Financial Knowledge All Adults Should Know?

[kyphysics]

Why do you think we will like it any better than we did 100 messages ago?

You continue to push the idea that the secret is to find the right guru. Everyone else - most of whom are investment-age adults - has spent 100 messages trying to explain why this is a bad idea. What will even more of this accomplish?

V50 - Without wanting to get into any kind of unnecessary argument, I think you can all just disregard the "personas" I'm quoting and focus on the substantive ideas (like some have done).

I guess I'm not sure how to engage in a discussion without being accused of being completely intellectually subservient to a "guru." I try to give proper credit to ideas by referencing the person/(s) they are associated with (or, at least, where I've come across them). You can just ignore the person(s) I'm quoting or referencing and just focus on the ideas and discuss/debate those if you like. I honestly and respectfully think you're showing selective or flawed reading of my comments in this thread, because I've said before that I evaluate an idea on its own merits and expect/assume others will too. I might be excited by some idea or just want to "break the ice" to get conversation going by posting things I come across, but that shouldn't be confused with thinking that I fully support everything such and such a person says (I've laid out many things, for example, that I disagree with Dave Ramsey on).

So, long story short, I'm genuinely unsure why you think I'm a "guru-seeker." Let's just focus on ideas going forward! Who cares who said them and if they're famous or not.

 

[kyphysics]

Agreed. And because he isn't programmed to provide useful advice, he doesn't give it -- so he shouldn't be relied on for it.

I judge an idea on its own merits, though.

I've said it many times: I don't recommend buying individual stocks.

I must have missed that then. Sorry!

With Peter Lynch's classics in value investing being the first books I ever read on investing and finding his ideas agreeable, I'm someone who wants to go that route. But, I would want to have other asset classes too.

Frankly, one of the things that frustrates us about your contributions to the thread is you seem to be repeating yourself without showing that you've read/understood the responses. Please try to correct that.

I've read most people's responses (I skip - either temporarily or permanently - responses from people that I deem unnecessarily abrasive) and feel I understand them just fine with all due respect. And I appreciate the time people put into giving analysis of various ideas and arguments. I may not respond to every person, but I do read and appreciate good dialogue from others. What I'd like to see, respectfully, is less commentary on, insinuation of things, reading-into-the mind-of, and criticism on other posters on a personal level and more focus on just discussing ideas. If I were to do what others have done in the thread, I'm afraid I might be arm-chair diagnosing people with all manner of personality flaws and possible personal problems and disorders! But, I haven't and wont!

I disagree with the order and the idea that 2 and 4 are separate things: both credit cards and certain types of investments can serve as "emergency funds".

I think Dave's logic was that having those 3-6 months of living expenses saved up in easily accessible cash savings is much more of a bullet-proof vest, whereas a CC and/or investments may not work in those situations where you're unable to generate income (say, after getting laid off in a recession and unable to find a job for nine months or something).

 

[CWatters]

They say you should never let a tax break determine where you invest, but you should consider making use of any tax breaks that don't dictate where you invest.

For example here in the UK even children can start a Self Invested Pension Pension Plan and get tax back on their contributions. That is they get 20% tax back that they probably never paid in the first place! Obviously children need generous parents or grandparents to make the contributions but that sort of return is hard to achieve any other way. Obviously there are some disadvantages, like not getting access to your money until age 55 but worth considering.

Like Russ I rarely invest directly in stocks, preferring funds or investment trusts. If you don't have a lot to invest the these are a good way to reduce your risk without loosing a lot in dealing charges. Each fund will typically invest in at least 30 stocks and it would be impractical to hold that many yourself if you only have a small amount to invest. Many will also allow you the invest small amounts regularly. If you invest via an online platform you can also switch between different funds at low or even no cost/spread.

 

[russ_watters]

I judge an idea on its own merits, though.

That's not as reasonable an approach as you think: Gold is shiny, but very few shiny objects are gold. You are allowing yourself to be distracted by shiny objects when you should be ignoring them. You're wasting your time and never getting to real learning.

