In a wider social- and group-context it is sometimes best to maintain the view that you are a victim being manipulated by outside forces.
In a strictly personal context it is often better to maintain the view that you are a fully empowered actor.
In a strictly personal context it is often better to maintain the view that you are a fully empowered actor.
Becoming wealthy without manipulating the system (or, put another way, becoming wealthy while creating a similar amount of value) requires both prudence and either a great deal of luck or a lot of hard work and reasonably good luck. Many people work hard; most do not become wealthy. Sometimes that's due to their own choices, but not always. It's something of a disservice to teach a child that he or she is a fully empowered actor; the reality is very different.
In the real world, you are competent, professional, and hardworking but your employer goes under during a bust. During the 2 years you're out of work, you drain your savings and have to start over from scratch. 5 to 10 years of earning, saving, and investing go down the crapper.
In the real world, you work hard, draw good pay, and invest wisely. Unfortunately, due to monetary policy established by unelected officials, you are faced with a choice of losing money to inflation every day or paying wildly inflated prices for any asset available to you. As a result, you never achieve financial independence no matter what you do.
In the real world, you may be faced with a choice between working a job that will never enable you to become financially independent and engaging a crooked physician to help you collect disability benefits from the government for the rest of your life. You find it impossible to accept that you should have to work for what others are given for nothing.
A child who grows up believing he or she is fully empowered is likely to respond poorly when encountering these situations later in life. It would be reasonable to interpret them (incorrectly, of course) as evidence of one's own failure, inadequacy, or even bad character. The reality is that the game is rigged, and badly so. The industrious good behavior the Calvinist work ethic endorses makes success a little more likely, but it's nothing close to a guarantee. Better to learn these lessons young, even if it encourages "cheating" later in life. Sadly, cheaters usually do prosper; the choice to be "honest" or not should be made from moral principles, not a misguided belief that it will lead to success/happiness/financial independence.
It isn't really about working hard, either. That's a myth. It's about working effectively, and making prudent, common sense choices about what to do with your income.
Of course, life can hand you a lot of bad luck that can derail your plans. But this is simply not the usual experience.
Bubbles come and go, some are long, some are short, some are consequential, some are not. For example, real estate bubbles: these are most dangerous because it is usually the most substantial asset purchase an individual ever makes, and it is typically 90% leverage. If you fall ass-backwards into the right spot on the development curve, you can literally turn $50k (down payment) into a million++ dollars - if you guess wrong, you're bankrupt and you pray that you have a non-recourse loan.
Zero sum game. Rampant inequality. Crashing social mobility.
As you say it's not merit based. How many people can save 500k in 10 years? Leveraged mortgage debt then becomes the only game in town. Game set and match the banks.
It comes from two places (at least):
1. Debt - someone pushes a few buttons on a computer keyboard and "poof", you've conjured a million dollars out of thin air
2. China - this is real money, but if it gets pointed at one geographical region, it can cause major distortions, especially if that real money can be confiscated at the whim of the politician who happens to be in power at the moment
Yes there is foreign money but still most buying is domestic. Foreign money is a convenient bogey man. It's the same in Canada and the stats do not bear it out.
Actually, no one knows, because stats are (deliberately imo) not kept.
http://www.greaterfool.ca/2015/05/14/the-tipping-point-2/
Vancouver not even in the top 10 yet we are told endlessly HAM is the cause.
The investment works because in 10 years time you own bigger chunk of the asset (Mostly due to inflation but also debt repayment from rent).
Everyone gets the financial outcome they want.
I'm curious what you mean by that?
Everyone can unpack the statement in different ways, but essentially your financial position is a result of how much effort you put into it. Most people put little effort into it, or even knowingly make bad mistakes like buying new cars on credit, yet shrug their shoulders and do it anyway.
In the short term you might have a setback but people with priorities for financial success are able to overcome these and go on to greater heights.
An evidenced in these comments there are some people who want to talk about how the deck is stacked against them and they can't possibly get ahead - yet people from all walks of life achieve financial freedom every day, so this is patently not true. The people who think this way are getting the outcome they want, which is to priories blaming over achievement.
They are achieving financial freedom by stepping on the throats of their brothers and sisters. If you want to "achieve" financial freedom that way fine, but I'll rest easier on my (cheap) death bed rather than surrounded by trinkets bought after exploiting the poor and needy.
Your comment is so wrong it's hard to comprehend the mindset.
1. The activities in which one engages to obtain income. This can be labor, crime, cheating and manipulation, employment of capital, or some combination of these.
2. Starting position: did you enter adulthood with an inheritance or trust fund?
3. Management: what do you do with the income you receive?
4. Environment: macroeconomic conditions and public policy (presently inseparable).
5. Luck, those arbitrary events that affect an individual or small group of people (as distinct from environmental factors that affect everyone). These can be positive or negative.
