How One Couple Climbed Out of Debt and Became Millionaires in Their 30s | Hacker News Reader

How One Couple Climbed Out of Debt and Became Millionaires in Their 30s

forbes.com

14 pointssonabinu33 comments

Ah, the story starts at 27 with lots of debt... no wait, it starts with $200k in net assets including $70k already in the market... no wait, it starts at age 16 with a father who knows how to play the markets...

I'm the father, and hope my kids end up with a million in their lifetime. I started with enough of a negative hand to know it's unlikely for me without a startup or real estate miracle.

That's great, I wish you and your children the best. I'm just noting that this 'rags to riches' story has the protagonists starting out with $200k in net assets and a great understanding of how the market works. It's hard for a 'climb out of debt' story to actually tug the heartstrings when the net assets are worth five times the national median wage (~$44k in the US).

For what it's worth, I grew up in the lower middle class. I was never in poverty, but I saw it enough to know how lucky I was. I don't have a problem with 'how to better yourself financially' stuff (terrible at it myself, to be honest), but it sticks in my craw when people with six-figure assets and a median income are painted as 'doing it tough' :)

This is a linkbait article for a financial blogger: of which there are several (Mr. Money Mustache being another that comes to mind).

He publishes monthly updates, so you could go back and figure out the "how" and the curve over time. It would involve looking at at least 100 blog posts, so here's a notional summary:

Investments: Dropping $2k/month into a $70k financial account earning 8% per year for 8 years yields $400k. FV(.08/12,12*8,2000,70000). The power of compounding interest.

Real Estate: A $266k property appreciating at 4% per year for 8 years is $365k.

Those two facts alone total more than three quarters of a million. Debt is going nowhere but down. Scrimp a save a little more, get a few reasonable raises/bonuses and it's "easy".

-----

I hate the treatment of debt in this article. DEBT IS BAD, it screams. Mortgages aren't bad; car payments aren't bad. Long-term CC debt is bad because interest rates are insane, but everything else is a time-value-of-money problem.

You know what's weird?

I biked to work for years, and bought a car in cash.

I lived in a cot on a boat for years, and bought a condo in cash.

The most debt I ever had in my life was $6K when I lost my scholarship for a year, and paid it back the following year.

All this for some reason combines to give me a horrible credit rating, to the point that BofA refused to loan me $5K for two weeks in order to finish a prototype run... which is when I ditched them for a credit union.

None of those things you list are credit based. A credit rating is determined by your ability to repay debts, such as credit cards, mortgages, etc. If you never have those, how can you have a credit rating.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

Then the problem is in the model. A credit rating is supposed to index your financial stability. I'm obviously stable enough to not have debts, but my credit score does not reflect this.

The bank guy I explained this to got physically agitated.

It doesn't really index your financial stability. It indexes your history of paying bills on time. People in debt that make regular payments are much better customers than people that don't need to use debt.

The article is pretty light on the "how" part, which is the only real reason to read the article. I did the things the author did, minus paying down the debt because I didn't have any, and I don't have anywhere near $1 million. So what do I need to change?

    > So what do I need to change

15 years of investment in mutual funds + aggressive real-estate acquisition + a pharmacist and an engineer's salary paying in each month.

I never did mutual funds; if there are more mutual funds than stocks, seems like that's not promising avenue. But my stock investments have done well.

I thought he decided that real-estate wasn't worth it?

I've only had the engineer's salary, maybe that's my problem :)

I have to admit I'm sceptical. An engineer and a pharmacist with a combined income of $85000 in 2006 seems extremely improbable. I know pharmacists that graduated in 1995 and walked into 100K+ jobs immediately. The low paid engineer I get ;). And how'd they pay off the 48K in student debt?

The pharmacist may not be working full-time.

Good point, however, that should probably be stated in the article if that's the case.

Another possibility is that the 85k figure is after tax. Given tax rates in CA, that would be more in line with your expectations.

"Pretty soon the debt totaled up: $25,000 for the car loan, a $100,000+ mortgage and $45,000 in outstanding student loan debt."

Why would someone do this?!

"Oh I have a student loan of 45k, better buy a house!"

If houses are rapidly increasing in price, interest rates are low, and you have sufficient future income expectations, it makes sense to buy a house as soon as you can.

At some point in the early to mid 2000's, almost everyone I knew, as well as almost every financial writer, was telling me that I was insane for not buying the biggest and most expensive house the bank would let me.

real estate speculation can be quite lucrative, but it's all about location. Following that advice in Vancouver for example would have been a great financial move - at least in retrospect.