This is why PF forbids discussion of personal theories and perpetual motion. We already know that 99.9999% are garbage so we know it is a huge waste of time and a distraction to evaluate all of them.

I think Dave's logic was that having those 3-6 months of living expenses saved up in easily accessible cash savings is much more of a bullet-proof vest, whereas a CC and/or investments may not work in those situations where you're unable to generate income (say, after getting laid off in a recession and unable to find a job for nine months or something).

Again: if you can't connect the advice to a real life scenario, then the advice must be wrong. Getting laid off for 9 months is not a viable scenario because you can easily access money in the stock market in a week. If you can think of (or your guru provided), a real life scenario where this advice would be good, great, but so far you aren't even doing what you said in the first line: you aren't even really evaluating the advice.

 

[TeethWhitener]

While this doesn't scale to the individual investor: consider buying timber assets.

Timber REITs and ETFs are available (example). I don't know anything about them, though. Is there an advantage to timber as an inflation hedge versus some other (non-gold) commodity?

 

[StoneTemplePython]

Timber REITs and ETFs are available (example). I don't know anything about them, though. Is there an advantage to timber as an inflation hedge versus some other (non-gold) commodity?

Historically, yes. Though Yale's Endowment did so well that a lot of people crowded into timber in the late 90s as I recall. Certain grades of wood also got too coupled with the 2000s real estate bubble. So I am not so sure anymore.

In general holding a commodity has storage costs and no yield -- i.e. you pay to hold onto it, which is not so great. Timber is nice in that the underlying asset base tends to rise with inflation over a long haul, and if you operate it within best practices-- and legal guidelines -- you get a yield (i.e. selling off some wood) but do not deplete the asset base because your harvest rate matches the growth rate so your overall asset base stays about constant.

Saying its superior to other inflation hedges is too much, but it's a nice mix of commodity and hard asset business.

- - - -
edit: there are some technical ways to "synthetically" own a non-perishable commodity -- say oil-- and get a yield at least in certain market conditions-- i.e. if the futures market is backwardated, you over time pocket the 'roll yield', and if the market is in contango, there are contango trades but you have to pay for storage which naturally shoots up in price in steep contango markets. This seems pretty far afield, though. It seemed best to me to focus on commodity holding vs various commodity trading (and storage) strategies.

 

[kyphysics]

That's not as reasonable an approach as you think: Gold is shiny, but very few shiny objects are gold. You are allowing yourself to be distracted by shiny objects when you should be ignoring them. You're wasting your time and never getting to real learning.

So, I agree that not all ideas are worth exploring in depth (mainly due to some ideas' overwhelming absurdity or easy refutation), but that wasn't my point, Russ. I merely meant to say that I evaluate an idea independently from its source and based on reason. There was no mention after that of which ideas I might find worthy of attention.

Again: if you can't connect the advice to a real life scenario, then the advice must be wrong. Getting laid off for 9 months is not a viable scenario because you can easily access money in the stock market in a week. If you can think of (or your guru provided), a real life scenario where this advice would be good, great, but so far you aren't even doing what you said in the first line: you aren't even really evaluating the advice.

So, this was what I meant by selective reading and ascribing certain thoughts of others onto me (that I merely brought up for discussion and evaluation)! I just said a few posts ago that I was hoping to get feedback and open critique of Ramsey's "road map" for financial peace and wealth building. I don't have any definitive views of his guidelines yet!

Having said that, I think I recall him saying something about ideally never touching your investments (until you're old) to allow them to maximize their compounding effect. But, also, having the fund in cash savings helps if there's a market crash too? Just seeing what the advantages are for a stored away cash emergency fund...

 

[russ_watters]

So, I agree that not all ideas are worth exploring in depth (mainly due to some ideas' overwhelming absurdity or easy refutation), but that wasn't my point, Russ. I merely meant to say that I evaluate an idea independently from its source and based on reason. There was no mention after that of which ideas I might find worthy of attention.

By posting ideas in this thread you are declaring them worthy of attention. Your filter is broken...And your analysis... or attention...is faulty...and you arent paying attention to the analysis of others. Frankly it's hard to identify anything you are doing well in this thread.

