The Five Biggest Myths About Saving Money, According to a Millennial(bloomberg.com)
bloomberg.com
The Five Biggest Myths About Saving Money, According to a Millennial
http://www.bloomberg.com/news/articles/2015-11-11/the-five-biggest-myths-about-saving-money-according-to-a-millennial
46 comments
If you followed his advice and not bought a house you would have had 2 less emergencies. Also, renting in the city you would have had no need for a car and thus 0 emergencies.
I can't tell if this is parody or a serious encouragement to conform to a specific lifestyle and thus remove all life's problems.
"The City" being Manhattan or perhaps Chicago, the only place sin America where we have usable public transportation.
Depending on lifestyle and place of employment, being carless without a lot of sacrifices isn't necessarily limited to New York and Chicago. I know people in Boston and San Francisco without cars who use some combination of public transportation, Uber/taxis, Zipcar, and conventional rentals. That said, it's somewhere between inconvenient and very difficult in many places--including urban ones.
> public transportation, Uber/taxis, Zipcar, and conventional rentals
That doesn't add up to something more expensive than a car? I was in ny recently, and a train ticket on the LIRR cost ~20 round trip. That's $600/month. But, it's better overall because of the traffic to and in the city.
That doesn't add up to something more expensive than a car? I was in ny recently, and a train ticket on the LIRR cost ~20 round trip. That's $600/month. But, it's better overall because of the traffic to and in the city.
Well, somewhere like NY you also have to consider the cost of storing the car. You live in a dense city and transportation tends to be expensive one way or the other.
It really depends on a whole host of factors both related to the economics and the convenience. There are a few cities that tend to be particularly car unfriendly. Many where cars are essentially a requirement. And some that can go either way depending upon your lifestyle, where you work, and a variety of individual preferences.
But figure that a car is going to cost some X thousands of dollars a year plus whatever it costs you to park it. (The government rate is $0.57 or so per mile though that may not be that directly applicable to car vs. other transportation analysis.)
It really depends on a whole host of factors both related to the economics and the convenience. There are a few cities that tend to be particularly car unfriendly. Many where cars are essentially a requirement. And some that can go either way depending upon your lifestyle, where you work, and a variety of individual preferences.
But figure that a car is going to cost some X thousands of dollars a year plus whatever it costs you to park it. (The government rate is $0.57 or so per mile though that may not be that directly applicable to car vs. other transportation analysis.)
San Francisco is very bikeable/longboardable/electricgizmoable.
Source: I don't have a car, but I do have a motorized longboard.
Source: I don't have a car, but I do have a motorized longboard.
Those are the only cities with ubiquitous rail transit. But you can do it in lots of other places if you insist on it or if you don't feel like you're above riding on buses, the latter of which are available in basically every major U.S. city.
I live in Columbus, and I looked at a bus route to work, and it was about 1.5 hours one way, with a transfer. For me, it's a 20 minute drive to work.
Also there is not service to/from most of the suburbs.
Also there is not service to/from most of the suburbs.
Pretty sure he still had emergencies. You're suggesting he just wouldn't need to pay for them if he was renting.
I'd personally rather pay an extra 20-40 bucks a month for something like BGE Home appliances/HVAC warranty than an extra 30% a month in rent relative to the cost of the mortgage. Oh, and gain equity. And rent the same house to someone else in a few years, have them pay my mortgage, and make an extra 30% off the top from them.
Renting isn't stupid. Buying isn't either, despite how popular that notion seems around here.
I'd personally rather pay an extra 20-40 bucks a month for something like BGE Home appliances/HVAC warranty than an extra 30% a month in rent relative to the cost of the mortgage. Oh, and gain equity. And rent the same house to someone else in a few years, have them pay my mortgage, and make an extra 30% off the top from them.
Renting isn't stupid. Buying isn't either, despite how popular that notion seems around here.
It was also advice for Millenials. I don't know who seibelj is, so I have no ability to judge whether a house is or is not a good idea.
I own mine. It is, for me, where I am physically and personally and professionally, a better move than renting. But then, I'm not really a Millenial. (Born 1978, some stretch "Millenial" back to the 1980s, but in life trajectory I'm more "X" than "Millenial". Though frankly I identify with neither.)
