Wealthy use debt to buy future cash flow everyone else uses debt to buy stuff (2020)
themdpreneur.com
themdpreneur.com
Meanwhile, yeah, sure, Marks not building equity in businesses, but that car and that boat have bought him a good social life and correspondingly, a good professional network. Turns out the guy in the next slip is also a doctor, and thinking about getting into private practice on the side from their regular job. The hours would be long, but if they can get the practice established, they’ll be their own bosses. Mark has tons of free time working his 9-5, so he says what the hell, let’s give it a shot.
Sam couldn’t do this because he’s got too many irons in the fire. Mark might fail, but he’s got a good network now, and he’s going to be building his own relationships with his patients. Also he’s young! Worst case, sells the car, sells the boat and eats the loss - he doesn’t have obligations that are hanging around his neck.
I’m not saying my scenario is probable, but it’s equally as probable as the fantasy outlined in the article.
Boats and cars depreciate in value pretty hard, so those are most likely sunk costs. Now mark has a cool boat and car, but that doesn't guarantee you a social network, much less a social network of professionals.
A doctor wanting to start a practice in the slip over would be quite a stroke of luck. An even bigger stroke that he would be any good, and yet even bigger stroke that he would want to start his practice with some random dude on a boat. All that for a shot at putting in the hard work so you can maybe have a successful practice.
In your scenario, it seems likely that Mark is actually pretty charming, and that's what would lead another boat doctor to want to start a practice with Mark. If so, then Mark probably doesn't need the boat or car to charm a peer from his existing network. Which would almost certainly be better ROI.
Additionally, even if everything went wrong for Sam, as you describe, he would have learned a ton for future cash flowing assets, and can probably sell them for what he purchased them for, possibly more if he improved the numbers. Between the knowledge, and the intermittent cash, Sam almost certainly has a much better ROI.
I would like to point out though, that I don't fully agree with the goal of the article. Sam seems like he is going to wake up one day and wonder where his life went. Doesn't sound like he is making any great new memories. Mark, on the other hand, probably won't be retiring in the Hamptons, but he will probably look back on his life and have made some awesome memories.
The sort of meta-comment that I think the article kind of doesn’t address at all is that there’s a lot of personal growth and development books that are all about “core competency”. Figure out what your core competency is and double down on that, make sure that is tended and watered and growing every single day, because that’s the thing you do better than other people.
Sam’s core competency is presumably being a doctor, but he has all these distractions. The author can say “passive income”, but it’s a drag even when things don’t go as wrong as my overwrought scenario. My father had a ton of “side hustles”, and some worked better than others, but they were all some amount of psychic drag on his attention and focus.
Mark isn’t necessarily doing the right thing from that perspective either, but we could imagine a third person, Alice. Alice is making the same money, but instead of either of the two previous paths, she devoted her free time to working in a clinic, did research, wrote papers, went to conferences. She studied on her own time, and worked to improve her craft and reputation. She hires an accountant to deal with her taxes, a money manager (or roboadvisor) for investments, outsources everything so she can focus on being the best at what she does.
That seems pretty likely to yield dividends too, imho.
To be fair, the original author makes some very improbable assumptions. Several people have posted research they've done or experience in things like vending businesses. At one point the author says that even with Covid affecting the short term rental market Sam could still get a 20% return in year 1. To make that math work he needs to make $100 profit a month from the rental property during a pandemic when he would actually have a hard time just minimizing his losses.
As my grandfather used to say, "If you sold $20 bills on the corner for $19 all you'd do is get arrested."
Immensely powerful quote.
Since it's so common knowledge, can you point me to where I can buy a website that makes $200/month for $3000?
I’m a super biased reader though. I get very anxious when it comes to money so when the going was good for me, I used all the extra earnings to secure a moderate income outside my job.
How? You make it sound straightforward, but I wouldn't know where to begin.
Let’s say I have $1M liquid (I don’t) and I want to “build passive income”. What do I do? Specifically, what are the actual steps? As in, I pick up the phone and do what? Should I buy a laundromat? Great! HOW do I do this? Where is eBay For Laundromats? Once you but it you’ll need to hire someone to run it. How?
Buy a bunch of duplexes and be a landlord? OK... where is the step-by-step guide?
The answer of course is that it is not straightforward. It is complex and requires experience and not-widely-known niche know-how, and that’s why not everyone just does it.