I don't have any definitive views of his guidelines yet!

You really need to start getting some. You need to start making your posts add more value in this thread.

Having said that, I think I recall him saying something about ideally never touching your investments (until you're old) to allow them to maximize their compounding effect. But, also, having the fund in cash savings helps if there's a market crash too?

Even if I agreed that that rule should be absolute - and I don't - that still doesn't preclude keeping all of the money in the same fund. Having $50000 in a fund that you never touch and $50000 in another fund for emergencies is logically the same as having a $100000 in a fund of which you declare $50000 to be your emergency fund.

Just seeing what the advantages are for a stored away cash emergency fund...

None that I can identify.

 

[jtbell]

But, also, having the fund in cash savings helps if there's a market crash too? Just seeing what the advantages are for a stored away cash emergency fund...

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

If you're thinking of bond funds or something similar, then OK. It looks like Vanguard Total Bond Market Index dropped by only about 5% in that case, and only briefly (a few months). It recovered completely before the stock market hit bottom.

 

[Vanadium 50]

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

There have only been two such events ever. (The other was 1929) So the question is how much you want to spend on "insurance" for such a rare event. In my view, a well-balanced portfolio is the best protection against that. If you find you need to sell in a hurry, you can pick the most sensible asset class and avoid locking yourself into a big loss.

 

[jtbell]

In my view, a well-balanced portfolio is the best protection against that.

Sure. However, during the last year especially, I've been seeing a lot of younger investors on another forum asking why they shouldn't be 100% in stocks, they've got the guts to ride out a downturn.

Actually, I think the best case for an "emergency fund", either in cash or a bond fund, is when all of your retirement investments are in tax-deferred accounts like a 401(k) and you can't get at them before age 59.5 without incurring a penalty on top of the taxes. This is more likely when you haven't reached the annual contribution limits for those accounts.

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

 

[kyphysics]

Sure. However, during the last year especially, I've been seeing a lot of younger investors on another forum asking why they shouldn't be 100% in stocks, they've got the guts to ride out a downturn.

Us millennials are often lucky to just have a full-time, decent-paying job, JT! It's tough out there! I have a good mix of friends who are going into or already have high-paying jobs (for me, if you're above median, then that's "high-paying"), but just as many that can't find one and have to do low-paying part-time work. Some are thinking of going back to school for a change of career, while others are thinking of doing a high demand trade like welding or programming. Lots of us are nowhere near the investing stage yet. My older brother, who is in a joint law and Ph.D program is the one who got me into thinking and planning earlier about this stuff. He mentioned feeling "barely" able to scrape by on $60K a year teaching high school in Los Angeles prior to that. Granted, he admitted he was bad with money too (admitting to not being a devoted saver and spending on eating out and hanging out a lot)!

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

Why checking instead of savings/money market, JT?

 

[kyphysics]

By posting ideas in this thread you are declaring them worthy of attention. Your filter is broken...And your analysis... or attention...is faulty...and you arent paying attention to the analysis of others. Frankly it's hard to identify anything you are doing well in this thread.

.
Oh please! This is the kind of strange and hyper focus on others' personal character that is completely unhelpful and unhealthy to the thread!

I honestly don't know what you're talking about with saying I haven't paid attention to the analysis of others. I literally just said that I have read most people's posts and understood and appreciated them. I often agree with the analysis/comments. Sometimes I don't. ("Oh, no!" Is that a sin and should you or others berate me or someone else should they happen disagree with you?) In other cases, I'm undecided about some matter. To say that I'm not paying attention, however, is offensive frankly and just plain inaccurate. I'm not sure what you want. Should I quote every person's post I agree with and say: "I agree!" I've done that in the past with someone like NTL, for example, with point-by-point commentary back and forth (affirming areas where I agreed with him and voicing my own line of thought or open questioning of areas where I'm undecided or disagree) only to be "yelled at" at the first instance of maybe disagreeing or providing some critique of a line of thought.

