10 Things Millionaires Won't Tell You

http://www.smartmoney.com/print/index.cfm?printcontent=/10things/index.cfm?story=september2008-10-things-millionaires-will-not-tell-you

by ryanwaggoner • 18 years ago

76 94 18 years ago

smartmoney.com

hbien• 18 years ago

I'm gonna throw a book recommendation out there: "The Millionaire Next Door".

nazgulnarsil7• 18 years ago

it's impossible to be happy if you're always comparing yourself to others. there will always be someone smarter, better looking, richer, and with a bigger ____ than you :p True happiness is contentment, contentment comes from financial security. I laugh at those millionaires who, as the article said, are squeaking by on 400k a year. The biggest key to financial security isn't making more money. It's reducing your living expenses. If you're making 90k a year but socking away half of that, you're buying a year of retirement for every year you work. (assuming your investments only keep you even with inflation and dont make you any additional money).

also: one of the best pieces of advice in the article is always have a mortgage. as soon as you finish paying off your first house it's time to make a down payment on a new one and rent it out to pay for the mortgage. assets>cash, plus it's tax advantaged.

paul• 18 years ago

Because real estate always goes up? The "houses are the greatest investment ever" myth is amazingly persistent.

nazgulnarsil7• 18 years ago

putting money into a house that maintains its value or even drops slightly is better than paying rent. rent money is gone forever. a mortgage is building equity that you can draw on. plus I don't get how people don't realize that renting out a house to pay its mortgage is basically free money. Someone else is building equity in a house for you and all you have to do is pay the down payment and manage tenants.

My personal plan is to buy a house that has something that can be turned into a studio, live in the studio and rent out the main house. I have a feeling this type of situation doesn't go on the market too often for obvious reasons though.

johnrob3• 18 years ago

I am also skeptical of the conventional wisdom of home ownership. I think a mortgage is simply a way to force yourself to save money. If people save with the same commitment as mortgage payments, even while paying rent, they should end up doing just fine.

dmv2• 18 years ago

Because mortgages remain a great leverage instrument. Find a bank who will lend you 4X your initial deposit with a low fixed (or not...) interest rate, without margin calls, in any other investment vehicles?

mattmaroon6• 18 years ago

He said mortgages were a good investment, not houses. In terms of EV they're pretty high up the list, especially compared to the alternatives (buying the house outright or renting).

Nothing always goes up, but over time real estate does pretty well. Plus the tax deduction on the interest rate, and the fact that the APR is lower than what you could get with the money if invested well in other stuff make mortgages so well-worth it that even people who could buy outright almost always take them.

nazgulnarsil7• 18 years ago

and viewing houses as just another investment is amazingly persistent and is the attitude that got us into our present problem in the first place. a mortgage is building equity in a physical asset, stocks are gambling to try to get 10% returns in paper money.

Eliezer2• 18 years ago

there will always be someone smarter, better looking, richer, and with a bigger ____ than you

Oh, come on, nazgulnarsil, where's your spirit? You can do it!

Bart: You make me sick, Homer. You're the one who told me I could do anything if I just put my mind to it!

Homer: Well, now that you're a little bit older, I can tell you that's a crock! No matter how good you are at something, there's always about a million people better than you.

Bart: Gotcha. Can't win, don't try.

nazgulnarsil7• 18 years ago

my extreme pragmatism depresses most people. I always hear hope for the best but plan for the worst and I think it is unnecessarily pessimistic. Hope for the best, plan for the averages, have a backup plan for the worst.

But the bottom line is that we're already incredibly wealthy by historical standards. I am in the bottom quintile by income in the U.S. (poor college student) and yet i enjoy a standard of living that is probably in the top 1% of all humans who've ever lived.

P.S. assuming you are Mr. Yudkowsky your posts at overcoming bias singlehandedly turned me from an empiricist into a rationalist.

dkokelley2• 18 years ago

plus it's tax advantaged

I've never really liked that reasoning. Let's assume that someone is in the 30% tax bracket (paying 30% on all qualified income). Let's say this person makes $100,000/yr. They pay $30,000/yr in taxes.

Let's say they also have a $100,000 mortgage at 5% APY. They're paying $5,000/yr in interest. That interest is deducted from their income of $100,000 leaving $95,000 taxable income. Assuming they didn't move down a bracket, they're paying $28,500/yr instead of $30,000/yr, saving them $1500/yr in taxes. Remember though that they're paying $5,000 in interest. It doesn't make financial sense in that respect.

