The wealth-building thread

[Pdxwayne]

Kiyosaki's Why "A" Students Work for "C" Studenst and "B" Students Work for the Government. was really intended for parents wishing to teach their youngsters to gain a broader perspective of how money works, But since I don't have children, I skimmed sections pertaining to suggested family activities, and I found it a fairly easy read.

But I was nearly at the end of the book when I encountered what I thought was a really neat take on how to buy an automobile: It seems that the author had $50K to spend, and found a Porsche that he wanted to own. But this is an author who is very fond of the fable of the golden egg-laying goose, and from this perspective, simply hanging over his money was tantamount to surrendering his goose. So how to solve the seeming conundrum? By using the $50K + bank money to buy a business which generated enough net revenues each month to cover his car payments. Even better, the $50K initial investment is returned at some point, and the monthly revenue stream continues: This sort of thinking is entirely new to me.

There are of cause risks of running a business.
; )

Another similar idea:
Instead of paying off home mortgage early with extra cash, use that cash to buy rental properties. Those rental properties will eventually have enough cash flow to pay off your home mortgage. So, instead of having just a paid off home, you ended up with a paid off home + rental properties that continue to provide cash flows. Again, there are risks in running rental properties.

 

[PatentLawyer]

There are of cause risks of running a business.
; )

Another similar idea:
Instead of paying off home mortgage early with extra cash, use that cash to buy rental properties. Those rental properties will eventually have enough cash flow to pay off your home mortgage. So, instead of having just a paid off home, you ended up with a paid off home + rental properties that continue to provide cash flows. Again, there are risks in running rental properties.

You know I'm a fan of that. Though it's not uncommon to purchase rental properties using a mortgage, you can still often find yourself cash flow positive. We have one rental property with a mortgage, but still come out about $550/month ahead--not chump change! I have a distaste for debt, but if we were more aggressive, we'd have a much larger portfolio of properties and lot more leverage. But I am happier (that's what we're after here!) with less debt.

 

[Pdxwayne]

You know I'm a fan of that. Though it's not uncommon to purchase rental properties using a mortgage, you can still often find yourself cash flow positive. We have one rental property with a mortgage, but still come out about $550/month ahead--not chump change! I have a distaste for debt, but if we were more aggressive, we'd have a much larger portfolio of properties and lot more leverage. But I am happier (that's what we're after here!) with less debt.

Same here. Peace of mind is more important to us than being more aggressive with more debts.

 

[muslhead]

I sense you had a point to make but I'm not seeing it..?
As for PS Audio, I doubt that Paul McGowan has filled out a time sheet or relied on someone else for a paycheck in decades. Could you do it? I'm realizing how little I know of such things.

I did have a point and it looks like it got cut off when i posted. I never reviewed my posting afterward to notice sorry for the discontinuity of my prior post.

I dont know if your question was directed at me but if so, I dont know about Paul. I have been on both sides of the table. I worked for others for 2 decades. The last 2 have been for myself so I can and have done it. I do think Paul, at one time, worked for someone else before PS audio. While i was fortunate to pick a very high paying job in a dynamic high growth industry (semiconductors) out of college, i did make a lot, mostly via stock options and the shares given to employees, not via salary. Not because the salary wasnt large, it was, its because of the cost of living in Si Valley easily eats up a low 6 digit salary.

I have not posted the following as this thread degrades to repeating historical things anyone with a modicum of experience or search capabilities already knows. And the its eaten up by the ignorant. I get frustrated reading it but like the fool i come back to try and provide a different financial perspective. Why? because it has as much probability to be correct as all the standardized bullshit that is posted by others above. I have nothing to gain. I am not selling anything. I KNOW the best way to find the best solution is not to find those that think like you (confirmation bias) but those that don't. This is why you always need a tenth man in groups and someone who can provide you a different view. Someone whose job it is to be the devils advocate. That has been my job since starting my journey as an RIA and learning how the financial world works. One opinion, for example is that sovereign bonds will be more risky than stocks (not more volatile but more risky). There is not one government on the planet that has the capability to return capital of their outstanding bonds. NONE. If you are never going to get paid back on the bond, why on gods green earth would you purchase one? Its not the case now but it will be in the future. When? No clue but if you dont have your eyes on the road and and instead plop you money in a balanced portfolio, expect your 8% return forever because that what was developed (and failed) 60 years ago, the best of luck. The market is a living breathing and changing environment that will strip anyone who stays static.

