What I’m Teaching my Son about Money
mrmoneymustache.com
mrmoneymustache.com
> Income is not something that employers or the government ration out to you based on a rigged system. It is a something you generate yourself. It is the byproduct of your hard work, combined with learning and mastering the system itself. Even the system itself is subject to your control if you choose.
It's easy to interpret this as a positive statement about the way things simply are, but I don't think the author quite intends it that way. When pressed, he might say it is a positive statement, but the clearly intended ethical significance of the statement—the fact that it has deep consequences for the way his son should act—suggests we can look deeper.
Specifically, it's important to understand the normative dimension of the statement: that when "income is not something that employers or the government ration out to you based on a rigged system", that is a good thing. And most importantly, it's possible for things not to be that way—whether because the laws or government of your country are not set up the right way, or because you yourself have the wrong attitude about your work.
The attitude interpretation is probably what the piece is focusing on (and what most readers will take away), because obviously the author can't teach his son to solve problems outside of his control. But the author is thinking about systems too.
When he says "the system itself is subject to your control if you choose" it's clear that there are plenty of systems where this is not the case, where the system is so huge or arbitary or irrational that "learning and mastering" it is not possible. Examples might include oppressive dictatorships, bloated bureaucracies, or sweatshops (especially to a child).
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The point I'm trying to make is that we have a responsibility not just for our own attitudes and actions, but also to shape our world in such a way that it is possible for the right attitude to pay off.
Edit: the author's point about how the son's savings account enables him to be generous is a great example of this. This is called "moral luck" by philosophers--the idea that certain conditions need to obtain before a person can be virtuous. The idea goes back all the way to Aristotle.
In a strictly personal context it is often better to maintain the view that you are a fully empowered actor.
Becoming wealthy without manipulating the system (or, put another way, becoming wealthy while creating a similar amount of value) requires both prudence and either a great deal of luck or a lot of hard work and reasonably good luck. Many people work hard; most do not become wealthy. Sometimes that's due to their own choices, but not always. It's something of a disservice to teach a child that he or she is a fully empowered actor; the reality is very different.
In the real world, you are competent, professional, and hardworking but your employer goes under during a bust. During the 2 years you're out of work, you drain your savings and have to start over from scratch. 5 to 10 years of earning, saving, and investing go down the crapper.
In the real world, you work hard, draw good pay, and invest wisely. Unfortunately, due to monetary policy established by unelected officials, you are faced with a choice of losing money to inflation every day or paying wildly inflated prices for any asset available to you. As a result, you never achieve financial independence no matter what you do.
In the real world, you may be faced with a choice between working a job that will never enable you to become financially independent and engaging a crooked physician to help you collect disability benefits from the government for the rest of your life. You find it impossible to accept that you should have to work for what others are given for nothing.
A child who grows up believing he or she is fully empowered is likely to respond poorly when encountering these situations later in life. It would be reasonable to interpret them (incorrectly, of course) as evidence of one's own failure, inadequacy, or even bad character. The reality is that the game is rigged, and badly so. The industrious good behavior the Calvinist work ethic endorses makes success a little more likely, but it's nothing close to a guarantee. Better to learn these lessons young, even if it encourages "cheating" later in life. Sadly, cheaters usually do prosper; the choice to be "honest" or not should be made from moral principles, not a misguided belief that it will lead to success/happiness/financial independence.
It isn't really about working hard, either. That's a myth. It's about working effectively, and making prudent, common sense choices about what to do with your income.
Of course, life can hand you a lot of bad luck that can derail your plans. But this is simply not the usual experience.
Bubbles come and go, some are long, some are short, some are consequential, some are not. For example, real estate bubbles: these are most dangerous because it is usually the most substantial asset purchase an individual ever makes, and it is typically 90% leverage. If you fall ass-backwards into the right spot on the development curve, you can literally turn $50k (down payment) into a million++ dollars - if you guess wrong, you're bankrupt and you pray that you have a non-recourse loan.
Zero sum game. Rampant inequality. Crashing social mobility.
As you say it's not merit based. How many people can save 500k in 10 years? Leveraged mortgage debt then becomes the only game in town. Game set and match the banks.
It comes from two places (at least):
1. Debt - someone pushes a few buttons on a computer keyboard and "poof", you've conjured a million dollars out of thin air
2. China - this is real money, but if it gets pointed at one geographical region, it can cause major distortions, especially if that real money can be confiscated at the whim of the politician who happens to be in power at the moment
Yes there is foreign money but still most buying is domestic. Foreign money is a convenient bogey man. It's the same in Canada and the stats do not bear it out.
Actually, no one knows, because stats are (deliberately imo) not kept.
http://www.greaterfool.ca/2015/05/14/the-tipping-point-2/
Vancouver not even in the top 10 yet we are told endlessly HAM is the cause.
The investment works because in 10 years time you own bigger chunk of the asset (Mostly due to inflation but also debt repayment from rent).
Everyone gets the financial outcome they want.
I'm curious what you mean by that?
Everyone can unpack the statement in different ways, but essentially your financial position is a result of how much effort you put into it. Most people put little effort into it, or even knowingly make bad mistakes like buying new cars on credit, yet shrug their shoulders and do it anyway.
In the short term you might have a setback but people with priorities for financial success are able to overcome these and go on to greater heights.