I own mine. It is, for me, where I am physically and personally and professionally, a better move than renting. But then, I'm not really a Millenial. (Born 1978, some stretch "Millenial" back to the 1980s, but in life trajectory I'm more "X" than "Millenial". Though frankly I identify with neither.)
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That depends on how you define emergency. Water-heater and car tires don't qualify as emergency for me. Heck, car tires are a regular maintenance expense. Emergency is something like the house burning down, the car getting stolen, or my health taking a turn for the worse. All of which I insure against.
I assume that's short-hand for taking a loan against your 401K (penalties mentioned as a worst-case-scenario?). Which you pay back "to yourself", with interest.
I have an emergency fund because "I'm supposed to", but in hindsight, paying myself 4% would've been a higher rate of return than my 401K has seen this year.
In light of that, is the advice really that bad? Even if it was a good year and it turned out wrong, you've probably only lost a few points on that money over the term of your loan. If the alternative is putting money into a Savings Account returning a fraction of a percent, and actually becoming worth less over time?
Just thinking out loud. I don't consider myself all that financially savvy.
I have an emergency fund because "I'm supposed to", but in hindsight, paying myself 4% would've been a higher rate of return than my 401K has seen this year.
In light of that, is the advice really that bad? Even if it was a good year and it turned out wrong, you've probably only lost a few points on that money over the term of your loan. If the alternative is putting money into a Savings Account returning a fraction of a percent, and actually becoming worth less over time?
Just thinking out loud. I don't consider myself all that financially savvy.
I agree that he was thinking a 401k loan but the biggest downside of 401k loans is that if you leave your current employer (are fired or choose to leave) the full amount of the loan is due immediately. This is a huge set of handcuffs to your employer that make it more difficult to jump ship for more money.
Replacing tires on a car is not an emergency unless you happened to blow a tire, and even then that's usually covered under warranty unless you screwed something up and like drove your car over a curb causing the damage.
Agreed.
Same can be said about the water heather and the dishwasher. If they both failed so close one another it was either an Act-of-God (and outlier that no one ought to experience more than once, statistically speaking) or more likely the result of malign neglect. If the GP had just bought the house, he/she ought to have made a better job at surveying the infrastructure and considering repair cost in the total price. If that's the case, it reflects poorly on them to have been taken by surprise by those events.
Same can be said about the water heather and the dishwasher. If they both failed so close one another it was either an Act-of-God (and outlier that no one ought to experience more than once, statistically speaking) or more likely the result of malign neglect. If the GP had just bought the house, he/she ought to have made a better job at surveying the infrastructure and considering repair cost in the total price. If that's the case, it reflects poorly on them to have been taken by surprise by those events.
Many people, particularly those interested in personal finance, wouldn't dream of buying a car new enough to be under warranty.
Tire warranty != Car warranty. Tires include their own warranties up to a certain number of miles, they also (in my experience) cover many types of damage.
Err... running over a nail, for example, is not generally covered by warranty.
really? Every tire I've purchased has included free flat fixes. I've had nails and screws pulled. All covered no charge.
Here are the 5 "myths" and his advice to save you a click through:
1. It's important to get a job and start saving for retirement the minute you're out of college. >It's more important to spend time thinking about what you want to do (surfing in South America?) than to start working and paying off students loans immediately.
2. Getting a credit card right out of school is dangerous. >Get a credit card with a small limit ($500) and set it on autopay.
3. The American dream involves buying a house. >Rent rather than buy and don't get attached to anything while you're young.
4. Once you graduate, immediately try to build up a cash emergency fund. >Use 401k as an emergency fund, even if you have to take the tax hit. Long-term benefits outweigh short term risks of doing this when you're young.
5. Investing is difficult, and stocks are sexy. >Avoid managers/fees and just put money into an index fund.
Nothing too radical.
1. It's important to get a job and start saving for retirement the minute you're out of college. >It's more important to spend time thinking about what you want to do (surfing in South America?) than to start working and paying off students loans immediately.
2. Getting a credit card right out of school is dangerous. >Get a credit card with a small limit ($500) and set it on autopay.
3. The American dream involves buying a house. >Rent rather than buy and don't get attached to anything while you're young.
4. Once you graduate, immediately try to build up a cash emergency fund. >Use 401k as an emergency fund, even if you have to take the tax hit. Long-term benefits outweigh short term risks of doing this when you're young.
