This 4×6 index card has all the financial advice you’ll ever need
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50% of the US population can't afford to put even a dollar into any sort of investment security. Of the 50% of the public that does own some sort of security, most of them are in the three-figures range. This index card, without realizing it at all, has targeted itself towards the top 10% of the population: people who have jobs with 401Ks, people for whom Roth IRAs will be useful.
In other words, if you are well into being one of the richest people in the richest country in the world, here you go - save 20% of your income, and so on. And you'll be fine!
So I'm just curious: suppose you aren't?
(Source: U.S. Bureau of Labor Statistics, 2009 National Compensation Survey, http://www.bls.gov/ncs/ebs/benefits/2009/ebbl0044.pdf)
In Table 2, it says that even 15% of the lowest income decile - people making less than 90% of workers - find a way to participate in a retirement plan.
Here's a more detailed writeup from the Bureau: http://www.bls.gov/opub/cwc/cm20100520ar01p1.htm
Meanwhile, the "top 10%" of households earn $135k per year or more, while the median income is around $50k.
(Source: http://www.economist.com/blogs/dailychart/2011/09/us-househo...)
Anyone making over $60k per year could (in theory; this is a highly abstract argument at this level, of course!) save 20% of their income without dropping below the median household income of $50k; households making over $60k per year appear to constitute 32% to 40% of the population, if I read this Census Bureau chart correctly: https://www.census.gov/compendia/statab/2012/tables/12s0690....
None of which says anything about the effectiveness of 401k plans, or anything else. But if you're going to handwave about numbers it's nice to hit the right order of magnitude.
20% of 60k is 12k, 60k - 12k = 48k. So no, the claim isn't true for the most trivial of reasons.
You are technically correct though.
Mathematics is the one discipline where "close enough" isn't close enough. :)
$48K is below $50K.
Your math is wrong.
Poor people: save money and pay off credit card debts. Middle Income And Above: do that + other rules.
And saying poor people couldn't save even a dollar is nonsense. Poor people are not 100% optimal in their spending and financial matters - often quite the opposite. Furthermore, poverty is often something people grow out of (the poor skew young), and this has some good advice for doing that faster.
Stop making a useful article out to be some elitist hogwash.
So, "poor people, get surplus income".
Or, equivalently, "poor people, stop being poor".
> And saying poor people couldn't save even a dollar is nonsense.
If you can reliably meet the requirements of life without charity or depletion of reserves, you arguably aren't meaningfully poor. Poor people can save sometimes, but that's mostly saving a reserve for the bad times that will come (usually fairly soon and frequently), not net savings over the long term.
Buy cheaper clothes, stop smoking, stop drinking, eat out less, don't have a fancy car...etc. Don't live beyond your means and consider your means what allows you to save 20%. Exactly what I'd have to do if I wanted to save more money. Stop pretending like poor people are all dizzy starving idiots that can't do a damn thing to better their condition. People tend to live up to their expectations.
A year ago I had a great job as a sysadmin, then I got laid off. Shit happens. I got a job doing landscaping for $10 an hour til I could find something better, and when winter came I worked in a restaurant serving people in the city.
What did I do? I stopped eating out and put my cooking skills to use saving money by eating in. I cut out cable, lowered my Internet speed and got Netflix. Got more conscientious about power usage.
What did I learn? At that job I both cooked and took orders in a 24/7 setting in a large city. I saw wealthy executives and immigrant Somalians alike buy food. The one thing I took away from that is that poor people stay poor by making poor decisions. Pun. Intended. When you walk around buying lottery tickets and junk food, wearing bling bling, smoking a pack a day, and clubbing every night, of course you're going to hit a financial hurdle.
My advice? Exercise that section of your mind we call common sense. Shop smarter. Do some math. Skip the club. Stop smoking. Put that on a 4x6.
Poor people are not just personally poor, they were raised by poor parents who taught them different values, albeit seemingly dumb ones (though I know a lot of poor people who are wayyy happier than a lot of wealthy people I know following the note card). They were taken to crappy schools, if their parents took them, or made them go at all. They were fed all sorts of unhealthy food their whole lives. They're lied to relentlessly by businesses saying things are healthy, will help them, or are good decisions (always campaigns run by wealthy people taken advantage of poor people).
They have everything around them working against them, and some dumb, naive, asshat, born to the middle class, thinks (s)he was poor for a little while and it was kind of enlightening and fun, ignorant guy telling them to put money in a 401k. Will it put rims on my car, because that would make me happy? When I'm 65? Fuck that.
Try earning federal minimum wage and providing for 2-3 people. You cut the crap out early. But your car that you need to get to work still breaks down. Your SNAP (don't know what they are? you've never been poor) benefits still run out too soon. And you and your kids still get sick.