An evidenced in these comments there are some people who want to talk about how the deck is stacked against them and they can't possibly get ahead - yet people from all walks of life achieve financial freedom every day, so this is patently not true. The people who think this way are getting the outcome they want, which is to priories blaming over achievement.
They are achieving financial freedom by stepping on the throats of their brothers and sisters. If you want to "achieve" financial freedom that way fine, but I'll rest easier on my (cheap) death bed rather than surrounded by trinkets bought after exploiting the poor and needy.
Your comment is so wrong it's hard to comprehend the mindset.
1. The activities in which one engages to obtain income. This can be labor, crime, cheating and manipulation, employment of capital, or some combination of these.
2. Starting position: did you enter adulthood with an inheritance or trust fund?
3. Management: what do you do with the income you receive?
4. Environment: macroeconomic conditions and public policy (presently inseparable).
5. Luck, those arbitrary events that affect an individual or small group of people (as distinct from environmental factors that affect everyone). These can be positive or negative.
Individuals generally can control (1) and (3), though the available options and their merits are products of external forces. You seem hung up on the notion that these are the only two factors that matter. You acknowledge (5) but assert that it's ultimately irrelevant to outcomes. You don't seem to acknowledge (2) and (4) at all.
I am asserting that a high probability of good economic outcomes (i.e., financial independence) requires that at least (3), (4), and (5) all be favorable if we begin from the premise that the only sources of income and capital available are the proceeds of labor and one's own accumulated capital. That is, we're not going to cheat or steal and we weren't born into anything.
I am not asserting that good economic outcomes are impossible under other circumstances, only that they are highly unlikely.
It would be very useful to bring some data into this conversation. I would like to compare the outcomes achieved by hypothetical pairs of individuals who satisfy our constraints on factors (1) and (2) and are identical in their luck (there are no material events) and management, but differ in environment. For example, suppose that there are two individuals born 20 years apart, one in 1955 and the other in 1975. Both are male Americans, both are employed in full-time, year-round work beginning at age 20, neither is ever unemployed for any reason, and both set aside some fraction of their age-appropriate median-wage income and invest it in one of a few simple ways (we can vary that fraction and how it's invested). Each pays the taxes he legally owes and no more, and for simplicity's sake each is single and lives in a state with no personal income tax. The object of this exercise? To check in with each at age 40 and see, in today's dollars, the purchasing power of their assets and the purchasing power of the income those assets produce. We could then examine other splits; for example, two people born at the same time, one in Japan and the other in Switzerland. Or fraternal twins, one male and the other female. The possibilities are limited only by the availability of data.
It would be great to see such a study. If anyone has done it, the results are not particularly easy to find. Most of the data exists: historical tax laws from the Tax Policy Center, historical income data from the Census Bureau, deflators and unemployment data from the BLS, interest rate and bond market data from the Fed, and stock market prices and dividends from the exchanges and many other sources. Some countries keep better records than others. Having looked into what's available, I think someone could put together something reasonable in a week or two.
According to your thesis, these studies will show that everyone will obtain approximately the same outcome, because in all cases we have controlled for luck, starting position, income, and management strategy. Only the choice of management strategy will have material impact.
According to my thesis, these studies will reveal (a) that environmental factors dominate the outcomes, (b) that there are many environments in which there is no non-oracular management strategy that will yield an outcome as good as that achieved by a male American born in 1955 who employs a simple, moderately frugal management strategy, and (c) that the vast majority of environments that have existed over the past 20 years, including today's, are strongly detrimental to positive outcomes.
I assert this despite the ultra-simplified deterministic model I propose to use. I further assert that the stochastic injection of periods of unemployment (in accordance with actual historical rates) will radically worsen outcomes in at least 3 quintiles relative to the above-mentioned baseline.
Finally, I assert that these results are obvious. I'm not exactly going out on a limb here.
I know I sound like a "progressive". I am not. I do not advocate redistribution, higher minimum wages, more rent control, or a culture of victimhood. Quite the opposite on all counts. What I do advocate are changes to public policy that make it much less likely that decades of any individual's working life will be lived in an environment that strongly penalizes the proceeds of labor and accumulated capital. You should not attack me based on your preconceived ideas about "what I want", from either the markets or public policy.
More directly to the point, my original assertion was that teaching a child that factor (3) is the only one of import does him a great disservice. Prudent management of one's finances is almost always necessary but almost never sufficient. Acknowledging this is not casting blame but rather observing the world around us, thinking critically about how it works, and accepting it as it really is: healthy things for any child to do from an early age.
I've seen a lot in my life with this, and it's wildly untrue. I know many families with multiple children, and over time some of those became millionaires and others did not. None I know started with inheritances. I know a lot of self-made millionaires. All of them share a common attitude that their future is in their own hands, and it's clear from the arc of their financial lives that that is true. Their choices produced their outcomes.
The ones who did not become millionaires also share a common attitude that nothing they could have done differently would have changed anything.
The fatalistic outlook you have will be self-fulfilling. But you can choose to change it. It really is up to you. The choices you make matter. If you want to know more, I can't recommend a better book than "The Millionaire Next Door" about how ordinary people doing ordinary things become wealthy.
It's not fatalistic. As I've been saying all along, you have some control of some things. Exercising that control constructively is necessary. It simply is not sufficient.
I also know people who abandoned the market at the bottom of one of the various dips. They're all bitter about the recoveries since. Taking a longer view, the various machinations of the market that seemed so important at the time are lost in the width of the line on the graph.
