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... Let's assume a 7% annual ROI, which would require around $1000 a month. Saving $12k a year is not particularly easy. For a lot of people, that's half or more than half of their income.
If you stick to the idea of using your own earned income to invest with, you will hit that wall.
I found it was much easier to invest using OPM [Other People's Money].
As a servicemember my earned income has never been much. It was enough to buy a Tri-plex property and get 2 renters. We had enough rental income to pay the mortgage, insurance, taxes, and upkeep. Then at our next duty station we bought a Five-plex to live in. At the following duty station we got another Tri-plex. Then at the duty station after that we got a Four-plex.
The most we ever paid at closing to purchase any of these properties was $6,000.
The real 'trick' to building equity was to make monthly principal-only payments.
If you calculate your Net Worth every year, with standard mortgage payments your equity grows very slowly. But if you can put $200/month against the principal, you will see that your Net Worth grows at a much faster pace.
Yep. But the math often does not pencil out for the high income job in the high cost area. For certain careers, you need to live in high cost areas, but most jobs/careers are fairly mundane and the higher pay for the mundane jobs (which is most of them) in the high cost areas typically doesn't make up for the higher cost of living--usually not even close.
I understand.
We have friends and relatives who were all drawn to high-paying jobs in high COL cities. We know people who owe more on their Single-Family homes than we have ever paid on any property. The most expensive apartment building we ever bought was 1/3 of the price of my SIL's home.
High wages can seem like a great thing, but they commonly are offered in high COL cities. When you work out the math, those high wages might not be an advantage.
In a low COL area, I can buy a Four-plex, after closing I can live in the property and I will never put another penny of my earned income into the property. By making monthly principal-only payments our equity will grow at an advanced rate. All the while in a high COL city you can buy a Single-Family home for 3X the price, and your then stuck making mortgage payments from your earned income. I am sure that you understand how slowly you are paying off your mortgage making regular P&I payments.
Except for when the Navy sent me to high COL locations, I have tried to avoid those cities. When I have been offered high wage jobs, we did our best to 'pencil-out' what our budget would look like to live there. As a result I never accepted one of those jobs.
Saving a million over your working life, according to the calculators I see, depend greatly on the annual rate of return on the money in savings. 6-10% returns and it's a relatively low amount, although not low enough that just any joe could do it easily.
2-4% return and the monthly amount becomes more prohibitive.
Everyone seems to use the 10% figure on the stock market's historical rate of return.
Let's assume a 7% annual ROI, which would require around $1000 a month. Saving $12k a year is not particularly easy. For a lot of people, that's half or more than half of their income.
To make $1000 a month "easy" to save and forget - I'd say it needs to be about 15% of net at most, so around $6000 a month net needs to be coming in, which translates to a gross household income of about $100,000 a year. That is approximately double the median household income.
the long term typical accumulation time frames typically have been very good in equity's . typical time frames can run 30-40 years .
i started in 1987 with the fidelity insight growth portfolio . including the crash in 1987 , the dot com bust , very slow growth on older money since 2000 on an inflation adjusted bases and 2008 the portfolio still averaged 10.80% over time even if i never added another penny . the s&p 500 clocked in at 10.1 over the same time frame.
but big difference in tax liability today between the 2 since the portfolio is split between ira's and brokerage account . the s&p index fund would owe decades of pent up taxes at this point where as my insight portfolio used active funds and we paid taxes all along so returns were actually even better in the growth model than they appear since they allow for the price set backs from payouts . .
the long term typical accumulation time frames typically have been very good in equity's . typical time frames can run 30-40 years .
i started in 1987 with the fidelity insight growth portfolio . including the crash in 1987 , the dot com bust , very slow growth on older money since 2000 on an inflation adjusted bases and 2008 the portfolio still averaged 10.80% over time even if i never added another penny . the s&p 500 clocked in at 10.1 over the same time frame.
but big difference in tax liability today between the 2 since the portfolio is split between ira's and brokerage account . the s&p index fund would owe decades of pent up taxes at this point where as my insight portfolio used active funds and we paid taxes all along so returns were actually even better in the growth model than they appear since they allow for the price set backs from payouts . .