Some of you act like your position is 100% correct when it's not close to being clear that it is, while personalizing things and accusing me of things that are false. You mentioned paying attention. But, I would ask: Have you paid attention to what I've complained about? Can you see why your manner of speaking and "reading into things" can come across as rude, offensive, and also unhelpful to the discussion of ideas? I don't wish to be rude myself, but it's gotten to a point that I think I have to say something about this and have an ultimatum that either people stop personalizing things (it's okay to rationally and politely disagree on ideas) or I shall move on and stop engaging with them.

One final thing: Keep in mind, that I also have things I haven't had time to comment on, because I wanted to look some things up first. I've also mentioned wanting to comment on things earlier, but not having the time (for research) yet to post what I wanted to say. I'm just responding sometimes in bits and pieces, given the time I have on hand.

That's all. I'm going to leave it at that. Either people can take that I'm posting in good faith and also genuinely reading and thinking about others' comments (whether I respond immediately or not and/or agree or not) or think I'm posting badly, in which case it's best to go our separate ways (if the latter).

 

[kyphysics]

So these other investments that you are waiting for, that he won't tell us what they are, better be capable of netting you at least $34,000 over 10 years, with little risk, otherwise they aren't better than storing the money in the stock market.

A summer colleague of mine did FBA sales, but I'm not sure if she was ever as successful as this person purports to be:


This is one example of where having cash on hand may be useful. The former accountant, who quit his job to buy (cheap) things and sell them (at competitive mark up) on Amazon says he's grossed millions doing FBA (fulfilled by Amazon) sales. He goes and buys clearance items at stores (such as WalMart, Target, etc.) in bulk and sells them online cheaper than what the listed price is to draw buyers for a profit.

He says he made $1,000/month in profit working part-time at 10 hours a week at first, before going full-time. As of now, he claims to have made 15% profit on gross sales of $4M and pays himself $60,000 in salary. He's got a staff of 11 people now as well. In a way, this reminds me of the guy on Extreme Couponing, who bought a ton of items in bulk for pennies on the dollar and in addition to using them himself and donating to charity, he also sold them to neighbors and what not. The basic idea is the same. Buy low, sell at a competitive mark-up for profit.

I guess you could say the cash on hand needed for an immediate bulk sale/clearance buy for something like what this guy is doing can be considered a business asset tool and not just some passive cash laying around waiting for a buy every few years. He's constantly buying stuff for his business. But, it's a seeming example of using cash to profit vs. having it stored in securities investments, where it could be tied down or down in the market at any given time.

Another thought that came to me from having watched a lot of Dave Ramsey shows is that of house flipping. FWIW, he warns people against it, despite having made millions himself in his 20's doing it, because it's requires very specialized skills and talent and many people don't have them and think it'll be easy only to lose money. But, basically, anything where there's a very low buy value on something that has a higher or potentially higher sales value (or cash flow generating value) can be something that you would benefit from having immediate cash on hand.

I guess when you say you can't think of anything that you'd buy requiring immediate cash that could net you more than what you'd make with your money in the market, it's perhaps because you're not an all-around business person maybe? I don't see myself in that light either, despite being open to such opportunities. I'm not natural at seeing these types of deals and/or looking for them. Your comments seem to speak more to your own (and mine) limitations of imagination and business expertise versus other people's, who may be in business or just have a knack at these things.

I don't know if having immediate cash tucked away, while using the TVOC and earned interest in savings, is a good idea for me yet. But, I wouldn't rule it out just yet.

 

[kyphysics]

May I ask; are you an investment-age adult? Is this real to you or just hypothetical?

I'm over 21 if that helps, but am not in a financial position to invest yet. I have one year, before graduation and will be taking some "baby steps" (to use a Ramsey-ism) to prepare for when I will be able to invest (or when it would be presumably wiser for me).

But, having said that, many people learn the ropes and/or buy stocks as kids (through their parents' accounts). I just finished watching Lauren Templeton's (the great niece of the famous Sir John Templeton, who has been called the greatest investor of the 20th century) lectures for Google Talks and at the Benjamin Graham School for Value Investing and she mentions having bought her first stock at age 6. And she's been investing ever since!

