To anyone who once had nothing and is now worth 7 or eight figures... (payment, rate)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
unless you can leverage the debt to make more money. IE: in some cases it makes sense to buy a car cash. Other times if you are getting a really low interest rate, it makes more sense to take the loan and invest the money. Say you had $20,000 to buy a car. Instead of paying cash, sometimes it's better to take that 0.9% loan and then invest the $20,000 and pay the cheap loan for a few years. During that time, you could probably crush the 0.9%. and come out farther ahead than paying cash. Paying cash you spent $20,000. If you take the 0.9% loan, sure you may pay $20,300 for the $20,000 car but at 7% a year in the market you would have also made $8000, so you actually came out $7,700 ahead . Even if you put it in a 2% CD you could earn $2200 and come out $1900 ahead of paying the cash.
The debt problem is when people take out lots of loans for stuff they can't actually afford. In some cases, when you already can afford stuff, it makes sense to leverage cheap money.
This makes perfect sense, but a huge majority of people are either not smart enough, have enough money, and/or have enough discipline to do this.
A friend of mine purchased a brand new 2013 car for $35,000. He had enough money to pay for the car in cash, but managed to get a 0.0% APR loan over 60 months! So he got an interest free loan, same as cash!
He is going to invest that $35,000 into the market which is up over 29% this year! Assuming a much more conservative 8% annual return, he is looking at about $16,000 in profits after 60 months. I know that still doesn't beat the depreciation on the car, but the car is a necessity that he will use every single day and drive until the wheels fall off.
This makes perfect sense, but a huge majority of people are either not smart enough, have enough money, and/or have enough discipline to do this.
A friend of mine purchased a brand new 2013 car for $35,000. He had enough money to pay for the car in cash, but managed to get a 0.0% APR loan over 60 months! So he got an interest free loan, same as cash!
He is going to invest that $35,000 into the market which is up over 29% this year! Assuming a much more conservative 8% annual return, he is looking at about $16,000 in profits after 60 months. I know that still doesn't beat the depreciation on the car, but the car is a necessity that he will use every single day and drive until the wheels fall off.
Smart friend. I used to want to pay for things like that in cash because everyone always told me to be "debt" free. And, don't get me wrong, being debt free is much better than racking up debt. But as I've been out of school working for almost 7 years now and accumulated more financial security, I've moved toward the philosophy in my last part (like what your friend is doing) in terms of leveraging cheap money. The market won't always be great like it has been, but I'm taking advantage of it for now
I do completely agree it is not for everyone though.
...then it becomes you vs your own pucker factor, which rarely turns out to be as high as most think it is once real money is on the firing line. the more money you have at risk the less that pucker factor becomes.
Wisely stated! And this is why it's so difficult for a self-made person to graduate from "middle class millionaire" to higher wealth levels. Once one's portfolio becomes 10X or 20X that of one's gross annual salary, it is difficult to treat that portfolio as something to be grown via speculative investments such as stocks. One tends to enter a museum-mentality, where the emphasis is on wealth preservation instead of growth.
Quote:
Originally Posted by SoloTraveler
"The first $500,000 is the toughest"
This is literally true, in terms of compounding annual returns mattering greatly once the portfolio becomes large, but personal savings habits mattering more, when the portfolio is small.
Example: you earn $50K/year and your portfolio is $50K. 7% annual return is $3.5K. But if you save another 10% of your income, that's $5K... more than your annual returns. However, suppose that you are older, and have $2M, but earn $100K. Now 7% annual return is $140K. That's more than your entire annual salary! At that point, additional savings is moot. Frugality is almost pointless, and what really matters is your investment skill.
The problem is that as people become wealthier, they also become skittish. Mutual fund investment literature assumes a high portfolio allocation to stocks, even when investors are advanced in age. Does that really happen in practice?
This is why we should distinguish between 7 figures and 8 figures. 7 figures are achievable with some diligence, a reasonable annual salary, and perseverance. 8 figures requiring doing something altogether different... stock options, a successful business, speculation. Even the doctor/lawyer set can't save enough money to break into the 8-figure range, unless they do something well beyond conservative and dogged investing. But too often, we aim for the tantalizing goal of 8 figures, blow up, and don't even achieve 7 figures. This is why sometimes mediocrity is superior to excellence.
Not a millionaire yet, but def. planning to be one. Two words that come to mind: Hard, work.
A person searching for a nickel more likely to find one than someone not. A person who works hard has a high probability of of success than one that sits around asking for hand outs.
Wisely stated! And this is why it's so difficult for a self-made person to graduate from "middle class millionaire" to higher wealth levels. Once one's portfolio becomes 10X or 20X that of one's gross annual salary, it is difficult to treat that portfolio as something to be grown via speculative investments such as stocks. One tends to enter a museum-mentality, where the emphasis is on wealth preservation instead of growth.
This is literally true, in terms of compounding annual returns mattering greatly once the portfolio becomes large, but personal savings habits mattering more, when the portfolio is small.
Example: you earn $50K/year and your portfolio is $50K. 7% annual return is $3.5K. But if you save another 10% of your income, that's $5K... more than your annual returns. However, suppose that you are older, and have $2M, but earn $100K. Now 7% annual return is $140K. That's more than your entire annual salary! At that point, additional savings is moot. Frugality is almost pointless, and what really matters is your investment skill.
The problem is that as people become wealthier, they also become skittish. Mutual fund investment literature assumes a high portfolio allocation to stocks, even when investors are advanced in age. Does that really happen in practice?