5. Investing is difficult, and stocks are sexy. >Avoid managers/fees and just put money into an index fund.
Nothing too radical.
I'd add to number 4 that being able to borrow short-term cash at a reasonable rate can be a better choice. If you borrow $10k at 1%/month and pay it off at $1k/month, the total interest is something like $550. If you need that much cash once every 5 years, then that's about a 1% rate of return on holding $10k worth of emergency cash in terms of saved interest fees.
That said, this is only really a good option if you've got a healthy income level and strong saving habits. If you don't, you won't be able to borrow at a reasonable rate (and you won't be able to pay it back quickly).
That said, this is only really a good option if you've got a healthy income level and strong saving habits. If you don't, you won't be able to borrow at a reasonable rate (and you won't be able to pay it back quickly).
Rent Vs. buy is the most "radical."
I think it really boils down to what the relative costs are. There are many renters who pay as much or more as someone with a mortgage, and the person with the mortgage is obviously building up capital within that property (value Vs. current mortgage).
I think it really boils down to what the relative costs are. There are many renters who pay as much or more as someone with a mortgage, and the person with the mortgage is obviously building up capital within that property (value Vs. current mortgage).
Most sage advice about buying vs. renting boils down to "run the numbers but there are a lot of tradeoffs, many of them non-financial." The "Don't buy" sentence is deliberately provocative I think. The rest of what he says boils down to don't buy a house because you think you're supposed to. Which sounds like very sensible advice to me.
I certainly held off buying for a fairly long time because I didn't want to be locked down in that way. In retrospect I might have done things differently but hindsight is 20-20 and all that.
I certainly held off buying for a fairly long time because I didn't want to be locked down in that way. In retrospect I might have done things differently but hindsight is 20-20 and all that.
I certainly held off buying for a fairly long time because I didn't want to be locked down in that way. In retrospect I might have done things differently but hindsight is 20-20 and all that.
In my case foresight was 20-20 since I bought in 2012 and I knew that when interest rates on a 30 year fixed were the lowest they had been in 30 years that this was the time to lock in a mortgage. At the same time, housing prices in my city were the lowest they had been in 15 years so it made sense to buy. I knew if we didn't make a move then that we'd regret it once interest rates and prices started to rise.
In my case foresight was 20-20 since I bought in 2012 and I knew that when interest rates on a 30 year fixed were the lowest they had been in 30 years that this was the time to lock in a mortgage. At the same time, housing prices in my city were the lowest they had been in 15 years so it made sense to buy. I knew if we didn't make a move then that we'd regret it once interest rates and prices started to rise.
+1 to index funds for saving, but you are already into a better off market when you look at optimizing savings.
Debt is where most people fall down, and most folks in the US don't manage debt well. For example, there is a phenomena where people will take additional expensive debt (e.g. credit card) to keep their savings/401k contributions high. Irrational from an ROI standpoint, but very common.
I like all of these startups that try to optimize your spending/savings (e.g. Even, Acorn, Betterment), but I haven't seen anyone doing this well on the debt side.
Debt is where most people fall down, and most folks in the US don't manage debt well. For example, there is a phenomena where people will take additional expensive debt (e.g. credit card) to keep their savings/401k contributions high. Irrational from an ROI standpoint, but very common.
I like all of these startups that try to optimize your spending/savings (e.g. Even, Acorn, Betterment), but I haven't seen anyone doing this well on the debt side.
It's not completely irrational to take on additional debt to maintain 401k contributions, especially if you're in lower income brackets. You can't lose your 401k to bankruptcy, which in some ways makes it a more stable investment than not taking on the emergency debt. There are tax benefits as well.
There's also the budgeting and discipline aspect- if you make yourself work inside of a budget (one that's comprised of your money after your retirement savings) you're much more likely to stick with it in the long term. Once you start allowing emergencies to alter your retirement plans you may end up doing it again in the future. It's much better in that case to take on the additional debt and take paying that down out of another part of your budget.
There's also the budgeting and discipline aspect- if you make yourself work inside of a budget (one that's comprised of your money after your retirement savings) you're much more likely to stick with it in the long term. Once you start allowing emergencies to alter your retirement plans you may end up doing it again in the future. It's much better in that case to take on the additional debt and take paying that down out of another part of your budget.