This card contains all the major points of advice a poor person can use about finance. Whether that is enough to save them is a completely different question. Raising it is not a valid criticism of this card.
#1 Convince all the rich people to do the last item on the card from the original article
#2 Try to get your kids to do something different than you, if you're earning $20k/year with no savings, no spouse and have kids it's probably too late for you to save anyway
When one loses one's source of income, one loses one's security. One is then eligible for state and federal benefits --for most intents and purposes, one has become poor --though perhaps not a destitute pauper.
I never said people's poor decisions made them poor, I'm saying they can help get out of poverty by making good ones.
And if you have kids, yes, make a dollar. You brought life into this world and you have a responsibility. You can let your kids get stuck in a cycle of poverty by feeling like a victim or you can bust your ass to try and get them out of poverty. If I had a child in poverty I wouldn't be smiling, because I'd know that I brought life into this world at a disadvantage and I'd work my ass off until I did what was right. So you can keep telling poor people that they're helpless, or you can, like I do, believe they have a great perseverance and aptitude that they need to tap into and provide a better life for their children.
I'm not saying they need to do it alone; quite the opposite - we as a nation need to believe in the ability of our disadvantaged to become productive members of society and promote programs to help them get there. But we do not need to act like any nudge towards taking matters into your own hands is an implication of blame. It is not. It is a suggestion that betting your children's future on government intervention is a colossal mistake. I'll vote for legislation that enables the poor, I'll pay higher taxes and donate to 401cs and get the word out, but there is no single greater factor in the equation of your children's happiness than you yourself.
Your earlier comments were showing that you don't understand the poverty problem at all and you don't know how to motivate people at all. The problem is not that poor people are constantly choosing to be poor, or making no choice and allowing themselves to fall into poverty, but that they are raised in poverty. Being raised poor means all sorts of things: you are taught poor values by your parents, you likely get a terrible education, you likely only have access to be friends with fellow poor people, you probably eat poorly, and worst of all your poor parents and poor friends have reinforced your entire life that these poor decisions you're making are actually good decisions.
You will never accomplish anything (or sound smart or practical at all) by slapping individuals in the face and telling them to make better decisions. They're told that these good decisions us well off people make, by their friends and by the vast majority of us well-offers, are actually making us terribly unhappy people (and in a lot of cases they're not wrong). The only way real change can happen is by addressing the cultural cycle of poverty, and by supporting, positively teaching, and motivating these people to make better decisions.
This is outrageous. Parenthood is one of the most (if not THE most) meaningful parts of being human. Financial issues should NOT take this away from anyone.
But we cannot ignore the fact that raising a child is extremely expensive, and children raised in poverty often have very negative outcomes. He's not saying poor people aren't allowed to have children, he's saying it's a good idea to try not to, because of the likely poor outcome of a child born in poverty.
Poor outcomes such as the child being unable to graduate from high school, or go to college. Repeating the cycle by having a baby in high school, dropping out and probably to raise a high school dropout as well. No one is saying this is always what happens, or that poor people aren't allowed to have children. We're just saying it is not a good idea to have a child unless you're financially stable enough to raise a child with a better outcome. There are obviously plenty of exceptions to the idea that a child born in poverty will have a bad outcome, but the majority outcome is negative (in terms of economic achievement, social mobility, etc).
If you have surplus income after paying for essentials, you aren't poor.
http://www.heritage.org/research/reports/2011/07/what-is-pov...
You may be surprised to see "poor" households usually include:
* the usual money-saving appliances (fridge, stove, microwave, coffee maker, clothes washer, dishwasher)
* plenty infotainment (2-3 TV's, DVD, VCR, stereo)
* money-draining luxuries (cable / satellite TV, xbox subscription, smart phone)
Yes, the last items are luxuries, if you're going to complain about poverty. Heck, I'm middle class and I don't have any of those three.
Let's talk about food, too. From the report:
Temporary food shortages have increased during the current recession but still remain atypical among poor households. During 2009, less than one poor household in five experienced even a single instance of “reduced food intake and disrupted eating patterns” due to a lack of financial resources.[26] Strikingly, only 4 percent of poor children experienced even a single instance of “reduced food intake and disrupted eating patterns” due to a lack of financial resources.[27]
Regrettably, most discussions of poverty in the U.S. rely on sensationalism, exaggeration, and misinformation ... an effective discussion must be based on an accurate assessment of actual living conditions and the causes of poverty.
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This is all to say, with concrete data, that people we consider "poor" tend to have the essentials and then some.
What the government defines as "poor" is irrelevant to the substance of the criticism being raised here. Words have different meanings in different contexts.
