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August 29, 2008


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Great links here!

I think you've pointed out something very important about being able to be comfortable with your finances. Many articles deal with only the savings aspect of personal financial matters but rarely do they talk about the making more money aspect.

People often are found to say that they have no extra money to put into savings but don't perhaps consider the potential for making more money.

Okay, I'll say it: they are lucky.

First, they profited from the real estate bubble. That clearly made a huge difference early on.

Second, stock options at Microsoft clearly was probably another big player. Some of us don't have those type of options.

Third, if my parents rented me a house well below market value, I'd too be half way to a million dollars.

I don't begrudge them. They seem like they save well, but anytime I hear that someone is going to retire at 40, you know a simple thing about them. They either make ungodly money or had some real advantages over the joe smith whose saving x% of his income every month.

Well, if I made $174K, I'd certainly be well on my way towards being a millionaire. I make a quarter of that, but still spend much less than I earn. Still, I do think these sorts of articles are unfortunate in that they almost glamorize saving. For anyone who makes $174K and can rent a house in SF for just $650 a month, saving is extremely easy.

Anyway, one other big difference between me and them is that I actually love my job. The article made it seem he hates his job and "yearns" to quit it. I too am a software developer, but I really enjoy what I do, and would never want to give it up for anything.

Yeah, great story and good for them but they have advantages most people do not. Folks that make realistic decisions about saving, living within means, etc. will do just fine in retirement--even if retirement isn't until 65.

If you're entire life is spent thinking about what you'll do when your retire you will have missed the best years of your life in looking to a future that is never 100% certain. Your life is happening right now. Just be sensible about how you save, how you spend, and what's important. It's all really about balance...

Anon and Rick --

These principles still work no matter what the income. If you spend well less than you earn, you'll prosper no matter what your income. I've posted before on people making $20k per year and ending up with a high net worth. It can be done.

Seems like you both addressed the people and not the principles, so I just wanted to clarify -- these DO work. I know -- they are what I've used to grow my net worth.

Damn, if I made $174k a year I could probably be a millionaire in 10 years...what's taking them so long?

The key is to start young and live below your means!

No, FMF, I'm not objecting to the principles. I'm objecting to the glamorization the article makes of the possibility of being a millionaire by 40. Sorry, but most people are not in their circumstances. Bully for them that they are taking advantage of their opportunity, but let's not pretend as though their path is one that most could duplicate. If they had to pay even just market rents on an average place in SF they wouldn't even be close.

I'm not attacking the people. I'm not attacking the principles. I am suggesting that sometimes the examples used to support the principles mislead people as to what they can really accomplish. Someone making 40K a year who lives below their means and saves from the start of their career can amass a very nice sum over the course of a long professional career. But I also know that one thing they will never be (judged in terms of cash flow they will be able to generate -- which in my view is the true test) is rich. And that's fine. As one with similar retire early goals as the couple in this article (although nowhere near that aggressive) and as one who makes a lot more than them, I know exactly what their path looks like. And I'm telling you, if they had to pay the true average costs in their area and didn't get lucky in the real estate markets, they'd be nowhere near where they are. They also have that wonderful advantage (as a married couple) of having two sets of tax-favored accounts to max out (which makes a big difference).

Anon --

I just don't want to throw the baby out with the bathwater. While these two are unusual (I grant that), they do illustrate solid principles that anyone can use (spend less than you earn and save) to be quite well off. Even someone making $40k per year will be MUCH better off (and will be wealthy compared to most others their age) if they apply the principles.

Here are some examples:

Now you still may have some objection, but the simple math will prove me to be right -- spend less than you earn and save the difference for a long period of time and you'll do well financially. Just saving $2k per year at 9% return for 40 years nets you almost $700k. Add to that the value of your house at retirement and you are well off indeed.

As I understand the article points up the fact that the young family maybe had luck but maybe knew what they want from the beginning and that is to find better deals. They could move into a better house but they prefer to pay less. You don't know all the facts, don't judge them. Learn from the example what is to learn.

Find a way to make more and find a way to spend less and still be able to maintain same lifestyle.

If they had luck is because they wanted to have luck. Maybe they had luck in some parts and misfortune in other parts but for sure they knew how to use their luck.

As FMF said, it's the principle not the people.

Just because I said my hypothetical saver won't be rich, doesn't mean I don't think my hypothetical saver shouldn't save or that he won't be better off for having done so.

But let's be realistic -- that person needs to save until 65 to achieve what you are talking about. That person will not be able to retire at 40.