Yes, your choices are by far the #1 factor in any success, or lack of, that you have. Telling your children anything less is a disservice.
No, you haven't understood my thesis at all. You seem to think I'm making some sort of political or statement related to the current economy.
The point us that every gets out a combination of what effort they put in and the decisions they make. For some, born with a trust fund, those efforts bad decisions are easy. For others, new immigrants without qualifications, those efforts are going to need to be huge.
For all, they will get back what they put in. All will get what they want, when you read want as not what people say they want but measured by their actions.
I might say I want to get fit but unless you see me out training you would quite correctly surmise I don't actually want to get fit. Everyone gets what they really want.
Instead, for a specific example, consider a 4-plex my wife and I bought for $65K down ($215K total - it is in an economically depressed area). Rents, when fully occupied (not always the case, we see about a 5% vacancy rate) are $700 a month over all expenses, including debt service.
Plus, we put close to 20% down but get 100% of the depreciation. End of the year: $7000 in our pockets, a legal tax loss of $800. And that is assuming no change in value of the asset. If someone offers to buy us out at %200 of the purchase price I would definitely consider it, but until then, I pocket the proceeds.
For me, doing the due diligence up front reduced the luck factor, my preferred way of obtaining my goals, when possible.
We also bought in Lee County Florida, where a single family home IS cash flowing. If the employment market stays stong, we will look at picking up more, assuming we find deals that are acceptable to us.
Risk: Insurance (property and landlord's liability), entity (LLC), and strong property management that is tight on screening prospective tenants. Last, watchful management: We keep an eye on the Property Managers, and provide overall management decisions, like where to keep rents, what improvements/repairs to make, etc.
We are new at this, only 5 years in, so we are still most definitely learning.
how much do you pay for property management?
Property management in both locations is about 10% of Gross rents. One company also charges half of the first month's rent to cover turning, advertising costs.
So no worries about taking advice!
It's the American dream!
Moreover, the amount of depreciation you can take (in total) does not increase with a change in the value of the asset; it's based on your "cost basis" in the asset. It only goes up if your costs in the asset increase, such as for property taxes paid, improvements, etc.
Finally, and this is a big one--the value of the land is excluded from the depreciation calculation--only the building and improvements to the property can be depreciated. So $215,000 is an upper bound on the recoverable amount--the properly depreciable amount is less than that, meaning that your annual depreciation should actually be less than $7800/year and that you should actually have more than $600/year in net rental income.
You need to talk to an accountant soon, because if you get audited you almost certainly will be paying back taxes and penalties.
To be more accurate, we do get a bit more, but we withhold for repairs, replacement costs, wear and tear, new appliances, etc. So our income is higher, but I have trained myself not to count it, as the odds tell me I am going to have to pay for repairs. The $700 is what we get to hold onto most often, unless we are saving towards big repairs like new roof, outside paint, etc. And (crucially) I left out that we had enough first year expenses to legitimately lower that perceived income, as well as the interest that we get to deduct (interest being far higher at first in a mortgage payment). Next tax year will have different numbers, since we will have had different expenses and different occupancy (unfortunately they do not stay 100% occupied).
I am just trying to get out round numbers that show that it can work.
Most people have this concept that their house is their biggest asset, when a residence is really a liability for the person who lives in it.
I should not have taken the shortcuts in my math, but regardless, we do well. We have used the profits to invest in more education, and have recently purchased another unit in Florida that will start cash flowing in about two more months. Well, actually it cash flows now, but we had to pay for some new appliances, so in my head, we are negative for two more months, then we start paying off ourselves for the down payment. Again, I am more conservative.
So it is a slow path to wealth, but a valid path, nonetheless.
Now, in a lot (not all) geographical locations, all these historical indicators are useless. Asset values no longer have any relation to local economics, in various different ways. In the US in the housing bubble, it was loose credit. In Canada and Australia, this persists, because they somehow escaped the psychological popping of the housing bubble. And at least in Canada, there is the additional massive "unnatural" demand coming out of China:
http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughness...
And this isn't crazy "no money down" like the US housing bubble - the Chinese have cold hard cash. Name a price, and they will write you a cheque.
I.e. you don't have to live a Spartan lifestyle to have an investment program, nor do you have to be unusually lucky, or any of that. Just underspend your income by 10 or 20%, and invest the rest in ordinary, boring investments.
Delayed gratification. Give up the "wants" for now to get a bigger benefit later.
It sucks not going out to eat or buying Starbucks as often as we used to. But we do it by choice so that the $5, $10, or $40 now stacks with the $5, $10, or $40 from next week and the following week and can be put to something more important later on.
As a result, we were able to wipe out all of our non-mortgage debt in about 2 years. We didn't have a ton by current standards (2 car payments, student loans, small cc balance), but killing all of that immediately reduced our stress and increased our options.
Even pretending to play at a victim is corrosive to a proper attitude of being in control and responsible for your life outcomes.
He retired in his 30s and derives income from "a rental house or two". I'd suggest he's doing well out of this rigged system. I'd also suggest that saving $70 on coffee is utterly eclipsed by his equity gains on these two properties and that the rent derived from them would enable him to bathe in coffee daily.
Errr...leveraged debt, at a guess.