Yeah but you know the old adage about "past performance" and all that. Getting started in the 1980s was fortuitous for a number of reasons.
At this point I don't see someone who duplicated your actions starting today necessarily enjoying the same result. If you had money circa 2009-10 maybe, but it was a relatively short window and not a lot of people had money then.
So here you are. You've just paid the rent or the mortgage, the utilities, the car insurance, bought some gas (not enough to get you to work for the whole month) and some food (not enough to see you through the month), and you have $4 left in cash. And you need clothes, a haircut, shoes for the kids, etc, etc.
That's your first mistake friend. You are trying to pay yourself last, instead of first. Always, always pay yourself (savings/invest) FIRST!!!!!
You list clothes haircuts shoes. Go to goodwill for clothes an shoes, craigslist. You shouldn't be buying clothes for yourself at this time until you get your salary higher.
You can do it, but it starts with you. Pay yourself first.
We have friends and relatives who were all drawn to high-paying jobs in high COL cities. We know people who owe more on their Single-Family homes than we have ever paid on any property. The most expensive apartment building we ever bought was 1/3 of the price of my SIL's home.
High wages can seem like a great thing, but they commonly are offered in high COL cities. When you work out the math, those high wages might not be an advantage.
In a low COL area, I can buy a Four-plex, after closing I can live in the property and I will never put another penny of my earned income into the property. By making monthly principal-only payments our equity will grow at an advanced rate. All the while in a high COL city you can buy a Single-Family home for 3X the price, and your then stuck making mortgage payments from your earned income. I am sure that you understand how slowly you are paying off your mortgage making regular P&I payments.
Except for when the Navy sent me to high COL locations, I have tried to avoid those cities. When I have been offered high wage jobs, we did our best to 'pencil-out' what our budget would look like to live there. As a result I never accepted one of those jobs.
Yep to all of that. I live in the high cost area and I really do get paid much more than I could in a lower cost place, but at some point, I may be forced out due to ever increasing rents.
Yeah but you know the old adage about "past performance" and all that. Getting started in the 1980s was fortuitous for a number of reasons.
At this point I don't see someone who duplicated your actions starting today necessarily enjoying the same result. If you had money circa 2009-10 maybe, but it was a relatively short window and not a lot of people had money then.
here is the problem with that thinking .
no time frame stands alone when it comes to investing . folks always say the 1980's was the greatest time to be invested .
yeah , it was but don't forget things have a way of working out where you never really benefit from it .
the time frame leading up to the great bull market was terrible . we had inflation eating us alive , dead markets and a crippled bond market so very few of us had any money invested .
not only that but 401k's didn't even exist .
so here comes the greatest bull market in history and few of us had any money to take advantage so basically we started from dollar 1 .
by the time we got to 2000 and managed to get any money saved BOOM . that money hit a brick well and for the last 15 years that older money barely beat out inflation .
new money did very well but what ever you accumulated from the 1980's saw only about an average of a 2% real return on it the last almost 17 years .
if i fell a sleep back in 2000 after looking at my existing balance and woke up today and looked again , that balance would be so far below my expectations over those 17 years i would be like what the heck happened to my projected growth .
where you stand when your fuel tanks are full is where the markets will have the greatest effect .
right now a mere 7% drop which is not much wipes out 9 years of maxing out my 401k at catch up .
those just coming on board with their 401k's may not even see a months worth of dollars in damage
so the point is over the 30-40 years we have in the accumulation stage things seem to level out like water eventually and no matter how we start out or how markets end up we seem to be in a tight range at the end of the day .
as michael kitces said in his latest article . i will post the high lights
"Saving for retirement is often framed as a long-term effort of systematic saving and years of compounding growth. But the reality is that in the early years, whether you save is more important than the growth you earn, because the portfolio isn’t large enough for the earnings to have a material impact. It’s only after a decade or more of saving that eventually the annual return of the portfolio begins to trump the impact of the direct contributions to it."
"
And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glide path that drifts equity exposure lower each year.
Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely. "
Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal). "
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