The big thing with value investing is that you always have to be ready even if you're not making a single trade/buy/sell in several years. Warren Buffet, for example, talks about sometimes not buying a single thing in years and patiently waiting for the right opportunity. Lauren Templeton (who heads Templeton Phillips nowadays) says her great uncle, Sir John Templeton, always kept a wish list of his favorite companies he wanted to own, but for which it wasn't the right time to buy, in his top desk drawer. He would wait patiently for what he called "maximum pessimism" in the markets before buying. Her lectures were great and showed all the historical recessions and crashes of the 20th and 21st centuries and the times Templeton was buying when everyone was selling low. A lot of the "work" to be done for value investors is just "watching" and waiting (and researching).

I'm not actively buying stocks now, but I do have an account with Investopedia and have played their real-time stock market simulator game in the past. I have friends who play too. I got away from it to focus on my academics in the past, but am now going back to learning more about investing. It might take me five years to be in a position to be financially ready to invest and even then, it might take a few more years to find the right stock to value invest in (albeit, I'd want to invest in funds too). The process is "slow." It can take years, so I see this as both a learning time (getting to understand the basics) and also real investing in the sense of laying the ground work of looking into companies I might want to invest in, but for which the timing is not right (i.e., the price is too high for that stock currently).

So, to answer your question more precisely, yes, this is definitely very real for me.

 

[CWatters]

Why checking instead of savings/money market, JT?

I'm not JT but here in the UK the interest rate on some regular current accounts (which i think is the same as a checking account in the USA) is higher than on many savings accounts.

 

[russ_watters]

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

There have only been two such events ever. (The other was 1929) So the question is how much you want to spend on "insurance" for such a rare event.

It's even worse than that. This "insurance" is only actually insurance in rare cases such as that and only if you stop using it permanently after such a crash. All it takes is to survive one recession and the S&P index fund is the better deal. Or to put it another way, looking forward from today: the savings account is only better if we have a 56% crash every 8 years in the future. In which case none of the conventional investment advice works anymore either.

 

[russ_watters]

Us millennials are often lucky to just have a full-time, decent-paying job, JT! It's tough out there!

It's not as tough as millenials complain it is:

I have a good mix of friends who are going into or already have high-paying jobs (for me, if you're above median, then that's "high-paying"), but just as many that can't find one and have to do low-paying part-time work.

So, right out of college, half of you are already above the median? That means you're 20 years ahead of schedule!

Oh please! This is the kind of strange and hyper focus on others' personal character that is completely unhelpful and unhealthy to the thread!

There is nothing personal in what you quoted. I know nothing about you other than that I now know you are a millenial. My response was entirely in response to your tiresome, repeated, posting of bad advice without analysis or taking-in responses others have given to it.

I honestly don't know what you're talking about with saying I haven't paid attention to the analysis of others. I literally just said that I have read most people's posts and understood and appreciated them.

Repeating the same thing over and over again doesn't show recognition of responses you've already received to it (much less showing you've done any analysis of it).

This is one example of where having cash on hand may be useful.

I'm not even going to respond to that other than to say no...and that you should be able to analyze that scenario by now.

 

[kyphysics]

It's not as tough as millenials complain it is:

Russ - I'm going to put a hold on any further posts in this thread for a while.

I do see that I missed two previous posts you wrote and one that may be relevant to what you're talking about here. I'm not sure why I skipped them. It could have been their proximity to other posters' posts in this thread that I have chosen not to read (in which case my eyes would have quickly glanced over a section of comments while using the scroll feature as well and possibly inadvertently skipping your post) or something you said in one of them that made me discontinue reading it. I'll have to go back and check when I have time.

I'll simply state for the time being (until I have more time to respond in full) - and this is a repeat of what I've said before, but perhaps said slightly differently - I don't read every post in forums, nor respond to them. If a post starts out rude, aggressive, and attacking and/or a particular poster has shown themselves to have that sort of persona and I've warned them before in the past (I usually give fair and polite warnings, but sometimes I don't even do that if I feel I've done it enough already in a thread that that person should have read it too), then I sometimes won't continue reading and/or refuse to respond. Just as I would walk away from a rude, unnecessary conversation on the street with a stranger, I do the same online. I don't feel humans are under any obligation to engage with others who fail to show any signs of personal respect and social/personal consideration in the way they speak to others. In fact, rudeness and things of that nature go beyond just being annoying. They can harm another person's emotional well-being, which in turn affects other aspects of their life (from ability to focus and think properly to even physical health concerns). So, if a post or poster falls into that category, it's not safe to assume I've read them.