Now back to a point -
The greatest lesson i have learned about wealth creation is to find a passion, start a business, become an expert and do it to the best of your abilities. Once there, keep your head down and of course, mind your spending like has been posted by others above (its not the answer an accelerator of wealth). The rest will solve itself. Money follows expertise. My client with the most amount of money (double digit millions of dollars), at just over 40 has done just that. He has always put money away for himself and but mostly for his business. He is not the only one i have like that so this is not a one data point sample size. Those of us that work for ourselves rarely go "to work". We dont work because we do something we love which is not work. Wealth is rarely ever created in reasonable sums working for someone else. It takes balls and someone willing to risk it all but otherwise you will be stuck working for "the man" forever and likely never be wealthy. Wealth is created by investing in yourself and taking risks.
It is my greatest disappointment in myself i didnt start earlier. Dont make my mistake.

 

[Pdxwayne]

I did have a point and it looks like it got cut off when i posted. I never reviewed my posting afterward to notice sorry for the discontinuity of my prior post.

I dont know if your question was directed at me but if so, I dont know about Paul. I have been on both sides of the table. I worked for others for 2 decades. The last 2 have been for myself so I can and have done it. I do think Paul, at one time, worked for someone else before PS audio. While i was fortunate to pick a very high paying job in a dynamic high growth industry (semiconductors) out of college, i did make a lot, mostly via stock options and the shares given to employees, not via salary. Not because the salary wasnt large, it was, its because of the cost of living in Si Valley easily eats up a low 6 digit salary.

I have not posted the following as this thread degrades to repeating historical things anyone with a modicum of experience or search capabilities already knows. And the its eaten up by the ignorant. I get frustrated reading it but like the fool i come back to try and provide a different financial perspective. Why? because it has as much probability to be correct as all the standardized bullshit that is posted by others above. I have nothing to gain. I am not selling anything. I KNOW the best way to find the best solution is not to find those that think like you (confirmation bias) but those that don't. This is why you always need a tenth man in groups and someone who can provide you a different view. Someone whose job it is to be the devils advocate. That has been my job since starting my journey as an RIA and learning how the financial world works. One opinion, for example is that sovereign bonds will be more risky than stocks (not more volatile but more risky). There is not one government on the planet that has the capability to return capital of their outstanding bonds. NONE. If you are never going to get paid back on the bond, why on gods green earth would you purchase one? Its not the case now but it will be in the future. When? No clue but if you dont have your eyes on the road and and instead plop you money in a balanced portfolio, expect your 8% return forever because that what was developed (and failed) 60 years ago, the best of luck. The market is a living breathing and changing environment that will strip anyone who stays static.

Now back to a point -
The greatest lesson i have learned about wealth creation is to find a passion, start a business, become an expert and do it to the best of your abilities. Once there, keep your head down and of course, mind your spending like has been posted by others above (its not the answer an accelerator of wealth). The rest will solve itself. Money follows expertise. My client with the most amount of money (double digit millions of dollars), at just over 40 has done just that. He has always put money away for himself and but mostly for his business. He is not the only one i have like that so this is not a one data point sample size. Those of us that work for ourselves rarely go "to work". We dont work because we do something we love which is not work. Wealth is rarely ever created in reasonable sums working for someone else. It takes balls and someone willing to risk it all but otherwise you will be stuck working for "the man" forever and likely never be wealthy. Wealth is created by investing in yourself and taking risks.
It is my greatest disappointment in myself i didnt start earlier. Dont make my mistake.

Everything got risks.

Yeah, sure, there are always examples of those who made it with business.

BUT, there are always those who failed due to various reasons. My father-in-law was a very smart engineer who thought he could do better than working under a boss. But he continued to struggle in business for decades until the day he got a stroke and passed away not long after.

