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Want to have a million dollars by age X? [Personal Finance] Thread

Protein ShakesProtein Shakes __BANNED USERS regular
edited April 2010 in Debate and/or Discourse
This is a thread about personal finance. In it, we will discuss what to do with the money we earn so that we can gain financial freedom and live a happy life after our working days are over, and perhaps even open the way for an early retirement.

A lot of the ideas I will be presenting may be familiar to you if you have some exposure to the topic, but the quotes themselves will be taken out of a spectacular book about personal finance, called The Boglehead's Guide to Investing.

Let's start with a short story.
In February 2005, Jack Bogle and a small number of Bogleheads met for an informal dinner in Orlando, Florida. During the course of the dinner, Mr. Bogle mentioned receiving a letter from a Vanguard shareholder some weeks back. The person writing reported that he had been investing since the mid 1970s with Vanguard. Since that time, the value of his portfolio had grown to $1,250,000. But here is the interesting part: He never earned more than $25,000 per year in his lifetime.

Did that get your attention?

You may be asking, "How is that possible? Is he a stock market wizard? Did he have a great advisor? Did he win the lottery? Did he rob a bank? Did he inherit a bundle? Was he just lucky?"

We don't know the person or anything about his investment history. But the likely truth is that he accumulated a small fortune through consistently saving and investing over time. Anyone can do it, although few choose to do it. It turns out that an investment of $601 at the beginning of each month in stock market index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249, 655 in 30 yers. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody.

Einstein said that compound interest is the most important mathematical discovery in human history. But we will get to that later.

The reason most people find the above story so difficult to believe is that our culture tells us that if you don't have a high income, you are doomed to a working class or lower-middle class life. Sure enough, if you take 100 young Americans starting out at age 25, by age 65 only one of them will be "rich" and only four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self-sustain the lifestyle to which they have become accustomed.

I am hoping that this thread will allow you - all of us in fact - to become like those five, so that you don't reach retirement only to find yourself dependent on Medicare, Medicaid, and Social Security.

Start by figuring out your lifestyle. For purposes of simplicity, the Boglehead book looks at lifestyles of three different couples.

The Borrowers
"Forget about tomorrow, let's live for today." That's the creed of Bill and Betty Borrower. It's a financial lifestyle literally built on a house of cards -- credit cards. To the Borrowers, paying cash for almost anything is unheard of. They drive the newest and best cards, wear the latest high-fashion jewelry and clothing, and live in a great big house, all financed by enormous debts. The big house was purchased with little or no money down and the balance is financed with an interest-only, variable-rate mortgage. Similarly, the cars are leased and financed to the max with hefty car loans. And anything that can be charged to the credit cards is charged to the credit cards. To the Borrowers, credit cards are one terrific deal -- almost like free money. Just pay the credit card companies only 2 percent of the balance due each month -- forever. It's one of the first lessons they learned in college.

Bill and Betty are dying to take that luxury cruise that their friends, the Braggarts, took and rave about. Unfortunately, the price is light years past their credit card limits. However, there is a ready source of financing nearby. As fate would have it, Bill and Betty's home has appreciated substantially in a recent real estate bubble. So they simply take out a home equity loan and go cruising. Better yet, since the interest on the loan is tax deductable, part of the money spent to take the cruise is courtesy of Uncle Sam. Isn't America great?

Unless the Borrowers make drastic changes, their financial future is headed over a cliff. Not only are they failing to build wealth, they're building negative wealth, better known as debt. A job loss here, an accident all ilness there, and the Borrowers' high living is history. Cars are repossessed. The mortgage is foreclosed, and they are forced out of their home. They declare bankruptcy, and many of their prized possessions are auctioned off to pay creditors. Friends and neighbors are totally shocked, and remark, "They appeared to be doing so well."

Bill and Betty declare themselves victims of bad luck. The reality is that they robbed tomorrow to pay for today.

The Consumers
Fortunately, most Americans are more responsible than the Borrowers, Instead, their financial lifestyle more closely parallels that of Chad and Cathy Consumer. While the Borrowers spend with a credit card mentality, the Consumers spend with a paycheck mentality. Instead of borrowing to the max, Chad and Cathy spend to the max based on their combined net incomes. They look at their take-home pay, see how much it is, and then go out and buy as much stuff as they can afford. After all, isnt' that why they work?

Like most Americans, Chad and Cathy can't afford to pay cash for major purchases such as a home, a new car, or that big-screen HDTV like the one their neighbors have. When it comes to making a major financial purchase, the buying decision usually boils down to finding the answer to the magic question:

Can we afford the monthly payments?

They never stop to consider how much they are adding to the cost of the purchase or how long they will be paying for it. Details like that just don't interest them. If they can swing the payments, they're buying the goods. Their financial lifestyle is all about earning to spend.

Chad and Cathy have heard about Roth IRAs, where they can accumulate money tax-free for retirement. And both of their employers have 401(k) plans in which the employer provides a company match of any money that they are willing to save and invest on a tax-deferred basis. However, they pass up on the offers of free money and the opportunity to build wealth tax-free. Of course, they would like to save. Unfortunately, there are too many things they need right now: a new car, that big-screen TV, an iPod, a new cell phone with a digital camera, a trip to Disney World, and scores of other life necessities. Their soul may belong to God, but Madison Avenue is in control of their wallet.