I think it's still being poor, given the insecurity. Even if it's a conscious and choice they made but could work out of.
Ok, so I can afford to supplement that income somewhat; but saying that they couldn't save is absurd.
The wealthy have been sufficiently vilified that we now have to crucify those not born into money, bu starting to do okay?
This was a very reasonable & practical post with good advice for those starting to come into money. Why is that so bad? That type of advice can't be dispensed without a holistic social program? That's total bullshit.
I know that HN is full of tech people who think that six figures is slumming in SFO, but you are desperately out of touch with reality. If a family of five (my dad, mom, and us kids in the 80's) can set aside money money on $22k a year, then the median family at $50k can set aside money in 2013.
People in Eastern Europe save money and 50% of Americans can't?
Don't lay out your budget and set aside $x for entertainment (eating out, etc). Savings will always suffer. Set aside desired savings first and then work with what's left.
As a corollary, just writing (and following) a basic budget does wonders. I've talked to a lot of people who said it was like getting a raise. You have regular expenses, so just plan out a basic month and then follow it. Something magic happens next: by being more conscious and deliberate about your spending, you spend less on un-necessary "wants" (if it's truly a need you'll spend it no matter what).
Plus, a written budget is like looking in the mirror: it's a reflection of your priorities, good bad or indifferent. If you see you're spending $300 / month on restaurants and $0 / month saving for retirement ... well, that shows what appears to be important to you. And, if you've got two brain cells to rub together, it shows an easy place to make some adjustments. Not that I have anything against restaurants ... even $200 and $100 would be far more reasonable.
If we made this two or three standard deviations more exclusive, the financial advice could be: Be born wealthy. Don't borrow against your trust fund.
That's one of the most important factors in your personal finances: not how much you make off your investments, not whether you max your 401k, but how much of your income you save and how much you spend. The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".
Expand it by 100 and you would be already retired before you would were even born!
I guess the point of the advice is to be realistic.
>The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".
Well, lots of people have started companies or saved themselves from starvation by maxing a credit card.
EDIT: "Almost anyone on Hacker News". Yes, 20% would be significantly harder on minimum wage.
Say I make $100k gross per year. That's a very nice salary for a new grad engineer -- the kind of person who might take this ten-year-retirement advice to heart. Roughly 1/3 of that income goes to taxes, so I'm actually taking home $66k per year. If I save 66% of that, I'm saving ~$44k per year. These numbers can shift a little depending on where you live, how you save, etc., but they're not going to change by a huge amount.
Multiply that $44k by 10 years, and you're not even at half a million dollars. That's not retirement money (unless perhaps your "retirement" is to continue to live off of $20k/year indefinitely and die young from eating too much ramen).
The other half of the equation is finding investments that return a reasonable yield without betting the farm on timeframes <= 10 years. In this market, that's nearly impossible. Your choices are stocks and bonds (which are fine, but are risky on anything less than a ten-year window), or investments that don't yield anything.
With 1 million, you could live off of $25000/yr, which is more than enough to live like a king if you do not have other debt payments.
You could rent a $1000/month apartment, pay for a $400/month car, eat $300/month in groceries, and still have thousands and thousands left over.
Not if you're depending on using that money in the next ten years. Or if you believe in inflation.
A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today.
Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
Average return for S&P 500 from 1928 to 2012 is 11.3% [ source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... ]
Inflation rate averages about 3.2% [ source : http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_... ]
11.26 - 3.2 = 8.1 % real return.
Long term investment in a diversified set of equities is a very good investment and is very likely to secure your future finances.
It's scary how many of you don't seem to know this. Did you all read the same book on investing and skip everything after the preface, or something?
Yeah. We aren't. This whole thread spawned because the claim was that you can retire in 10 years if you save 66% of your income.
I don't understand. Retiring after 10 years means you'll be retired for around 50 years, doesn't it?
It's why real-life retired people don't put their entire savings in the stock market. Retirement funds tend to have most of your money in fixed-rate securities by the time you actually quit working.
If you had enough money to live off for fifty years, the market taking a dump isn't going to wipe it out. Especially if you invested part of it before the market got high, and your total without accounting for dumps would have lasted seventy years.
This is interesting - I've shared this multiple times in other discussions like this, and a comment like yours is always the first response, that it seems low, questioning if I included dividends. If anything it might just underscore how our collective "societal" intuition might be a bit off in terms of long term retirement performance.
I think part of it is that people tend to contribute more to retirement when times are good, since they have the extra money, and contribute less when times are bad since they're just getting by. The problem is that the market tends to be high when times are good, and low when times are bad. So this will naturally depress performance for everyone. It's impossible to contribute a consistent amount every week/month without having a cash buffer (which would depress performance anyway).