Individuals generally can control (1) and (3), though the available options and their merits are products of external forces. You seem hung up on the notion that these are the only two factors that matter. You acknowledge (5) but assert that it's ultimately irrelevant to outcomes. You don't seem to acknowledge (2) and (4) at all.
I am asserting that a high probability of good economic outcomes (i.e., financial independence) requires that at least (3), (4), and (5) all be favorable if we begin from the premise that the only sources of income and capital available are the proceeds of labor and one's own accumulated capital. That is, we're not going to cheat or steal and we weren't born into anything.
I am not asserting that good economic outcomes are impossible under other circumstances, only that they are highly unlikely.
It would be very useful to bring some data into this conversation. I would like to compare the outcomes achieved by hypothetical pairs of individuals who satisfy our constraints on factors (1) and (2) and are identical in their luck (there are no material events) and management, but differ in environment. For example, suppose that there are two individuals born 20 years apart, one in 1955 and the other in 1975. Both are male Americans, both are employed in full-time, year-round work beginning at age 20, neither is ever unemployed for any reason, and both set aside some fraction of their age-appropriate median-wage income and invest it in one of a few simple ways (we can vary that fraction and how it's invested). Each pays the taxes he legally owes and no more, and for simplicity's sake each is single and lives in a state with no personal income tax. The object of this exercise? To check in with each at age 40 and see, in today's dollars, the purchasing power of their assets and the purchasing power of the income those assets produce. We could then examine other splits; for example, two people born at the same time, one in Japan and the other in Switzerland. Or fraternal twins, one male and the other female. The possibilities are limited only by the availability of data.
It would be great to see such a study. If anyone has done it, the results are not particularly easy to find. Most of the data exists: historical tax laws from the Tax Policy Center, historical income data from the Census Bureau, deflators and unemployment data from the BLS, interest rate and bond market data from the Fed, and stock market prices and dividends from the exchanges and many other sources. Some countries keep better records than others. Having looked into what's available, I think someone could put together something reasonable in a week or two.
According to your thesis, these studies will show that everyone will obtain approximately the same outcome, because in all cases we have controlled for luck, starting position, income, and management strategy. Only the choice of management strategy will have material impact.
According to my thesis, these studies will reveal (a) that environmental factors dominate the outcomes, (b) that there are many environments in which there is no non-oracular management strategy that will yield an outcome as good as that achieved by a male American born in 1955 who employs a simple, moderately frugal management strategy, and (c) that the vast majority of environments that have existed over the past 20 years, including today's, are strongly detrimental to positive outcomes.
I assert this despite the ultra-simplified deterministic model I propose to use. I further assert that the stochastic injection of periods of unemployment (in accordance with actual historical rates) will radically worsen outcomes in at least 3 quintiles relative to the above-mentioned baseline.
Finally, I assert that these results are obvious. I'm not exactly going out on a limb here.
I know I sound like a "progressive". I am not. I do not advocate redistribution, higher minimum wages, more rent control, or a culture of victimhood. Quite the opposite on all counts. What I do advocate are changes to public policy that make it much less likely that decades of any individual's working life will be lived in an environment that strongly penalizes the proceeds of labor and accumulated capital. You should not attack me based on your preconceived ideas about "what I want", from either the markets or public policy.
More directly to the point, my original assertion was that teaching a child that factor (3) is the only one of import does him a great disservice. Prudent management of one's finances is almost always necessary but almost never sufficient. Acknowledging this is not casting blame but rather observing the world around us, thinking critically about how it works, and accepting it as it really is: healthy things for any child to do from an early age.
I've seen a lot in my life with this, and it's wildly untrue. I know many families with multiple children, and over time some of those became millionaires and others did not. None I know started with inheritances. I know a lot of self-made millionaires. All of them share a common attitude that their future is in their own hands, and it's clear from the arc of their financial lives that that is true. Their choices produced their outcomes.
The ones who did not become millionaires also share a common attitude that nothing they could have done differently would have changed anything.
The fatalistic outlook you have will be self-fulfilling. But you can choose to change it. It really is up to you. The choices you make matter. If you want to know more, I can't recommend a better book than "The Millionaire Next Door" about how ordinary people doing ordinary things become wealthy.
It's not fatalistic. As I've been saying all along, you have some control of some things. Exercising that control constructively is necessary. It simply is not sufficient.
I also know people who abandoned the market at the bottom of one of the various dips. They're all bitter about the recoveries since. Taking a longer view, the various machinations of the market that seemed so important at the time are lost in the width of the line on the graph.
Yes, your choices are by far the #1 factor in any success, or lack of, that you have. Telling your children anything less is a disservice.