They are paying $3500 more per year than if they paid off their mortgage.

It's seems like a way for people to live in nicer houses (or have more of them) and get a "deal" or "discount" on taxes, though in the end they are paying more.

This doesn't take into account housing prices, cash flow issues, or alternative investments. The rational I've seen in people who could pay off their houses but decide not to is either:

A: I can use this as leverage and sell later when the price is higher, making me money (risky, if the market drops)

B: I can use the money that I could use to pay off my mortgage to invest in other things (also risky, given the nature of any investments)

or C: It's a tax deduction (which from my math doesn't make sense. Maybe someone can show me a situation where the math works out better by keeping the mortgage)

mattmaroon6• 18 years ago

I'll show you the situation. If your mortgage is at 6% (I think mine is just below that) and you're in the 30% bracket (I am around there) you're effectively saving 1.8% in deductions (30% of the 6%) and therefore paying 4.2% interest right? A C.D. now pays over 5.25%.

So to clarify the math, you borrow $200k, pay $12k in interest, but get to deduct it and therefore save $3.6k, thus really paying $8.4k in interest (or 4.2% of the $200k).

Therefore if you mortgage the house (as opposed to buying it outright) and buy into a CD at 5.25% you're effectively gaining 1.05% interest for free. You're making about $2k a year. Also you're increasing your credit score, which saves you a lot of money in the long run.

In your above scenario the guy was saving 30% of 5% (1.5%, or 1500) which would put him at 3.5%. He'd be borderline retarded to pay for the house outright.

Much more intelligent (especially for someone my age, who has a good 30 years to worry about retirement, thus reducing the volatility) is to put that $200k into the market, which will probably average somewhere between 7-10% in that time. Suddenly that $200k mortgage turns into a shit ton of money in my retirement account.

Also, there's the fact that the mortgage costs only slightly more than renting a similar place (if homes as nice as mine were available for rent, which they generally aren't here) yet in 30 years I have a free and clear home I can sell.

In summation, mortgages FTW. That's why very wealthy people who could afford not to still damn near always get them.

nostrademons2• 18 years ago

The tax deduction on mortgage interest just means you cut the interest rate by the tax bracket, eg. if you're in a 33% tax bracket and have a 6% mortgage, the effective interest rate is 4%. Makes the math easy.

dionidium• 18 years ago

In addition, it seems to me that a lot of middle-class homeowners who use this argument would be just as well off (or very close to it) with the standard deduction.

I've never owned a house. Am I missing something?

EDIT: I live in the Midwest where 2000 sqft in a nice neighborhood is very often less than $200k. This is probably a factor.

bp001• 18 years ago

Agree dkokelly, and it also gets worse.

In your example, $5000/year interest is under the standard deduction. Unless you already have other deductions to itemize, you are getting no tax write-off for the $5000.

For instance, in 2008, the standard deduction for singles is $5450. Lets assume that you have $2000 in other itemized deductions. So, the first $3450 of your mortgage interest simply offsets the write off you would get with the standard deduction. Therefore, only $1550 would get you an additional deduction.

Now, if you're married, the standard deduction is $10900. In my situation, my mortgage interest is just barely greater than that amount.

IsaacSchlueter• 18 years ago

You may think I'm rich, but I don't.

How very very true that is. I have friends that make less than half what I do. Once upon a time, I would have thought that my current income would mean I'd "made it". But somehow, here I am, still occasionally concerned about being overdrawn, still trying to be frugal, still feeling like I don't make enough to do all the things I want to do. By world standards, I was fantastically wealthy when I was peddling vacuums.

Some things are more a function of the human condition than anything else. People in San Diego complain about the weather.

vaksel3• 18 years ago

all things are relative. You can be the smartest person in your state, but not the country. You can be the smartest person in the country, but not the world. Same thing with wealth, you may be a millionaire but there are MILLIONS other people who are richer than you.