Also, Firecalc is a good tool for running withdrawal strategies over historical data: http://www.firecalc.com/
It gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years. Obviously, though, there is no 60 year period starting in 1999 for which the data is fully known, so it has its limits and can be prone to overfitting. It does take inflation into account, by the way (by increasing your withdrawal correspondingly each year).
"[Firecalc] gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years."
Well, again, you're not likely to accumulate a $1M portfolio in a decade on a $100k salary without a nice helping of luck. And not for nothing: that 60-year period encompasses the largest bull market(s) in US stock history. Past performance definitely does not extrapolate in this case.
Marry someone with their own $25k/year and you'll be able to pay for plenty of college.
>Want to be ready for the day when you're old and paying for medical problems?
Insurance?
RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon.
Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
It's only "conservative" if you don't understand variance.
The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today.
And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component.
So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
More importantly when something bad happens you both have a cushion and a cheap lifestyle so it can last.
Actuarial tables show if you make it to age 40 you have a very high likelihood of making it to 80 or 90. Statistics show that the last decade of your life - thanks to health care needs or assisted living necessities - is often more expensive than any other decade of your life.
That's absolutely important to plan for in your 20's and 30's when you have the time (and energy) to make a difference.
You know that 50% or so of HN readers are not in the US, right? Some have to do with $300-$1000 a month (or less), with the same costs for food and costlier computers, clothes etc -- oh, and 3x the price of gas. And renting some small-ish appartment.
"Never borrow money" would include never having a mortgage, which would be a huge lost opportunity for many. Not to mention borrowing money to invest in oneself, start a business, etc.
Education depends heavily on return on investment; you'd want to carefully analyze how much more you'll make with that education, how long it'll take you to pay off the debt, etc. It can certainly make sense when attempting to bootstrap yourself if your alternative is no higher education at all, but if you're in a financial position where you have to borrow for tuition, you may well qualify for better options such as scholarships. If you're reasonably well off and borrowing to go to a higher-end school, that makes much less sense.
And yes, the savings -> years to retirement table came from a Mr. Money Mustache article: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... .
A lost opportunity? If you can afford a house easily buy one, if you cannot afford it a mortage is anything but a huge opportunity.
http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to...
http://www.jamesaltucher.com/2011/05/why-i-would-rather-shoo...
You have to live somewhere.
Seriously- if you didn't, buying a house would be a terrible investment! But you do, so the cost of owning a house needs to be compared to the cost of renting, instead of being discussed as a normal investment.
Emm, the linked articles get into exactly this.
Unless, of course, you can land an incredibly low interest rate on your mortgage and have something interesting to do with your capitol, like fund your business.
$250,000 invested now could be substantially more by retirement than the cost of the mortgage over its lifetime.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
It all depends on your circumstances.
The other thing missing is to take calculated risks for higher returns. For example, if you see housing starting to recover, picking up a distressed rental is smart. Provided you know what you are doing.
I recall a while back someone posted here about picking up semi-abandoned apps that were generating some cash flow, sprucing them up and letting the revenue drip in. Again, this works if you know what you are doing, but won't work for average Joe.
It depends on how quickly you wish to generate wealth. Leverage (OPM, OPT) must be used wisely, but significantly speeds up the process.
Can you/someone please point to the maths behind this? It sounds to me there are some assumptions about returns on investments and inflation rates.
Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.
If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.
If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.
Of course 20 years of savings maybe be too optimistic. The book is good and has more details.
Ignoring growth rates and inflation is also a huge simplification. E.g. 3% yearly growth doubles your money in about 24 years. So it may again be a factor bigger than two between the two scenarios above.
So if you have 25 years of living expenses and each year take out 1 year of living expenses, that is 4% of your money. If you earn ~4% a year then your account balance stays the same.
The 4% number matches the 4% rule: http://www.investopedia.com/terms/f/four-percent-rule.asp
Of course after the great recession now the common wisdom is that the 4% rule can't be trusted: http://online.wsj.com/article/SB1000142412788732416230457830...
Personally I think it would be foolish to plan on retiring with only 20 years of living expenses. However some people also plan on holding a part time job at least in early retirement.
Burning question: what to do when you have (education) debt? Do you put every spare dollar in repaying it or still inculcate a habit of saving 20%?
The savings rate still applies; it determines how fast you can pay off the debt. If you can reduce your spending and increase your savings rate, you'll pay off the debt that much faster, and the same principle applies once you've paid it off and started investing.
I'd caution that you should still keep a small cash reserve for emergencies, of course. Savings are liquid: student loans are not.
The general advice I got was that if the loan interest rate is less than 6%, you're better off investing the majority of your excess cash into something like an index fund since it theoretically will give you >6% gains.
