Building Wealth

[jschembs]

For the guy who asked, my post was similar to Nate's but not near as eloquent.

 

I think he's right, though. It really depends on what you find enjoyable, but if you think there's any chance 20 (30, 40) years from now that you're going to look back on the nights you spent reading 10-Ks instead of taking your wife out, playing with your kids, seeing friends, etc. and regret it, then you need to reassess your priorities.

 

Let's be honest. Looking up individual investments for selection can be time consuming, and there's a very good chance that you won't beat the market. And even if you do, there's an even better chance that it won't be enough to justify the opportunity cost of your time. Time is a very valuable thing - once it is spent, you can never get it back.

 

I think most people would be better off financially and emotionally just putting their investable money into index funds or giving it to a manager whose processes you think are sound. Odds are good you'll detract value, and if you add value... well what does it matter if you retire with $2 million or $20 million, really.

 

Frills aside, you'll do just fine on either amount... so is it really worth dedicating a portion of your life to the extra? For some of you, maybe. But for many of you, I wouldn't be surprised if you come to regret it. And that's if you're successful at adding value. If you look back and find that all those hours were a waste? Well, that'll be a real bitter pill to swallow.

 

That said, if you genuinely find this fun, have at it. Just don't forget that as far as we know, life is finite. You only get to spend each day once. So spend it wisely.

 

Scott great points.  There is a cost to anything we do.  Investing can take time from family, or from a job, or whatever.  I've known people in terrible marriages that can't stand their kids, so staying at work until everyone was asleep was their escape.  To them there was zero opportunity cost to being a workaholic, they hated every other aspect of their life, work was better.  But for others that isn't always true.

 

I worked a job where we had to stay until 10-11pm every Tuesday.  To all the investing martyrs on here working 80 hours a 45 hour mandatory week sounds like a walk in the park.  But when everyone else is only doing 40 that extra five hours sucked.  Especially because most weeks we had nothing to do, so I sat captive in the office all night.  At the time I wasn't married so it wasn't terrible, I just sucked it up and went with it.  I had co-workers with families and kids and it was much more stressful for them, sitting around doing nothing because we had to.  That was part of the cost of the job, if you wanted to work at this place that's what you did.  On a side note companies that make you stay late on Tuesdays have lots of fire drill emergencies at other weird times.  I ended up working a lot of weekends and other nights as well, and eventually the cost was too much and I left.

 

Investing is the same.  For many on here those Tuesday nights have zero cost.  It's either reading 10-K's or watching TV.  I'd say the 10-K is worth it in that situation.  But it's not always clear cut like that.  Family or work obligations can happen as well.  Then there's a real cost, do you focus on investing or spend time with an ailing parent?  In the long run monetarily investing works out, but you can't get time back.

 

Dshachory made the point that those here in their 20s want to enrich their lives.  I agree, I'm here for the same reason.  But don't let the goal blind you to life.  I've met a few people who are so singularly focused on getting rich and retiring that they miss life.  Not to get philosophical or anything, but no day is guaranteed.  When you're young you'll live forever.  Kids aren't supposed to die etc.  I understand this thinking fully, I lived it.  What changed it was an incident with one of my kids when they were 6-mo old.  They were on the hinge of death and I was keeping them alive by breathing for them.  We had a scary stay in an ICU, but thankfully he's fine.  But that morning was like any other morning until suddenly it wasn't.  How many people are living ordinary lives until suddenly one morning they find out they have cancer?  It took a scary event to wake me up so to speak, but my hope is that others can realize it without going through something similar themselves.

 

I guess my rambling point is that you don't need to invest or have money to be rich.  If you're alive and healthy you're rich, enjoy that.  I have relatives who put off life until they were older only to find they weren't healthy enough to enjoy their savings.  I had a relative suddenly wake up with cancer and a few months later they were dead.  They were very young with a kid, things like this happen.  Everything is normal until it isn't.

 

So to piggy back off Scott really take a deep look and consider what your goals are in life.  Like I posted earlier you can work, save 15% in index funds and do quite well.  Is the time spent investing taking away from something else that's better?  Is having $3m vs $4m when you're 70 going to make much of a difference? 

 

Let me put it another way.  What could you buy with the extra money from your job or extra time investing that would be worth more than whatever else you'd be doing with that time?

 

Love reading Nate; underrated and understated man.

[frommi]

What fun is living if you have to cut every unnecessary expense?

 

Unncecessary for me are things that don`t have value to me but cost money.