> "It is the byproduct of your hard work"
An attitude like his can almost be considered subversive today. If it wasn't for 'keeping up with the Joneses' the world could be a much better place and more people could live the lives they actually want to live.
Thank god MMM is a subversive, because his is one of the only revolutions I could see myself subscribing to.
If you liked the article, you might find the community there interesting: http://www.reddit.com/r/financialindependence
I subscribed to the FI sub hoping to find a lot of discussion about efforts to bring money in. Instead, I find a lot of people angling for a definition of financial independence that includes wearing the same clothes for seven years, barely ever eating out, and vacations that resemble nothing I'd call travel. Whatever discussion around increasing income does take place is usually centered around picking up another job. For me, as long as the income earned is a linear function of time invested, it's a losing proposition. There's a reason why "work 10 jobs" isn't commonly suggested as a way to get rich.
I know this sounds snobby, there's not any way around that.
My definition of FI is not having to deliberate, rationalize and bargain with myself when it comes to purchasing something I want. Yes, reducing wants is a major factor in happiness, but finally there will always be something that I want, despite pursuing a life of frugality and parsimony. The FI/MMM approach leans way too far towards ascetism for my tastes.
Are there any communities, besides HN, which focus discussion more on strategies for increasing income and less on lifestyle amputation?
There are a few ways that are reasonably reliable. Owning multi-family housing has a pretty easy to understand cost and revenue, and property ownership can be leveraged to purchase additional property, and so on.
If someone I don't know (we're talking about internet forums here), I don't know their personality, their strengths or weaknesses, they say "I want to become financially independent". Well I can almost guarantee if they eat out half as much, walk/bike to work instead of making car payments, they'll be in a much better financial position. If I tell them to create a tech startup ... well, that could end in several ways but probably not good.
Additionally, what does it cost them to follow the advice? Spending less, by definition, has no cost. But saying "buy an apartment complex" or "start a tech company" has real cost. How do they get to the point where they can do those things if they can't afford it now? That's again where the "spend less" comes in.
When I asked him why he didn't just increase his (seemingly low to me) freelancing rates by 10-20%, he said that was impossible. Little did he know I charge nearly triple his rate for sort of similar work, and spend about 50% less time than him working.
You don't build wealth by saving on small purchases, you do it by earning.
My mother did this with her home business by slowly increasing her prices. The product she delivers hasn't changed in the slightest - but she now makes 5x more than she was before!
People fall into the trap of lowering their cost to increase buyers without paying attention to how much they are working. They see an increase of price "would ruin them financially" because they would get less clients.
Of course, finding the balance is important.
There was a story on HN where someone was setting up custom sites for $75. They quickly realized this was more work than they expected and began charging $2,000 a site (after charging more and more per site, from $200->$500->$1000).
People were still purchasing. Same work. $75 --> $2,000.
In contracting or consulting, you want to find critically important projects to work on and then almost shock people by what you're charging. Then overdeliver.
I feel this brings up another important thing. Set realistic expectations. Always set the bar at what they expect while remaining near the bare minimum of what you can realistically deliver...then do everything you can do deliver past that.
1) If you overpromise and underdeliver you give yourself a bad rep and have an unhappy client.
2) If you promise reasonably and overdeliver your client will be happy. Happy clients often lead to more clients.
Assuming in 1 and 2 you did the same amount of work and the only difference was you didn't promise them the world and a field of kittens to boot. Marketing for 1 might land you the sale; but that's incredibly shortsighted. 2 will almost always do better for your business.
You will likely lose some sales if you market with #2 in mind. However are those the types of sales you want to begin with?
Breaking the nexus of the 'more stuff' mindset is important as groundwork in increasing income. I have read quite a few stories on here where someone hit a wild payday with an online venture but were broke again in 2 years. That is because they never tamed their desire to spend, and when lack of income was removed, all of it got spent, and more. Worse still, their expectations of life increased to the point where being happy again required a much bigger income.
So it's better to put a frugal mindset in place and practice - and be ok with that- so that any increase in income can be channeled into building assets that will increase financial independence.
My personal framework is not to worry too much about small purchases (i.e. coffee, eating out, etc) but to consider it when making a larger purchase (i.e. a holiday, car, house, etc).
Before I spend money on a larger purchase, I tend to think: would I rather spend/waste money on this, or have it compound over many years. For each million invested properly, you can get annual gains between 50-100k.
I brought up it's usually more about value and trust than it is about the price of things. When a real estate broker sells a house for $500k, they (tend to) get 2.5% of the purchase price. That's a lot of money for basically showing people around, in most cases. But they do deliver significant value to the seller.
Another example: I regularly work with a lawyer. He charges like a professional. We've worked together frequently on something during a 2 year period, and there's a trust relationship. He bills properly, like any professional would, but his billables are reasonable and he doesn't charge me as much as he does his other clients. Could I find someone cheaper to do the job? Absolutely. Will I go looking for someone else? Hell no, he's awesome at what he does and we work well together. We can also relate, since I have an interest in his area of the law and he has an interest in IT, which in turn leads to interesting conversations.
Once you're past a certain price point, it's not about price, it's about value and trust. Too bad I couldn't show him that.
Yes, reducing wants is a major factor in happiness, but finally there will always be something that I want
If there's always something you want, where do you stop? It seems the key to happiness is to learn to live with that want, rather than try to satisfy a desire that can't be satisfied?
http://www.mrmoneymustache.com/2011/10/02/what-is-stoicism-a...