My previous neighbor was a smart engineer with his own business, but he struggled for years trying to keep afloat and just recently decided to sell his business and work as an employee for another business.

 

[Chromatischism]

At last, we agree about something. It's 1999, all over again.

Of course, it's a "Boomer thing" to remember stuff that happened more than ten years ago. We're smug, that way.

"...Mark Cuban thinks so, arguing recently on his blog that the difference between the 2000 bubble and today’s economy is that today’s bubble isn’t really about the stock market. It also includes private “angel” investments, which can’t just be sold off like stocks. And that, he says, is a problem:

So why is this bubble far worse than the tech bubble of 2000?​

Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.​

If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?"​

https://time.com/3741681/2000-dotcom-stock-bust/

I don't invest in IPOs. Seen too many people get burned over the past year. Lucid, Coinbase...

 

[muslhead]

Fair, and of course I'm here, too. But there is so much gratuitous snark. Everyone is a tough guy when they are behind their keyboard and no one knows their name.

Some people are tough guys and snarky assholes in front of their keyboard. Ok, so i admit it.
Also if you understood securities laws you would understand the risk if being anything but anonymous in a public situation for an RIA. Unless you are Bernie Madoff, of course

 

[muslhead]

Everything got risks.

Yeah, sure, there are always examples of those who made it with business.

BUT, there are always those who failed due to various reasons. My father-in-law was a very smart engineer who thought he could do better than working under a boss. But he continued to struggle in business for decades until the day he got a stroke and passed away not long after.

My previous neighbor was a smart engineer with his own business, but he struggled for years trying to keep afloat and just recently decided to sell his business and work as an employee for another business.

Risk is commensurate with return. Would you rather have someone be responsible for your future or do you want to be at the helm and manage? Easy decision for some, others not so much. I find millennials the hardest to convince of this.

 

[MRC01]

... when the time comes to make withdrawals from said 401(k), you will likely be depleting your asset, not generating income from it. ...

What motivates this statement? Why I ask:
A 401k shouldn't be different from any other account invested in various mutual funds, ETFs, or whatever. Suppose for simplicity when you retire it's all in one mutual fund, say SWYDX, and has $1M in it (or whatever, doesn't matter). Year 1 of retirement you sell $50k of the fund for income. You pay income tax on that $50k and the fund has $950k remaining which continues to grow.
In short, you are doing BOTH: gradually liquidating the fund, yet at the same time it continues yielding a return. Whether it grows or shrinks depends on how much you take out and how much it yields.

 

[Chromatischism]

and while you can amass a decent amount of money via capital gains in this manner, the taxes are merely deferred, if that. And when the time comes to make withdrawals from said 401(k), you will likely be depleting your asset, not generating income from it.

Here's an idea I discovered recently while grappling with the same question. You'll need to do the research and math on this, but look into getting that 401k converted to a Roth IRA if you can afford the taxes, then leave it invested since there is no required distribution after 70 1/2. That helps some. Then, look into using that as collateral for an interest-only loan rather than withdrawing it: https://www.wellsfargoadvisors.com/why-wells-fargo/products-services/lending/securities-based.htm

Then you need a small source of income to pay the loan. It may be that social security would pay for the loan, depending how much SS you're getting and how much you're borrowing to live off of. My back of the napkin says a 3.25% loan could easily fall within your SS income.

So there you have it. Your money stays invested and you can do yearly interest-only loans in perpetuity. Only pay them off when you have to. Then, donate the remainder to charity in your will. I'd like to get some feedback on this idea to understand what if any gotchas there are.

 

[MRC01]

Here's an idea I discovered recently while grappling with the same question. ... Your money stays invested and you can do yearly interest-only loans in perpetuity. ...

It sounds like the idea is that the interest you pay on the loan is less than what your investments earn. Same idea as borrowing money to buy a house even if you can afford to pay cash. You don't even need to have a job, you can sell off investment funds to make loan payments. Those sell-off amounts won't lower your investment principal because we're assuming you borrow money for less than your investments earn. The idea is not entirely risk-free, since you will encounter years where your investments lose money yet you still have to pay the mortgage. If you can weather this in the short-term, then it can be a good long term approach.