This is why we should distinguish between 7 figures and 8 figures. 7 figures are achievable with some diligence, a reasonable annual salary, and perseverance. 8 figures requiring doing something altogether different... stock options, a successful business, speculation. Even the doctor/lawyer set can't save enough money to break into the 8-figure range, unless they do something well beyond conservative and dogged investing. But too often, we aim for the tantalizing goal of 8 figures, blow up, and don't even achieve 7 figures.
If I understand correctly you are describing me. Me and a friend were just talking about us having to get past the museum mentality. I like that term, it describes it perfectly. I understand what you are saying, it's time to put the money to work for us. but I'm older and have become skittish and can't seem to get a grip or blow past on the pucker factor. I'll get there though.
If I understand correctly you are describing me. Me and a friend were just talking about us having to get past the museum mentality. I like that term, it describes it perfectly. I understand what you are saying, it's time to put the money to work for us. but I'm older and have become skittish and can't seem to get a grip or blow past on the pucker factor. I'll get there though.
Well, just remember that volatility is your friend when you are accumulating ("you must make a friend of risk. Risk and volatility are your friends, if they are not then they are enemies to be feared"), but...it is your enemy when you are distributing.
In addition, there is the issue of marginal utility. Most people have some sort of marginal utility curve. Obviously, the difference between, say, 25K of annual income and 125K of annual income is HUGE in terms of comfort and lifestyle, the difference between 125K and 225K is sizable but not nearly as large, the difference between 225K and 325K is there but not a whole lot, and so on.
A simple example is this - say that I offered you either A) $5 million dollars, net after-taxes etc., right this second, no strings attached, here you go, or B) I'll hand you a coin to flip, and if it comes up heads I'll give you 15 million dollars but if it comes up tails you owe me $1,000.
Almost EVERYBODY would just take the $5 million from choice A rather than flipping the coin, even though choice B (the coin flip) has a significantly higher expected return. We all know why - because for most people, $5 million is enough to sustain them at or above the level their lifestyle level for the rest of their lives.
As everyone knows, the greater the return you're looking for on investments the greater the degree of volatility you'll take on (in general, Modern Portfolio Theory and Efficient Frontier Curves and all that, yadda yadda). If you're already at or close to the level you'd like to be at, taking on substantial risk for an upside that won't mean a whole lot to you in terms of how you want to live doesn't make sense...because the downside would hurt a whole lot more.
TL;DR - there's a good reason a lot of people get "skittish" when their portfolios get really big relative to their income/annual expenses.
say that I offered you either A) $5 million dollars, net after-taxes etc., right this second, no strings attached, here you go, or B) I'll hand you a coin to flip, and if it comes up heads I'll give you 15 million dollars but if it comes up tails you owe me $1,000.
Almost EVERYBODY would just take the $5 million from choice A rather than flipping the coin, even though choice B (the coin flip) has a significantly higher expected return. We all know why - because for most people, $5 million is enough to sustain them at or above the level their lifestyle level for the rest of their lives.
The expected value of the coin-toss is $7,499,000. But that only matters if there is a large number of tosses. If the offer is to toss 100 times, then of course the better deal is the toss, instead of the guaranteed $5M. But if the offer is to toss only once, I would take the $5M. The decision has nothing to do with the dollar amount. If we were tossing for $15 win and $0.001 loss, vs. a guaranteed $5 in my pocket, and had only one toss - well then, I'd still choose the $5.
The point here isn't to argue over the esoterics of probability theory, but to note the role of having multiple opportunities to try and to win/fail. A younger investor with lots of remaining earning potential has the analog of many future available tosses. An older investor whose portfolio is much larger than his/her remaining earning potential has few tosses. But, it is precisely when we have fewer tosses remaining, that we are wealthier; that is, later in life. We asymptote towards a ceiling of wealth.
having multiple opportunities to try and to win/fail.
But, it is precisely when we have fewer tosses remaining, that we are wealthier; that is, later in life. We asymptote towards a ceiling of wealth.
multiple opportunities to win or fail throughout our lifetime. Some never do succeed but some will succeed most likely when they are older and bam! comes someone with a redistribution agenda just at the time when you are playing catch up. I say be careful what you wish for today for it may cost you tomorrow.
I graduated at age 22 with no assets and tens of thousands in student loans. I worked, lived cheaply, saved & invested, and became a millionare a few years later
My tip is to live way way below your means while you're building up your asset base. Drive beater cars, don't eat out that much, get into low-interest debt, and invest every penny you can. But be patient and smart about your investments. If you rush them, it becomes gambling. Do lots of research; there's much more out there than just stocks and gold. Low-interest debt is good!
Once you build up enough assets to generate significant income, you can live the good life that you had to sacrifice in your 20's when you lived cheaply. That's where I am now
Smart friend. I used to want to pay for things like that in cash because everyone always told me to be "debt" free. And, don't get me wrong, being debt free is much better than racking up debt.
You should ignore those people who tell you to live debt-free. Those people tend to be the least savvy investors out there. They don't know how to find investments so they pay down their debt instead.
I've computed my hypothetical net worth had I always paid down my debt instead of investing it. It was $1mm less than what I have now.
Debt is good. Just because some people don't know how to use it doesn't make it bad. That's like a saying cars are bad just because some idiots don't know how to drive.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
. Even if you put it in a 2% CD you could earn $2200 and come out $1900 ahead of paying the cash.