About the only good thing you can say for the Consumers' financial lifestyle is that it is better than the Borrowers'. Although Chad and Cathy believe they own their lifestyle, the truth is that they are just renting it. Like the Borrowers, a job loss, accident, or ilness could hold dire financial consequences. Without a cash cushion and a long-term plan for achieving financial independence, they will continue to live a rented lifestyle until they choose to retire, or can no longer work. From then on, they will live a very spartan lifestyle dictated to them by a government bureaucracy.

The Keepers
While most Americans go through life with a credit card or paycheck mentality, a third, very wise group has a different financial mindset. As Ken and Kim Keeper put it, "Debt is deadly, and earning to spend gets you nowhere. The people who reach financial freedom focus on accumulating wealth over time." While others pay attention to their net income, the Keepers are far more interested in their net worth.

The Keepers have no higher income that the Borrowers or Consumers. In fact, they may earn less. But over the course of a lifetime, they will likely have far more money to spend and more work-free years to enjoy it than the other two couples.

What's the difference? It begins with what the Keepers do with money as soon as they earn it. They first thing they do with every paycheck is to make a payment toward their financial freedom. A minimum of 10 percent of their take-home pay is taken off the top to be saved and invested. They eagerly participate in any employee saving and/or matching programs at work. They contribute the maximum legal amount to their Roth IRA accounts every year.

Do they have debts and credit cards like the Borrowers and Consumers? Yes, they do. However, their debts are likely to be in the form of a home mortgage with a payment they can well afford, or a student loan to pay for an education that boosted their earning potential significantly. If they have car loans, they are likely to be for two- or three-year-old cars they purchased and plan to keep for a long time. They know that depreciation in the first few years of a car's life is the greatest cost of owning one. They look for a car that's a good buy, in good condition, and let the original owner take the depreciation hit. As for the credit cards, they use them for convenience and pay the full balance each month without fail.

Are Ken and Kim cheapskates who lead lives of high deprivation in the hope of being rich one day? No, they are not. After setting aside a regular amount each month, they spend most of the money they earn. They wear nice clothes, live in a nice home, dine in fine restaurants, take vacations, and enjoy many of the good things money can buy. They simply realize something that the Borrowers and Consumers either don't know or choose to ignore. By making a long-term commitment and having a financial plan to build wealth over time, the odds are they will always have more money they need, and someday may have more than they want.


Steps To Take Before Investing:
Graduate from the Paycheck Mentality to the Net Worth Mentality

From the time we are old enough to understand, society conditions us to confuse income with wealth. We believe that doctors, CEOs, professional athletes, and movie actors are rich because they earn high incomes. We judge the economic success of our friends, relatives, and colleagues at work by how much money they earn. Six- and seven-figure salaries are regarded as status symbols of wealth. Although there is a definite relationship between income and wealth, they are very separate and distinct economic measures.
Pay Off Credit Card and High Interest Debts

Our hope is that when you calculate your net worth, you have no high-interest debts or revolving credit card balances. However, if you do, you should probably pay them off before you start investing.

We recommend doing that simply because it is the highest, risk-free, tax-free return on your money that you can possibly earn. Credit card balances are the most insidious of all. You might think you are outsmarting the credit card companies when you transfer existing balances from one card to another promising you a low interest rate for the next several months. Don't fall for it. Pay them off. By maintaining a revolving balance, you are making the credit card companies richer and you poorer.
Establish an Emergency Fund

The final prerequisite to investing is to have a readily accessible source of cash on hand for emergencies. Accidents, natural disasters, illness, job loss, widowhood, and divorce can wreak financial havoc. Worse yet, financial emergencies have a way of showing up when least expected. The two ways to minimize their damage is to carry the proper types and amounts of insurance and have a cash-cushion handy in case it is needed.

It is important to start investing as early as you can!

If you start with a single penny and double it everyday, by the end of the month (30th day) you will have $5,338,709. So never underestimate the power of starting with small amounts, as they compound to make people rich.

Let's assume that a child is born today. In order for him or her to have $1 million by the time he or she retires, how much do the parents need to invest everyday? Answer: Only 54 cents. Here is a chart that demonstrate a similar concept.

Amount needed at 8 percent annual return to accumulate $1 million at age 65
Age        Investment Needed
15             $21,321.23
20             $31,327.88
25             $46,030.93
30             $67,634.54
35             $99,377.33
40           $146,017.90
45           $214,548.21
50           $315,241.70
55           $463,193.49
60           $680,583.20

Most people don't have large sums of money to make one-time deposits when they are young, but there is a way around this. If a 25-year old wants to have a million dollars by age 65, it is easily achievable: deposit $4,000 a year to a Roth IRA and get an annual return of 8 percent. At age 65 it will be worth $1,119,124. If the same person waits until age 35, then at age 65 the portfolio will only be worth $489,383. Waiting for 10 years can cost you a shitload of money.

Another example:

At age 25, person A invests $4,000 a year to a Roth IRA for 10 years and stops investing. His total investment: $40,000.

Person B starts at age 35 and invests the same amount per year, for 30 years. Total investment: $120,000.

If both portfolios earn 8 percent average return, at age 65 person A will have $629,741, while person B will have $489,383.

Think about that for a minute. Person B ended up with 22% less even though he contributed 300% times as much money to the portfolio.

