After getting more and more comments about making money, breaking out of the middle class and generating passive income we decided to read a few popular personal finance blogs. The first step was realizing that most of these blogs encourage you to live a boring life by focusing on net worth instead of the much more important number, Adjusted Lifetime Spending.
A quick digression.
After an hour or so of reading personal finance blogs it became irritating. So irritating that we’re going to go ahead and outline every single piece of terrible advice you are receiving. Lets begin.
Bogus Rule #1 Save 10% of Your Income: Anyone who gives out this sort of advice is making a cruel joke, is broke or is a liar. One of these. The 10% rule does not work because your income should increase over time. If you save 10% of your income for life and your income never increases, you will be able to “retire” (see die) at the ripe old age of 60+ with the exact same standard of living… if you want to call it living.
How is this a cruel joke? Easy. If you believe you’re doing the right thing by saving “10% of your income” you’re going to lose motivation immediately. In your head you will mentally believe that you’re on the right “track” and instead of reinvesting in yourself you should ride the smooth wave to the same mediocre life at 60!
How is the person broke? Well if the person believes this, then there is absolutely no way he made it rich on his own. Why? If you actually want to get rich, you are busy generating a lot of income for many years of your life (usually in the beginning) so you are actually saving closer to 75%+ and hit closer to $1M by thirty or so. Why again? Simple, your life is extremely miserable if you try to live off of 25% of your income and have a salary of $100K a year… 25% on $400K is not difficult and the game works in your favor.
How is the person a liar? If the person is not trying to ruin your life with this cruel joke and the person is actually wealthy… then he is trying to sell you a steaming pile of horse sh*t. What is he actually trying to sell you? It depends.
– If this advice is coming from internet blogs (subject of this post) then he/she is trying to build a connection with you to keep you on their site generating money for them. Ever notice they try to make it seem like they were “just like you” in the ***past*** what an outstanding coincidence!
– If this advice is coming from a financial advisor (read broke guy who makes $80-100K a year). He is actually trying to get you to open accounts for his $50-100 bonus! Again, he is a liar.
– If this advice is coming from your employer? They want you to save just enough to feel good about yourself but not enough to be independent and quit! It also helps because knowing you can never leave allows them to pay you a smaller bonus.
There you go. Bogus advice #1 busted. Try to save 25% of your income per year and you’ll realize that the only way to do this, without stabbing yourself in the eye with a hot needle, is by generating significantly more income than average.
Bogus Rule #2 Focus on Day to Day Purchases: This is the second most useless piece of advice. It comes in many forms. You should spend your extremely valuable brain cells on… watching your $4 latte purchases, $4 bag lunch vs $7 take out lunch and you should be laser focused on $3 toilet paper versus $4 toilet paper. Just like the toilet paper, you should wipe your a** with this advice. Before getting too annoyed by this, it actually follows the same outline as above! Anyone who actually believes this is the way to become wealthy/rich is playing a cruel joke on you, is broke or is a liar.
How is this a cruel joke? It is a cruel joke because you are going to develop a frugality mindset. In addition to this development you’re not going to think about the extremely high cost of avoiding coffee. Want a solution? Every single time you get coffee, buy two, one for you and one for the guy you’re meeting for coffee. Now you’re down $8 instead of $4. How long does it take to make $8 with practically no skills? About 30 minutes. Go on fiverr and do a mundane job at your desk to make up the cost. Here’s the rub. If you can continuously find someone useful to have coffee with, the return on investment in a year is probably going to be $10,000 or so. How does that coffee taste now?
How is the person broke? Lets see… How many rich people do you know that fret about a $4 coffee? That is correct! Zero! If you are able to meet a rich person for coffee there is a zero percent chance he is going to be interested in the coffee. None. In addition, notice the trick from the question above… Rich people don’t pay a cent for coffee. Caffeine for thought.
How is the person a liar? Lets put the two points together. If you are telling people that saving $4 on coffee and $2 on toilet paper and $3 on bag lunches made you rich… This is mathematically impossible. Literally. If you saved an extra $10 a day for the rest of your life you’re putting away $3,650 a year. This is a rounding error.
Bogus advice #2 busted. The reason they are giving you this terrible life advice is so you feel better about your life when you read their blog. “If I just save $10 a day more I can be rich too!!!! (completely ignore the person’s $500K internet income!)”. If you feel better about your life after reading their blog, you are going to post their website links on twitter, facebook and instagram… This generates more income for them and you’ve been sold mathematical snake oil. In short, they made you feel good so you could spread their gospel… see make them rich. The “family man” is really just the mob, you are part of “the family”… doing his dirty work.
Bogus Rule #3 Bond Exposure Should be Equal to Your Age: Ahh yes lets continue to take advice from broke guys who only have $500K in assets! This makes complete sense. If you have bond exposure equal to your age this means that when you graduate college you will have 21% of your total assets earning 0% in inflation adjusted earnings power. Too complicated? The reality is here: bond and CD exposure = $ you are unwilling to lose.
In a low interest rate environment, the net gains by a diversified bond fund is likely in the 3-4% range. This means the yield is roughly offsetting inflation. So? The only time you should have exposure to bonds is when you are financially independent.
If you are not financially independent here is where you should invest your money. 1) In yourself. In anything that will actually generate real dollars for you over the next 2-3 years, 2) in a business you are starting where you can get cash on cash return within 1 year and 3) in index funds since you have to take on risk in order to move towards financial independence in the first place.
Other than that? If you have a low net worth keep a few months of living expenses in the bank in case you hit a rough patch and get to work on how you should really invest as noted in the three points above. The implied message is obvious, you have to continuously take on risk and volatility until you hit your stride. It will pay off.