I would say the scenario with the lowest amount of luck is not really outlined here, which is: get a good job with a high probability of stability. Work hard at it, spend less than you earn and put it in a diversified portfolio of investments and then don’t think about it once it’s in there.
I wonder if these stories are appealing because it seems like an “easy” path to wealth, whereas “work hard at a demanding job” seems hard.
That makes me wonder though: how would I even determine if an opportunity or side hustle is worth pursuing? If every SWE followed our logic, Silicon Valley would be a very different place.
I guess, there’s a big difference between starting an AirBnB and starting AirBnB: the latter has much higher potential reward. So if you’re going to start a side hustle, it better have the potential for fast growth.
In programming terms, choose a side hustle where O(Side Hustle) >= O(Career)
Granted, you likely have the privilege of working in an in-demand field so you won't be out of a job for long, but not everyone is like that.
I might not be completely familiar with the vending machine industry.. but I doubt there's a spot out there worth a ton of money that isn't already claimed. Vending machines arent a new concept. And then he has the idea of using a middle man that'll charge him a fee for managing it, who gets to see exactly how much he makes. They're in a perfect position to squeeze him, if they dont straight up pocket a few dollars from it.
This is more 4-hour work week success crap. There are tons of smart people out there.. if you think you can just phone it in, with no unique ideas on well trodden territory.. you're kidding yourself.
Which I like to pair with standard strategic thinking: assume your adversary (in the market economy, it's everyone) is at least as smart as you.
There's tons of businesses that are simple and obvious and that took just the right kind of team with the right kind of effort.
Some things require so much work to do that they leave an opening, verses things with low barrier to entry. Hence why real estate has more room for profit than stock investing.
That's the whole point of stressing the question though: to identify whether you have any unique advantages which mean you should succeed (or alternatively: to work out whether the idea is actually unique).
The light speed of these hypothetical doctors' accumulation would come from living as simply as possible and even using debt to invest more heavily in low expense ratio funds early in their careers.
Buying $30k of index funds will set you back ~$50k pre tax, which is 25% of our doctors income. If you subscribe to the 4% rule, you've "bought" a perpetual cashflow of $1200 annually.
To get a passive income of $200k annually, you need $5m in index funds which is going to take either ~30 years with compounding interest at 10% (assuming you are investing a continuous $30k after tax) every year.
Realistically, to make any sort of actual money (I'm defining this as $200k + annually in passive/semi-passive income), you need an ownership stake in a business or in another asset (likely property).
The vending machine example is stupid for a doctor to do, because it's the sort of opportunity that rewards someone with a lot of hustle and low opportunity cost - good luck competing with an entrepreneurial college student who has a lot more free time. Same thing with the website.
I’m not saying there will be a crash. It will be interesting to see how this money experiment turns out.
Yes, that works if you're already a millionaire. Otherwise that's still good advice but you won't get a decent wage from it.
The little by little approach also works but takes discipline and commitment to the future that’s hard to keep when you are poor and don’t know where the next piece of bread is coming from. When I first started making (by my then measure) good money, pretty much all of them were flushed down the drain one way or the other. It took me years to snap out of that.
The examples are pretty weak, but substitute index funds and REITs and you are in a better place. Does it fluctuate? Sure does. Does it also accumulate? Yup it does that too and that’s the key.
The home ownership rate in the US is currently on par with where it was in 1995-1996, higher than it was throughout nearly all of the 1980s, and higher than it was throughout all of the 1950s, 1960s and almost all of the 1970s.
If you chop off the particularly artificial five to six years of the housing bubble, the US is presently only about 1 to 1.5 points off from all-time highs on home ownership.
Now, having pointed this fact out, the obvious next response is to claim that today's home ownership is somehow a lesser form. Houses are quite larger today than they were in the 1950s-1970s however, and superior in most every possible way. And home owners have been building equity pretty consistently since the great recession, with US household balance sheets in good condition overall, including with debt service costs at historically low levels (which includes mortgage payments).
Realistically the primary people suffering versus the past re home ownership, are in select few locations like San Francisco, Los Angeles, New York City, Seattle and similar.
A much more interesting metric would be the number of shared households, that appears to be rising (although I couldn't easily google up a concrete graph).
>Realistically the primary people suffering versus the past re home ownership, are in select few locations like San Francisco, Los Angeles, New York City, Seattle and similar.