Again, no argument on the principles. I'm all for promoting them and all for people adopting them. I just think at times we overstate the case. It's the right thing to do for financial security and, sure, compared to idiots who don't plan for their retirement, you will seem loaded. But most won't become rich by any modern definition of the word (i.e., be able to afford lavish things they can't afford today without a worry of cost). But many will achieve what should matter more: a sound lifestyle where they can generate significant income from passive sources so they don't have to work. That is a great thing. But people shouldn't have falso notions that somehow if they save now the power of compound interest is going to make it posible for them to live like Bill Gates tomorrow. No, the power of compound interest is that it makes it possible for them to live a nice life now and still, with their savings being less than their current lifestyle expenditure (as few are in the position to save more than that), maintain their standard of living in retirement.

Anon --

1. Sounds like in general we are saying the same thing.

2. Your definition of "rich" is different than mine. I don't classify "rich" as being able to spend whatever price on whatever you want. I define it as being well off enough to live a very comfortable lifestyle. Someone with $1 million (in my example above -- assuming a house and the $700k) can certainly do this. And this example is saving only $2k per year. Most people can do much better than that if they try hard.

3. That said, compare a $1 million net worth with the net worth of the world's population. You're more wealthy than all but maybe 1% of people. Even in the US, you're more wealthy than 90% of the population or so. Many (most?) people would say this would make you at least very well off, if not "rich."

4. I think very few can retire at 40 as well. That's why my emphasis in the post was on the principles, not on retiring at 40.

5. I don't think people have false notions that if they save now the power of compound interest is going to make it posible for them to live like Bill Gates tomorrow. Do you really think anyone would believe this?

6. There's MUCH more of a problem from people saving too little than there is from people saving too much, wouldn't you agree? As such, I'm focused on doing all I can to get people to save more.

Meh, not impressed by this couple.

1. I doubt they actually earn 175k. I bet he earns near 100k and the shop takes in some money and they get rent money.

2. They are losing money on the houses.

3. They are renting his parents place for cheap, mooching.

4. No kids yet.

5. Spend no money on fun. Although he bought the STi. She got a 15-20k ring.

My wife and I on the other had are both 25, make 150k combined, sock away $40k+ a year into retirement accounts, and save an additional $2k a month for a house. Still have fun and have done it on our own.

Our wedding was half paid for by both of our parents and that was all the help we got. We have student loans, but they are low since we both worked hard to get scholarships for college. And we now have $120k net worth after graduating school 3 years ago.

Very interesting, I am trying to accomplish the same thing as they are. Working extremely hard to get into a high-income job, learning about finance, investing through retirement account and plan to begin real estate investing when I finish professional school. And most importantly...keeping the money I earn by being frugal.

Though their general plan is sound, I think some of his past investment decisions could have been a lot better. He definitely did NOT make his money through real estate, he bought right into the height of the bubble. It would have been even worse if he had bought a primary residence rather than living with his parents. Additionally, buying your initial rental property far away from you is just not very smart, you need to learn the ropes of managing it, and can only do that if you can be there to see what your renters are doing.

Aside from that though, well done.

Also, the financial adviser and/or the author aren't exactly the brightest bulbs. Based on the couples current spending/saving ratio, they will be withdrawing near 2% of a 2.9M portfolio already. Their current COL expenditures come out to 25k/year, assuming for 3.5% inflation, they will have COL expenses of 58k/year and would have 88k/year in investment income at 3%, at 2%, it would be 56k/year. I don't understand how he could possibly think it would be somewhere around 4%. Is this guy even a financial adviser? Additionally, the advice to sell the company stock, while good in principal, as it isn't good to have all your eggs in one basket (income+investments) it also is stupid to sell when you know stocks in general are tanking hard. The only decent advice the financial planner offers is the 90/10 asset allocation advice, it greatly reduces the risk of carrying a 100% stock portfolio and allows the couple to re-balance when the opportunity arises.

They make $174k and they only save half of that. I must admit I'm impressed by their earnings (I guess they staid far away from grad school eh?), but I'm not so impressed with their spending and their savings rate of 20% is fairly average for financially responsible people. Heck, the average savings rate in Europe is 15% and in China it's 50%. OF course compared to the trainwreck of the average American consumer they are handling things very well.

As for their networth most of their net worth seem to have originated in real estate adventures and stock options. It even seems like a rule that if someone is young and has substantial amounts of money, the real estate bubble was involved at some point.

I think the only thing that sets them apart from, how do you say, regular people with their finances in order, is their scale of operations. I mean, good for them, but other than their income level and career skills, they're not extraordinary.

It's kinda like putting an average guy in a race car and say ... wow he goes really fast ... but that does not necessarily mean he's a good driver. He's just in a faster car.

You left out
* live with your parents
* cheat on your taxes

They did those too.

This certainly falls under the old adage of "easier said than done", right? Thanks for the links! I'll be checking them out as I go through my own financial development.

