Delaying gratification or in simple terms, delaying fun is easier said than done.
What it takes to retire early or at least be in a situation where a job loss, or other difficult life situations wouldn't effect you all that much is known for ages. Acting on it is just a totally different thing altogether.
And this is not just restricted to money. Nearly everything is like this. You could have a habit to read everyday, do push ups and eat healthy. You just have to do a little of this everyday. But most people struggle to keep up.
Success is doing boring things. Unfortunately since being boring is unattractive, some people actively avoid succeeding.
Morgan Housel hits this nail on the head in "The Psychology of Money", by talking about these "touchy-feely" aspects of money (which are routinely tossed aside in quantitative analyses... because they're not quantifiable).
It really does come down to "we know what we have to do, but it's too f**ing hard and/or tedious".
> Delaying gratification or in simple terms, delaying fun is easier said than done.
And arguably not worth doing. Tomorrow may never come -- you could get hit by a bus driving home today.
Studies show that a lot of poor people spend money immediately because their lives are often crazy uncertain and trying to balance and pay debts -- which they may never pay off -- doesn't get them anywhere. Blow the money on a new xbox now, because even if they pay the rent today they probably won't be able to stop eviction next quarter.... but at least they have an xbox, and can take that with them to the next flophouse.
If most people blindly invest in index funds the whole market ends up overvalued. And they kill competition as companies only aim to just stay in the index.
It should be adjusted by current and expected returns. Else, it becomes an asset bubble with insane multipliers of real returns (like today). You are just counting on someone else to buy the stocks when you sell in the future.
You can invest savings in the market, but that ups your risk. Investing in a primary home is fine because you would pay rent otherwise, but look at rent to sell ratios for sure, you won’t always win owning a home if you are in a frothy market where rents are cheap and buying is expensive.
Really, just look for opportunities. Something undervalued, or something you are in a special position or have the skills to leverage (eg you are great with people and like DIY, go ahead and do rentals). That isn’t very easy though, and definitely doesn’t fit into a book.
I've seen many videos by finance youtubers going over the classic "buy a home vs invest the savings" and the dumb mistake that all of them make is assuming that the rent price will stay the same across the entire time frame considered.
It's just not happening.
I did buy a home (a flat, really) rather than investing and my mortgage payment is pretty much the same amount I was paying in 2014 for a single room as a student (same city, high cost of living).
Housing usually is the primary and largest expense every month, so it makes much sense to get that sorted out and stabilized.
This of course assumes that you plan on staying in that city (I've been in the same city for the last 11-12 years). If you're not sure you'll be in the same city in 3-5 years then sure, go ahead and rent.
> I've seen many videos by finance youtubers going over the classic "buy a home vs invest the savings" and the dumb mistake that all of them make is assuming that the rent price will stay the same across the entire time frame considered.
> It's just not happening.
Buy versus rent is pretty complicated, and specific to each market and timeframe.
You are right that rents will increase over time, but so will the value of invested assets. While I cant speak to your youtube videos, it is not crazy to assume that the value of invested assets will increase at least as fast as rents.
Also, even if your mortgage payment is flat, that doesnt means housing expenses are flat. Taxes, insurance, and maintenance should be expected to regularly increase on property you own.
I rented for 9 years in Beijing, paying $1k-$1.5k/month for apartments that were on the market for $1 million. It would have been dumb to buy in that context, an obvious bubble (rents are slightly stronger now, but vacancies are high). There are many bubble markets where you can nope right out of since the rents are probably cheap enough.
Owning rental property is a small business. You can earn far more, reliably, without the whims of a number going up and down, than you can by passively investing it.
In general I have always found the passive investment "standard smart advice" to be wrong, but I'm a contrarian by nature. I actively manage everything because I like to know what's going on.
It's crazy, I just call a contractor I trust and they fix it, and then charge enough rent to make sure it covers anticipated maintenance, and then have a business insurance policy to protect against big disasters.
Charging enough without leaving the property empty can be a challenge. As is finding tenants who won't trash the place so often you lose money on all the repairs and turn over.
Depending on the market that may be so easy you'll think everyone else is stupid. Or it may be so hard you wonder if you are doing something wrong.
- you previously spent time building relationships with contractors. You didn’t just type in property management in Google
- a significant overhead goes to insurance and management. Your comfortable putting money as needed into the venture. You have knowledge of legal pitfalls of being a landlord.
- you regularly spend time managing these contracts
Sure, but you're managing the property. And that's great! Many get into RE thinking it's a set it and forget it type thing. That's not the case. But the work is pretty well understood and it can be done as a side gig, making it great for someone who wants to add to their income.
I know a number of people who have done very well with RE, but they all actively manage their properties.
It's good, but it's work. I have a friend, really good swift/iPhone dev who charge 350 to 500€ an hour (so 200-350 after taxes). If after taxes and expenses (loan repayment) he can earn 2-3.5k for less than 10h of work per year that can be a good investment. But that's not taking into account the principal he invested, the fact that the job would bore him, the fact that he can't improve his skills.