Having a Porsche or a big luxury apartment are only status symbols that are there to impress others and show my status to them. They don`t give happiness or fun. In my case it was quite the opposite, the big apartment was cold in winter and hot in the summer, so that i had to run air conditioner in the summer and my heating bill for the winter was extraordinary. I paid more on energy than for food, and cleaning the apartment always took a lot of time. Is that smart or fun? The car looked great, but its utility was marginal, i couldn`t even transport a bike and for every visit in the garage i had to work 4-5 days to make the money back.

 

My time and freedom to live where and how i like are so much more worth in the long run.

I have someone in my family who earns nearly the same money and spends 95% of that on gadgets, a big house, two cars etc. But he has to work 10-12 hours a day and retires at 70 without having time for family and friends. Is that what you call living a life?

 

Its living by your inner scorecard vs. the outer one. I prefer the inner one.

[tombgrt]

This is really the heart of the issue, learn to save, make it automatic and learn to live on less.

 

Anyone who doesn't know how to save runs out of money quickly, look at pro athletes, entertainers etc.  They have giant salaries coming in and huge expenses going out. 

 

Head over to Bogleheads.org, that place is filled with average people who learned to save and are all wealthy as a result.  Most just have normal jobs, engineers, doctors, managers, etc.  Some inspiring stories there as well, people who never made more than $50k who have close to a million saved and retire early.  If you learn to live on less you can quit earlier.

 

Thats probably the most reliable way to get rich. The moment you realize that spending doesn`t make you happier is the key to get wealthy. Save 50-80% of your income and you get rich fast, especially when combined with above average investing. I see money as my time, so i want to spend my time/money as efficient as possible.

 

For me the key was finding http://www.mrmoneymustache.com/ and www.earlyretirementextreme.com 4 years ago. After that i got rid of my big car, switched into a smaller apartment and slashed every unnecessary expense. I am near the finishing line already and can work for fun.

 

What fun is living if you have to cut every unnecessary expense?

 

Wasn't it Buffett (Watsa?) that said he wouldn't bet the farm on something if there was even a 1 in 100(00...) chance he lost it all?  Why wouldn't the same be true for life? Once you're 20, you have a yearly chance of 0,1% of dying or 1 in 1000 and that number grows rapidly as you grow older. Do you really want to risk not having any fun with your money before you die?

 

It's all fine if you're like Buffett who gets all his happiness out of investing, doing business and getting richer but almost no one is like that. Sure, you don't "need" anything past the basics, but buying those things experiences actually shapes your life in a big way. There aren't a lot of trips, restaurant visists, drinks with friends, day at [insert anything fun to do that costs money], ... that I would return for more money.  I'm sure a lot of extremely frugal people realize this as they get older after which they start to spend more. I saw it happening for the last 15-20 years with a family member and it has been great to see!  :)

 

Where did he say he stopped living? He said he got rid of his big car and lives in a smaller apartment. He cut the two biggest expenses anyone has right in the fat. Seems quite reasonable to me.

 

I literally repeated what he said??

[innerscorecard]

Nate, I really enjoyed your last post. I already said before that I really enjoy your writing because it's not just about stocks, even though stocks and investing are the core of what you write. I think it's like a lot of the best writing in general, which really concerns everything in the world and the human condition, even though its supposedly about just one topic.

[innerscorecard]

I'll say that I've never regretted a single minute I've spent on learning about investing and investing, even though it's considerable, but I've always hated having to spend almost every day (and many nights) in an office, separate from my spouse, who is slaving away in another office, instead of doing the many things in the world that we love, together.

[orthopa]

I am a product of the hard work/save aggressively route. Sprinkle in some slightly above average investing and financial decisions and its hard to go wrong.

 

Outside of going into a personal finance discussion on the simplest level debt is bad and appreciating assets are good. Its very hard to become wealthy when you have monthly obligation essentially stealing from your compounding future. For some reason it always seems easier to "invest" in negative compounding structures then positive ie, credit cards, student loans, mortgage, cars etc. One could argue student loans aren't negative but there are plenty of students that would argue otherwise.

 

A higher starting point ie high salary, inheritance, etc makes it much easier to get the ball rolling but as mentioned many have started with negative net worth (myself) and turned the ship around. I would say the level of lifestyle you choose to live and your happiness with that will play a very large role also.

 

IMO if you make it a priority in your life you have already taken a big step IMO.