Perhaps a combination of

- a sense of normality ("everyone else I know does/did it, so will I!")

- a sense of numbness ("I already have 45k in loans, what's another 25k?")

- optimism ("since I went to college, I'll be making more money as I get older and can pay off all of this faster!")

- apathy ("meh, I'll deal with it somehow")

The car loan seems like a bad idea.

If the student loan is low-interest, it probably makes sense to invest your extra money and only pay the minimum on the loan. It's cheap money.

The mortgage may be cheap money too, and can pay off depending on how long they stay in one area. You still need to pay for housing no matter what, and the interest is tax deductible. (This is not an excuse for buying the biggest house you can afford; I mean a lateral move from renting to owning.)

The mortgage interest is not tax deductible in Canada.

Also, taxes are much higher in Canada than in the U.S.

I'm a bit skeptical about this article. I think the bottom line is that he had a bunch of stocks and mutual funds that he's been accumulating since he was a teen.

Most people lack the foresight and advice to do such a thing (God, I wish I'd done it) so this article doesn't really apply to the majority.

I see.

It just shocks me to see how people who make good money still get deep into dept.

Well, maybe it's just that I came from a poor family, where taking any credits was only done by people who are bad with money. I had a student loan of 4000€ and all I wanted to do was pay it as fast as possible.

Many people use credit to buy MORE than they need, and MORE than they can afford. A new car instead of a gently-used car, a larger house that just becomes a sink for their income.

That doesn't mean credit is bad - it can be used as a leverage to do more with less - but people with money problems tend to use both cash and credit badly.

If it was 25k in credit card bills from vacations meals out plus a 5k jetski loan, I'd be tut-tutting too.

Because one needs to consume housing, regardless of financial status. There are basically two ways to consume housing, to buy or to rent. Buying and renting are easily substitutable strategies and thus by basic economics the prices are equivalent except in speculative bubbles (renting is cheaper) and in panic crashes (buying is cheaper). Since the prices are generally equivalent it makes sense to buy a house if one would prefer to not be subject to landlord-externalities and/or if one would prefer to own one's housing outright 30 years in the future, when retirement looms.

None of this has anything to do with student loan debts. They are utterly irrelevant with respect to whether one should choose to buy or rent housing. It only makes a difference as to how much housing one can consume.

You're probably right.

Most of my life I had the impression, that buying a home would be a huge waste of money. Funny thing is, I always saved much money for the future. If I had bought a home, I would probably paid as much per month as I now pay rent AND have money invested for the future, so I could subtract those payments from my monthly savings.

Somewhat unrelated to the article, but trying to work out the math of whether becoming millionaires by the time you're in your 30s is hard or not for a pair of engineering couples in silicon valley.

Assuming graduated when they are both 22 yrs old and worked till 30 years old on a typical software engineer salary (pulled this out of my ass, but let's say 125k) they would have had a total gross income of 2 million. If they save aggressively and invested wisely, this shouldn't be too hard to do?

This is easy payment math. Assuming you start with nothing, your goal is $1M in the bank in 8 years, and you make average stock market returns (7%), you need to invest $7,800 per month ($93k/yr). That's approximately 1/3 of your $250k total pre-tax income.

The capital is there: the question is whether you can live the lifestyle you want in Silicon Valley on $90k/yr. (Assuming Uncle Sam takes ~35% in taxes and you incur no debt otherwise.)

In Excel:

=PMT(0.07/12,L18*12,0,-1000000)

Thanks for actually doing the math! =)

There might be a mistake with the $90k/yr leftover though. If you lose 35% of $250k/yr to tax (87.5k) and need to save $93k each year, then you should only have about $70k/yr left.

This is 5.8k a month to support two people which is barely doable for me personally (according to my past spending trends on mint.com).

I'll blame rounding. :)

It's not easy, but it's doable.

There are other ways to reach a million in 8 years, but this is a pretty sure-fire one.

Care to elaborate? =P

This is going to sound obvious and/or snarky, but:

- Explore other investment types and vehicles (e.g., optimize for cash flow, real estate, increased risk) to accelerate asset growth.

- Make more money somewhere else (including taking advantage of simple stuff like 401(k) matching).

- Assume you're going to make more money later (and save more money later) / get a better job.

- Hope for a huge exit / win the lottery / rich uncle inheritance.

What's the fascination with these articles about how people went from rags to riches?

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