Well, that's where the jobs are. Sure you can afford a home in Salty Creek with a median Seattle salary, but that's not what most people would want to do. These days, unless you are in STEM (big cities) or trades (rural areas), you are pretty outpriced.
Particularly, they discovered an underserved market niche and found a way to satisfy people's desires in a cost efficient way.
They originally saved money by using a cardboard tray not a box, that had a paper sleeve over it to keep the pizza sanitary. They could get two pies in there for what it cost the bigger chains to deliver one.
The fact that one person doesn't see value in a good or have a willingness to pay the asking price doesn't mean nothing is created. There exceptions however, but by and large people are free to pay whatever price for whatever good. Canned fresh air, little caesar's, art etc.
This is why free transactions in a market economy make everyone wealthier.
PS: Please spare me a lecture about externalities. Formally, an externality exists when Bob's preferences are decreasing in Alice's consumption. Since economics does not place any restrictions on preferences other than being complete, non-satiated, and convex, they are a possibility. But, a society in which everyone is able to veto anyone's consumption on the basis of some externality is a nightmare (e.g., can't allow other people to eat meat, can't allow other people to have children, can't allow other people to enjoy the sunshine etc).
I'm not against your point of wealth creation, but externalities are real and do need to factor in. Individual veto isn't in play, but some sort of societally mandated rules-of-the-game are.
There is no "pure" water or "pure" air. The "right" amount depends on costs and benefits ... None of that can be looked up anywhere and people end up bargaining over them indirectly.
Sure it’s not the best long term and in aggregate, but if you need an income then it’s a reasonable choice.
It might be suboptimal, but when you're planning your financial future understanding what's happening is important and I suspect is one of the reasons more people don't invest. My country also has different rules on how dividends are taxed.
I disagree about looking for stocks that pay a decent dividend. They're overpriced because boomers are all over that (which actually means the yields aren't great), and dividends are taxed as regular income (32% for our $200k doctors), not 20% like long-term capital gains. Dividends also more or less come out of the stock price (tends to be a bit less), so the draw do dividends is that the feel better than selling shares.
The main takeaway from the article was just "live within your means and invest what's left."
Not all dividends can be qualified (payouts from REITs for example are a common exception), but most typical blue chip stocks that pay dividends will become qualified after holding the underlying asset for enough time.
Yes, you're generally better off with equities. Though going for total return is better. It's not that dividends are bad (they're an important part of returns), but (a) you're limiting your diversification options by only focusing on dividend-paying companies, and (b) there's little correlation between dividend-paying companies and companies that give you good financial results.
> Dividend investors will tell you that theory does not extend to reality, and that dividend stocks do indeed do better than the market. I am not denying that dividend growth stocks have beat the market on average. But the dividends are not the reason why. Dividend stocks, particularly dividend growth stocks, have excess exposure to the value, profitability, and investment factors. That is what explains performance differences, which means the outperformance still doesn’t justify trying to pick individual stocks.
* https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...
* https://en.wikipedia.org/wiki/Fama–French_three-factor_model
There isn't no "get rich quick" in personal finance though.
As for breaking even, the security is highly liquid and can be sold at any time to recover one’s capital.
If it was purely the cash flow you wanted you would buy a bond, but once the bond period is over that's it, you own nothing except the cash taken out. If you want to accumulate wealth but not necessarily cash flow high growth stocks are probably a better option.
As an anecdote of actually using debt to generate future cash, when I purchased a house my mortgage was bundled with a home equity line of credit that was used for the down payment. My plan was to pay this off as soon as possible since it had a higher interest rate than the base mortgage. All the advice I got told me not to - everyone said take the 10 years they offer of paying interest only and reinvest what you would’ve put in. It turned out to be great advice and any time I can make this trade on debt, I will.
When it’s not, you’re screwed. I have a relative who was a exec with a credit card bank. Great job, etc. Then the bank moved off to South Dakota, and didn’t pack him.
Long story short: this is actually not the best way to accumulate investment returns. The numbers in the post are not just realistic. Small $ private equity investments (that’s what this is) often lose money when costs are properly accounted for, especially if you include the value of time. And if you pay someone to manage the asset (rental property manager for example) it eats your return.
My dad once came into possession of a coin operated laundromat. It was exciting for a while. I’d go with him down to the laundromat and we’d pick up the quarters and do inventory. We bought a coin counter on eBay to make it go faster. Eventually we did the math and realized the business barely broke even, and was occupying 20% of his professional attention. He shut it down after 3 months and sold off the equipment.