[bargainman]

This is certainly a very thought-provoking discussion with many good points. It reminds me of the old quote "Success is getting what you want. Happiness is liking what you get”

 

As usual there is this balance of delaying gratification versus enjoying the now. I like the fact that somebody brought up the actuarial tables which tell you how likely you are to die at any age. You can certainly look these up on the Internet. I have a friend of a friend who does skydiving and engages in a number of other risky activities. His general premise is that he could die tomorrow so he may as well enjoy life.

 

The problem of course is that he is optimizing for the most unlikely scenario, which by definition means he is not optimizing for the more likely scenarios. In other words he doesn't save as much as he could or should, should he want to have children or buy house or retire etc. Those are all the more likely scenarios. In addition he increases his likeliness of death by engaging in those risky activities.

 

Speaking of actuarial tables and probabilities....

 

Nassim Taleb often writes about how it is not just about the probabilities but also about the magnitude. So if you have a very small probability event but the results of that event could be highly catastrophic or of very large magnitude, then you need to consider that in the equation and build resilience into your plan.

 

Obviously death and illness are very large magnitude events, so just because there is only a .5% chance of you dying in the next year or getting sick with a horrible disease, you probably want to consider the magnitude when creating your probability plan or decision tree as I believe it is called in many an MBA course.

 

The other thing that hasn't been mentioned in this thread so far is the concept of compounding. You can create yourself a very simple compounding spreadsheet in Excel or Google spreadsheets. you can have one column for money saved that year, another for money earned from investments, and obviously another for the value of your investments that year. Depending on your inputs, what you will find is that after a certain stage, pretty much around the million mark or maybe a little bit above, the value of the money earned on your investments starts to quickly eclipse the amount you will be able to save. This is obviously simple compounding at work and if you are here you are very likely familiar with the concept. I do suggest that you create your own spreadsheet just to see the effect.  once you hit about 2 million you'll start seeing also that the growth in your investments will even start eclipsing your salary.

 

In any case my main point is that if you are able to save a lot early, that will certainly have an outsized impact later in life when your investments have compounded and have reached a certain threshold. So I do believe some extra sacrifice is worth it early on. I would also contend that doing so is good practice, both from a mind control and discipline perspective, and also just from the point of view of learning to enjoy life without needing materialistic things.

 

So this discussion has taken many turns but let me get back to the original posters original question. Personally my route has been getting into a career where my job was in high demand and well-paying. Making sure that I was good at it and also at ancillary skills. In particular I believe, and it seems that Warren Buffett always talks about this, that the social skills are pretty important. In other words that Dale Carnegie course keeps talking about.

 

I read an estimate that young people today apparently are going to have anywhere from 5 to 7 different careers. If you want monetary freedom, I would suggest that you pick a career that will not make you miserable, that hopefully will make you reasonably happy, that is in demand and high paying.

 

There is often this debate about following what you are passionate about. But there's a lot of research showing also that you end up enjoying those things which you are good at. And you end up being good at something that you spend a lot of time mastering. I do personally believe that there is some relatively small percent of the population who is very passionate about a particular subject and they should follow that career regardless of monetary consequences. However there are many others could be many different things. If you're one of those and I believe the majority of people are, then it would be a good idea to pick something that will give you ancillary benefits.

 

[berkshire101]

I remember reading The Millionaire Next Door and the author said that on average it takes a person 12-20 years to reach their first million.  Success does happen overnight, but that's usually the result of 10 or so years of hard work.  Slow and steady right?  I think we often have this lottery mentality due to media bias who report overnight success stories. 

[innerscorecard]

The funny thing is how many people actually work in something resembling finance or investing and still really don't get it with regards to their personal wealth. Many are slaving away even when they're not tap dancing to work, and they don't actually have to.

 

And yet many ordinary people without the same background do get it. (Obviously, I'm not saying more ordinary people get it, but the very fact that some in finance don't get it and some people not in finance get it is interesting to me.)

[Morgan]

The funny thing is how many people actually work in something resembling finance or investing and still really don't get it with regards to their personal wealth. Many are slaving away even when they're not tap dancing to work, and they don't actually have to.

 

And yet many ordinary people without the same background do get it. (Obviously, I'm not saying more ordinary people get it, but the very fact that some in finance don't get it and some people not in finance get it is interesting to me.)

 

This is so true. It just seems that some people have the propensity to save and create wealth and others simply do not regardless of their industry. Quite interesting psychologically. Has anyone come across a study that tries to explain why?

[NewbieD]

 

For me the key was finding http://www.mrmoneymustache.com/ and www.earlyretirementextreme.com 4 years ago. After that i got rid of my big car, switched into a smaller apartment and slashed every unnecessary expense. I am near the finishing line already and can work for fun.