Eliezer2• 18 years ago

So if you're the smartest person in the world, does everything stop being relative? Or do you start worrying about alternative Everett branches?

wallflower• 18 years ago

This reminds me of what someone taught me about being the relative best. Sometimes it is good enough to be the best in your environment. For example, it is easier to be the most popular guy in a room (e.g. throw a party/be a host/invite lots of people) than the most popular guy in a club. Big fish in a small pond. Local maximums (City Council member) are more realistic and achievable than global maximums (global maximum = U.S. President).

lsemel2• 18 years ago

Everything is relative. No matter what you have, there is always someone with more. If you have $1 million, there's someone with $10. If you have $10 million, there's someone with $100. If you have $100 million, there are billionaires. And if you're the richest of the billionaires, there will still be people who are better looking, healthier, younger, and happier whom you can feel inferior to.

timr2• 18 years ago

I thought that was a fairly inane point. While I have no doubt that Joe Millionaire feels like he's not rich if he can't buy a new Lotus without blinking, that's pretty much irrelevant to any practical discussion of wealth.

When your income places you well into the top 1% of earners and you're still hurting for cash, that's your problem. Learn to live within your means.

netcan4• 18 years ago

Well that goes to the definition of rich. I'd say it is (or should be) at least partially to do with the psychology.

daniel-cussen• 18 years ago

Some people hurt for cash and are frugal no matter how rich they are. This helps them get rich.

ojbyrne• 18 years ago

I don't think its a matter of "hurting for cash." Its the thought that you could lose it all just as easily as gaining it all (or actually much, much easier). And as you get older and accumulate responsibilities, the overhead of families, good schools, retirement, all weigh on you making that thought all the more horrific.

Entrepreneurs are probably much more vulnerable to these kinds of worries, because that's what they worried about (losing it all) on the way up.

sah2• 18 years ago

I think the clearest line between rich and not is whether you have to work to earn a living. In my book, if you're an "earner" at all, you're not rich yet.

jauco• 18 years ago

  Annual income twenty pounds, annual expenditure nineteen six, 
  result happiness. 
  Annual income twenty pounds, annual expenditure twenty pound ought and six, 
  result misery.

-- Charles dickens, david copperfield

ambition4• 18 years ago

This is really about how to get upper-middle class wealth. The psychology of these millionaires is very different from the mentality of big startup founders -- sure, half run businesses, but these are lifestyle-type companies with no ability to scale.

JoelSutherland2• 18 years ago

http://en.wikipedia.org/wiki/Upper_middle_class#Income

10 Million households have $1 million+. There are an estimated 111,162,259 households in the US...

This is upper class wealth...just not completely elite levels of wealth. I think the point of the article is that people with upper class levels of wealth tend to have upper-middle class lifestyles.

ambition4• 18 years ago

This is really an argument of semantics of "upper-middle-class" vs. "upper-class." Maybe there's standard definition I don't know about. My personal definition is that upper class is "don't need to work ever again."

You're right that upper middle class people have the same lifestyles as upper class. The difference isn't in material goods, it's in freedom.

gaius• 18 years ago

Upper class is second-generation. To be truly upper class you'd have had to have gone to an elite boarding school, for example, and bonded socially with the rest of the upper class. Self-made people can never be more than upper-middle regardless of how much cash they have.

lsemel2• 18 years ago

Just because a business isn't suited for investment by VCs doesn't mean it's not a great investment for its owners nor that they necessarily possess lesser business ability or some kind of inferior mentality.

netcan4• 18 years ago

Nor does it mean that they can't scale.

ambition4• 18 years ago

I didn't intend to imply anything about inferiority.

The people described here have a different mentality. They get rich by avoiding risks and cutting costs. It is a slow and systematic process with guaranteed results.

Startup people get rich by taking big risks and working hard to increase their top-line productivity and wealth-creation. It is relatively fast and chaotic process with unpredictable results.

yan• 18 years ago

When people start affording more with larger incomes, their assets turn into overhead that must be managed. It's a cliche, but the TCO of most things is more than their face value. On the other hand of that, there is an amount of dollars one can earn to build a framework and make their money be self-supporting. I.e. the returns on investment covers taxes and expenses and actually has non-negative growth.

While I agree that contentment is /a/ key to happiness, it won't exactly motivate you to strive for things completely out of reach. Just the chase of your goals can result in happiness.

Hexstream• 18 years ago

I hate those obnoxious ads that spin your CPU to 100% for no reason at all :/

vaksel3• 18 years ago

install Ad Block Plus

gabrielleydon• 18 years ago

I think the most important point was:

"You don't get rich by being nice."