Anyway you can make these kinds of businesses work but it’s a grind, not a free lunch. You’re better off with ETFs or a good dividend stock.
Not to say I disagree, but one wonders if there's broader macroeconomic implications when it's widely accepted that the best use of capital is to buy ETFs and stocks, or maybe real estate.
I say widely accepted because, as an upper middle class professional, it seems to be common sense retirement planning revolves around dumping a large amount of money into the S&P500, maybe with a side of small-time rental management.
This has changed here. It is a reaction-bait article that arrives at no actual conclusion except for "You are in a better position to be wealthy if you are wealthy", and all the comments here are aware of it.
I want more of these discussions. But not like this. I expect higher quality, even from a "Learn business 101" blog.
Guaranteed to hit front page when the articles revolved around these areas.
I don’t need snarky bloggers to tell me investing beats pure waste. This information is of absolutely no value to me. I want to know how good these ideas are compared to other reasonable ideas.
> So, after 1-year Sam has purchased $1,000 in monthly future cash flow (website + vending machine + beach house). It cost him $33,000. He puts in two hours max per week on these purchases.
> Calculating a rate of return yields ($1,000 x 12 months= $12,000 per year) and $12,000/$33,000= 36%.
edit: a few commenters pointed out that these passive income business (for lack of a better phrase) aren't as good as they sound.
Almost absolutely not. That sort of pricing implies it'll net you $20/month in a year. Even if it's not that bad, you'll have to put in work to keep it printing money.
What’s your math on that?
The $3k for $200 a month of seller discretionary income (sdi) is definitely ambitious and rare - basically, it’s either something a friend wanted to unload or something that had some low hanging fruit for instant profit increase.
A more standard multiple would use a 3.5 multiplier of annual sdi for an approximate price. This would mean $3k gets you ~$70 a month or $200 a month will cost you ~$8400.
The majority of the income in year 1 is coming from the rental property. A down payment for property will typically be between 5-20%. That puts the condo at between $125k-500k. I'd guess we're looking somewhere in the higher side if this is supposed to be on a beach where people are taking vacations. Condos have higher interest rates than houses. Rental properties have higher interest rates than your home. If we assume a $300k mortgage that makes mortgage payments around $1400-1500 a month for a 30 year mortgage with a fairly low interest rate. On top of that they have to pay HOA fees, mortgage insurance, home insurance, property taxes, and utilities. Let's be generous and say this brings us to $2000 a month total. A quick search tells me that property management for an AirBnB seems to start around 15% or more. Assuming they only pay 15% this means they need to bring in at least $3000 a month to have any chance of making the $550 profit. That might be doable but it means averaging $100 a night, every night year round. When it isn't tourist season they're going to need to have lower rates. There will be nights when no one wants to rent it regardless of the rates. This might be doable in some locations but it doesn't seem like something you can do everywhere.
I've seen websites like this advertised on flippa or what not. The problem is that they usually rely on "tricks" and there's a good chance that Google will knock the site down in their search rankings when the algorithm changes next time. The risk is that it will keep it's traffic long enough to break even on the investment. Any legitimate website making $2400 per year with a high chance of continuing with minimal maintenance is going to command a larger multiplier.
There's of course the DIY aspect, but I doubt two hours per week of effort as a amateur handyman is enough to make that kind of difference. If it was, I'm sure I could quit my job as a developer and start mowing people's lawns and cleaning their gutters and make far more money.
Owning one vending machine is a terrible business. It needs regular attention and there's no economy of scale. A friend of mine used to own a photo booth at a popular SF nightclub, and it was a maintenance headache.
Similarly, trying to rent out one beach condo sucks. You have to market, and the marketing cost isn't spread over multiple units.
There are few good passive investments right now. There's so much capital available in search of returns that all the good ones and most of the mediocre ones have been taken.
However, spend less than you earn, and life will turn out better.
This is one of the more insightful comments in this thread. The risk is not merely that Sam’s investments are not diversified, it’s that Sam has competition from more sophisticated capital. Truly passive investments often scale (and get more passive with scale). That scale attracts a lot of capital that can afford lower revenue, higher risk, and better expert knowledge.
Why does he care about trying to rent it? That's why he gives a % to his property managers.
