10 Things Millionaires Won't Tell You
smartmoney.com
smartmoney.com
The parts that aren't false read like a description of someone who made money from e.g. developing shopping malls. People who get rich from technology are less likely to be B students, less likely to try to cheat the IRS by routing their personal expenses through their companies, and more likely to be "nice guys."
I wouldn't say I'm rich, but my accountant is creative when it comes to tax, and rightly so.
I completely agree on the handbags thing, Ferraris are a different matter - if you have a means of moving that cost from being a taxable depreciating asset to a tax writeoff then go for the latter. I know an entrepeneur who leases high end sports cars through his companies as a means of reducing tax liability. YMMV though (pun intended, sorry)
West coast/the South is all about your image, I saw more 6 figure cars in the poorest sections of Miami than I've seen in the richest places in New England.
That said, it looks like Volkswagons and Volvos tend to be the cars of choice among the wealthier. Not Ferraris, sure, but a step above the Toyota.
Is this because rich people don't borrow, or have the found a source of income even lower than a subsidized loan with tax advantages? If someone's home is a small fraction of his net worth, taking a mortgage and using it to invest in a business would probably be a sensible arbitrage.
It all depends on the circle, though. Doctors and lawyers seem to be more likely to use these services, while entreprenuers seem to be used to doing things themselves.
I don't know what evidence, other than opinion, you have that rich people don't have a special guild of concierges, or rent handbags or Ferraris. I know several people of the private jet sort who do have an assistant that is not just someone who just takes down their schedule, but rather is someone who can solve problems anywhere, work the network to get a dinner reservation where ever you want, etc. Further, most fabulously wealthy people are very smart with their money, even if they do have ten houses and two yachts, and although they could buy $2000 bags and throw them away in two months, why would they? They could buy a fancy sports car, an asset that radically depreciates and that you can’t drive all the time, or they could rent one whenever they want?
- His cost of capital is undoubtedly very low. Lending $4-5m to someone with that much money (and secured on property!) is practically risk free.
- He probably has access to a lot of good investment prospects.
- Tax breaks on mortgages will make the gap between cost of capital and likely return even larger.
Where did you hear that Bill Gates has a mortgage on his house? It seems very unlikely. You can only deduct the interest on the first million of mortgage debt, so it wouldn't seem worth the trouble.
As for the handbag question, try giving a woman the choice of buying a new handbag or renting a used one, and see what she says.
And on the handbag question, haha, I think you're likely correct.
I am less sure about cars, since if you are going to buy and dump a car, it seems like you should lease it, no? I don't know...
I think the other important thing to realize is that the rich aren't, like any large group, unified in their behavior, which is something that article like this always avoid. There is no one way to become a millionaire and there certainly isn't one set of behaviors they exhibit.
How very very true that is. I have friends that make less than half what I do. Once upon a time, I would have thought that my current income would mean I'd "made it". But somehow, here I am, still occasionally concerned about being overdrawn, still trying to be frugal, still feeling like I don't make enough to do all the things I want to do. By world standards, I was fantastically wealthy when I was peddling vacuums.
Some things are more a function of the human condition than anything else. People in San Diego complain about the weather.
Wealth isn't like that though. If I have X Peso's (Or Dollars, etc) and you have X + Y then you are richer (for any positive value of Y).
The only 2 limits to comparison that I can see is: * Liquidity - (ie - Bill Gates can't sell all his MSFT stock without the price crashing significantly) * Historical Data - How do BillyG/Buffet/Slim compare to Rockefellar and King Soloman?
And both equally pointless.
When your income places you well into the top 1% of earners and you're still hurting for cash, that's your problem. Learn to live within your means.
Entrepreneurs are probably much more vulnerable to these kinds of worries, because that's what they worried about (losing it all) on the way up.
I say this because I don't think one needs a lot of money to not need to earn a living.
Personally I think on the order of 2^22 dollars reasonably qualifies as well. Maybe that's because of the standard of living I'm used to. Certainly if you have 2^24 dollars and you don't think you're rich, you have a definition of wealth that ignores a major qualitative difference in what a person can afford to do. Above 2^23 dollars, I think additional wealth begins to put you more in the realm of the low-level aristocracy and rulers than the merely rich.
It's quite obvious that the definition of the word "rich" is relative, and subjectively defined. Yet everyone seems to focus on that relativity as if it's some huge, meaningful insight. It isn't. At the end of the day, if you're earning more than 99% of everyone around you, and you still can't pay your bills? That means that you're doing it wrong.
Annual income twenty pounds, annual expenditure nineteen six,
result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six,
result misery.
also: one of the best pieces of advice in the article is always have a mortgage. as soon as you finish paying off your first house it's time to make a down payment on a new one and rent it out to pay for the mortgage. assets>cash, plus it's tax advantaged.
