you’re not staying up at night worrying about the things that are out of your control, basically.

Paul Sullivan: You’re absolutely right.  When things go wrong, as any homeowner knows—and things go wrong—we’re not worried about having a guy over to fix the boiler or even replacing the boiler.  We’ve put that money aside so we’re not going to let life control us.  We’re going to get control over our life.

Steve Pomeranz: That is an element of being on the right side of the thin green line.  The book is The Thin Green Line: The Money Secrets of the Super Wealthy.  The author is with me today, Paul Sullivan.  That’s exactly what we are talking about.

In your book, you mention the term called financial therapy, which is a combination of psychology and financial advice.  What do you think a person should expect from their financial advisor, with regards to these issues?

Paul Sullivan: In financial therapy, it’s a real deep dive.  I think if more advisors could get trained up in this and more advisors were willing to take that dive with their clients, I think it would benefit everyone.  In the book, I fly out to Kansas State, where they’re doing a lot of really interesting research on our underlying feelings about money.  Essentially, we may say one thing, but I was sort of the guinea pig.  They hooked me up to all kinds of sensors.  I was saying one thing, but all of the readings were showing another thing.  My fingers were getting sweaty; my fingers were getting cold.  It was the classic fight or flight response.  On the outside, I thought, “Hey, I’m answering all of these questions factually,” but I wasn’t.

Steve Pomeranz: What were the questions?  What were the questions?

Paul Sullivan: They were basic questions.  It was the exact questions that any advisor would ask their client.  All questions that not only did I have an answer for, but I thought my wife and I had handled well.  It’s just the basic construct of talking to your advisor can be stressful for a lot of people, but one of the things that the research out of Kansas State has shown, that I think advisors and clients and everyone can benefit from, is they’re really trying to get people to understand themselves and their relationship to money.

There are people who suffer from money vigilance.  What does that mean?  That means they may be a little bit afraid of money, and what money can do.  They’re afraid to spend it.  They’re depriving themselves when they don’t need to.  You also have people for whom money, their net worth equals their self worth.  You have other people who believe, “If only I had a bit more money, life would be better, or I’d be a better person.” Both are equally untrue, but they try to get people to understand these things.  Once somebody understands that, hopefully, they can have a better relationship with their advisor.

How many times do advisors tell clients, “You know what?  You need to save X amount and spend Y and things will be fine,” and the client goes off and says, “Yeah, I can do that,” and they do, for a couple months.  Then, just like a diet, they fall off the wagon.  They can’t do it anymore, because it’s deprivation.  It’s not sort of understanding who you are as a person.

Steve Pomeranz: We deal in these issues all the time.  We especially deal, in our community, with a lot of people who live in fear, because there’s so many uncertainties out there with regards to politics, or what’s going on in countries, or in the economy, and so on.  There’s a tendency to be more fearful than not, and they end up with having more than enough money and, really, in a sense, sacrificing their own lives and the things that would make them more happy in that life or more contented out of fear.  One of the keys to addressing this is to quantify it.  There are some wonderful tools out there that good investment advisors are using in order to quantify whether, in fact, you’re going to be underfunded or over-funded or adequately funded for your retirement or for your goals.

Once you get a sense of the quantification of these numbers, it goes a long way to helping you to counteract some of these four basic money scripts.  You mentioned money vigilance.  That’s what I was just talking about.  There’s also one called money avoidance, Paul.  Tell us about that.

Paul Sullivan: You don’t want anything to do with money.  Money has become so freighted with emotions that you want to push it away.  You’re not going to negotiate for that higher raise.  You’re going to be very blasé about your savings.

Money, in my book, if I can stress it again and again, money is a means of exchange.  The more money you have, the more things you can buy, the more options you have.  The less money you have, the less things you can buy, the more cautious you have to be about your choices.  That’s it.

Too often, and, particularly these folks with money avoidance, too often money becomes something more.  Perhaps their parents fought over money.  Perhaps their parents were divorced, and they fought over money.
Steve Pomeranz: How about the fact that maybe parents never talked about it?

Paul Sullivan: They never talked about it.  Exactly.  I see it today.  Look, we wouldn’t send our kids out into the world and not talk to them about drugs or sex.  We’d be considered negligent parents if we didn’t talk to them about drugs and sex.  Why don’t we talk to them about money?

Steve Pomeranz: It’s taboo.