Bottom line: start investing early.
THE FOLLOWING "COMMON SENSE" PRINCIPLES WILL LEAD TO DISASTER WHEN APPLIED TO INVESTING

1. Don't settle for average. Strive for the best.
2. Listen to your gut. What you feel in your heart is usually correct.
3. If you don't know how to do something, ask. Talk to an expert or hire one and let them handle it. That will save you a lot of time and frustration
4. You get what you pay for. Good help isn't cheap and cheap help isn't good
5. If there is a crisis, take action. Do something to fix it.
6. History repeats itself. The best indicator of future performance is past performance.
----

You can use this thread to discuss personal finance topics - how to save money and what to do with the money saved. Even if you are still in college you'd do yourself an incredible favor just by educating yourself on this topic, so that when you start working you can immediately do what is necessary, be it pay off debts, establish emergency funds, or start setting aside money for retirement.

Net Worth Calculator
Bogleheads Wiki if you want more education
Best Roth IRA providers

----

Disclaimer 1: Please do not turn this thread into a bitching-fest about taxes, corporations, government, bootstrapping, welfare, or rich people.

Disclaimer 2: I quoted extensively from The Boglehead's Guide to Investing - however the parts I quote dare already available on books.google.com as part of the book's preview, so I am not infringing on copyright. Thank you for your concern though!

Protein Shakes on
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Posts

  • DeadfallDeadfall I don't think you realize just how rich he is. In fact, I should put on a monocle.Registered User regular
    edited April 2010
    Get out of my head.

    Seriously, I was thinking about this stuff today and wondering where I could go to find more information. Thank you.

    Deadfall on
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    xbl - HowYouGetAnts
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  • RichyRichy Registered User regular
    edited April 2010
    Let's assume that a child is born today. In order for him or her to have $1 million by the time he or she retires, how much do the parents need to invest everyday? Answer: Only 54 cents. Here is a chart that demonstrate a similar concept.

    Amount needed at 8 percent annual return to accumulate $1 million at age 65
    Age        Investment Needed
    15             $21,321.23
    20             $31,327.88
    25             $46,030.93
    30             $67,634.54
    35             $99,377.33
    40           $146,017.90
    45           $214,548.21
    50           $315,241.70
    55           $463,193.49
    60           $680,583.20
    

    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    Richy on
    sig.gif
  • KetherialKetherial Registered User regular
    edited April 2010
    but what youre saying doesnt take into account the fact that investments go up and down, not just up, up, up 6-10% per year.

    i made more from the interest payments on my stupid savings account than from my 401(k) investments over the past half a dozen years or so. bleh.

    in the long run, im hoping things will be better. but i read somewhere that for people that turned 65 in these past few years, 401ks and investments actually made less overall than high yield savings accounts. and that doesnt even take into consideration the liquidity of savings accounts.

    Ketherial on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Richy wrote: »
    Let's assume that a child is born today. In order for him or her to have $1 million by the time he or she retires, how much do the parents need to invest everyday? Answer: Only 54 cents. Here is a chart that demonstrate a similar concept.

    Amount needed at 8 percent annual return to accumulate $1 million at age 65
    Age        Investment Needed
    15             $21,321.23
    20             $31,327.88
    25             $46,030.93
    30             $67,634.54
    35             $99,377.33
    40           $146,017.90
    45           $214,548.21
    50           $315,241.70
    55           $463,193.49
    60           $680,583.20
    

    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    No investment guarantees it, but 8% is actually pretty average. You might do worse. You might do better.

    However, the chart exists to demonstrate the point that the earlier you start investing, the better.

    Protein Shakes on
  • SaammielSaammiel Registered User regular
    edited April 2010
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    Saammiel on
  • enc0reenc0re Registered User regular
    edited April 2010
    Shameless plug for Mint. I have switched all my spending to credit cards* and it tracks expenses, nicely categorized, based on the online logins. It also has budgeting functionality. That website has made a huge positive difference in my personal finances.

    *Schwab Bank Invest First and Citi Forward if anyone is curious.

    enc0re on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    I believe the compound annual growth rate of S&P is actually 8.80%. This wiki article has a chart towards the bottom:

    http://en.wikipedia.org/wiki/S&P_500_index

    Protein Shakes on
  • SaammielSaammiel Registered User regular
    edited April 2010
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    I believe the compound annual growth rate of S&P is actually 8.80%. This wiki article has a chart towards the bottom:

    http://en.wikipedia.org/wiki/S&P_500_index

    Looks like the wikipedia figures are nominal growth rates, not real. Really what we probably care about are the real growth rates since it is (roughly, there are a lot of problems with inflation baskets) a more honest indicator of what you need. I'll dig more maybe later.

    Saammiel on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    No, you're absolutely right actually. :)

    Protein Shakes on
  • KetherialKetherial Registered User regular
    edited April 2010
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    the problem is the personal finance calculators and programs that try to encourage you to invest dont take into account that a little bit of up and down is very, very different from a straight line increase in value of +6% every year. and a lot of down 1 year might crush all the value increases you've had in previous years, effectively making you start all over again.

    and the compound interest idea is one that doesnt apply to stocks - it only applies to interest, like from a savings account.

    Ketherial on
  • enc0reenc0re Registered User regular
    edited April 2010
    Real return over 20-year windows is what you want.
    S&P50020-YearTotalChartBig.GIF

    enc0re on
  • YamiNoSenshiYamiNoSenshi A point called Z In the complex planeRegistered User regular
    edited April 2010
    YamiNoSenshi on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Ketherial wrote: »
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    the problem is the personal finance calculators and programs that try to encourage you to invest dont take into account that a little bit of up and down is very, very different from a straight line increase in value of +6% every year. and a lot of down 1 year might crush all the value increases you've had in previous years, effectively making you start all over again.