However, I hate the stress, mental overhead, and risk involved in owing somebody money, so I decided to automatically save 10% of each paycheck (set up direct deposit to funnel 10% to a separate savings/investment account) and essentially contribute as much as possible after that to student loans.
I'm happy where I currently am - almost out of debt and with a non-trivial amount saved up. The key for me was automatically moving the first 10% to savings then setting an ambitious goal each month to put toward debt. Good luck!
I'm not one for biblical citations, but "the borrower is slave to the lender" always gets to me.
Furthermore, borrowing money for investment and selling equity in a business to investors are two very different things.
If putting $7,000 away for retirement right now nets you more by retirement age than the lifetime cost of a car loan, you should take the loan.
I have a friend who is 15 years older than me and very financially savvy. He grew up in India in a poor family and his father spent all his free time repairing their ancient clunker that kept breaking down. That memory is enough that he only buys new cars.
If I retired, I would just find another job or career to make stuff.
The important detail about increasing your savings rate: it also means decreasing your spending rate, and you can retire as soon as your savings generates income greater than your spending rate, not greater than your overall income.
Seriously, everybody talks about saving money, and everybody intellectually agrees it's a good thing, but next to nobody actually does it.
Which means, even if you're aiming for 20% of the little number, you're behaving smarter than the vast majority of your peers.
While you should of course do what you can to reduce taxes, that's so complicated it warrants completely independent dialogue.
"Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds."
Yeah, no. Mutual funds, even those by Vanguard, have high expense ratios, and there is absolutely no evidence that they outperform their equivalent index funds. Jack Bogle, founder and retired CEO of Vanguard, himself recommends index funds over mutual funds for this reason.
And, the idea of the target funds is that they become more conservative as you reach the target. The pure index funds do not. So they are basically index funds with portfolio rebalancing.
https://institutional.vanguard.com/VGApp/iip/site/institutio...
There's also the fact that not everyone's 401k is offered through Vanguard. For example, if you're stuck with Fidelity like I am, then you will definitely need to avoid their mutual funds and choose their index funds instead. (With 401k, you cannot pick a fund outside of the broker that manages it.)
Yes, it's slightly lower if you buy all the composing Vanguard index funds individually, but for an index card comment, I'd say it's good enough.
(Minor quibble: index funds can be mutual funds or ETFs)
* Pay attention to fees. Avoid actively managed funds.
http://www.forbes.com/sites/baldwin/2013/06/05/the-trouble-w...
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund.
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
- If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) ( hire a fee-based financial planner, not one who charges a percentage of your portfolio.
(source: https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?Art...)
Before buying a house, buying individual securities, or maxing any retirement contributions, you need enough liquidity in your investments to get you through an illness or layoff that leaves you without income for a year.
It amazes me how otherwise intelligent peers of mine will be paying extra on mortgages, student loans, and retirement funds with less than $5k in the bank.
However, unless you have especially nasty rates on student loans, paying them off shouldn't come before accumulating some fairly liquid savings. The same probably goes for paying extra on the principal on your mortgage and maxing out retirement plans.
This sounds like the kind of failure mode better addressed by solutions like insurance instead of upfront savings.
Also keep in mind that it's huge to have 6 months of expenses easily available while evaluating job offers. You're much more likely to settle when you have to worry about paying your mortgage next month.
And that insurance is readily available in the market, if the duck on my television is telling me the truth.
For example, I keep a very low cash balance and divert most of my surplus to investments. This is partly a gamble, in that I may be forced to sell at a less than ideal time, and partly a credit-backed risk in that my credit cards provide me a buffer large enough to liquidate most of my investments.
The person on the other side is c++.
We're still below the s&p inflation adjusted high from ~2000 -- almost 14 years later. When will the gains finally arrive?
I worry that there is some systemic problem in our economy that has leaders playing whack-a-crisis every five or ten years that erases years of gains.
I've read John Bogle and I want to believe. But a few years ago I took some money out of index funds and placed it in a rental property and so far I've seen very predicable returns with no loss in principle, and it makes me wonder if I should keep bothering with index funds at all.
Only if you're looking at the price index. The total return index -- including dividend payouts -- peaked at 2108 in September 2000, and is now at 3027. After inflation that's a gain of 6%, for a real return of slightly under 0.5% per year... but hey, at least it's positive.
Also worth noting- can rental properties ever be included in blanket investing advice? Investing directly in property requires either a group of investors or considerable capitol- both, really. Stocks and such are popular in sweeping advice because anybody with two nickels to rub together can acquire stocks.