 

Same exact sources inspired me. Congrats on your progress. For me it's got a bit delayed bc of marriage and a baby on the way, but should be good in <10 years with current income and average investing. We got a house this year but are renting out ~1/3rd of it.

[Liberty]

Most just have normal jobs, engineers, doctors, managers, etc.

 

Am I the only one who raised an eyebrow reading that line?

 

Guess we don't come from the same background. If being a doctor or an engineer is merely normal, what's a good job? Does that start at the C-suite level?

[karthikpm]

Most just have normal jobs, engineers, doctors, managers, etc.

 

Am I the only one who raised an eyebrow reading that line?

 

Guess we don't come from the same background. If being a doctor or an engineer is merely normal, what's a good job? Does that start at the C-suite level?

 

You are not the only one.. This board has a cohort of people with high levels of education and people that are proponents of value investing. That is a pretty small subset of society...

[innerscorecard]

CoBF, where 10% a year is "brutal" and being a doctor is a normal job!

[oddballstocks]

Most just have normal jobs, engineers, doctors, managers, etc.

 

Am I the only one who raised an eyebrow reading that line?

 

Guess we don't come from the same background. If being a doctor or an engineer is merely normal, what's a good job? Does that start at the C-suite level?

 

Ouch!  I write to the audience, figured most on here have white collar jobs.  I included 'manager' as a way to encompass all of the cube-jockey's out there.

 

In terms of background I'm not sure where you come from.  But my family lineage is solidly blue-collar (or below) with a recent escape to the white-collar realm in my parents generation.  When people ask about my family I like to point out that everyone in my immediate family (myself included) has been in a union at some point. 

 

The brutal truth is this, for most working hourly wage jobs building wealth isn't on their radar.  For many earning below the median income building wealth is a dream, most of their wages are just going to keeping their life running.  The math on saving works for anyone.  The problem is if you're earning $15/hr that's $30k a year and if you save 15% you'll have a pre-tax income of $25,500.  That's tight to live on if there were no taxes, after-tax it's extremely difficult.  I'm sure it can be done, and there will probably be someone in this thread who pops on to say they're a millionaire and never earned more than $30k, but it's tough.  That extra $4500 is necessary for most at this income level.

[Liberty]

No problem with writing to the audience, and I wasn't trying to claim street cred or anything.

 

I just thought it was weird calling those "just [...] normal jobs" (the "just" made it even worse) when they are in fact pretty much what most people would think of if you asked them to list really good, high-paying jobs.

 

IMO you could have used the same jobs as examples without calling them that and it would have been fine.

[pocoapoco]

To add to what Scott and Nate have said, it seems that there is are two utilities to compare, that of your time, and that of the benefits of working/investing, which change depending on what stage of life you are in.

When you are young, there is a high value to working hard and saving, because from an investment standpoint you gain from future compounding of money earned now, and from a career standpoint, working hard can position you well in your career path.  As a young person, you are weighing these massive benefits largely against "leisure time".

Later, when you are older, especially if you get married and have kids, there may be less marginal payoff for working the long hours.  You already have accumulated some wealth, and likely have some status and experience in your job.  Any wealth you may gain from the additional hours spent now may add to your bank account but not in a way that would significantly change your lifestyle.  At the same time, the utility of your time has gone up dramatically because your children really want to spend time with you, and you want to spend time with them; you may be sort of a hero to them and that won't last forever.  Even if you don't have kids, you might realize that your days as a healthy active person are finite, and it would be cool to do some of the adventures like climb a mountain or whatever that would be better done while you've still got your vitality.

So I don't think it's black and white about living your whole life like a monk or not - the right balance will certainly change in different stages of your life.

 

 

[innerscorecard]

The problem for most people seems to be is that those very personal characteristics that build wealth also make it hard to enjoy it.

[Morgan]

The problem for most people seems to be is that those very personal characteristics that build wealth also make it hard to enjoy it.

 

Seriously.

[grasshopper]

For those on this board who are still young, single, and wanting to travel AND get to a million $ net worth quickly (10 years or less):

 

Get a job in the middle east and/or offshore, preferably one with no income tax, and preferably a professional job with uplifts and a rotation

 

You will generally earn huge hourly rates, especially with uplifts and overtime. For US citizens 90K per year is tax free if you are living in a no income tax country. You will not be spending ANY money pretty much, because you will live in a camp with food and housing

 

Practice value investing, as per this board, use generous amounts of smart leverage, as shown on several threads. Max out ALL your retirement plans, 401K, ROTH, etc.