    Yes, but long run is what matters. Over a period of 30-40 years it averages out. Sure, some years you might do horribly, but you might also do great. There is no rule that says "you will earn X percent every year until you retire", but you're right that most people think along those lines even if they may not explicitly think that way.

    Protein Shakes on
  • KetherialKetherial Registered User regular
    edited April 2010
    Ketherial wrote: »
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    the problem is the personal finance calculators and programs that try to encourage you to invest dont take into account that a little bit of up and down is very, very different from a straight line increase in value of +6% every year. and a lot of down 1 year might crush all the value increases you've had in previous years, effectively making you start all over again.

    Yes, but long run is what matters. Over a period of 30-40 years it averages out. Sure, some years you might do horribly, but you might also do great. There is no rule that says "you will earn X percent every year until you retire", but you're right that most people think along those lines even if they may not explicitly think that way.

    i just worry that it might be misleading.

    like i said, if your 401k matures (i.e. you turn 65) on a really bad down year, you get totally fucked. and who the hell knows if it will be a good year or a really bad down year 35 years from now.

    Ketherial on
  • MrMisterMrMister Jesus dying on the cross in pain? Morally better than us. One has to go "all in".Registered User regular
    edited April 2010
    @ the story in the OP: If you make $25,000 a year, then putting away $600 a month is a huge amount. I get about that amount in fellowship support, and am a pretty frugal person, and after running the numbers it's hard to imagine getting by with that much left over at the end of every month.

    MrMister on
  • LoklarLoklar Registered User regular
    edited April 2010
    This is awesome. I'm happy to see this. Also get out of my head!

    I'm 26 and just drew up a personal budget for myself. I make ~30,000 Canadian dollars a year. But my job is insecure.

    Anyways, here is the budget I drew up. Feel free to shit all over it.

    Rent: 142.50/Week (570 a month)
    Transportation: 30.25/week
    Phone/Internet: 35.00/week
    Savings: 62.50/week (250 a month)
    Groceries: 80.00/week
    Entertainment: 80.00/week
    Extras: 40.00/week

    Total = 470.25

    Now the thing is, with overtime and stuff, I always make more than that a week. In fact, my budget is based off of one of the worst weeks of work I've ever had. So I have a bunch of extra money to 1) Pay down student loan 2) Hoard for stuff I like.

    Anyways, I've turned into a total personal finance nerd. I keep track of all the money I spend and cut costs where I can. IE: I used to buy coffee before work, but if I wait 30 minutes there is always free coffee delivered to work, so I just drink that.

    Advantages of being a nerdlinger:

    -I don't feel weird when paying my huge iPhone bill or 121 dollar metropass because it's in my budget.
    -I don't worry about the future, because part of my budget is accounting for the future.
    -I eat healthier because I bring my lunch to work instead of buying it at the store.
    -I'm often under-budget.
    -I'm probably making the least amount of money in my career. It only goes up from here!

    Disadvantages:

    -It's hard to invest when you've got nothing to start with. I've set up a savings thing with my broker (a family member) but he basically said that he can't start investing until I've gathered a significant chunk of coin.
    -I'm pretty sure I'm going to be charged a % based brokerage fee. If it's 2% that means all those 8% return rates above have to actually be 10%, which I think is probably very optimistic.
    -If I invest myself I could seriously fuck it up.
    -My investor could seriously fuck it up.
    -It would be nice to spend a bit more on rent, and feel freer to to update my clothes, buy a big TV.

    Anyways, overall, I feel good. So I'm excited for this thread.

    On a side-note, I was thinking of taking 1000 dollars and opening a discount brokerage account to see if I could make any money and blog about it. If anyone has any experience in investing personally, I'd love to hear about it!

    Loklar on
  • VeritasVRVeritasVR Registered User regular
    edited April 2010
    One should always un-riskify their portfolio as they age to mitigate any crazyness that may occur right before maturity of their retirement funds. But if you're young, you should go nuts (responsibly) with risk. It's actually risky not to.

    VeritasVR on
    CoH_infantry.jpg
    Let 'em eat fucking pineapples!
  • ThanatosThanatos Registered User regular
    edited April 2010
    The reason most people find the above story so difficult to believe is that our culture tells us that if you don't have a high income, you are doomed to a working class or lower-middle class life. Sure enough, if you take 100 young Americans starting out at age 25, by age 65 only one of them will be "rich" and only four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self-sustain the lifestyle to which they have become accustomed.
    It's worth noting that only 70 or so of those 100 young Americans will actually make it to 65.

    Thanatos on
  • CommunistCowCommunistCow Abstract Metal ThingyRegistered User regular
    edited April 2010

    This is probably the best advice of the thread. If you have something like a computer monitor, don't go out and buy another better one until your old one breaks.

    Similarly if you are at or near a computer 95% of your day you don't need to get an iphone and a data plan.

    CommunistCow on
    No, I am not really communist. Yes, it is weird that I use this name.
  • VeritasVRVeritasVR Registered User regular
    edited April 2010
    Loklar wrote: »
    On a side-note, I was thinking of taking 1000 dollars and opening a discount brokerage account to see if I could make any money and blog about it. If anyone has any experience in investing personally, I'd love to hear about it!