Ages ago I interviewed with these folks who were early in the space: https://www.cantaloupe.com/
“Live within your means”
Invest as much of your salary as possible. Pay for your living expenses with free cash flow. If expenses exceed cash flow, reduce expenses.
When your free cash flow exceeds your living expenses you can generate wealth (aka “you are wealthy”)
That is a set of keywords that tells you to bail out: "slave, mercy(2), paycheck (salary for me) and employer". My spam scanner will take a dim view of an email on these lines.
What the article fails to mention is that you need expertise in each investment area. Clever Sam knows about lucrative websites. He knows about the finer details of vending machines and beach condos. Crikey, clever chap. This article stops short of Sam owning huge wodges of GME bought last year at $15.
If you are an expert in something and can make money from your shrewd investments then great. To succeed like Sam, you will need to become an expert about a lot of things.
HN loves to hate on crypto. And the average crypto bagholder will get screwed when this bull run ends. At the same time there are some fairly accessible places in this space where you can make 8-10% dollar-denominated returns without taking on significant principle risk. You just need the technical understanding to wade through the pond of ponzi shit to find the opportunities that actually make sense to you. But if you’re on HN, you probably have that know-how. So play to your strengths.
In the words of Dr. John Hussman: “Understand that securities are not economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others.”
Of course, the great irony there is that the past saving that Dr Hussman is referring to may have itself derived from output produced by others, unless the investor obtained that money by wage labor done by themselves personally.
why is that ironic? This is the premis of capitalism.
> unless the investor obtained that money by wage labor done by themselves personally.
at some point in the past, or in their ancestry, this is true. Unless their initial wealth was usurped by robbing off someone else without recompense, there's absolutely nothing wrong that wealth begets wealth.
“ The law locks up the man or woman
Who steals the goose from off the common
But leaves the greater jvillain loose
Who steals the common from off the goose.
The law demands that we atone
When we take things we do not own
But leaves the lords and ladies fine
Who take things that are yours and mine.”
But the greater point is: if the money you have now was taken from work someone else did, and the money you will have in the future will also be taken from work someone else did, and a tiny number of people hold most of the rights to that cash flow in a country, at what point does that simply become another system of oppression? The property owner/worker relationship is just an updated form of the lord/serf relationship that came before it. It’s not the same, but it shares common features.
It probably feels like there’s nothing wrong with that- if you’re the one holding all the wealth. But it’s not “cash flow” that you own. It’s people.
https://www.google.com/amp/s/thewildpeak.wordpress.com/2012/...
it is less oppressive than before. The feudal times were way more oppressive than now - only nobility were allowed to own assets (like land). Today, it's not a serfdom, because it is possible for someone to strike it rich by inventing a new idea, or conduct a business well, or utilize skills they trained to make wealth.
The idea that "it’s not “cash flow” that you own. It’s people." is patently false - slavery was abolished. When you own a cashflow, you are owning the promises that other people have made, in exchange for upfront cash. This promise is as old as time - and to equate it to slavery is just ridiculous.
It is better than before. But it’s still oppressive. There are shades of grey.
In medieval times the relationship between serf and lord was also couched in the fancy language of promises and debts. That doesn’t change anything. And bear in mind that those stocks represent permanent ownership of the work output of people who may not have even been born yet.
When the slaves in the American south were freed, in many cases they continued to work at the same plantations under the same masters as sharecroppers instead of slaves, with the ownership of property and land used as a lever to get them to work instead of owning the people themselves. A positive step? Yes. At least it wasn’t actual slavery anymore. And modern day workers have considerably better conditions than sharecroppers did. But there remains room for improvement.
You probably can’t get rid of all forms of unfair leverage and exploitation. There is no such thing as utopia. But I do believe that every worker ought to own the products of their own labor.
If it were so easy I would be curious to read the author’s detailed experience with the costs and revenues from running websites and vending machines in a passive manner.
Article presents a nice story, but rings hollow without concrete experience of the nitty gritty details that separates profit from loss in these side gigs.
One basic piece of information that is missing, for example, is explaining the difference between a car and a house. The land that a house sits on can appreciate over time, whereas cars will always depreciate over time. One can make money, the other will lose money.
A lot of people need a car in the US, and both Sam and Mark have one in this article. It doesn't explain why an expensive car is a worse investment than an inexpensive one, and it is because it loses a more value per year than a more affordable car. it doesn't go into the nuances between leasing and owning, either.