The gains are here now, and I'm more concerned about a bubble personally. Vanguard's total stock market fund has year-to-date growth of ~17%, and their more-stable lower-growth "balanced" fund with bonds included has year-to-date growth of ~8.75%. Both of those are better than the usual estimate of 7% annual growth for retirement funds (a conservative 3% for inflation and 4% for income).
More generally it seems like all pop financial advice is based on the premise that the next 40 years will look much like the last 40 years. Historically that's been a bad bet. For example, you never hear about hedging for a deflationary crash, because that's unthinkable given recent history.
401K and IRA are defined contribution pensions. Repricing financial instruments can affect those greatly, but I would argue that those are accurate reflections of the value of the investments.
Just because the average salary in the United States is $57,000 (random-ish number) does not mean that's what I have to settle for because it's the average. If I put in the time, work smart, work hard, and keep learning, then the expectation is that I can beat the average income. Likewise, I can beat the average market by putting in more time, more effort, more learning, than the average investor.
I tried forex for 2 years, and did poorly, so I stopped, and learned my lesson.
I bet on Ford at 1.60. I bet on Tesla at 16, and 24. (not heavily mind you, just 2.5% of my portfolio). I research the companies, the management. I not only go to the annual report, but I also read books by the founders, read about their manufacturing (are they using lean like Toyota or lean like GE?). I went after Ford based on Mullally's performance at Boeing. I went after Boeing based on the 787's promises. (It's doing very well.) I read Deming.
I lost $900 in American Airlines, and $300 in Washington Mutual. I did lose $6K on a $10K mutual fund that went south in 2007-2008. It looked like it would recover, but then wasn't following the market up. I've made a lot less money with mutual funds that with stocks.
Granted, I've been riding a pretty nice wave since the drops of fall 2007 and mid 2008, but I don't blindly pick a stock and buy in. I'm very careful where I put the money, and will do 2-4 weeks of research on a single company.
I also research their competition, and business trends in general. This means I don't watch TV, don't watch sports, and will do one movie per month with my son. Instead, I read. A lot.
I do max my 401k because of company matching, but I'm not holding my breath on returns. There's an event horizon where it's better not to match and buy securities directly, because of the 1% or so fees. (You start out with twice as much, but you get less annual yield.) You don't pay taxes till you sell, and you can sell at a time of your choosing.
I don't day-trade, I don't even month-trade. I generally invest for 7-15 years.
Finally, I invest only my own money, and that is a very strong motivator for spending the time to do it right. (Small caps do slightly better than large caps--more risk, more return. Diversify.)
I also agree with investing in the management.
Finally, I think investing in some individual stocks is probably a good way to stay mindful about your investments in general.
Or simply beat on an outright basis?
That time period, aggressive buying of nearly anything beat the DOW-30 (as my portfolio handily beat the DOW30 as well, since I'm full risk-on at this point in my life). I know I crushed the DOW, but I'm much less convinced that I delivered alpha.
I knew a lot of people who thought they were hot stuff day traders back in 1998 too. Spoiler: they weren't.
I don't expect to beat the market, and I don't put much into individual securities. However, I have fun and have been making modest returns. Besides, you'll never beat the market if you never even try shrug. Of course, with the portion of my capitol that I put in, "beating the market" makes me feel good, more than it makes me money.
If you are paying a higher marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off with a tax deferred retirement account.
If you are paying a lower marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off without a tax-deferred retirement account.
For most people, the former is more likely than the latter.
There are conceivable situations where you end up paying more in taxes, if your retirement income tax rate is higher than your current income tax rate plus your capital gains rate multiplied by the ratio of capital gains to the total capital.
I've spreadsheeted it out and using a 30 year timeline and what I most would consider an extremely conservative rate of return, you end up with about 15% total advantage. This can go up to 20 to 25% if you assume more aggressive returns.
Despite that, I hate the fact that your money is locked up and there is a severe penalty if you pull it out (except in a few situations, and even then the amount you can pull is limited.)
Is it worth 15% of your money for it to be truly your money? It is to me, but that's a subjective call.
Hopefully few people will come to need such protections, but that's an additional way to keep it "truly your money".
Not true if it is a Roth IRA, which is post-tax contribution but tax free on withdrawal.
A Roth IRA almost always makes sense, which is why they are so limited.
A Roth IRA makes sense in two circumstances:
1) You have maxed out contributions to tax-deferred retirement accounts, such that the only options for additional retirement savings are Roth IRA or regular investments with no special tax benefits (i.e., post-tax contribution and capital gains tax on withdrawals.), or
2) you expect to be at a retirement-savings-excluded income esuch that the average tax on withdrawals from your retirement savings would, if taxed as income, be greater than the taxes you pay on current-year income. (Otherwise, your better off with a tax-deferred vehicle than a Roth IRA.)