    I did this last year. Took $1000 and invested in a single company when they were at like 18.50/share, and sold it when they were $26.00 two months later. I don't recommend this because you need to time it right twice: guessing the low and the high. Fortunately, I got the low right. Unfortunately, my guess on the high was off, but I'm still glad I sold it when I did. Still, 25% gain in two months isn't bad. A cool $250 was nice but actually $200 after short-term capital gain tax.

    Unless you're a mind reader, stocks are for buy/hold.
    If you have something like a computer monitor, don't go out and buy another one until your old one breaks.

    But how will you research excellent deals and prices on new monitor without a monitor?

    VeritasVR on
    CoH_infantry.jpg
    Let 'em eat fucking pineapples!
  • LoklarLoklar Registered User regular
    edited April 2010
    MrMister wrote: »
    @ the story in the OP: If you make $25,000 a year, then putting away $600 a month is a huge amount. I get about that amount in fellowship support, and am a pretty frugal person, and after running the numbers it's hard to imagine getting by with that much left over at the end of every month.

    This is true but it's a pretty ridiculous scenario anyway. I mean, this pretend person would retire and be able to spend 35,000/year every year until they reached 100. And this doesn't even account for appreciation of the principle. IDK what their real wealth would be, but anyway it would be way higher than what they were earning when they were struggling along when working. So it's an unlikely scenario.

    This person could probably retire at 55 comfortably. With enough money to cover the lifestyle they were accustomed to. Plus there might still be old age pensions in 30 years.

    Loklar on
  • YamiNoSenshiYamiNoSenshi A point called Z In the complex planeRegistered User regular
    edited April 2010
    As an honest post, I need to consider doing something with the money we make. We worked up a rather generous safety net in a savings account that's making 1.7% interest - not bad for a zero risk account - and we both have employer matched 401ks. There isn't even anything left to save up for, except going from condo to house in several years, but we'll easily be ready for that.

    YamiNoSenshi on
  • LoklarLoklar Registered User regular
    edited April 2010
    *snip*
    If you have something like a computer monitor, don't go out and buy another better one until your old one breaks.

    Similarly if you are at or near a computer 95% of your day you don't need to get an iphone and a data plan.

    That's great advice, however I disagree with the iPhone thing. I'm very happy with the money I spend on it.

    It depends on how valuable getting your email no matter what is to you. Also I listen to a lot of podcasts and I don't want to carry around 2 devices.

    Hmm, I could just set my home computer to download all the stuff I like though... Maybe I will dump my iPhone data once the contract is up.

    Loklar on
  • override367override367 ALL minions Registered User regular
    edited April 2010
    Which category is someone in if they don't buy things on payments because after paying the bills they have $0 or sometimes less than $0 left

    override367 on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Ketherial wrote: »
    Ketherial wrote: »
    Saammiel wrote: »
    Richy wrote: »
    One question. Where do you find an investment that guarantees an 8% annual return for the next 65 years?

    The S&P 500 index has a historical real rate of return of between 6-7% per year. Granted, you always need to diversify as you near retirement and that rate isn't 'guaranteed', but it is the best bet you have.

    the problem is the personal finance calculators and programs that try to encourage you to invest dont take into account that a little bit of up and down is very, very different from a straight line increase in value of +6% every year. and a lot of down 1 year might crush all the value increases you've had in previous years, effectively making you start all over again.

    Yes, but long run is what matters. Over a period of 30-40 years it averages out. Sure, some years you might do horribly, but you might also do great. There is no rule that says "you will earn X percent every year until you retire", but you're right that most people think along those lines even if they may not explicitly think that way.

    i just worry that it might be misleading.

    like i said, if your 401k matures (i.e. you turn 65) on a really bad down year, you get totally fucked. and who the hell knows if it will be a good year or a really bad down year 35 years from now.

    This is not a reason to not invest.

    I mean I don't understand what you're trying to say here. If you start saving and investing now, then odds are strongly in your favor. And the earlier you start the better it is. That's all there is to it.

    Protein Shakes on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    MrMister wrote: »
    @ the story in the OP: If you make $25,000 a year, then putting away $600 a month is a huge amount. I get about that amount in fellowship support, and am a pretty frugal person, and after running the numbers it's hard to imagine getting by with that much left over at the end of every month.

    What are your expenses like?

    Protein Shakes on
  • PantsBPantsB Fake Thomas Jefferson Registered User regular
    edited April 2010
    This is a thread about personal finance. In it, we will discuss what to do with the money we earn so that we can gain financial freedom and live a happy life after our working days are over, and perhaps even open the way for an early retirement.

    A lot of the ideas I will be presenting may be familiar to you if you have some exposure to the topic, but the quotes themselves will be taken out of a spectacular book about personal finance, called The Boglehead's Guide to Investing.

    Let's start with a short story.
    In February 2005, Jack Bogle and a small number of Bogleheads met for an informal dinner in Orlando, Florida. During the course of the dinner, Mr. Bogle mentioned receiving a letter from a Vanguard shareholder some weeks back. The person writing reported that he had been investing since the mid 1970s with Vanguard. Since that time, the value of his portfolio had grown to $1,250,000. But here is the interesting part: He never earned more than $25,000 per year in his lifetime.

    Did that get your attention?