Since I'm too busy to reply to this message and some previous ones, at the moment, and I don't want to be accused of ignoring the discussion analysis that's happened thus far, I'll temporarily refrain from posting anything else until I can clear some things up.

I regards to your last sentence of this post, I saw that I hadn't fully read your previous post about using a credit card to float the balance of an immediate high value purchase desire and to use the month to pay it back to cash out some stocks to cover that sum. I did have a question about this I wanted to ask later...no time right now...off the top of my head, it looks okay to do that assuming you have a high credit limit to cover the cost and your securities' values are high enough to cover them at that very moment.

I'll re: this later. Have to run.

 

[Rive]

What financial wisdom, concepts, and knowledge do you feel all adults should know to be literate/functional/successful in society?

Well, the most shocking and useful revelation for me was when I finally understood that most of the so called 'experts' are actually selling the market itself instead of trading in any instruments, stocks, commodities or currencies.

 

[jtbell]

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

Why checking instead of savings/money market, JT?

A long time ago (early/mid 1980s) I did have most of it in a money-market account. For a while, interest rates were sky high and for a few months I was getting interest at an annual rate of more than 18% . Then rates dropped and I probably decided it wasn't worth the hassle of shuffling money between accounts for the small returns I was getting. This was before it was possible to transfer money simply by logging into an online account and clicking a mouse. At some point that "cash cushion" became a small part of my assets anyway, as I continued to put money via payroll deduction into my tax-deferred retirement account at work.

I might be able to get $100-$200 in interest on my cash cushion if I put it somewhere besides a checking account, but we're pretty frugal otherwise which more than makes up for it. For example, we've always used a roof antenna for broadcast TV, instead of cable or satellite TV. That alone saves us several hundred dollars per year. We buy most of our groceries at Aldi, and my wife buys most of her clothes at thrift shops. Etc.

 

[Stavros Kiri]

My favorite advice along these lines is "Buy a stock. When it goes up, sell it. If it doesn't go up, don't buy it."

This is kind of enigmatic and I hope you realize it's just a figure of speech. E.g. you either have to be a prophet (to predict if it will go up or not) or have specific means and criteria to make such predictions. Unless stating those such means and criteria such an advice is useless! (I am talking about the third part)

Also, from the mathematical standpoint, even the second part ("When it goes up, sell it.") is inaccurate. Better yet, unless stating 'how much up' it can be a bad advice! (Without knowing and predicting the expected/anticipated tendency ... and/or 2nd derivative ...)

But in any case I think I know what you mean ... as a pun (or figure of speech).

 

[Vanadium 50]

<foghorn leghorn>
Son, I say, son, it's a joke son. Am I going too fast for y'all?
</foghorn leghorn>

 

[Stavros Kiri]

Ah, ok

 

[kyphysics]

Back with two questions for the financial chat gang here!:

1.) Cost of homeownership - Does anyone know if there's a formula for determining how much it costs a person a year in "hidden fees" to own a house (vs. just renting). Some things I know you have to keep in mind are:

a.) homeowner's insurance
b.) property taxes
c.) upkeep, repairs, and prevention (lawn, broken fixtures and structures, termite inspections, etc.)

What else might you have to pay for that would be unique to owning a home versus just renting somewhere? And is there a "formula" (even if a general one) for determining how much you'll be paying each year for these home costs? Say you have a three bedroom house in an average suburb in middle America (let's say it's worth $250,000). Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)?