"• What is the Second Noble Truth?
The second truth is that suffering is caused by craving and aversion. We will suffer if we expect other people to conform to our expectation, if we want others to like us, if we do not get something we want,etc. In other words, getting what you want does not guarantee happiness. Rather than constantly struggling to get what you want, try to modify your wanting. Wanting deprives us of contentment and happiness. A lifetime of wanting and craving and especially the craving to continue to exist, creates a powerful energy which causes the individual to be born. So craving leads to physical suffering because it causes us to be reborn.
• What is the Third Noble Truth?
The third truth is that suffering can be overcome and happiness can be attained; that true happiness and contentment are possible. lf we give up useless craving and learn to live each day at a time (not dwelling in the past or the imagined future) then we can become happy and free. We then have more time and energy to help others. This is Nirvana."
Everyone wants more, but more often doesn't lead to happiness due to hedonistic adaptation. His philosophy is not about being cheap: rather it is about carefully examining what really makes you happy and choosing to align your spending with that, which naturally leads most people choosing a more frugal path. (Also note: frugal != cheap)
http://en.wikipedia.org/wiki/Hedonic_treadmill http://www.mrmoneymustache.com/2012/10/24/frugal-vs-cheap/
Personally, I think that increasing income and reducing expenses are two sides of the same coin. You're either changing the numerator or the denominator in the time-to-FI equation. The really powerful stuff happens when you do both at the same time.
Put another way, are making $10,000 more dollars per year and spending $10,000 less per year the same? No. You will retire exponentially (literally, if not colloquially) sooner by spending less.
The MMM resource: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
MMM talks about a bunch of non-stock investments. Real estate and peer-to-peer come to mind.
If you want online communities for investing, pick your poison. https://www.quantopian.com http://covestor.com https://www.reddit.com/r/investing
He purposely uses hyperbole, possibly to break through the established messages being broadcast far and wide by the institutional investment consortium. Or maybe he just enjoys being a contrarian and having people sling hate at him, I do not know him personally, so I have no idea.
Every time I use his name at HN I get down-voted, but I also know that SOME of his recommendations work.
Such as "the best investment you can make is in your self/mind/thinking."
He definitely rubs many people the wrong way, but just like when I read someone whom I think is a poor author but has a message to convey that contains truth, I find underlying reasoning/principles that work, or can be made to work for me, YMMV.
For example, as stated in other comments here, multi-family rentals can be profitable, and are fairly straight forward to me, now that I have done the research. My wife and I are slowly accumulating properties that cash flow - They produce more in income than they require in expenses and debt service.
Likewise arbitrage in paper assets and commodities is another way to structure gains - Having your money work for you, also called investing, in the more traditional sense of the word. I am currently studying Stock Options as a method for investing with insurance (hedging) and doing so with some leverage (buying a stock=1 to 1 - Buying an option is a ratio, like 1.50 to 100, depends on the option).
The biggest rewards come from starting a business that can be grown to be so successful that it gets to IPO stage (financial exit), or is able to continue without the founders, if they so choose (royalty/profit distributions). That is the frequent path of the majority of contributors to HN, based on my reading.
But all of it requires significant knowledge, the equivalent of another job. Knowing what/who to study is a challenge, mentors and coaches can speed up the processes significantly.
If my conservative planning goes correctly, I expect to be earning more in passive income within 10 years than I have expenses to consume. Then, "work" takes on that optional quality. I will not stop working, but which projects I take may change drastically. I do not say this to toot my own horn, but to just state that it can work, if the person is sincere.
All of that said, if you want to know more, please post such and I will answer any questions I can, what little I can offer, I have only been studying and doing this for about 5 years. An Internet search should definitely find who I am talking about, because as I said earlier, there are many who really dislike this author, but a number (like me) who have taken something away from him that works for them, and many people post. Again, YMMV.
There is a difference between being frugal - not wasting money by buying crap on credit - and being cheap, like wasting your time shopping around for 10c savings on bananas or fuel.
The main thing is to control both - curtail the urge to spend, and spend time working out investment options and concentrating on cashflow.
It doesn't matter what people think of who you follow - being unafraid of other peoples opinions is arguably step number 1.
A rule I did have to institute later though is that if he forgets to ask for his interest that evening, he doesn't get paid.
We also have to rely on his last bank receipt to calculate the amount owed because it appears impossible (at least here in Canada) to open an online account for a child his age.
Edit: sorry, to actually answer your question, yeah they still have those -- they just call it Youth Account at TD
We give our kids an allowance of sorts for chores above the basics. We also allow them to blow this money on "stupid crap". We once let them split a pack of candy at an ice rink, but they didn't have the money yet (we were traveling). Once everyone agreed that they'd buy it with their allowance, I bought it with them understanding that they needed to pay me back.
Later that weekend, it came time to pay their allowance. We could have easily paid them $2 each (the net), but it was far more effective to pay them $3 each and then make them physically pay us back the $1 each, even though it resulted in significant frustration and a more than a few tears now that the candy was gone.
That's education, not a mind game.
> To me, raising kids to feel pressure and fear so they can be COMPETITORS is bullshit. Life is not a competition. It’s a gigantic collaboration, and the world welcomes and rewards people who see it that way.
Life is not a competition; it's a collaboration.
