So, I was browsing the Internet and found this article on Bankrate and since I know there are some wealthy BPers on this forum, I thought I would ask what your opinions are. I'm a saving and a believer of a penny saved is a penny earned and have massed a decent sum of money investing in real estate, but I no where close to considering myself wealthy.
"The real key (to wealth) is earning," Siebold says. Unfortunately, if you are making $50,000 per year, it will be nearly impossible to accumulate large sums of money, even if you save all your extra pennies.
"People need to stop always looking at the expenses portion of their budget. … It is usually the shortage of income that gets people into trouble," Cardone says.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
I can't find it now, but I wrote a long post about that topic a couple years ago. I'm a big believer that saving a few bucks here and there (even religiously) isn't a recipe to achieve wealth. Certainly it's a recipe to achieve long-term financial comfort and to ensure that your nest egg continues to grow, but saving isn't going to help you generate shorter-term financial freedom or wealth.
If I have a choice between giving up drinking Starbucks coffee everyday (okay, I don't really like Starbucks, but let's go with it as an example) and figuring out a way I can earn an extra $1000 per year to cover my Starbucks purchases, I'll go for the latter.
The reason being, I'd never waste time striving for an extra $1000 per year -- instead, I'll strive for an extra $50,000 or $100,000 per year. If I miss my goals and only make an extra $20,000 per year, I'm still $19,000 ahead of where I would have been had I just stopped drinking coffee.
Perhaps not the best analogy, but you get the idea. I'm not saying that increased saving is a bad thing (it's a good thing, especially when you're starting out), but increased earning is what generates the big bucks.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
Amassing wealth is not hard. There is no magic. It just takes time and discipline.
If someone entering the workforce at age 20 sets aside just $50 a month the entire time they are in the workforce and does nothing more than buy good low or no load mutual funds with that $50 a month...
They will be a millionaire SEVERAL times over by the time they retire.
The key to amassing wealth starts with living within your means each and every day.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
I can't find it now, but I wrote a long post about that topic a couple years ago. I'm a big believer that saving a few bucks here and there (even religiously) isn't a recipe to achieve wealth. Certainly it's a recipe to achieve long-term financial comfort and to ensure that your nest egg continues to grow, but saving isn't going to help you generate shorter-term financial freedom or wealth.
If I have a choice between giving up drinking Starbucks coffee everyday (okay, I don't really like Starbucks, but let's go with it as an example) and figuring out a way I can earn an extra $1000 per year to cover my Starbucks purchases, I'll go for the latter.
The reason being, I'd never waste time striving for an extra $1000 per year -- instead, I'll strive for an extra $50,000 or $100,000 per year. If I miss my goals and only make an extra $20,000 per year, I'm still $19,000 ahead of where I would have been had I just stopped drinking coffee.
Perhaps not the best analogy, but you get the idea. I'm not saying that increased saving is a bad thing (it's a good thing, especially when you're starting out), but increased earning is what generates the big bucks.
Wholesaler · Salt Lake City, UT · Member since 2009 · 1k+ posts · 401 votes
12y
It is only a part of the total formula and to view it as the whole basis for wealth accumulation is misdirected but the saying is one I have believed in since I was a kid. When you save that penny put it to work earning another penny.
You have all heard that if you could start out with a dollar and double it, and then double that and so on and so on you can end up with a very large pile of money. Real estate is a place where you can double your money if you do it right.
My dad used to say if you want to waste money wait until your rich enough not to miss it.
Amassing wealth is not hard. There is no magic. It just takes time and discipline.
If someone entering the workforce at age 20 sets aside just $50 a month the entire time they are in the workforce and does nothing more than buy good low or no load mutual funds with that $50 a month... They will be a millionaire SEVERAL times over by the time they retire.
That sounds amazing!!! But it is not close to being true. I set up an excel spread sheet and did a 50 year analysis. Assuming a $600/year contribution and an 8% compounded annually after tax rate of return on capital saved, I came up with a total after 50 years of $344,262. I did another calculation increasing the initial $600/year contribution by 4% per year, I came up with a total after 50 years of $595.924. In 50 years a decent new car will probably cost $200,000.