This guy's advice applies to people who have a higher risk tolerance. The advice is given in an off-the-cuff manner that really only applies to a small sub-set of the population.
TLDR; "You don't need to save money, just fund your 401k. If crap hits the fan, just pull money out of 401k. Just wait until your start-up is successful, then you will have cash and an emergency fund!"
TLDR; "You don't need to save money, just fund your 401k. If crap hits the fan, just pull money out of 401k. Just wait until your start-up is successful, then you will have cash and an emergency fund!"
Yeah. One can debate the specifics of how big an emergency fund a given person should have but he seems awfully cavalier about tapping the 401k for unexpected expenses. I suspect, given that he doesn't offer dollar amounts, that he assumes that having $5K or so around to cover an emergency car repair doesn't rise to the level of emergency fund.
The bit at the beginning about the latte is also pretty silly. Sure if you can afford it and get great pleasure out of your Starbucks, go for it. But this is exactly the sort of money leak that causes a lot of people to wonder where their money all went at the end of the month.
The bit at the beginning about the latte is also pretty silly. Sure if you can afford it and get great pleasure out of your Starbucks, go for it. But this is exactly the sort of money leak that causes a lot of people to wonder where their money all went at the end of the month.
> This guy's advice applies to people who have a higher risk tolerance
And resources to spare. For the people that entered the workforce after 2004 - the economy has not been generous. And the spoils of growth has rarely got to them. We in tech are so far in position to extract almost fair value for our labor, but not all sectors of the economy are like that.
And resources to spare. For the people that entered the workforce after 2004 - the economy has not been generous. And the spoils of growth has rarely got to them. We in tech are so far in position to extract almost fair value for our labor, but not all sectors of the economy are like that.
This kind of generic financial advice is dangerous, and pretty irresponsible for someone in his position (and supposed expertise).
I bought my first house while I was still in college. I patiently waded through the 8 month process of buying a short-sale property. I invested maybe $5k over 2 years (and a lot of elbow grease) in making improvements and netted $40k when I sold it.
Home ownership carries risk and responsibility, but leasing is restrictive and will never provide any kind of returns. In my case I was basically paid to live in my house, vs the $28k in rent it would have cost me
I bought my first house while I was still in college. I patiently waded through the 8 month process of buying a short-sale property. I invested maybe $5k over 2 years (and a lot of elbow grease) in making improvements and netted $40k when I sold it.
Home ownership carries risk and responsibility, but leasing is restrictive and will never provide any kind of returns. In my case I was basically paid to live in my house, vs the $28k in rent it would have cost me
The housing piece is so much more complicated than his bumper sticker finance approach. Forgetting you heard his name is probably a good first step into smarter personal finance.
Did he say you can pay off college loans in three years?
No, he said that you shouldn't worry about paying them for the first three years - presumably because this is the period of time for which all student loans can be deferred due to unemployment in the United States.
https://studentaid.ed.gov/sa/repay-loans/deferment-forbearan...
https://studentaid.ed.gov/sa/repay-loans/deferment-forbearan...
What kind of interest do you pay in the US for student loans, anyways?
Completely forgetting about your credit card debt, or even your mortgage, for any extended period of time sounds like an amazingly stupid decision. Ignore compound interest at your own peril.
Completely forgetting about your credit card debt, or even your mortgage, for any extended period of time sounds like an amazingly stupid decision. Ignore compound interest at your own peril.
Typical rates are between 4 and 7 percent.
Agreed about the issue of compound interest, but everyone's case is different. I think that's all he's saying: "Take the time to be unemployed and figure out what you want to do. Three years of CI is less important than knowing what you want to spend your life making money at."
Now one might argue that this decision should be made prior to going to university in the first place...
Agreed about the issue of compound interest, but everyone's case is different. I think that's all he's saying: "Take the time to be unemployed and figure out what you want to do. Three years of CI is less important than knowing what you want to spend your life making money at."
Now one might argue that this decision should be made prior to going to university in the first place...
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Are you surprised by this? Median student loan debt of graduates is around $15k. Is it really that hard to expect some people to prioritize their debt to the tune of $6k/year?
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And "emergencies" happen several times a year. In a few month span I had to replace a water heater, then a dishwasher, then tires on my car. Several thousand bucks of expenses in a couple months. Having to withdraw from a 401k for life's unexpected issues is insanity.