    You may be asking, "How is that possible? Is he a stock market wizard? Did he have a great advisor? Did he win the lottery? Did he rob a bank? Did he inherit a bundle? Was he just lucky?"

    We don't know the person or anything about his investment history. But the likely truth is that he accumulated a small fortune through consistently saving and investing over time. Anyone can do it, although few choose to do it. It turns out that an investment of $601 at the beginning of each month in stock market index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249, 655 in 30 yers. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody.

    Einstein said that compound interest is the most important mathematical discovery in human history. But we will get to that later.
    SNIP
    Reason this is a deceptive story: Inflation.

    Median household income in 2005 was ~46K
    In 1975 it was 11,800. Investing 600 dollars a month would have exceeded the post-tax income of the median US household.

    Additionally, in 30 years 1,000,000 will not be nearly enough to retire on. I'm 28. Say I want to retire at 65. Say I put 7500 away a year and I start with 10,000 right now with a 9% annual return. Assuming ~3.1% inflation rate I'll end up with the equivalent of $600K.

    Don't get me wrong. Saving is critical. I pay off my credit card each month, comfortably pay the mortgage on a 350K house and don't spend the rest of frivolous things. But no one got rich by saving and few get rich investing. Income is the key to prosperity, savings and investing just let you maximize the benefit.

    edit
    And MrMister is correct, that if you don't live in your parent's basement an income of 25,000 will rarely if ever allow for a savings of 7200 a year. Assuming no state income tax that's 1/3 of your takehome pay and a 33% savings rate is crazy high

    PantsB on
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  • FeralFeral MEMETICHARIZARD interior crocodile alligator ⇔ ǝɹʇɐǝɥʇ ǝᴉʌoɯ ʇǝloɹʌǝɥɔ ɐ ǝʌᴉɹp ᴉRegistered User regular
    edited April 2010
    I appreciate threads and advice on personal finance but I have to echo MrMister and PantsB in that savings and investing discussions are really only relevant to people whose income is already high. If your income is less than median than you shouldn't be learning about savings or investing, you should be learning some job skill that's going to get you more money per year.

    I'm also tempted to go off a little about how finance talk plays into a conservative mythos in which we blame the victims of economic inequities for their own social status; but I'm not sure if politicizing what is meant to be an advice thread would be particularly welcome.

    Anyway, statements like "If you're making $25,000, you can save X by the age 65" are kind of silly. If you're making $25,000 a year, you need to spend your money on community college tuition and get a medical assistant or actuary certification.

    Feral on
    every person who doesn't like an acquired taste always seems to think everyone who likes it is faking it. it should be an official fallacy.

    the "no true scotch man" fallacy.
  • ThanatosThanatos Registered User regular
    edited April 2010
    Ketherial wrote: »
    i just worry that it might be misleading.

    like i said, if your 401k matures (i.e. you turn 65) on a really bad down year, you get totally fucked. and who the hell knows if it will be a good year or a really bad down year 35 years from now.
    You change your stock profile as you get older.

    If the year you turn 65 is the worst year the stock market has ever seen and it loses 95% of its value, you shouldn't care, because at that point you should be almost entirely invested in T-bills and government-backed bonds.

    Thanatos on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    PantsB wrote: »
    This is a thread about personal finance. In it, we will discuss what to do with the money we earn so that we can gain financial freedom and live a happy life after our working days are over, and perhaps even open the way for an early retirement.

    A lot of the ideas I will be presenting may be familiar to you if you have some exposure to the topic, but the quotes themselves will be taken out of a spectacular book about personal finance, called The Boglehead's Guide to Investing.

    Let's start with a short story.
    In February 2005, Jack Bogle and a small number of Bogleheads met for an informal dinner in Orlando, Florida. During the course of the dinner, Mr. Bogle mentioned receiving a letter from a Vanguard shareholder some weeks back. The person writing reported that he had been investing since the mid 1970s with Vanguard. Since that time, the value of his portfolio had grown to $1,250,000. But here is the interesting part: He never earned more than $25,000 per year in his lifetime.

    Did that get your attention?

    You may be asking, "How is that possible? Is he a stock market wizard? Did he have a great advisor? Did he win the lottery? Did he rob a bank? Did he inherit a bundle? Was he just lucky?"

    We don't know the person or anything about his investment history. But the likely truth is that he accumulated a small fortune through consistently saving and investing over time. Anyone can do it, although few choose to do it. It turns out that an investment of $601 at the beginning of each month in stock market index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249, 655 in 30 yers. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody.

    Einstein said that compound interest is the most important mathematical discovery in human history. But we will get to that later.
    SNIP
    Reason this is a deceptive story: Inflation.

    Median household income in 2005 was ~46K
    In 1975 it was 11,800. Investing 600 dollars a month would have exceeded the post-tax income of the median US household.

    Nothing deceptive about it, if you read it carefully: the story says "the person never earned more than 25k in any given year". It doesn't say he earned a flat 25k throughout his life.
    Additionally, in 30 years 1,000,000 will not be nearly enough to retire on. I'm 28. Say I want to retire at 65. Say I put 7500 away a year and I start with 10,000 right now with a 9% annual return. Assuming ~3.1% inflation rate I'll end up with the equivalent of $600K.

    Don't get me wrong. Saving is critical. I pay off my credit card each month, comfortably pay the mortgage on a 350K house and don't spend the rest of frivolous things. But no one got rich by saving and few get rich investing. Income is the key to prosperity, savings and investing just let you maximize the benefit.