The first problem that comes to mind is that most people shift investments to less volatile instruments as they retire. These have lower average rates of return, so you may not be able to borrow money for less than what your investments earn. Or the difference may not be enough to justify the approach.

Yet here's a twist: what if you keep your money invested in equities to get a higher long-term return, while borrowing against it for living expenses? In this case, if you can find a fixed long-term interest rate for the money you borrow, this cushions the volatility of your equity investments because when they lose money on a bad year, it doesn't curtail your income because that comes from the loan. I don't know whether this would work, you still have short-term risk how to make the loan payments on years your volatile investments lose money, but it doesn't seem obviously wrong or crazy. Seems worth studying or discussing with a financial pro.

BTW, this is starting to sound like an annuity. Give them a lump sump and they guarantee so much income over a time period.

 

[levimax]

It sounds like the idea is that the interest you pay on the loan is less than what your investments earn. Same idea as borrowing money to buy a house even if you can afford to pay cash. You don't even need to have a job, you can sell off investment funds to make loan payments. Those sell-off amounts won't lower your investment principal because we're assuming you borrow money for less than your investments earn. The idea is not entirely risk-free, since you will encounter years where your investments lose money yet you still have to pay the mortgage. If you can weather this in the short-term, then it can be a good long term approach.

The first problem that comes to mind is that most people shift investments to less volatile instruments as they retire. These have lower average rates of return, so you may not be able to borrow money for less than what your investments earn. Or the difference may not be enough to justify the approach.

Yet here's a twist: what if you keep your money invested in equities to get a higher long-term return, while borrowing against it for living expenses? In this case, if you can find a fixed long-term interest rate for the money you borrow, this cushions the volatility of your equity investments because when they lose money on a bad year, it doesn't curtail your income because that comes from the loan. I don't know whether this would work, you still have short-term risk how to make the loan payments on years your volatile investments lose money, but it doesn't seem obviously wrong or crazy. Seems worth studying or discussing with a financial pro.

BTW, this is starting to approach how annuities work. Give them a lump sump and they guarantee so much income over a time period.

Leveage cuts both ways

 

[MRC01]

Leveage cuts both ways

Yes.
And, most of the ideas we can come up with, chances are, somebody else already thought of that, and if it's a good idea, they created a ready-made financial instrument for it. And others competed with them, the resulting efficiency making it a better deal for you to jump on their train rather than create your own.
Not always, but often enough.

 

[Pdxwayne]

Risk is commensurate with return. Would you rather have someone be responsible for your future or do you want to be at the helm and manage? Easy decision for some, others not so much. I find millennials the hardest to convince of this.

You sound like my older brother. He is a successful business man, btw. ; )

I am responsible for my future, no matter how I earn a living. : P

In addition, if everyone takes your advise and open their own business, how will anyone get employees to help?

 

[MRC01]

... In addition, if everyone takes your advise and open their own business, how will anyone get employees to help?

Conversely, if everyone wants to be an employee, who is going to create the companies that will hire them?

 

[muslhead]

Here's an idea I discovered recently while grappling with the same question. You'll need to do the research and math on this, but look into getting that 401k converted to a Roth IRA if you can afford the taxes, then leave it invested since there is no required distribution after 70 1/2. That helps some. Then, look into using that as collateral for an interest-only loan rather than withdrawing it: https://www.wellsfargoadvisors.com/why-wells-fargo/products-services/lending/securities-based.htm

Then you need a small source of income to pay the loan. It may be that social security would pay for the loan, depending how much SS you're getting and how much you're borrowing to live off of. My back of the napkin says a 3.25% loan could easily fall within your SS income.

So there you have it. Your money stays invested and you can do yearly interest-only loans in perpetuity. Only pay them off when you have to. Then, donate the remainder to charity in your will. I'd like to get some feedback on this idea to understand what if any gotchas there are.