No, you haven't understood my thesis at all. You seem to think I'm making some sort of political or statement related to the current economy.
The point us that every gets out a combination of what effort they put in and the decisions they make. For some, born with a trust fund, those efforts bad decisions are easy. For others, new immigrants without qualifications, those efforts are going to need to be huge.
For all, they will get back what they put in. All will get what they want, when you read want as not what people say they want but measured by their actions.
I might say I want to get fit but unless you see me out training you would quite correctly surmise I don't actually want to get fit. Everyone gets what they really want.
Instead, for a specific example, consider a 4-plex my wife and I bought for $65K down ($215K total - it is in an economically depressed area). Rents, when fully occupied (not always the case, we see about a 5% vacancy rate) are $700 a month over all expenses, including debt service.
Plus, we put close to 20% down but get 100% of the depreciation. End of the year: $7000 in our pockets, a legal tax loss of $800. And that is assuming no change in value of the asset. If someone offers to buy us out at %200 of the purchase price I would definitely consider it, but until then, I pocket the proceeds.
For me, doing the due diligence up front reduced the luck factor, my preferred way of obtaining my goals, when possible.
We also bought in Lee County Florida, where a single family home IS cash flowing. If the employment market stays stong, we will look at picking up more, assuming we find deals that are acceptable to us.
Risk: Insurance (property and landlord's liability), entity (LLC), and strong property management that is tight on screening prospective tenants. Last, watchful management: We keep an eye on the Property Managers, and provide overall management decisions, like where to keep rents, what improvements/repairs to make, etc.
We are new at this, only 5 years in, so we are still most definitely learning.
how much do you pay for property management?
Property management in both locations is about 10% of Gross rents. One company also charges half of the first month's rent to cover turning, advertising costs.
So no worries about taking advice!
It's the American dream!
Moreover, the amount of depreciation you can take (in total) does not increase with a change in the value of the asset; it's based on your "cost basis" in the asset. It only goes up if your costs in the asset increase, such as for property taxes paid, improvements, etc.
Finally, and this is a big one--the value of the land is excluded from the depreciation calculation--only the building and improvements to the property can be depreciated. So $215,000 is an upper bound on the recoverable amount--the properly depreciable amount is less than that, meaning that your annual depreciation should actually be less than $7800/year and that you should actually have more than $600/year in net rental income.
You need to talk to an accountant soon, because if you get audited you almost certainly will be paying back taxes and penalties.
To be more accurate, we do get a bit more, but we withhold for repairs, replacement costs, wear and tear, new appliances, etc. So our income is higher, but I have trained myself not to count it, as the odds tell me I am going to have to pay for repairs. The $700 is what we get to hold onto most often, unless we are saving towards big repairs like new roof, outside paint, etc. And (crucially) I left out that we had enough first year expenses to legitimately lower that perceived income, as well as the interest that we get to deduct (interest being far higher at first in a mortgage payment). Next tax year will have different numbers, since we will have had different expenses and different occupancy (unfortunately they do not stay 100% occupied).
I am just trying to get out round numbers that show that it can work.
Most people have this concept that their house is their biggest asset, when a residence is really a liability for the person who lives in it.
I should not have taken the shortcuts in my math, but regardless, we do well. We have used the profits to invest in more education, and have recently purchased another unit in Florida that will start cash flowing in about two more months. Well, actually it cash flows now, but we had to pay for some new appliances, so in my head, we are negative for two more months, then we start paying off ourselves for the down payment. Again, I am more conservative.
So it is a slow path to wealth, but a valid path, nonetheless.
Now, in a lot (not all) geographical locations, all these historical indicators are useless. Asset values no longer have any relation to local economics, in various different ways. In the US in the housing bubble, it was loose credit. In Canada and Australia, this persists, because they somehow escaped the psychological popping of the housing bubble. And at least in Canada, there is the additional massive "unnatural" demand coming out of China:
http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughness...
And this isn't crazy "no money down" like the US housing bubble - the Chinese have cold hard cash. Name a price, and they will write you a cheque.
I.e. you don't have to live a Spartan lifestyle to have an investment program, nor do you have to be unusually lucky, or any of that. Just underspend your income by 10 or 20%, and invest the rest in ordinary, boring investments.
Delayed gratification. Give up the "wants" for now to get a bigger benefit later.
It sucks not going out to eat or buying Starbucks as often as we used to. But we do it by choice so that the $5, $10, or $40 now stacks with the $5, $10, or $40 from next week and the following week and can be put to something more important later on.
As a result, we were able to wipe out all of our non-mortgage debt in about 2 years. We didn't have a ton by current standards (2 car payments, student loans, small cc balance), but killing all of that immediately reduced our stress and increased our options.
Even pretending to play at a victim is corrosive to a proper attitude of being in control and responsible for your life outcomes.