It might be an okay investment for me (I'm a salary man, can't be bothered with freelance work), but for him I'd bet it's a money loosing proposition
[edit] the 500€/hour is an outlier, he wanted out of a project and kept increasing his rates, which were accepted up to that point.
I agree with much of this, but I do think that there is a flaw in his logic - he operates on the notion that saving more of your income has a two-fold impact on your ability to retire.
First, and most obvious, it increases how much savings you have. But secondly, he states that you permanently decrease your expenses, making that magical 4% withdrawal rate of your savings easier to attain.
And yes, while that is true on the surface, the underlying message is - if you just don’t have cable tv (streaming in today’s world) and other things like cars and basic vacations, then you are almost there! And yes, if you want to live as a monk then this could be considered by some as a noble thing. But some want to live reasonably comfortably (new-ish car, trips to places like disney world with the kids while staying in a nice hotel vs biking and camping).
I only bring this up because even mister money mustache has admitted that he is unusually monk-ish in his lifestyle choices. Don’t get me wrong, I actually retired 7 years ago partly on reading his blog, so I get it. But we have to be realistic on what his message is and what others are liable to achieve.
I guess what I take most umbrage with is, he says that it is easier and more effective to cut expenses than raise earnings. And just like a business, this strategy quickly runs into diminishing returns. Raising the top line while keeping expenses reasonable is always the best strategy to an early retirement (or a successful business).
That's so true. I have hundreds, maybe thousand of memories linked to hiking and camping with my parents (we went on 'kayak hike', and everytime I sail or just visit around gersais/guenersay, the emerald coast, corsica or southern France I make a trip down memory lane.
I agree, for those that prefer biking and camping vs Disney world and hotels, then Mister Money Mustache’s advice rings true and seems logical. For those that have other ideas of what consists of a ‘good time’, then there is a limit to the ‘cost cutting’ that can be achieved.
My main point is really this - be real with yourself on how frugal you can reasonably get sustainably. If you try to be as frugal as Mr Mustache and that is beyond your level of comfort, you are going to fail and/or be miserable and wonder why you are not enjoying your retirement because it is based on false figures.
If you're comparing passively investing in VTSAX vs some REIT, I might agree with you. But generally, the fewer people between you and your capital being deployed, the higher the return.
Real Estate is the one investment that most people can own, manage, improve as individuals without a ton of special skills/knowledge. Additionally, you can choose the amount of leverage you want to apply and there are considerable tax benefits.
If you have the time, a little knowledge, and enter at a decent time in the market with not TOO much leverage, Real Estate is an excellent long term investment.
You also have to be cool with knowing that your real estate gains are largely contingent on people being unable to afford a home to live in.
House prices rise because of lack of supply, people are unable to make down payments/get approved, people can make rent though, which is more expensive than the mortgage on the house they are renting.
In the past renting was a stepping stone to home ownership. But now it's become more and more a lucrative trap to hold people down in as home prices have skyrocketed. Landlords are double dipping where the home value increases also means that the rent they can charge increases. Meanwhile tenants get slapped twice over, their rents rise and the cost of a home runs away from them.
Sure it can be lucrative, but at least right now it feels like a really dirty way to make money.
Lot's of people don't have the means, financial stability and minimum stay duration required to buy real estate.
In my European country, you need to stay 5 years in the appartement you bought, otherwise you need to pay back a large amount of registration costs (tax) back.
I think you could make the same argument about the externalities of many of the components of the S&P 500 too. E.g. you also have to be cool with knowing that your ETF gains are largely contingent on the destruction of the natural environment, or the addicting of people to pharmaceuticals or social media, or…
It turns out our capitalist system associates very few returns to human flourishing!
Most markets don't have the stranglehold on supply like real estate does. Especially in populated markets.
Medical is similar, since it's basically "pay us this or suffer/die", but the returns from medicine are generally fairly lackluster since there is so much cost/risk in failed trials.
Calculate appreciation in a hot market area over time, and the returns aren't terribly exciting. Short periods of wild appreciation and decades of nothing.
I picked a random house in Southern California, it is up 42% in the last 10 years, sounds great, right?
But that is only an annual rate of return of 3.572%. Nothing at all exciting.
Where it becomes exciting is where you bought that $500k house ten years ago with $50k down, and sell today for $800k - ignoring everything else like taxes, etc, you made $300k on a $50k investment (leveraged) - which is an 18% a year return. THAT is something to take notice of! Of course, you have to factor out all the associated costs, but the leverage is the be-all and end-all of your "investment". If you could leverage against stocks the way you can against single-family houses, you could go nuts.
The advantage to leveraging real estate that you live in is that you basically have a heads I win, tails you lose scenario; if the house crashes you walk away (at least in non-recourse states like California, and practically almost everywhere).