The gotchas are exactly the same thing with your other threads. you are assuming that something will be the same in the future as it is now. We know that is never the case. This only works if interest rates stay low. Bonds have been a very long bear market driving interest rates to zero. Will they always be? Maybe in your investing timeframe which would make your idea doable.
You also assume you will always be able to get an interest only loan. Not always the case. During the 08 meltdown, most loans were not available to the average person including interest only. Could you find them? Sure but look up the word usury and you will understand the gotcha here.
You make another assumption you will be able to get a loan using your IRA as collateral. Bad assumption.
If your ira declines less than the value that it being used for your loan, you will either have a margin call or have it repossessed if you cant provide the difference.
IF you are planning on making 8% year when making your plans that only works when we are in a long term market uptrend. Uptrends end, and long term consolidations (sideways market) or even bear markets occur. Check out 1968-81 returns on stocks for a sideways market. There are plenty of bear market examples to know the carnage that occurs.
To do leverage you need to look at worst case, not historical. Humans are horrible at assuming anything but linear thinking which never bodes well for long term financial decisions.

There is a reason why leverage is the biggest way to make a big pile small.

 

[muslhead]

Conversely, if everyone wants to be an employee, who is going to create the companies that will hire them?

Everyone wont. In fact the majority wont. Not enough trust in themselves, planning and business acumen. there will always be someone (in fact generations full of them) that will want to be nothing more than an employee. Its too much risk for them

 

[Chromatischism]

Yet here's a twist: what if you keep your money invested in equities to get a higher long-term return, while borrowing against it for living expenses? In this case, if you can find a fixed long-term interest rate for the money you borrow, this cushions the volatility of your equity investments because when they lose money on a bad year, it doesn't curtail your income because that comes from the loan. I don't know whether this would work, you still have short-term risk how to make the loan payments on years your volatile investments lose money, but it doesn't seem obviously wrong or crazy. Seems worth studying or discussing with a financial pro.

That's exactly what the SBLOC is. If you have enough of a balance to be doing this in a way that can fund your living, you have enough for a cushion to weather any down years. You could dial back from the most risky stuff but I don't think you should have to scale back from simple funds like SPY or something.

And, if you're getting SS, the loan interest is paid for. Doing an $80k loan each year costs $2600 in interest. You could either sell some funds each year to pay the loan (after they gain more than the loan interest), or float this as long as you need (I would say, stay under 50% loaned, though to make sure you never get liquidated if the market tanks). Then when you croak, bam – everything gets paid and what's left goes to whatever/whoever you put in your will.

 

[muslhead]

You sound like my older brother. He is a successful business man, btw. ; )

I am responsible for my future, no matter how I earn a living. : P

In addition, if everyone takes your advise and open their own business, how will anyone get employees to help?

is your brother as big of a PITA as me? probably not

 

[Chromatischism]

The gotchas are exactly the same thing with your other threads. you are assuming that something will be the same in the future as it is now. We know that is never the case. This only works if interest rates stay low. Bonds have been a very long bear market driving interest rates to zero. Will they always be? Maybe in your investing timeframe which would make your idea doable.
You also assume you will always be able to get an interest only loan. Not always the case. During the 08 meltdown, most loans were not available to the average person including interest only. Could you find them? Sure but look up the word usury and you will understand the gotcha here.
You make another assumption you will be able to get a loan using your IRA as collateral. Bad assumption.
If your ira declines less than the value that it being used for your loan, you will either have a margin call or have it repossessed if you cant provide the difference.
IF you are planning on making 8% year when making your plans that only works when we are in a long term market uptrend. Uptrends end, and long term consolidations (sideways market) or even bear markets occur. Check out 1968-81 returns on stocks for a sideways market. There are plenty of bear market examples to know the carnage that occurs.
To do leverage you need to look at worst case, not historical. Humans are horrible at assuming anything but linear thinking which never bodes well for long term financial decisions.

There is a reason why leverage is the biggest way to make a big pile small.

1. Rates should stay low for a while to juice the economy, but even if they go up, just be ready to make adjustments.
2. Never loan more than 50% of your investment value. We're talking like 50-100k loans on a million or two in value.
3. Always keep your shoes on in case changes need to be made. If that means you switch to the traditional withdrawal method, so be it.