I agree with the general premise of what Cardone says. I do think a penny saved is a penny earned, but it is still just a penny
The historical average performance of the S&P 500 is 12% per year. Any mutual fund tracking the S&P 500 will have that same average performance over a long period of time.
If past is prolog, and it is, then $50 invested each month in a mutual fund tracking the S&P for 600 months will yield $1,952,917 when you make that final $50 contribution in the 600th month.
So, not SEVERAL times over, but TWO times over. I sit slightly corrected.
If you increase that $50 as your income increases, you will do even better.
Time and discipline... the tortoise always wins over the long haul.
The historical average performance of the S&P 500 is 12% per year. Any mutual fund tracking the S&P 500 will have that same average performance over a long period of time.
The only way you can claim a 12% annual return is by starting in 1970, and exploiting the big bull market of the 70s, imo that is not reflective of history, I find this 9.77% pre tax calculation accurate...
But using your 12% number which does not factor in income taxes on gains, I come up with $1,440.011 after 50 years. Using your 12% but deducting 2% for income taxes (so 10%/year after taxes), I calculate $698,345 after 50 years. And by the way, my basing this on a 50 year working timeline is being very generous.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
There are several flaws to your post.
First, the 9.77% return you quote is for the historical S&P 500 AND its predecessor the S&P 90. That is not a valid combination to use for extrapolation.
Second, the author of that page limits his exercise to a maximum of 25 year blocks, over any 50 year period the return will be very close to the 12% mark.
Third, on taxes, you are making a pretty big assumption on the marginal tax rate our hypothetical taxpayer will face over their working lifetime. You are also assuming the ROTH IRA was never invented.
Fourth, the error in your math is you are assuming a single yearly deposit and compounding yearly.
And by the way, I agree, the 50 yr time span is probably not a fate our 20 year old would face if they set aside $50 a month. They would be able to retire LONG before their 70th birthday.
Isn't theory and extrapolation fun?!?
Anyway, it is really kind of moot because the number of people who save in this country is pathetically small. I guess, in a way, I should be happy about that. Otherwise, where would I find employees?
Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes
12y
You need to work both ends against the middle.
Strive for above average earnings and a large savings/investment rate.
Scrimping while earning 50,000 is not going to produce life changing results.
making 150,000 and living a nice american lifestyle can allow you to save or invest 30,000/year. Re-Run Duncan's math with 20,000/year or 30,000/year and see what I mean.
make 200,000 and lease new cars, go on fly vacations and live in 6,000 sqft in expensive areas, and you can end up broke.
Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes
12y
I am a high earner but I have a saver mentality: I like to say that a penny saved is more than a penny earned due to income taxes.
If you 'don't buy a starbucks' - that's $4 in your pocket.
To earn enough to get $4 in your pocket - you probably have to earn $5 or more. So each penny saved is about 1.25 earned.
While $4 or $5 is not much, its the sum of many small decisions that add up to something. My 150,000 example was already a very high earner. Anyone making 70,000 who can live like someone making 45,000 has the opportunity to save a large amount each year, which does add up over time, but it requires years of sacrifice, and I don't want to live like someone earning 45,000. You know its possible, because there are many people who make 45,000 and live OK lives. Many, many people survive on that and find ways to have fun, complete fulfilling lives.
The other advantage of saving and living a frugal lifestyle, is that it reduces the total amount of savings needed to retire AND MAINTAIN YOUR LIFESTYLE.
If you have a 45,000 lifestyle, in theory with a 4% withdrawl rate, a portfolio of only 1,125,000 is sufficient to sustain that lifestyle.
If you are living large with an 80,000 lifestyle - you need 2,000,000 to sustain it.
at 120,000 - you need 3,000,000
So, if you make 65, and live like 45, you can quickly get to 'financial independence'.
If you make 140 and live like 120 (same 20k difference) it will take you much longer to be financially independent.