    Income isn't the key to prosperity. If that was so, vast majority of lottery winners wouldn't end up poor.

    Sure, there is a definite link between high income and lots of wealth, but the former does not necessarily lead to the latter, and is also not necessary for it. You don't need a six figure salary in order to retire financially independent.
    And MrMister is correct, that if you don't live in your parent's basement an income of 25,000 will rarely if ever allow for a savings of 7200 a year. Assuming no state income tax that's 1/3 of your takehome pay and a 33% savings rate is crazy high

    That's why I asked him where he lives. Depending on cost of living it is actually quite possible in some states.

    If he lives in Bay Area, Manhattan, SoCal, Seattle etc. maybe not so much.

    Protein Shakes on
  • SavantSavant Simply Barbaric Registered User regular
    edited April 2010
    You need to be careful and put quite a bit of thought into what you are going to do when investing, and what sort of appetite for risk you have and what sort of timeframe you are dealing with. As recent history shows, the markets can go absolutely insane in both down and up directions, and we're still in an economy that has very weak fundamentals that has heavy private and public manipulation.

    If you bought into the S&P 500 or the Dow Jones Industrial average at the trough of the financial meltdown, you could have made a roughly 50% return on your investment in a pretty quick amount of time. However, if you bought at the peak before the meltdown you would be down and lost a decent amount of money.

    We're in an environment where there's a strong push and pull on inflationary and deflationary tendencies, with the Federal Reserve ramping up the virtual printing presses to try to offset the implosion of the real estate markets in the US and abroad and the destruction of money and demand as more and more people are broke and defaulting on their debt. Short term interest rates are really low, and the stock market might simply be inflating into another bubble that will pop god knows when, so planning on getting an steady 8% return is extremely optimistic.

    That being said, with debt and interest being centered around the exponential function, borrowing too much can crush even with a high income, and investing and lending over time can make you stupid rich. Having a grasp on the math behind it can be the difference between being financially independent or getting wiped out when struck by misfortune. Just make sure you don't jump blindly into the stock market or do something like buying up Greek bonds or mortgage backed securities without really understanding what the hell you are doing.

    Savant on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Feral wrote: »
    I appreciate threads and advice on personal finance but I have to echo MrMister and PantsB in that savings and investing discussions are really only relevant to people whose income is already high. If your income is less than median than you shouldn't be learning about savings or investing, you should be learning some job skill that's going to get you more money per year.

    Investing in oneself is still investing. I didn't talk about it in the OP but the book I quoted covers that topic as well.

    My bad on that one, but the OP can only be so long.
    I'm also tempted to go off a little about how finance talk plays into a conservative mythos in which we blame the victims of economic inequities for their own social status; but I'm not sure if politicizing what is meant to be an advice thread would be particularly welcome.

    No one does any blaming, but you're right that one of my disclaimers says please don't turn this into a political thread.

    Protein Shakes on
  • ThanatosThanatos Registered User regular
    edited April 2010
    When you talk about an 8% average return, that's actually fairly conservative; it assumes you have a very high risk profile when you're young, with a much higher return until you turn about 40-45, and slowly reduce your risk until at about 60 or so you're probably only pulling in 3-4% per year.

    Thanatos on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Thanatos wrote: »
    Ketherial wrote: »
    i just worry that it might be misleading.

    like i said, if your 401k matures (i.e. you turn 65) on a really bad down year, you get totally fucked. and who the hell knows if it will be a good year or a really bad down year 35 years from now.
    You change your stock profile as you get older.

    If the year you turn 65 is the worst year the stock market has ever seen and it loses 95% of its value, you shouldn't care, because at that point you should be almost entirely invested in T-bills and government-backed bonds.

    Entirely true. I'd say that the reason so many almost-retired people suffered is that they were taking way more risk than they were supposed to for their age group.

    Which is exactly why it is important to educate oneself about these kinds of things.

    Protein Shakes on
  • Protein ShakesProtein Shakes __BANNED USERS regular
    edited April 2010
    Also
    Feral wrote: »
    Anyway, statements like "If you're making $25,000, you can save X by the age 65" are kind of silly. If you're making $25,000 a year, you need to spend your money on community college tuition and get a medical assistant or actuary certification.

    Well yeah, no one is making such a promise here.

    All that is being said is: save as much as you can and try to start investing it as early as you can, and you will stack the odds in your favor.

    Protein Shakes on
  • CantidoCantido Registered User regular
    edited April 2010
    Was expecting more "Dude with Suit Covered in Question Marks"
    the-riddler2.jpg

    Cantido on
    3DS Friendcode 5413-1311-3767
  • PantsBPantsB Fake Thomas Jefferson Registered User regular
    edited April 2010
    PantsB wrote: »
    This is a thread about personal finance. In it, we will discuss what to do with the money we earn so that we can gain financial freedom and live a happy life after our working days are over, and perhaps even open the way for an early retirement.

    A lot of the ideas I will be presenting may be familiar to you if you have some exposure to the topic, but the quotes themselves will be taken out of a spectacular book about personal finance, called The Boglehead's Guide to Investing.