Bogus Rule #4 Spend 30% of your income on Housing Costs: This is laughable at best. Housing costs at 30 percent implies that you are going to be spending at least $2.5K per month on housing if you make $100K a year. This is insane! You don’t make enough money to afford $2.5K per month if you’re only generating $100K per year. Lose the ego and downsize.
Until you hit your stride financially, you should spend as close as possible to 10-15% of your income on housing. If you are fresh out of college working in a legitimate career then you’re going to have roomates. Tough it out. You’re not going to spend any time in the room anyway (if you’re smart!) so there is no point in having a high end place. When can you spend 30% of your income on housing? When your passive income is more than 2x this metric.
Bogus Rule #5 – Get Rich Slowly: Complete and utter lie. No one who is actually rich gets to their level in a long period of time. There is not a single successful person on this planet who got rich over 40 years and the general public knows his name. Not one. The reality is that you get rich in a windfall or by grinding out a large amount money over a shorter period of time. Why? The laws of mathematics once again!
Lets say you are happy with your lifestyle but you’re only saving 10% of your income… Now lets say one year you sell a business you were working on. It is sold for 10x your annual income. Boom an *event*. Assuming you do not spend the proceeds… you never have to worry about finances again. Why? Your savings just increased by a factor of 100x. Most people think their savings rate was only 92% versus 10% which doesn’t sound like much… This is not how you do the math. If you were saving $5K off of $50K a year, you incur an event at $500K, you just saved $500K/$5K = 100 years of savings in a single day. Make no mistake, most people who actually become rich have an *event* that makes it rain so hard the Mojave Desert could be turned into a swamp land.
Second way to get rich? Re-read point number one. If you go through these personal finance gurus who really tout “saving slowly” as the way to get rich you will realize that they made 3-4 times the median national income. It is simply non-sense. Place any normal human being in a major western city, give them an ounce of self control, pay them 4 times the median income of that city and they can save 9x the median income in just three years. Look at how quickly the math works in their favor: Average income $50K, earned income $200K = 3 years at saving $150K = $450K…. $450K in three years = $450/$5K = 90 times the median savings of the median household.
It had absolutely nothing to do with slowly saving money. It had absolutely everything to do with making money fast, fast, fast. The ETFs out there are going to return 7% – 10% a year, maybe. You ain’t gonna get rich quickly that way.
Bogus Rule #6 – Focus on Entertainment Cost Cutting: This appears to be the “new age” personal finance advice. “Cut your cable! Just use Netflix!” or… “Go to XYZ cheap carrier and save $40 a month!”. This type of advice should make you puke. If you are thrilled to find a way to cut your costs by $5 a month through internet research you’ve already lost. You are running head first into a brick wall at full speed. Why? You’re not addressing the real issue. Why are you consuming entertainment instead of consuming information?!
Here is what you do instead. At the end of every single year you can review your budget by getting into an excel spread sheet or using mint.com or a similar software. Got it? Now for one full day you get to browse the internet and find all the fixed costs you can reduce. With us so far? Once you spend 8-10 hours doing this, make all the changes and you no longer get to review your costs for the rest of the year.
Congratulations. With this simple step above, you better make at least $10K more this coming year. Take all your free time that would have been wasted trying to save $5 and go earn money instead. If you don’t make $10K by following this advice you’re wasting your time consuming entertainment off of your “cheaper” television costs. The real cost of television is not the cable bill. The cost of television is the time you waste watching it.
Bogus Rule #7 – Buy a Home: Simply put, no. If you buy a home you need to realize that the long-term expected returns are flat with inflation. Flat. Think about this for a moment, if you are going to put down a sizable amount of money, say $200K for a $1M home… Then you’re locking in all of that cash at 0%. If you don’t believe this data simply look up the Case-Shiller composite. If you don’t want to do this, the summary is that the real value of a house is “in-kind”… this is a cute way of saying “feels”. Last we checked “feels” do not buy anything.
If you are a housing evangelist then here is the blueprint to buying your home:
1) Be 100% certain you do not want to leave the area for the next 10 years
2) Befriend a lot of people who can do housing construction for you on the cheap. This will take you 2-3 years to develop strong relationships so you receive a legitimate discount on renovations (yes you must add value to their lives)
3) Buy the home with cold hard cash, no debt
4) Buy a fixer upper
5) Call your new friends to help you make changes
6) Your only costs are now maintenance (use HOA costs for high end condos as a proxy – 1% hit per year)
7) Simply assume your home will grow at a rate of 1% maintenance + 2-3% inflation over the long run
There you go, now you know the truth about the personal finance space which is full of lies and bogus equations that will ensure you remain broke for 40+ years and wondering “where your life went”. We have said this at least 100 times in the past, but if it is popular and mainstream you should probably do the opposite. Practically everything on here advocates the opposite:
1) Try to save the inverse of 10-20%… Try to save close to 80-90% of your income! The implied message is go out and make money so your life isn’t miserable off 10-25%
2) Double down on day to day purchases, buy TWO coffees, one for you and someone you want to build a relationship with.
3) Bond exposure is practically useless unless you’re financially independent, no risk, no reward
4) Housing costs should be a bare bones minimum since it eats too much of your income. You should be working extremely hard if you are broke which means you won’t be hosting dinner parties with that granite counter-top anytime soon.
5) Getting rich slowly is a myth, getting rich happens fast, fast, fast, fast, fast!
6) Forget fixed cost cutting. You get one day per year at maximum to plan all your cost cutting at once. After that 80/20 rule applies and its no longer worth your valuable time.
7) Unless you’re not going to move and love the location/city, do not bother with buying a home since it will be an inflation adjusted neutral investment