The 4% safe withdrawl rate is pretty well accepted and has been studied a lot. You assume that you start with 4% of the portfolio, have a diversified stock/bond portfolio and increase your withdrawls based on inflation and the starting 4% number, you don't redo the 4% each year, but you do get inflation bumps.
Udaipur, Rajasthan · Member since 2014 · 10 posts · 1 vote
12y
Yes for a long period of my life I have lived in the mentality that I need to save as much as I can, trust me it isn't fun.
But what happens is that you have finite amount of energy or will power you can either put it earning more money or in saving money.
I have friends who are focused on making more money rather than saving it, they spend lavishly and work hard to earn back more, I also work hard but most of the times my attention is on the saving the money I have earned.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
12y
I am all for discipline and focus. I enjoy planning and detailing a budget and project costs. I will admit that I do not have a monthly budget on paper but do know where my money is going. I know when I work overtime and when I spend a dollar that doesn't need to be. I firmly believe that everyone can gain traction by budgeting and making the money they have work harder for them.
That said I think J Scott nailed it when examining potential. If I make $100,000 this year, I can only save so much no matter how much effoet I put into it. However if I focus instead on building my income, there is no limit. I could increase my income to $125,000 a year or $1,000,000 a year or more. I think folks should manage their money prudently whether they have $100 or a million Dollars which is important but the most potential is in expanding my means not living within them.
Also for those wanting to live within their means, this can be a pretty poor business. Again if I make $100,000 a year and manage to put $20,000 in my bank account at the end of the year I did pretty good. If I make the same $100,000 the next year and manage to save $25,000 of that that is even better. I have been doing the opposite for a while now. If I buy a house every year for $70,000 and finance $50,000, I am spending more than I make each year however this is leading to prosperity. Whomever said you can't spend your way out of debt was not in real estate :)
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
12y
I know :). Somstimes we need to challenge conventional wisdom analyse things from the begining. We develope these sets of beliefs over time and then we extrapolate off of them and lead us to do and say things we really don't believe. For example, I see a lot of folks saying that they will take a new car loan at 1% all day instead of paying cash. They then proceed to give all the reasons why they will be able to make kore on that money but utilizing the cash in more efficient means. I question whether that is really the answer when you have pigeonholed yourself into limited options. I think you need to take a step back and see why you would need to purchase a new vehicle that you would need to consider borrowing to begin with especially if you are so financially savy. Instead of having 2 scenarios where you purchase a $30,000 vehicle and one you finance and the other you don't. Why not buy a $10,000 vehicle a couple years older for cash and still have $20,000 in your pocket and still no payment.
Or like Duncan above. He has a certain belief but made up numbers to prove his point. He might have studied all this 15 years ago and at that time everything he said might be true however his statements on returns and historical dats is not accurate today. Even when we are extremely confident inour beliefs we must review them regularly in order to verify that they still align with today's realities.
SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
12y
The one thing I see over and over on BP, is people saying "I want to start investing but how do I get my down payment",,,,you get your down payment by saving.
When I see something that cost $1k, I see about 10% of what it will cost me to add a house (I figure the average cost for getting in a house with a hard money/traditional financing is about $12k).
It's not like you can't save and try to make more money at the same time,,saving is a mental thing
Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
12y
I'm gonna invest most pennies, because when I leave it in the bank they use it to make money...
Repeat the compounding cycle over and over(RE for me)....keeping $$$$ earning consistently.....Invest 20,000 today compound at 25- 30% annually for about 15 yrs (millionaire) ......very feasible if buying and fixing right...Unlimited!!!
"I have been doing the opposite for a while now. If I buy a house every year for $70,000 and finance $50,000, I am spending more than I make each year however this is leading to prosperity. Whomever said you can't spend your way out of debt was not in real estate :)"
That's not the opposite of saving, that's investing. You are investing 20k and using leverage to add a 70k asset to your balance sheet, and a 50k liability. You are exactly 'saving 20k' when you do that. You are choosing to invest your savings in a property. To invest, you must save first, so you have something to invest.