    Let's start with a short story.
    In February 2005, Jack Bogle and a small number of Bogleheads met for an informal dinner in Orlando, Florida. During the course of the dinner, Mr. Bogle mentioned receiving a letter from a Vanguard shareholder some weeks back. The person writing reported that he had been investing since the mid 1970s with Vanguard. Since that time, the value of his portfolio had grown to $1,250,000. But here is the interesting part: He never earned more than $25,000 per year in his lifetime.

    Did that get your attention?

    You may be asking, "How is that possible? Is he a stock market wizard? Did he have a great advisor? Did he win the lottery? Did he rob a bank? Did he inherit a bundle? Was he just lucky?"

    We don't know the person or anything about his investment history. But the likely truth is that he accumulated a small fortune through consistently saving and investing over time. Anyone can do it, although few choose to do it. It turns out that an investment of $601 at the beginning of each month in stock market index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249, 655 in 30 yers. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody.

    Einstein said that compound interest is the most important mathematical discovery in human history. But we will get to that later.
    SNIP
    Reason this is a deceptive story: Inflation.

    Median household income in 2005 was ~46K
    In 1975 it was 11,800. Investing 600 dollars a month would have exceeded the post-tax income of the median US household.

    Nothing deceptive about it, if you read it carefully: the story says "the person never earned more than 25k in any given year". It doesn't say he earned a flat 25k throughout his life.
    First you are missing the point. "Only" 25K income in 1975 was the equivalent of a $120,000 income today. In 1975 dollars, putting 600 away a month is the equivalent of putting $1500 a month.

    Secondly, "Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000" implies that 25K income in order to show that such a savings rate is manageable. Never mind that its not at 25K, but it certainly doesn't become moreso as income goes down.
    Additionally, in 30 years 1,000,000 will not be nearly enough to retire on. I'm 28. Say I want to retire at 65. Say I put 7500 away a year and I start with 10,000 right now with a 9% annual return. Assuming ~3.1% inflation rate I'll end up with the equivalent of $600K.

    Don't get me wrong. Saving is critical. I pay off my credit card each month, comfortably pay the mortgage on a 350K house and don't spend the rest of frivolous things. But no one got rich by saving and few get rich investing. Income is the key to prosperity, savings and investing just let you maximize the benefit.

    Income isn't the key to prosperity. If that was so, vast majority of lottery winners wouldn't end up poor.

    Sure, there is a definite link between high income and lots of wealth, but the former does not necessarily lead to the latter, and is also not necessary for it. You don't need a six figure salary in order to retire financially independent.
    And MrMister is correct, that if you don't live in your parent's basement an income of 25,000 will rarely if ever allow for a savings of 7200 a year. Assuming no state income tax that's 1/3 of your takehome pay and a 33% savings rate is crazy high

    That's why I asked him where he lives. Depending on cost of living it is actually quite possible in some states.

    If he lives in Bay Area, Manhattan, SoCal, Seattle etc. maybe not so much.

    I don't mean this to sound condescending, but how old are you? Real life comes with expenses. My household income is 6 figures. I save more than 600 a month, but I then have to spend it on things - my wedding in the fall, home repairs and renovation, kids someday, a car when my current one dies, etc. The idea that anyone can manage a 33% post-tax savings rate with a 25K income for any non-trivial amount of time is ... naive at best.

    PantsB on
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    QEDMF xbl: PantsB G+
  • LoklarLoklar Registered User regular
    edited April 2010
    Thanatos wrote: »
    Ketherial wrote: »
    i just worry that it might be misleading.

    like i said, if your 401k matures (i.e. you turn 65) on a really bad down year, you get totally fucked. and who the hell knows if it will be a good year or a really bad down year 35 years from now.
    You change your stock profile as you get older.

    If the year you turn 65 is the worst year the stock market has ever seen and it loses 95% of its value, you shouldn't care, because at that point you should be almost entirely invested in T-bills and government-backed bonds.

    Entirely true. I'd say that the reason so many almost-retired people suffered is that they were taking way more risk than they were supposed to for their age group.

    Which is exactly why it is important to educate oneself about these kinds of things.

    It should be part of every highschool curriculum. And not a joke class either, everyone should have to take like 2 years of it.

    It'd be good for the economy and social welfare.

    Loklar on
  • LoklarLoklar Registered User regular
    edited April 2010
    PantsB wrote: »
    I don't mean this to sound condescending, but how old are you? Real life comes with expenses. My household income is 6 figures. I save more than 600 a month, but I then have to spend it on things - my wedding in the fall, home repairs and renovation, kids someday, a car when my current one dies, etc. The idea that anyone can manage a 33% post-tax savings rate with a 25K income for any non-trivial amount of time is ... naive at best.

    But you're still saving over 600 a month. So you'll still hit that 1,250,000 dollar mark. And because you make 4X more than 25,000 you'll have lots of money for weddings, kids, vacations...

    I think what it comes down to is that the 25,000 income example is just a really, really terrible example. Firstly, nobody's income is ever that linear, people make more money as they get older, it doesn't account for inflation, the person retires at a much higher standard of living than they were living when they were working...

    etc.. etc..

    It's just a really really silly way of illustrating the point.

    Loklar on
  • DibsDibs Registered User regular
    edited April 2010
    Question about investing (semi-posed before on H&A):

    I'm about to graduate with an MSc and have accrued ~$25000 in student debt (through OSAP, an Ontario-government run thing up in Canada). Should I pay off the entirety of this debt before setting up some investments? At which point should I start investing / stop putting all my disposable income towards paying off the debt? Opinions? Advice?

    Dibs on
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