But the key message which I really like is spending is your choice, and if you can't afford something you want to buy it may be because you chose to spend the money to buy it on something else instead. Recognizing that is what you are doing when you "spontaneously" buy that over priced beer at the ball game is a good life skill.
To get 10% with zero volatility, you have to invest with Bernard Madoff.
And I see the S&P has done slightly better (8.3% [1]) over 10 years so I should probably kick myself to having anything in a stock or fund other than SPY :-)
[1] http://quicktake.morningstar.com/index/IndexCharts.aspx?Symb...
> On the other hand, having crossed the threshold of having more than enough money for a good life almost a decade ago, I cannot even imagine my son not earning a plentiful and permanent surplus very early on in his adult life.
If I remember correctly, the author's net worth was greatly boosted by the stock and real estate market bull market of the 90's. During that era, making an earnest living and investing aggressively in these two markets would handsomely reward you. To automatically believe that the same is true in the current era or any other future era is a dangerous assumption.
In regions with the biggest opportunities from employment, employees are increasingly priced out of the real estate rally and the tax savings home ownership affords you. Similarly, there are no guarantees on how much longer the current 5 year bull market run in the public equities market will last, and how sharp and long lasting an eventual correction will be. While it is possible for informed individuals to navigate times of volatility in the markets, it is a matter easier said than done, particularly for a young professional who has not experienced market turmoil first hand.
> And yet consider the stunning case study of the children of the nation’s uber-wealthy enclaves like Palo Alto, California. Despite incredible wealth and some of the best educational institutions money can buy, kids there are more stressed, less happy, and more likely to commit suicide than others who live with a fraction of their privilege.
The problem arises when high-achieving parents assume that their kids need to be pushed to achieve more themselves, to beat out the other high achievers and gain access to the most elite schools, in order to compete in this incredibly challenging modern world.
It's worth examining "why" these parents behave this way -- what their underlying motivations are. I'm going to simplify the situation and focus on what I believe is the largest slice of the hypercompetitive student population: the children of successful immigrants (this classification is very representative of the Palo Alto and Cupertino school districts).
The immigrant parents who are sending their children to High School now overwhelmingly came from modest means and worked their way to financial and social well being and stability. As immigrants, their situation was highly volatile, both with respect to employment and residence status. As the author himself notes, parents want their children to have it better than them. The worst part about being an immigrant? The fear of not knowing what will happen to you tomorrow. The fear of losing your job and getting deported was a very real possibility. What they want for their children is first and foremost, stability. More than pure financial EV, they wish to maximize the predictability and stability of their children's employment prospects. Status and financial returns are secondary.
Anecdotally, even self made millionaire behave this way. Read "The Millionaire Next Door," (a book primarily about small business owners with prudent spending habits who saved their way to 7 figures) and you will find that most of these self made entrepreneurs want their children to become doctors and lawyers so that they won't have to endure the volatility that the parents suffered.
How do you maximize professional stability? The narrative of "go to the best school and study a technical, skill based discipline" is actually not misguided. The problem if any is that you quickly hit precipitously decreasing marginal returns on any additional academic competitive effort. But from the parents' perspective, even "poor marginal returns" looks like a no brainer. After all, they would have loved to have that opportunity to increase their employment stability before being subjected to the economic forces themselves. The stress in children is a result of wildly differing perspectives and experiences between the immigrant parents and the child born to safety and prosperity. The parents truly want the best for their children, informed by their own experiences and difficulties. Sadly, even "the correct decision" for any person is hardly ever the correct decision for another.
Granted, those who survive to adulthood from that kind of pressure seem to be extremely successful go-getters. But I also know of my peers who instead felt isolated from their "Tiger" parents, and instead ran away from home and never looked back (until their bank accounts ran dry).
The extreme pressures of the "Tiger Immigrant Parents" can be unhealthy. But as long as the pressure is done in moderation, it seems to lead to a number of "elites" who do well in school, get great jobs or become community leaders.
One day, I guess I'll have to make that decision on what kind of Father I will be for my child. For now though, I'll take advantage of the stress-free bachelor life (and at worst, deal with the responsibilities of being an uncle)
In moderate doses, it inspires you to work hard and achieve personal growth and exploration in any number of areas. I myself benefited immensely from friendly competition between academically gifted peers.
However, take in too much of the competition medicine, and you quickly overdose and will start to suffer a wide array of negative symptoms.
Things have changed from the 1990s. The expansion of the money supply has detached asset prices from wages. Older people rode that wave and loved it. The price? Their kids are going to be farmed forever via the financialisation of housing.
Fantasy land. I work hard and I'm well paid, in a high percentile. My financial security is way below someone who went balls deep into debt in 2000 on housing. They could have done a low stress, low pay job and they'd have more equity than me as I've had to spend a tonne on rent.
ps in fact on his "about" section he has this:
"very boring conservative Vanguard index funds and a __rental house or two__."
The first time I heard about the compound interest for kids was this "bank of dad":
http://www.econtalk.org/archives/2012/05/owen_on_parenti.htm...
Itself it's totally unrealistic now thanks to QE which itself of course is pumping asset prices which is great if you have "a rental house or two".
Retired in his 30s to have a family. Must be nice especially if you have a family slaving away in your rental houses for you so you can capture all their labour.
That may be true, but that doesn't mean opportunities for FI disappeared with depressed home prices after the dot-com bust.