You are absolutely not 'spending more than you make'.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
12y
david c. I guess it is all a matter of perspective which was an intent of the statement. I could say the same thing with a vehicle or a piece of furniture. If I know what I am doing I could invest in any one of those and make money. If I am wrong or something out my control happens then it is simply spending more than I made. I understand what you are saying however there are a lot of people that lose money by "investing" in real estate just as most people would think I was foolish to think that by buying a $40,000 vehicle by putting $10,000 down and taking a loan for $30,000, that I have made a wise investment on a new lickup truck no matter how much I believe it is a good investment.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
Well, if you take that penny and put it into a long term buy and hold with 20% down you really now get 5 pennies saved! You cant access all 5 pennies until the mortgage is paid off but still not a bad deal!
Real Estate Investor · Tulsa, OK · Member since 2013 · 31 posts · 20 votes
12y
Like @Duncan Taylor posted, it takes time and dedication to create wealth. I view wealth and income separately. Income is what you create now to spend and use to live and wealth is what is created overtime based on how you spent your income. For example, if I save $4 on a starbuck's coffee now, that is money that I can use on other day-to-day expenses. In turn, those savings can be added to my investment capital or it becomes money that I do not have to take from my investment capital. At some point, I have saved up enough money to buy a property. As a result, the savings is returned to me over time, not once but compounded each month of each year as long as I own that property.
This is how I have approached my investments. In the beginning it was slow and I did not feel like I was making any headway. Also, it was tough to save and to do without while our friends and family bought nice cars and went on trips. However, I eventually felt the winds turn and now my investments continue to grow without much additonal help from me. Now, my friends and family are struggling to repay the debts they accumulated and my wife and I are the ones reaping the benefits of our earlier lifestyle.
Also, to say that a person cannot have much of a savings on 50K or less is just an excuse to not make the tough decisions. I have a friend and his parents made 30K a year. They raised him and his sister on 15K and they saved the other 15K. When his parents retired they had saved almost a million dollars. Everyone maybe not be able to do this but saving is just a matter of prioritizing your spending.
Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes
12y
I want the best of both worlds. I want to save a lot pennies and build wealth, but I also want to blow some pennies along the way if I or my family desires. Why do people act like you cant do both? I hear people talk about scraping by all of their life to live comfortably while they are old. Who has a guarantee on how long they will live? I want to be comfortable in my later years and I plan accordingly, but at the same time I am not interested deferring my life for 60 years on the hope that I will get another 30 years. My dad died less than 10 years into retirement and I know he deferred a lot of life. If I want a damn cup of Starbucks coffee, I am going to buy me a damn cup of Starbucks coffee. I don't drink coffee by the way but you get my point :) Even savings should be done in moderation, not just spending.
As for people on the lower income bracket, sometimes I think we judge too harshly. We say they are not savers or they don't want to make tough decisions. I am all for holding people accountable but you have to look at their entire situation in context. We are not all built the same. My wife is a marriage and family therapist and I think it is rubbing off on me, ha ha ha.
Edmond, OK · Member since 2013 · 15 posts · 7 votes
12y
Most of the people I have seen here do not actually save their money. They invest it. Saving money would be throwing 10k a year into your mattress, suitcase in the backyard, or savings account in a bank. Little to no return with a high risk of losing purchasing power due to inflation.
When I turn down a cup of Starbucks coffee, I don't see the $4 as savings. I visualize the piece of real estate I am investing in by not spending the $4.
I am, like @Daren H. , a firm believer in enjoying your upward progress. The snowball method of investing is awesome. Each flip/rental feeds into the next deal, accumulating wealth faster and faster. But you need to think about your end goal.
You're goal should be to invest so that you can work less and enjoy life more. Take a portion of your profit and enjoy life. It doesn't have to be a one month vacation to Cancun after very flip or successful deal. I plan on spending 10% of my profits on myself and reinvesting the rest into the business.
Ask yourself whether you are still focused on the end goal of financial freedom or financial accumulation. The former sets the stage for a fulfilling and happy life. The latter sets the stage for a long working career and a short, fulfilling retirement wherein you have an excessive amount of money and only medical bills on which to use it.