Paul Sullivan: It’s taboo.  It’s fraught with risk.  You think, well, “Nice people don’t talk about money.” Well, how are kids going to learn if we don’t teach them about money?  We wouldn’t throw our kids in a pool without a lesson.  It’s just not the sensible thing a parent should do.  Yet, when it comes to money, an amazing part of the problem comes from a lot of couples don’t talk openly enough about money.  The husband does one thing; the wife does another.  At the end of the month, they have a fight.  Well, the kid sees that, that’s going to make money something more than just a means of exchange.

Steve Pomeranz: If the parents are not agreeing and can’t come to some kind of consensus, they’re surely not going to be able to turn around to the child and teach good values there, either.

Paul Sullivan: You’re absolutely right.  Parents realize that their kids are watching their every move when it comes to manners, when it comes to sitting at the table, when it comes to persistence in a task.  Why would parents think that kids aren’t watching their every move when it comes to money?  When it comes to the conversations they’re having or not having?  When it comes to how they spend or don’t spend?  The stories they tell, the cars they drive?  Kids are watching every single thing.  If we’re trying to model excellent behaviors in other aspects of our children’s lives, we need to also model that behavior in their financial lives as well.

Steve Pomeranz: Very interesting.  Let’s get back to these four scripts, because we’ve talked about vigilance.  We’ve talked about status.  The self worth is linked to net worth.  We’ve talked about money avoidance, and the final one here is money worship.

Paul Sullivan: Sure.  Money is the end all, be all.  “If I had that bigger house, my life would be better.  If I could take my Toyota and turn it into a Mercedes, my life would be better.” That’s quintessential keeping up with the Joneses.  It’s a sucker’s game.  It’s not going to end well.  There’s all this research that shows when you buy things … you need a suit to go to work.  You need a couple of suits.  You need a couple shirts.  You need a couple pairs of shoes.  If that’s what you wear to work, that’s what you’ve got to wear to work.  You don’t need 20.  You don’t need 20 suits.  You don’t need 20 pairs of shoes.  You don’t need 40 shirts.  At a certain point, the next shirt, the next pair of shoes doesn’t matter.  That’s what money worship becomes.  These people are going to find out, when they go from that 2,000 square foot house to the 4,000, to the 6,000, to the 10,000, to the 15,000 square foot house, it’s never going to fulfill them.  They’re worshiping something that is a false idol, as it were.

Steve Pomeranz: Many of those who have obtained great wealth through business creation or investing, it’s really never been about the money.  The money is basically a score card for them.  It’s a result of the work that says, “Yes, you’re doing this work correctly.” I mean, the poster child for this would be a Warren Buffet, who still lives in the same house he lived when he was first married.  I think he just bought a new Caddy.  This is a guy who could buy countries left and right.

You interviewed a lot of wealthy people.  I’m sure some of them viewed wealth as part of their self-worth, but did you find a lot didn’t as well?

Paul Sullivan: Yeah.  Those who would find it as part of their self-worth, I wouldn’t call them wealthy.  I’d call them rich, because they have the wrong mindset around money.  I agree totally with what you said, though.  For many of these people, the money just kind of came.  They were myopically focused on whatever it was they wanted to do.  Whatever job they were doing.  Whatever company they were running.  At a certain point, they raised their head, and they realized, “Geez, I’ve accumulated a bunch of wealth.”

For a different generation—I think of my grandparents’ generation—this is what happened with their homes, and my parents’ generation to some extent.  This is what happened with their homes.  They bought a house, and they lived in it for 30 years, and when they went to sell it, they said, “Geez, how did that happen?  It is worth some multiple, four, five times of what I paid for it.” We kind of got off that track in the early 2000s, where the home became an ATM.  I think most of the super wealthy still had that mentality of the home being just something that was there.  The home was their company, and it just kept building up, building up, building up.  At a certain point, they sold it, and they said, “Wow.  I’ve really accumulated some wealth here.”

Steve Pomeranz: Well said.  Unfortunately, we are out of time.  The purpose of this discussion is to help our listeners figure out how to get on the right side of that thin green line, and that, in fact, is the name of the book, The Thin Green Line: Money Secrets of the Super Wealthy.  My guest, Paul Sullivan.  Hey, Paul.  First time talking to you was great.  Thank you so much for your book and your information.

Paul Sullivan: Thanks for having me on.  I really appreciate it.