My personal plan is to buy a house that has something that can be turned into a studio, live in the studio and rent out the main house. I have a feeling this type of situation doesn't go on the market too often for obvious reasons though.
As a note, though, home ownership (esp. rental ownership) is more expensive than just the mortgage (and taxes, and utilities). Like any business, there is time and attention required. Like any other depreciating asset, there is also ongoing maintenance costs. And they are not smooth like the income stream. If your rent is $1000 and your monthly payment (mortgage + escrow) is $800, you may be netting $200/mo. Great! But then you have to scramble to find the $10k to replace the roof. Or it takes two months to replace the tenants (there goes 8 months' profits). In the long term, it should work out. Your mortgage + tax payments should increase slower than the monthly rent payment. But renting out a house is not free money.
A mortgage is basically borrowing money with which to make more money. Your mortgage payment on a place is generally not much more than your rent payment would be, and it's tax deductible and, over time, builds equity.
You can't save with the same commitment while paying rent because you have to pay rent.
This is not true in most of the formerly booming real estate markets in the U.S. My coworker just bought a condo for $500K in Boston. At 6%, his interest payments are $30K/year, or $2500/month. My friends are renting a similar place for $2200/month.
I've heard it's worse in California, eg. people paying $3500/month in mortgage payments for houses that rent for $2000 or so. The recent Businessweek article on Merced mentioned homes with $3400/month that the owners walked away from, then out-of-state speculators bought it at a foreclosure auction and are now renting it back to the original owners for $1200/month.
> The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years.
First rule of finance: any truly risk-free profit opportunities will be arbitraged away as soon as large numbers of people become aware of them.
That's exactly what happened in the 1990s. People suddenly realized that the stock market, on average, returned higher rates than a 30-year mortgage, so they took out mortgages and invested it in the stock market. As a result, the stock market quadrupled between 1995 and 2000. Then they pulled it out of the stock market and back into real estate between between 2001 and 2005.
It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.
Of course the cost of renting vs buying is different depending where you go.
Here it's about 3.5%-4% for a normal family house and 4%-5% for a flat.
*Interest rates are about 8%
Of course we can't expect every decade to be like the 90's, but I think it is a reasonable expectation that the 200-year trend will continue barring a kurzweillian singularity or other freakish phenomena.
Why? Stock market rises tend to be linked to technological advances. We are pretty close to some significant technological breakthroughs and these will only accelerate over the next 50 years.
Consider, for example, that within 15 years, it should be cheap and practical to use solar panels for almost everything. Consider robotics and the way robots will radicalize many industries as much as industrial robots have revolutionized factories, etc.
Of course it depends on the state of the market, but if it's a long term investment, and you don't buy out in hicksville, that shouldn't be to much of an issue.
As for owning and occupying a home you're paying a mortgage on... well that's more of a lifestyle choice. I would agree that it's not really the best investment.
Note that I live in Australia, so much of this may not apply to other regions.
Mostly it's about even.
But just as you say a lot of human elements come into play. People choosing a rental or a purchase choose radically different properties so usually saying 'I would be paying this rent' is meaningless since you would be living somewhere completely different paying different rent. And saying 'I would be saving X' is also meaningless because you probably wouldn't be.
I think these usually outweigh the pure financials. many people purchase houses that would have never saved a dime. But of course, that's beatable.
The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns.
True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves.
Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.
scenario 1
you "save" 2000 a month by spending it on a mortgage
scenario 2
you pay 1500 a month for rent and save the other 500.
in which scenario do you come out ahead? that 1500 a month is GONE.
- down payment: the renter takes the down payment and gets interest on it for N years
- closing costs
- repair costs
- property taxes
Nothing always goes up, but over time real estate does pretty well. Plus the tax deduction on the interest rate, and the fact that the APR is lower than what you could get with the money if invested well in other stuff make mortgages so well-worth it that even people who could buy outright almost always take them.
Oh, come on, nazgulnarsil, where's your spirit? You can do it!
Bart: You make me sick, Homer. You're the one who told me I could do anything if I just put my mind to it!
Homer: Well, now that you're a little bit older, I can tell you that's a crock! No matter how good you are at something, there's always about a million people better than you.
Bart: Gotcha. Can't win, don't try.
But the bottom line is that we're already incredibly wealthy by historical standards. I am in the bottom quintile by income in the U.S. (poor college student) and yet i enjoy a standard of living that is probably in the top 1% of all humans who've ever lived.