 

Make sure you buy a property in your home country to rent out while you are away, preferably in a low tax state (Florida, Texas, etc). Use a mortgage of course, show your inflated salary. The interest deductions will also come in handy for any income above the 90K limits

(you can skip this if you REALLY believe in your security investing abilities, but you are missing out on being able to obtain a huge amount of leverage to get a property/multi-unit property that you wouldn't otherwise be able to qualify for because of your highly inflated salary)

 

Your rotation will allow you to travel for 2 weeks every 8 weeks or some other combo. Usually airfare paid by company. Travel somewhere cheap like SE Asia if you REALLY want to squeeze every penny. But generally, travel is cheap when you are starting from the mideast to most of the Eurasian continent. You just have to be willing to stay away from your home country. Great way to pretty much see the whole world. You will also have much more vacation time per year than your peers back home.

 

Generally, doing this and with the right investments, you will probably have a million (or at least a ton of money for your age) in net worth in a several years depending on other factors, in addition to getting to see pretty much the whole world

 

CONS: (HUGE factors)

 

Isolation - your peers will largely be roughnecks, non college educated, and/or east-pats from developing countries who will drive you CRAZY during each rotation. Luckily, there is the internet and skype....but I shit you not...this is like prison

 

Lifestyle - You will be earning CRAZY amounts of money and the above factor will tempt you to go crazy on women/booze/activities/etc on your R&R. VERY difficult to suppress (humans all need to let off some steam) Most of your peers will have fallen into this trap and as a result, can never go back to a normal paying job due to this lifestyle inflation, especially if they find a gold-digging girl on one of their R&R trips.

 

That being said, this is a very viable plan to reach a net worth of $1 million AND see the world while you're at it for

YOUNG, SINGLE, ADVENTUROUS, STRONG WILLED persons who can keep to the plan.

 

The tax benefits combined with the huge $/hour wages are the reason why your net worth can increase so quickly. In addition, while in this mode of work, you can put MUCH more money to work in your portfolio and handle MUCH more leverage without even blinking. By the end of it, you will probably also be comfortable living overseas and have no problem living in a lower cost country to really stretch your net worth.

 

Again....YOUNG, SINGLE, ADVENTUROUS, STRONG WILLED

 

Just food for thought for younger readers who might be interested in this kind of lifestyle...It IS fun and rewarding AND exciting at times as well.

 

Also just for reference....these sort of jobs are getting less and less lucrative as the years go by due to globalization. Lots of eastern expats taking over many of these jobs for less.

[Liberty]

grasshopper, is this what you did/what you are doing?

[jawn619]

The problem for most people seems to be is that those very personal characteristics that build wealth also make it hard to enjoy it.

 

#profound

[grasshopper]

This was my plan. However, I was derailed from the beginning because of one of the requirements. I was not single and had a girlfriend before I went on my assignment.

 

In the end I lasted about 2 years. Didn't get to the million but I got to travel a lot with my girlfriend. 40+ countries. Ended up with a pretty good net worth for my age. Now living semi retired in SE Asia with my gf. Have a lot more time to read. Loving it.

 

I came to realize though. Net worth doesn't mean much if your life has no mother meaning. You are just staring at some number on a computer screen and then just trying to compare it against others. Very unsatisfying.....

 

I much more enjoyed the travel. Probably sacrificed a potentional few millions in future net worth to travel as much as I did (I didn't just go to low cost countries) but I wouldn't trade it back for a second.

 

Then again I love to travel. Value investing has let me do a lot with my life. For me it is a means to an end, but it helps that I find it interesting and I love reading history.

[Haasje]

I didn't go checking research but from memory there probably is not a great causal relationship between spending and happyness. I think there isn't one with making a lot of money either but happyness does rise significantly until ~$60k/year (probably differs by country) or so and then kind of levels off. I would also guess having a balance sheet that can withstand some stress also saves some stress.

 

People also like to make $55k when everyone else is making $50k more than making $60k when everyone else is making $65k. Although, that's not completely irrational as they may be making intuïtive assumptions about price levels in these theoretic worlds.

[nodnub]

I came to realize though. Net worth doesn't mean much if your life has no mother meaning. You are just staring at some number on a computer screen and then just trying to compare it against others. Very unsatisfying.....

 

 

I think that is a great thing to emphasize for anyone that is seeking financial independence.

 

It's probably helpful to have some other goals for your life once you reach independence because you might have lost interest in seeking high returns on your portfolio as your reason for living.