2.) This was something a friend and I talked about over lunch today in a cool hypothetical (although, for him, it's possibly a real situation). He's not interested in kids, nor marriage and wants to save up lots of money quickly to reach $xxx,xxx.00 so that he can possibly just live off of the interest on investments. I thought that was pretty interesting, albeit odd. He doesn't mind not even having a home, but is open to one too. But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever? Brought this up with another friend, who said he'd quit his job at $750,000 and just live off the interest. He'd feel $75,000 would be minimum for his lifestyle and needs.

What if everyone did this in America? Who would work anymore?

 

[Stephen Tashi]

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever?

These days getting 10% interest is unlikely. Also interest income is taxed.

As to living off $50,000 a year, in most parts of the USA you could do that if you had nobody else to support and no major debts.

 

[kyphysics]

These days getting 10% interest is unlikely. Also interest income is taxed.

As to living off $50,000 a year, in most parts of the USA you could do that if you had nobody else to support and no major debts.

I know this is going to kill Russ Waters, Vanadium, and NTL, but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea) in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield?

True, you'd have to pay capital gains taxes, but you'll be taxed at a lower percentage than with "normal" income. 15% isn't too bad, imo, for profits off of investments. The same $50,000 in salary through a normal job would get taxed worse in the upper margins.

re: COL ...Yeah, stay out of California with that salary! My family used to live there and my older brother taught math in Los Angeles for several years (he's even poorer now as a Ph.D. student lol). Most non-big city areas should be fine. One massive draw-back to this retire early and live off of investment income is the gap in your resume if you ever decide to return to work after 2+ years. If you somehow lost your investment money down the line, then you could be in some trouble.

 

[DrDu]

If you read the beginning of this thread you will have noticed the following rule: Interest is what you get for taking a risk

 

[MarneMath]

I would say the number you would reasonably need is near 1 million to honestly live off of your interest. First, 10% year after year growth is absurd. Does it happen sure. Does it happen reliably? When you want to live off of your saved money, you typically want your assets to be more focused towards annuities. You can expect somewhere between 2-3% return on bonds and cd's and probably 4% on dividends with blue chip type stocks. Either way, you're still a long way from that 10% you're looking for.

With that said, if you're risk hungry you can choose to make riskier moves and creep closer to the 10% goal, but with that risk comes the potential of losing significant assets depending on the year.

 

[NTL2009]

I know this is going to kill Russ Waters, Vanadium, and NTL, but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea) in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield? ... .

Well, I'm glad you posted this. If this doesn't stop you from listening to Dave Ramsey, nothing will. He is just plain flat out wrong on basic financial facts. Not opinion, not viewpoint, not strategy - facts. Why listen to a financial 'guru', who either doesn't know what he is talking about, or is lying to you? Does Dave publish his history in those funds for review?

OK, fact is you just cannot count on getting 10% annually. Instead of listening to gurus, or asking people on a forum, look it up yourself. You need to depend on yourself, not other people. An old saying is, 'no one cares more about the safety of your money than you do'.

Look here: https://goo.gl/krWdV6 and https://goo.gl/vYLhfw

So I just went back 20 years. The total stock market returned 6.95% - that's a long ways from 10%. And no, picking different funds/stocks will not reliably get you above that figure (google "active versus passive investing" for many well done studies).

And most retirees would be uncomfortable with 100% in the stock market, most will have some in bonds to provide a cushion in a downturn. A 60/40 Stock/Bond portfolio returns a slightly lower 6.5% (and almost half the volatility).

So if you tried to draw 10% annually, inflation adjusted, 20 years ago, you'd end up with $0 if you were 100% in stocks, and just $43K if you were 60/40 (not enough for next year's withdrawals). So imagine you took DR's advice 20 years ago? Or today, and the future ends up looking pretty much like that? Ouch!

... But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever? Brought this up with another friend, who said he'd quit his job at $750,000 and just live off the interest. He'd feel $75,000 would be minimum for his lifestyle and needs. ...

See above.

I've read many studies on this, and there are some tools out there you can play with that use historical data (google firecalc and cfiresim for two). To not have run out of money for any 40 year period in US history (data goes back to 1871), a 3.2% inflation adjusted withdrawal is about all you can do. And a young person would need to plan for longer - though 3.2% seems to become asymptotic.