I feel like explaining how to use debt to secure future cash flow would need to build on top of those fundamentals, and it feels out of place in this piece without them.
Of course, no one's getting rich when a car appreciates from $5000 to $6000 or $3000 to $3500 over a few years. Net of repairs it's probably break-even. But it's nicer than losing value :)
You can do anything you want, just not everything you want.
Also, in classic financial blogger style, he misses why people buy nice cars, and treats the invented reason with disdain. It isn’t always, or even often, to make others admire, but because they are pleasant to own and drive. Yes, it’s easy to overspend on cars, but it is easily done responsibly if it is a part of a broad careful plan.
(Google "vending machine scams" to read about the sordid history of this whole business.)
https://cepr.net/national-income-accounting-for-the-washingt...
The wealthy use debt to buy capital because they have plenty of cash to buy stuff.
If he expands his vending machine, lemonade, beach house portfolio, it quickly becomes a full time job, and he will probably need contractors/employees. The opportunity cost of his MD income versus his hustle income will be high for many many years.
Like groceries, medicine, utilities, housing, transportation...
ref: prepared bankruptcy cases for 2 years
Looking at the US national deposit rate of 0.06%, you'd have to put in, I dunno, $160000 up front to get $100/year of future cash flow. That seems particularly inaccessible to those this article is speaking to. When I was a kid, it was 4.00% or higher, so I only needed $2500 up front to get $100/year of future cash flow.
So, OP, since this is your self-post, in today's economic climate, what classes of opportunity remain for normal people to make money? Are any of those classes of opportunity insured against loss of principal, as FDIC savings accounts are?
Borrowing money at 1-3% is a lot cheaper than paying 40-50% tax. You can essentially defer tax liabilities forever this way.
Chapter 1 - Write a book about how to get rich.
There is always a risk no matter what the investment.
The obvious upside to this arrangement is that you can pay 1/8 of the ownership price to have access to a vacation home. There’s another way to get partial access to a vacation home - renting. Pacaso has the advantage of giving you gains from appreciation. But that needs to be compared to the overhead that they are capturing.
It’s worth mentioning that Pacaso is a type of time share. The disadvantage of a time share is that you’re stuck with fixed expenses at a vacation spot you may tire of, and where you might not have access at your preferred dates (unlike a wholly-owned property, or random rentals where you can always find something if you’re willing to pay market rate).
It would be useful to find out how liquid the market is for resale of Pacaso property shares.
Another option is splitting a vacation property with friends or family. It would be easier to ensure that you can access the property on your preferred dates if you’re willing to stay there at the same time as some of your co-owners. You’d also be paying less for management overhead.
Still, don't focus on pacaso specifically, I'm not try to push them. I'm more wondering about collaborative investment in general. Is it new? Are there examples where it has worked well? Would you consider it? Basically, the wealthy have an advantage but why wouldn't that create a market that provides the advantages to the non-wealthy?
I have looked closely into some other crowdfunded real estate platforms in the past and I felt that they were using some misleading marketing to hide fees and liabilities. But I haven’t done a deep dive into Pacaso and I don’t want to call any of these out by name because I’m not a lawyer.
The main collaborative investments are the equities markets. If you want real estate, there’s REITs. These markets are highly regulated, and the system is built over hundreds of years to protect the interests of billionaire shareholders. As a regular middle-class investor in these markets you benefit from the same protections.
On the other hand, equity valuations are inflated so I understand the desire to find another asset class. I’m just skeptical that bundling your investments with a vacation timeshare is necessarily a good idea. A lot of people got screwed doing that in the past. Maybe you are better off investing your money elsewhere and using the returns to rent a vacation home one day at a time.
This is though, the space of the privileged who have the opportunity to secure debt.
alternate URL: https://medium.com/@themdpreneur/purchase-future-cash-flow-t...
Keep coming back to submit this
The rich have the luxury of working on future income flows while the rest of us work to live now. How is this news to anyone?
And those examples are just not practical for most people in real life.
If you don’t know how to manage money, you won’t keep it.
Roughly 1/3 of lottery winners go broke within a few years, which is a much higher rate than the population in general.
Reading thru the article, it is clear that the PP’s comments are incorrect (“ The jist is that if the poor had more money they wouldn't be poor anymore.”)
[0] - https://www.cnbc.com/2017/08/25/heres-why-lottery-winners-go...
So, not so special, and I would argue a good proxy for the population at large.