Exactly, I don't know about most of you, but its pretty hard finding jobs that pay that well, it takes a lot of WORK to do it. The amount of hard WORK he has put towards his goals is impressive (he was probably working/studying the equivalent of 70-80 hours all through undergrad).

I believe she owns a gift shop. Last year, I read the "Millionaire Women Next Door"(by the same author as the more famous "Millionaire Next Door" book). According to Mr. Stanley, research shows that the very worst business one can own is a gift shop. They are not profitable businesses. Sorry, I can't remember specifically why but I think it had to do with the fact that gift shop owners tend to buy what they like and not necessarily what their customers like. I'm sure there was more to it than that but I just can't recall. I remember making a mental note to self: "DO NOT OWN A GIFT SHOP!"

With some determination it really comes down to the points you mentioned. Depending on your circumstances it might take you a bit longer but that's the core of it. I see some comments about people who say they're lucky and that they have to work hard. My only comment is they work hard and because of that they'll be sipping margaritas on a beach at 40 and most people will be up at night worrying if they can afford their lives at 65. Yes they make good money but they got to those positions with work, education and effort and those are options every person has.

It's easy to do #2 if you do #1, but not everybody can do #1.

Lots of excuses posing as comments on this post.

Is working full-time for $15K an excuse?

Terry --

It is if you let it be.

I haven't found a feasible alternative preferable to working full time for $15K.


You use my hyperbole to attack me. Fairplay in the blogosphere I suppose, but not really a response.

1) Yes, as I said from the start, we are saying mostly the same thing.

2) You are right, we have very different definitions of rich. I think what you describe is a good thing. I really do. But I'd never call it rich. Look, if I wouldn't say you are rich if you made 40K a year working for someone else, why would I say you are rich if "make" 40K a year in your passive investments? You are not. What you have done is a very smart thing, a wonderful thing. And relative to those who don't save, absolutely you are better off. But I'd save the label rich, in the way our culture uses it, for those who really are. And our culture defines it in terms of consumption. Which, in a responsible manner, means you have to look at cash flow. (Some will throw in debt as a way to leverage and bridge cash flow issues, but that's financial insanity.) All I'm saying is that most people associate "rich" with improvement in their financial status and "improvement in their financial status" with being able to afford things they presently can't. For many people, they just won't see much gains in that way. What they will see is an improvement in their financial status by a decrease in their dependency on another for their financial resources. And I by no means am downplaying that.

4) Fair enough. But I think we can agree that the article clearly used the 40 goal as a way to work on a reader's imagination. It isn't about retiring comfortably, it's about retiring rich, retiring radically early, retiring to the carribean, etc..

5) No, I don't think most people think they will retire like Bill Gates. I do think many have a false notion that they will retire with a better cash flow position than they do today. And most won't. Again, that's not to suggest that the plans you suggest aren't good or that their actual retirement won't be a happy and enjoyable one. But the reality is that it is exceedingly difficult to retire in a position where your investments generate greater cash flow than your accustomed yearly salary. The math will prove me right on this point, just as it proves you right on how much one will have if they save.

6) I agree with that.

Anon --

Fair enough. I hear you (though we still do disagree on a few, minor points.)

I can't believe folks aren't impressed with a 50% savings rate at their income. I always thought it would be nearly impossible at such a high salary because taxes plus tithe (which this couple does) should generally take up the vast majority of the other 50%, so I would have thought their expenses would have to be less than 10% of their income, not exactly easy.

But according to the article, they only pay 30K in taxes on 211K in income. Since there is no separate line for SS tax for him/payroll tax for her and the lines numbers balance out to zero, I assume this 30K includes that as well. The vast majority of their income would be in the higher California tax brackets. They make too much to qualify for most federal credits and deductions, so they are definitely are doing something right with their taxes. Is it all this rental property and their business that gets their total effective tax rate down to 14%?

That query aside, it looks with their spending breakdown that saying they have a "50% savings rate" shortchanges their efforts. If you include the money going into their rental property mortgages as investments (don't know why you wouldn't) and the large amount of money that must be going to insure these homes in that high insurance figure and subtract out their tithe and taxes, they only spend about 20K/year, or 10% of their income (thought the maount allocated to their savings/checking accounts is a questionmark, do they spend from this or not?).

20K/year is about what a couple making 24K/year would have after tax and tithe. That equates to a couple working minimum wage jobs. After reading the article linked to yesterday about the "forgotten American" whose gas was turned off when her husband has a union job making 42K plus OT, and these folks choose to live off of less than that, this is really interesting. Heck, if they ramped up their spending to the take home of the forgotten Americans, they'd easily be able to afford that 190K mortgage that was killing the forgottens after they lose their current sweetheart rental deal.

I will suggest two steps to being a millionaire and retiring in your 40's:

1) Marry a millionaire or;
2) Marry money - he who marries with money will surely earn it.

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