Unfortunately real estate is often the go-to option since it's (relatively) easy to get a RE purchase financed, whereas good luck getting a loan to e.g. buy into index funds.
"very boring conservative Vanguard index funds and a __rental house or two__."
It's still possible, depending on what real estate market you look in, and if you're ok buying somewhere out of state and having someone manage it for you. A friend who lives in the bay area bought two rental properties in Dallas ~2 years ago and (even with a property manager fee) it's been a great supplement to her income. I've been thinking about doing something similar.
Must be nice especially if you have a family slaving away in your rental houses for you so you can capture all their labour.
This is a weird thing to say... makes no sense, really.
From personal experience -- buying in a market you are not familiar with (i.e. you don't live there) inherently increases the riskiness of the investment because you are on the short end of information asymmetry. You may be able to ride momentum, but in aggregate you are signing up to the short end of the bargain.
More importantly, what are her after tax returns on capital after the management fees, and what is her leverage? What is the profile of her risk exposure on these properties? Just because the properties are working out for her now from an absolute returns perspective doesn't mean that (a) there aren't better investment options out there, and (b) the risk adjusted returns are good. Just my 2c.
Luckily most don't have to factor in opportunity cost because most don't "own" but are in fact highly leveraged. Housing is the only mainstream access to leveraged debt - that's why people love it.
Go to your bank and ask to borrow $400K "because you think google's shares will go up". They will say no.
But real estate? They love it, especially as it's all back-stopped by the government now.
Everyone wants to pile in and exploit other people working to capture some of their labour.
What happened to adding value and working hard? Can we all be rentiers? Who will grow the food?
You could buy call options, which include a leverage component.
An at-the-money 1 year call option (LEAPs) is a huge leveraged bet that the price will spike. If you are wrong, buy another at-the-money option in a year. But you must be prepared to lose 100% if you are wrong. (Like like you would have lost 100% if you were leveraged to the max on housing in 2008.)
This is my beef with this and the reason for my last comment about this guy capturing labour of others. Can we all just rent off each other and watch the dollars roll in? No - other people have to do actual work so rentiers can kick back.
I will never understand this kind of thinking. A rental agreement is beneficial to both parties - otherwise it would never have existed. You're no more "capture[ing] all their labour" than they are "squatting on your property".
And this is because banks have financialised housing. Prices are set by available credit.
We all have no choice in a world where land is financialised. You can't float in the air. You either live miles away from the source of most jobs (cities) and pay in commute time or you live nearer in and give someone a huge slice of your wages whilst they cream it in.
And in our current system it will always be like this. Productivity up? More wages to spend on rent!
But unless you're an absolute dictator you have to live in the environment in which you find yourself. People who buy real assets risk the possibility they'll go down in value, too - a lot of people where I live got wiped out in 2008.
Some did get wiped out in 2008 - those who got in late. Not MMM blog man who has "retired" but still takes rental income based on the differential between buying back before 2000 or so before housing was financialised and the cost of renting now. This doesn't take finance knowledge you just have to be born at the right time.
So many blogs have "yeah I saved a bit and my 3 houses quintupled in value and I wasn't handing over half my pay to a landlord like kids now...so let me give you some advice!"
For too many for too long housing has been a one way bet. And because they are creating nothing that money comes from the labour of others.
The more productive we become the greater the economic advantage of the land and therefore the greater the rent. If we all work harder and/or smarter the landlord gets it. And if we all try to get our slice of the pie we go to hell in a handcart. Together.
It's not like the person who owns the building does nothing to earn their rent. Building maintenance, loan servicing, taxes, insurance, vacancies, all of that and more has a cost (just ask a homeowner). From what I understand, 4% annually is a good return after expenses.
If you're arguing specifically about rents in the Bay Area, then sure that's a problem that needs to be fixed. But blaming the property owners for high rents is sort of blaming the messenger, no? No additional land and laws that prevent building upwards directly leads to higher rents because of increased competition, and high salaries at tech companies (combined with a bunch of other externalities like private buses) just makes it worse.
In the Bay Area, property owners directly influence the community rules and laws that restrict the construction of high density developments. This is the case in both SV and SF.
I don't blame the land owners -- they are acting in their self interest, as they have the right to be doing.
Due to the financialisation of housing the yield has not been 4%. People have gotten massive appreciation on their land which has left them with a lot of equity if they bought before banking went insane (pre 1990-1997).
The primary cost of housing is the land, not the cost to build, not the upkeep. The land. And the land price is set by available credit. Banks can create credit at will. They only have to stop when the price of land reaches the maximum and individual can service monthly in interest on the debt. With ZIRP this has reached insane levels. All of it is utterly unrelated to either wages or the cost to build.
I'm not blaming "home owners". I'm blaming speculators who are buying more than one home. A place to live and a place to extract economic rent from others. These guys are the foot soldiers for the banks. An army of exploiters in a zero sum game devoid of wealth creation.
Financial speculation in an item pushes prices way beyond their reasonable utility. For example the tulip bubble - people didn't want to live in a tulip but up the price went as speculators piled in.
If you're cool with that then fine. I'm not.
Suddenly, the availability of short and mid-term rentals seems like an economic good compared to a world where there were none of those dastardly "foot soldiers for the banks".
We basically need land value tax to discourage land speculation and to inhibit the huge unearned income flowing to land owners. And once this tax is introduced get rid of labour tax.