P.S. assuming you are Mr. Yudkowsky your posts at overcoming bias singlehandedly turned me from an empiricist into a rationalist.
I've never really liked that reasoning. Let's assume that someone is in the 30% tax bracket (paying 30% on all qualified income). Let's say this person makes $100,000/yr. They pay $30,000/yr in taxes.
Let's say they also have a $100,000 mortgage at 5% APY. They're paying $5,000/yr in interest. That interest is deducted from their income of $100,000 leaving $95,000 taxable income. Assuming they didn't move down a bracket, they're paying $28,500/yr instead of $30,000/yr, saving them $1500/yr in taxes. Remember though that they're paying $5,000 in interest. It doesn't make financial sense in that respect.
They are paying $3500 more per year than if they paid off their mortgage.
It's seems like a way for people to live in nicer houses (or have more of them) and get a "deal" or "discount" on taxes, though in the end they are paying more.
This doesn't take into account housing prices, cash flow issues, or alternative investments. The rational I've seen in people who could pay off their houses but decide not to is either:
A: I can use this as leverage and sell later when the price is higher, making me money (risky, if the market drops)
B: I can use the money that I could use to pay off my mortgage to invest in other things (also risky, given the nature of any investments)
or C: It's a tax deduction (which from my math doesn't make sense. Maybe someone can show me a situation where the math works out better by keeping the mortgage)
So to clarify the math, you borrow $200k, pay $12k in interest, but get to deduct it and therefore save $3.6k, thus really paying $8.4k in interest (or 4.2% of the $200k).
Therefore if you mortgage the house (as opposed to buying it outright) and buy into a CD at 5.25% you're effectively gaining 1.05% interest for free. You're making about $2k a year. Also you're increasing your credit score, which saves you a lot of money in the long run.
In your above scenario the guy was saving 30% of 5% (1.5%, or 1500) which would put him at 3.5%. He'd be borderline retarded to pay for the house outright.
Much more intelligent (especially for someone my age, who has a good 30 years to worry about retirement, thus reducing the volatility) is to put that $200k into the market, which will probably average somewhere between 7-10% in that time. Suddenly that $200k mortgage turns into a shit ton of money in my retirement account.
Also, there's the fact that the mortgage costs only slightly more than renting a similar place (if homes as nice as mine were available for rent, which they generally aren't here) yet in 30 years I have a free and clear home I can sell.
In summation, mortgages FTW. That's why very wealthy people who could afford not to still damn near always get them.
I've never owned a house. Am I missing something?
EDIT: I live in the Midwest where 2000 sqft in a nice neighborhood is very often less than $200k. This is probably a factor.
In your example, $5000/year interest is under the standard deduction. Unless you already have other deductions to itemize, you are getting no tax write-off for the $5000.
For instance, in 2008, the standard deduction for singles is $5450. Lets assume that you have $2000 in other itemized deductions. So, the first $3450 of your mortgage interest simply offsets the write off you would get with the standard deduction. Therefore, only $1550 would get you an additional deduction.
Now, if you're married, the standard deduction is $10900. In my situation, my mortgage interest is just barely greater than that amount.
10 Million households have $1 million+. There are an estimated 111,162,259 households in the US...
This is upper class wealth...just not completely elite levels of wealth. I think the point of the article is that people with upper class levels of wealth tend to have upper-middle class lifestyles.
You're right that upper middle class people have the same lifestyles as upper class. The difference isn't in material goods, it's in freedom.
The interesting component of the article was that the average income of somebody with $1 million of net worth was approaching $400,000. This implies a poor savings rate and not very much savings at all.
If freedom is the goal, it seems the key component is a modest lifestyle.
But I'll go one further and suggest there's a causal link in play here: The half that are business owners are people who make their money precisely in businesses that don't scale. They own and operate local businesses which are natural geographic monopolies and they don't get crushed by large multinational competitors because of that fact. For example, these are businesses like landscaping companies, local shops, construction contractors, and services businesses.
Also note that a chunk of the 50% that don't own businesses are well-paid, sometimes independent professionals such as doctors, lawyers, architects and engineers. Again, their source of income does not scale, so they get rich by cutting costs.
The people described here have a different mentality. They get rich by avoiding risks and cutting costs. It is a slow and systematic process with guaranteed results.
Startup people get rich by taking big risks and working hard to increase their top-line productivity and wealth-creation. It is relatively fast and chaotic process with unpredictable results.
While I agree that contentment is /a/ key to happiness, it won't exactly motivate you to strive for things completely out of reach. Just the chase of your goals can result in happiness.
"You don't get rich by being nice."
This is seldom said but often true.
1. Spend 2. Save 3. Survive 4. Invest
We are rich if we are investing cash!