[0] - https://news.gallup.com/poll/193874/half-americans-play-stat...
[1] - https://www.cnbc.com/2019/12/12/americans-spend-over-1000-do...
- it's a sudden spike
- money is not linear in many ways
Give people time to get used to different income levels and they are less likely to go bankrupt.
Oh and show them that even through they might think they are rich now they are not, and it's easy to accidentally spend what the have gotten. Many people have wrong ideas of when someone is "rich" compared to "just being wealthy".
The average person who wins $1 million in the lottery sees a new house, car, vacations, maybe a boat. A wealthy person would see it as an extra $30-40k a year in passive income. Of course, people with this mindset generally don't play the lottery, because they do the math.
https://www.investopedia.com/terms/s/safe-withdrawal-rate-sw...
There's no reason why a lottery winner necessarily can't make this transition, but as soon as they win the lottery, it's probably too late to teach them. They're going to quit their job, tell all their friends and family, and eventually the money runs out leaving them with an appetite for consumption they can no longer afford with their meager income potential. That's why it destroys people's lives.
On the other hand, if you gradually earn $1 million, or even make risky but calculated long term investments that pay off, you don't wake up one morning to suddenly find yourself with a massive amount of money. You watch your net worth creep up slowly over years or decades. Even if a person like this started by fantasizing about all the stuff they can buy with that much cash, the longer accumulation period gives them time to learn and reflect on what they really want, and therefore are more likely to use this wealth more intelligently.
It's the sudden, unexpected windfalls of cash beyond what a person is prepared to handle that are dangerous, not the absolute amount or the person handling it.
In the same way, a rich person suddenly becoming poor would lack the skill to stretch out their near-zero resources, while one that is conscious of a slow decline will not only stretch out their reserves longer but also be far more used to living frugally by the time they hit that same near-zero level.
And it's not like it's too hard either, you just need some guidance. A distant acquaintance had a frankly obscene amount of Bitcoin laying around from back when CPU mining still made sense and the first thing he did when he realised what he had was sell enough to hire the best financial advisor he could find. He now owns a house, a startup incubator, several rental properties and I don't think he's sold much more of that BTC than what he did originally.
Exactly - who doesn't understand that?
Most entrepreneurs are the last ones to get paid.
The key here is that both started out with a huge income for someone just starting out - $200k. If you are making $30k/year, this advice doesn’t really apply - you likely can’t even take advantage of 401k yet. This is for those that are lucky enough to have something to save.
I suppose if you define being rich by being able to save more than 1k USD per month, a lot of people are gonna be it ?
The article's not really focused on providing a path to financial security or "buying future cash flow", because there is no future cash flow one can just buy. It's just explaining a cartoon story of small-business capitalism that some capitalists occasionally make work for them. The majority do not. All businesses carry huge amounts of risk, far more than selling labor for money. In fact, that's the common explanation for why capital gets outsized returns while labor hasn't gotten a real-dollars pay raise since the end of the 70s. Capitalists take on the risk premium.
This is also why investments cannot usually be sold to the average retail investor without a huge amount of bureaucracy: it's far easier to scam investors than to actually provide a business worth investing in. Even then, we see all sorts of scams anyway, because the Internet has pulled the wool over the eyes of the notoriously underfunded SEC and thus we let "innovation" and "blockchain" obfuscate otherwise obvious Ponzi schemes.
For just the example of "buying an established website" - how do you know what websites are "established" and worth buying? How do you know that the person you're buying the website from isn't inflating their ad revenues with click fraud or black-hat SEO tricks that Google or Facebook will detect and ban next month? How do you know that the website won't see a huge traffic decline when Google deploys a new algorithm update and all the carefully-designed SEO suddenly becomes a huge negative signal on your site? All of these are risk factors that you have to actually specialize in a particular subset of web design in order to understand and mitigate. At that point you are back to just selling your time for money, but with more risk.
Okay, let's take the vending machine. Where the hell are you putting this vending machine? Do you just put it in front of your house? No, you have to find a high-traffic area, which will almost certainly have an owner that you'll need to pay rents to. And they will know more about how much money your vending machine makes than you will, so they'll be charging rents calculated to reach deep into your own pocket so that your margins will be as slim as possible. Not to mention your suppliers will also be looking to scrape away your margins, too.