No.
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Now let's do this pre-tax money (401k). $1000 invested, with 200% return, gives you $2000 profit, or $3000 with the initial investment. Now take 25% tax out of that 3000, you end up with $2250 at the end. So you get a total of $375 advantage with the 401k route.
Oh, and during retirement, you will most likely live on a reduced gross income (you aren't paying FICA, your house is paid for already, and you also [might] get social security income). Which means, with our graduated tax system, your overall tax rate is less then, for an even better tax savings (you only pay taxes on the amount of 401k that you withdraw each year).
Poverty isn't a privilege reserved to those who live under bridges, or take showers once in a while.
Driving to work and back every day, stuck in traffic, getting home exhausted and not wanting to do anything is poverty.
It's amazing how many guys I know who start working and consider it a success and start spending cash, get a car on credit, get a mortgage and what not. They actually think that having an expensive car makes them rich, yet can't even afford a part of that car breaking. It's a disaster for them.
So, if you have to slave for a pittance (or not, you're slaving anyway). If you can't afford to be ill with some weird disease and getting properly treated for it without waiting social security. If you can't afford a good life for your children. If you can't buy something (a car, a house) without a loan and it still doesn't represent a good portion of your assets..
If you can't do that, you're poor. Poor in money, and most probably poor in time, too.
If you know what you are doing, you might want to retain the money outside and do the investment yourself on investment that are not available in a typical 401K account.
With income in 7-figure range, one can buy commercial real estate, which gives decent returns and is a good replacement for exchange-traded equities. But what about others?
It takes a special kind of hubris to social welfare benefits believing you will never need them.
That still doesn't constitute financial advice, unless your choice to follow the card somehow influences others to follow the same card, which is unlikely at any measurable level.
That's not true. We are social creatures. If the people start behaving a certain way that exerts a very powerful influence on those around them to adopt that behavior. (Unfortunately, this phenomenon holds for negative behaviors as well as positive ones.)
In a similar vein, I would advise people to support charities that help the less fortunate like food banks, but I wouldn't consider that financial advice.
No, someone thought they'd be cute and throw a political jab in there.
> the broad implication that social programs reduce the number of people panhandling on the streets is not obvious to me
I spent two years hanging out with pandhandlers, so I can tell you form first hand experience: there are a few people who choose that lifetyle, but the vast majority of them would give it up in an instant if they had a better alternative.
As opposed to literally everyone having to figure this out on their own? Say what you will about government programs, they're going to be more consistent than what you get pushing the problem out to millions of individual actors.
There are data that suggest otherwise: Walmart, not FEMA was the best at doling out aid during Katrina; on the other side of the political spectrum, the same could be arguably be said for OWS during Sandy. On the other hand, if you're going to argue that the government is consistently bad at doling out aid, you may be right, but I don't know how good the government is at providing welfare or social services. I presume it's not exceptionally good, or else private food banks, homeless shelters, and charities wouldn't have to exist.
This isn't what I was saying at all: I was merely saying that consistency is the wrong angle to complain about. Efficiency is a separate discussion but the one thing a large government program will be is consistent – for better or worse.
What I'll say is that I think this is a ludicrous assumption to make, for the same reason that it would be ludicrous to assume that government food distribution or automobile production would be more consistent than pushing the problem out to millions of individual actors.
You should read for comprehension next time: I'm not saying anything about efficiency, merely that consistency is an odd angle to pick.
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They don't really always exist. As far as I'm aware there isn't really the British equivalent of a 401k, for example. Brits have ISAs but they're just tax free savings accounts with an interest rate generally well below inflation. Cash ISAs also come with the restriction that you can only deposit a very low amount into them per year -- this year it's £5,760. You also can't re-deposit withdrawn money without that further deposit subtracting from your annual deposit limit.
The trouble with putting large amounts of money in a savings account is that it generally comes with interest rates that (even before tax) are less than inflation. Savings accounts are great for socking away money to cover temporary shortfalls in income, but not much else.
Oh, but that money you borrowed isn't getting any investment returns in our 401k (I hear people say). But it is -- it is getting a 4% return (what you are paying back in interest). And considering that a well balanced fund is going to have some amount in a lower fixed-interest investment, that isn't much of a problem (just rebalance the fund when you take your loan out, then rebalance again as it gets paid off).
The ONLY downside I see, is that you have to pay it back all at once if you lose your job, or face a 10% penalty (plus tax) on the loan balance.
Some plans do not permit net-new contributions while a loan is outstanding. Even when plans permit it, the fact that you're borrowing on Thursday might not have you in a situation to make payroll deductions on that Friday. (This is situational, of course. If you're in dire straits overall, you might still not be making contributions.)