It can be even more insane than that. Not knowing what I was doing, I bought a house during the sub-prime boom thing (2004). I paid $10k in fees (zero down) for a $400k house with an interest only mortgage because I was able to "finance" the %20 down payment as a home equity loan. Fun times! I remember paying about $1700/mo total in interest payments ($20k/year). I checked Zillow all the time and the house was "making" 50k a year in appreciation just sitting there so it was essentially free. I sold it after 3 years (dec 2007, good timing) and after all the fees I walked away with $130k in cash right before the housing market crash (tax free!). I didn't know what I was doing then either.
The people who bought it from me tried to flip it but walked right into the chainsaw of 2008 and had to sell it at a loss. I could have bought it back for even less than I paid for it the first time a year later! Whoever did buy it got a great deal because now 15 years later it's worth $1.3 million and I feel like I should have just kept it. I definitely haven't managed to save $1m in the last 20 years.
"where you bought that $500k house ten years ago with $50k down, and sell today for $800k"
The problem is that in those 10 years you also paid a bunch of interest on the mortgage necessary to buy that house. For instance:
Assuming a 20 year mortgage with a fixed 5% interest rate, in 10 years you paid 200k just in interest. Makes that 300k look really much less appealing.
- A house mortgaged 10y ago isn't paying 5% interest.
- A house mortgaged today isn't necessarily going to be paying 5% interest for the life of the loan, one can refinance if/when interest rates become more favorable. Interest rates are set to start coming down next month.
- 20k/yr in interest isn't really 20k once one factors in the tax deduction on that money.
- Making 300k by other means is a lot harder, requires a lot more capital or much riskier leveraging than an asset like a home.
It's no longer a factor for many (most?) in the USA because the standard deduction went so high.
And even then, only the amount above the standard deduction is effectively deductible, so it kind of is a wash.
(Fun fact - if you have an expensive enough house it is better NOT to be married to your spouse, as if so each can claim up to $750k of mortgage, whereas as married it's only a total of $750k or something. I don't know the actual numbers, never been close to that.)
As a beneficiary, it's nice, but overall I believe it's unfair that homeowners get a tax break, while renters do not.
Also it's a bit of a wash, as prices end up reflecting the tax break because bidders are ultimately going right up to their budget, and they take that into account.
I wish there was enough housing so that it isn't seen as some sort of investment vehicle that distorts prices for basic human necessities.
> All that matters is the savings ratio. Everything else cancels out. I promise
This is an oversimplification.
It reminds me of those retirement calculators that estimate retirement based on a percentage of current salary, without considering that income and expenses change over time.
We don't aim to live on ramen noodles for our whole lives.
It's too simple because it's a point in time snapshot.
From your link:
If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart and a more detailed spreadsheet
Example numbers:
Take home: 50k
Spending: 25k
Ok sure we can say that if nothing changes and historical returns approximate themselves then this person can retire in 16 years. But that's not going to happen. Things are going to change.
Say on year 5 after career advancement + kids it changes to this:
Take home: 100k
Spending: 75k
Now the numbers point to a different retirement date (even though the annual saving amount is the same). Which means that the original 16 year estimate is already out the window.
Then on year 6:
Take home: 40k (lost job, looking for a new one)
Spending: 60k (still got to pay the bills - from savings)
Now the numbers from year 1 and year 5 are even more further off. And the simple snapshot says they'll never retire now due to a negative savings rate.
I'd say in the UK the majority of rich people are so through owning real estate. It's kind of a time honoured thing. Not sure it's a good thing - probably it's one of the reasons for slow economic growth here that people sit on property rather than making stuff.
I know people that invested in property and they either didn’t consider the risks they are taking (not servicing boilers) or the time managing tenants. If you end up with a court case, you are going to shorten your life through stress.
I get it that mortgage money is cheap leverage, but I think the good times on that have run out.
Yeah it has good times and bad times depending on the property market and the government laws of the day and also on the individual. Still over the long term there tends to be a transfer of wealth from the young and hard working to property owners as a class.
Also the monied class totally lost its appetite for manufacturing anything due to the unions that went with it, and the solution to the problem of socialism was to destroy the idea of society, as per Thatcherism.
VTSAX isn’t a free lunch, but you pay in risk rather than time spent managing real estate. It’s passive assuming you can handle drawdowns whereas real estate is passive assuming you think running a rental business is passive.
I don’t believe in efficient markets. I’m saying that there’s a lot of people sending their money to the SP500 on autopilot. The value-add of investors are
a) provide capital
b) re-allocate capital from less efficient to more efficient co’s.
The autopilot style of investing is good as far as it goes, but it risks inflating the SP500 far beyond what is logical, while starving smaller but still great companies of capital.
Don't invest in real estate. If it was a free lunch, someone else would eat it first. VTSAX is way less work.
All that matters is the savings ratio. Everything else cancels out. I promise. https://www.mrmoneymustache.com/2012/01/13/the-shockingly-si...
So a penny saved is actually worth more than a penny earned, because it means you need less invested to retire.