Beach condo - okay, sure, you got me here. Real estate is a pretty good investment, at least when you have someone to rent to. This is mostly because of stupid political decisions the US made that has resulted in everyone's home becoming their retirement financing vehicle. We can't let housing costs fall, because that means angry Americans can't retire, so the government props housing prices up with restrictive zoning. However, that's not really smart business decisions, that's just taking advantage of the government - and eventually anyone who isn't in on the scam is going to demand free housing. You can't make housing expensive forever.
401k/IRA - Not a bad option, especially if you index fund it. However, you put this into the "guy who just buys fancy things" column, so I won't count it as a business idea.
Consumer loans are a capitalist invention.
The poor is having increased living standard overtime: toilets, electricity, AC, refrigerator, TV, etc. etc. Why? Because the rich invests in technology and the poor takes benefit from technical improvements and successful business.
We are living in a sad state where everyone is benefiting from technical progress but people think only the rich is benefiting.
Historically speaking, capital didn't dig the coal out of the mines -- it bought the equipment and collected the proceeds, passing on the wages, but it didn't do the digging. That was Labor. It didn't fill its lungs with coal dust, that was Labor. It didn't even properly fund the retirement plan it promised in exchange for work -- Labor had to pick up the slack. Ditto for career risk. The company discharged responsibility for its piles of tailings in bankruptcy and the government had to pick up the tab. The long dead company certainly won't pay to clean up the CO2 it pumped into the atmosphere, that'll be on our children.
Capital is always trying to take credit for everything. That's what they're best at, it's what they do. They always try to minimize the role that everyone else played in making things happen. We shouldn't let them. Capital doesn't even do a very good job of fulfilling their nominal purpose, which is to shoulder risk and responsibility: they offload it at every opportunity, often successfully. We are on the other side of that hustle, so it's important to not let them get away with it, because they are always trying to privatize the gains and socialize the losses. A moment's negligence will let them get away with it yet again.
We live in a sad state where people expect everyone to be happier if absolute material condition is improving despite the gap between haves and have nots widening, because everyone either ignores or prefers not to believe the piles of evidence that, outside of the most desperate circumstances, relative deprivation is the main driver of experienced disutility, not absolute condition, so the people with power (including the relatively empowered portion of the electorate) keep pushing full throttle on policies which make human experience worse while looking at poorly chosen metrics that let them say things are getting better.
The most common practical argument that I've heard is that not doing so will cause those experiencing that disutility to take matters into their own hands, which is:
1) risible, to the extent that it is untrue, as slander generally is, and
2) unconvincing, to the extent that it is true, because it's a trivial case of extortion, and the correct game-theoretic answer to extortion is "no", and is also immoral for the same game-theoretic reasons.
I'm curious if you have a more convincing argument, along any dimension. n.b. My prior is that such redistributive efforts are long-run harmful in expectation to material conditions at all levels of the economic ladder, possibly with the exception of revenue-neutral taxation of land value & externalities (which may or may not end up being redistributive in the progressive sense). If you disagree with that, there's obviously an argument that could be made on that basis.
Things increasing in absolute terms isn’t improvement in and of itself; improvement consists in, and only in, enhancements to someone’s experienced utility.
> I'm not clear on what the (moral) argument is for acting to mitigate it on that basis.
The moral argument depends on the moral principals you subscribe to. With utilitarianism or Rawlsian liberalism, the argument is fairly trivial. In the moral framework of, say, Objectivism or Austrian economics there probably isn’t an argument, but the very idea of measuring aggregate outcomes to assess progress in those systems has no direct moral relevance, its just a way of redirecting complaints from people with different moral frameworks. The whole theory of appeal to broad aggregate measures is as an assumed proxy for broad experienced utility.
Also, people's experienced utility is not solely a function of positional concerns, so the claim that things increasing in absolute terms isn't an improvement (in terms of experienced utility) seems trivially wrong. To the extent that it's a useful claim you could say the same thing about reducing inequality; there's nothing inherently good about that, except to the extent that it improves experienced utility. So that circles back to the questions of "which factor(s) have a stronger effect on people's experienced utility on the margin", "what 2nd order effects (including feedback loops) might occur due to our proposed mitigation", etc, which ultimately boils down to an empirical question about whether people will gain more (long-term) from absolute improvements on the margin or from positional improvements on the margin. Economic growth compounds, so sacrificing it as a temporary band-aid (that might make the underlying issue worse!) before we've even reached "fully automated luxury space communism" levels of wealth seems like a sucker's bet.