Many of the lower income renters pay little net tax (often negative with EIC) today.
Historically, in the US at least, as a land owner your appreciation tracks the CPI pretty closely. It will go out of whack for a few years, but then there's a correction. I just can't buy into your exploiter-exploited mindset.
It's still 'beneficial' to both parties, because if you don't pay you will get legally killed for trespassing by police robots.
That's the situation on Earth, except 'the guy' is 'older generations' and the homeless are generally allowed to sleep rough on public land in most countries. Also no intergalactic internet.
If someone is renting too high of a price, then you go somewhere else.
My answer is : so what? Either you want financial independence and security, or you don't.
You can blame QE and land supply and all sorts of things. You can rant on the porch at passers by until the day you die.
You can be a victim of circumstance or you can make your own circumstances. The choice happens whether you make it consciously or not. It all depends on the attitude you want to take into it.
Personally I try every day to acknowledge where I am in life is a result of the choices that I have made. I am not a victim of anything because all outcomes I have a say in. If I want different outcomes I acknowledge I must make different choices.
Playing the victim card requires acknowledging that you are powerless. Some people prefer to live that way. I don't.
e: the people who disagree with you (eg, me) are saying that intent does not clearly translate to effect in a chaotic system.
Would love to see you try and sell this in Iraq, for example. An extreme but it illustrates the flaw in your theory.
My parents are boomers; I received no land and only some help with my college tuition, and I've owned my own place for over a decade.
My secret? I don't waste money on stupid stuff (and especially, I didn't waste money on stupid stuff when I was younger). I've never had cable. I didn't spend tons of money eating out or partying, back in my 20s when that was the thing to do. I drove a crappy used car for over a decade. Back when I rented, I rented a crappy old apartment without dedicated parking spaces; when I bought a place, I bought a crappy little place.
Meanwhile, I had a colleague earning more than me, who literally had no savings, nothing more than a few $20 bills in his pocket, and I've known plenty more young people in straits nearly as bad. Sure, they drive nice cars, eat at fancy places and drink fancy drinks, live in swank apartments nicer than what you'd see on TV, wear nice clothes and nicer colognes, and so on and so forth—but they have no savings, or almost no savings!
You can trim your lifestyle, and you can save 20% of what you make. Saving from your very first paycheque is possible, and it's desirable.
My only reservation was the artificial 10% interest rate. The current interest rate is 0%. Over the last 100 years interest rates averaged 5%. This is a concern to me because people on the Right tend to fetishize compound interest rates, while MMM seems to focus on true fundamentals.
At that time, I decided to teach my children about this. One of the ways I have thought of doing this is to ask my children to start earning a small amount of money early in life by providing value to others in ethical ways. I am glad to read that the author, who can be considered an expert at managing personal money, is being successful at a similar experiment.
It would be easy to take this line of reasoning into dangerous territory and suppose that earning money is equivalent to being morally virtuous, but this neglects externalities and the sometimes fundamental difficulty of accurately pricing certain kinds of goods (subjective wellbeing, community, a sense of meaning, etc.). Money is, at best, a very rough proxy measure for human value.
[1] http://www.meltingasphalt.com/wealth-the-toxic-byproduct/
If you make money "squarely" as described in I-IV, then you have created some value. Cashing out in section V is simply consuming that value.
All we can say (given the assumptions in I-IV) is that the person was a net positive (or zero) for the Congolese economy.
The technical mistake that the author makes is not realizing that adding value to the Congolese economy means increasing the total amount of physical wealth in the economy. When the person cashes out their yacht, they are simply exchanging cash for the physical wealth they helped create.
I don't think you can logically say that I-IV are "libertarian twaddle" and that V "brings it home", because V is predicated on I-IV being true. If you're interested in the theoretical basis behind "econ 101" I suggest you look into general equilibrium theory.
I wouldn't be surprised if small nudges like that have far reaching effects much later in life.
I suspect that having a nudger around who cares enough to do that kind of nudging is what really matters.
That too. I'm proud to say that my dad was a true class act - he swore both his kids would walk into life with a varsity education and no debt come hell or high water.
That being said I still think its the small practical things that count. All those small things accumulate towards one massive social edge that is hard to quantify. Suppose you need to pick an engineer to build a bridge...the one grew up with legos the other grew up without. Who do you pick? Trivial childhood detail?
>these types of experiments aimed at pushing kids in a certain beneficial direction ---interest me---
On the long-term, it's fundamental for building wealth and a future for oneself.
data that supports this?
A few years ago I finally figured out that the reason my mother always says things are too expensive is that her father committed suicide when she was just seven years old.
Are you equating price with value here? Just because something is expensive doesn't mean it is valuable.
I figured that out on my own - no one else taught me.
Yes I agree, I wear very modest close for example. Denim jeans because the cloth is comfortable and durable.
Everything else though, I say "you have to save for it". A Model S isn't too expensive, I just have to save for it. My wife wanted a couch that I thought was a little unreasonably priced, but I said if we save for it, sure. Savings is separate from retirement and so forth so knock yourself out.
Interesting thing about this is it forces you to choose -- you can't save for 10 really expensive things all at once, unless you're prepared to wait 15 years for the money to accumulate. So this method forces you to choose priorities.
Works great for a kid I think -- you're saving for this $10 book, but you want a $3 candy bar... what is that going to do to your book savings?
You can have anything you want if you save for it.