I'd consider borrowing from a 401k to buy a house, or to pay off credit card debts that were 15% or worse and that's it, full stop. Refinancing 7% debt at 4% seems not worth it, especially if you're taking money out of equities to do it.
That's what Wall Street wants you to do. Reality is whomever manages the funds has only one short-term goal in mind: year end bonus. It's very common for traders to move on shortly after bonuses are given out leaving "cooked" books for the next trader to deal with. The plan is always to never get caught holding the short term strategy book.
I find the typical trader archetype to be repugnant. There's so much of it that goes against technical-minded people with even the tiniest sense of ethics. If you're financially disciplined you're better off investing elsewhere.
Crashes historically happen at least once every decade.
First advice I would give is, totally avoid using credit cards. It might sound impractical, but I've found some workarounds for it. Which is to use my debit card as a credit card. Go frugal for a few days and save some money in the savings account, then use that money as credit to yourself. The worst thing about any kind of debt/loan is the interest part. Lesser interest you pay the better, except in situation where you are making an investment with the loan(like buying a property of a home) and the value of the investment is growing faster, when the at the same time inflation is decreasing your loan's net value.
Second advice I can give you is to buy your own home and avoid paying rent. If you look at the whole thing having your own home is vastly more profitable than renting some one else's home on a long term.
Then there are a few assorted advices I would like to give, especially to people in India(My country), But I believe it applies equally to else where to. Buy gold in small quantities regularly. Gold is protected from inflation, and is the near standard of economic growth around the world. And value of growth(over long term) always grows. Once you have sufficient gold- sell it and, learn to buy real estate in city outskirts. You will see in any growing city, sooner or later outskirts merge into main city areas and then real estate prices shoot up. Take loans to do this, if and only if the loan is small and as I said before, inflation affects your loan faster than, the rate at which its value grows.
Make the mandatory 1 lac per year(if you can't make as much as you can), tax savings investments on things like endowment insurances which serve as both life insurance and long term investments.
Its good if you could rotate money by building a home which you could rent out. It will serve as a steady source of income later and after retirement.
Lastly at the risk of attracting downvotes, please don't invest in stocks and show pointless heroics if you don't understand that business. Far more people have burnt their hard savings hoping for magical miracles to happen and make them millionaire while dealing in stocks. In short if you know how to do it, do it. Else keep out for your own good.
But I've seen millionaires being made and money being transferred through three generations in a family, only because some one invested in properties and bought enough gold when it was cheap and easy to buy, and later find it multiply. And people there hardly do enough work except for building more wealth through rents they get.
May be controlling a lot real estate is dangerous from a super super long term perspective. But by then, your great great grand daughters bones would have turned to dust and it wouldn't bother you least bit.
Gold, real estate, and kids. Nothing really beats these investments in a true sense.
Obligatory counter-comment - this is not true in a lot of markets, notably ones where a lot of HN people probably live like SF, NY. One must take into account many variables such as rent prices, house prices, property tax, your personal tax situation (in the US), expected duration of ownership (biggest factor IMO), etc.
Let the excuses and reasons for them fly, think whatever...fact is they are not necessary. While some smaller percentage of people can be responsible, for many it just invites problems. Don't get one in the first place.
Or do what 80% of us reading hn plan on doing ...build something awesome and get bought out for 10 mill.
Renting is a good investment if you can handle sourcing tenants and outsourcing or handling maintenance issues.
Are you a professional stock market trader?
If you answered yes to the first question but no to the second, why?
There's a word for people like you: suckers.
Now back to the point. When I say average Joe I was probably understating things - I'm talking about your rational, generally college educated, sentient being. When I say basic knowledge of economics, I mean knowledge or intuition of how unemployment, interest rates set by the fed, and global events can effect the economy (mostly for getting out when things are tanking and jumping in when they are on the up and up). When I say general knowledge of finance I mean more specifically trading savy - types of trading (trend, value...etc), ways to trade (short, long, margin, leverage), ..etc. And when I say domain knowledge I mean generally the domain the person works in and can pick a winner from a loser.
Now with that knowledge, the fact that a small investor can make small moves and not effect the security itself, and subtracting management fees, you mean to tell me just because a finance company puts their stamp on a mutual fund that means they'll do better than me?
My returns and the returns of folks I know that fit that characterization disagree with you.
And, yes, I can beat the market. My 20-year investment history shows that I consistently beat the market. And, no, I'm not a professional stock market trader. I've worked as support staff at investment banks, and I can tell you first-hand that there are many reasons not to be a "professional stock market trader". The industry is a horrible place to work, and I'm glad to be out of it.
No, I'm not a professional.
Because that's not what I want to do with my life.