This is seldom said but often true.

unalone• 18 years ago

Really? I think that's the one I hear most often.

pg3• 18 years ago

A lot of this is wrong. For example, no one rich would "leverage their home equity to finance purchases." And though rich people often have assistants, they're not drawn from a special guild of "concierges" with connections for getting restaurant reservations. Nor would anyone rich rent handbags or Ferraris.

The parts that aren't false read like a description of someone who made money from e.g. developing shopping malls. People who get rich from technology are less likely to be B students, less likely to try to cheat the IRS by routing their personal expenses through their companies, and more likely to be "nice guys."

_b8r0• 18 years ago

Hmmm...

I wouldn't say I'm rich, but my accountant is creative when it comes to tax, and rightly so.

I completely agree on the handbags thing, Ferraris are a different matter - if you have a means of moving that cost from being a taxable depreciating asset to a tax writeoff then go for the latter. I know an entrepeneur who leases high end sports cars through his companies as a means of reducing tax liability. YMMV though (pun intended, sorry)

iamelgringo• 18 years ago

If you've ever spent time in Newport, RI, and seen what the old money in this country drives... it's Honda's and Toyota's. You don't see so many Bentley's, Ferrari's or Bugatti's.

brentr• 18 years ago

I lived in Providence, and this is partially true. Yes, there are many old money that drive cars like this, but if you spend time out in Newport during the summer, you do see many six figure cars.

josefresco• 18 years ago

Money on the east coast is less concerned with flashy cars. Your more likely to see their money invested quietly in their homes and families.

West coast/the South is all about your image, I saw more 6 figure cars in the poorest sections of Miami than I've seen in the richest places in New England.

dgabriel• 18 years ago

I grew up in Newport, and the numerous non-rich people driving cars around might fool you...

That said, it looks like Volkswagons and Volvos tend to be the cars of choice among the wealthier. Not Ferraris, sure, but a step above the Toyota.

byrneseyeview2• 18 years ago

* For example, no one rich would "leverage their home equity to finance purchases."*

Is this because rich people don't borrow, or have the found a source of income even lower than a subsidized loan with tax advantages? If someone's home is a small fraction of his net worth, taking a mortgage and using it to invest in a business would probably be a sensible arbitrage.

ibsulon• 18 years ago

I've dated the very well off, and I know at the lower levels, they are using those services. American Express operates one, and I knew someone who made a decent living as a personal concierge in Manhattan.

It all depends on the circle, though. Doctors and lawyers seem to be more likely to use these services, while entreprenuers seem to be used to doing things themselves.

linhir3• 18 years ago

But, as a percentage, what subset of all rich people actually earned their money through technology? Either way, if those people aren't leveraging their home equity, than they don't know much about finance, truth be told. Assume you have good credit and a steady income or assets; there is absolutely no reason to own your house outright. Bill Gates, for example, has a mortgage on his house. The easier way to think about it is that if you're paying 5% interest on your mortgage, but could get 7% return on money elsewhere, you should take all the money out of your house and earn the 2%. Either way, you also get the value increase (or decrease on the equity as whole). This is the same reason that many wealthy college students take out college loans, because with their low interest rate, there is no reason not to have the 40k sitting somewhere else making more money.

I don't know what evidence, other than opinion, you have that rich people don't have a special guild of concierges, or rent handbags or Ferraris. I know several people of the private jet sort who do have an assistant that is not just someone who just takes down their schedule, but rather is someone who can solve problems anywhere, work the network to get a dinner reservation where ever you want, etc. Further, most fabulously wealthy people are very smart with their money, even if they do have ten houses and two yachts, and although they could buy $2000 bags and throw them away in two months, why would they? They could buy a fancy sports car, an asset that radically depreciates and that you can’t drive all the time, or they could rent one whenever they want?

hhm• 18 years ago

Bill Gates has a mortgage on his house??! Is that real?

pg3• 18 years ago

I didn't say that rich people don't have mortgages, but that that they wouldn't borrow against their house to finance purchases. There may be some tax advantage to having a mortgage, but it wouldn't make sense to borrow against one's house to buy stuff that was going to depreciate in value.

Where did you hear that Bill Gates has a mortgage on his house? It seems very unlikely. You can only deduct the interest on the first million of mortgage debt, so it wouldn't seem worth the trouble.

As for the handbag question, try giving a woman the choice of buying a new handbag or renting a used one, and see what she says.

lurch• 18 years ago

Where can one get 7% risk free return?

menloparkbum• 18 years ago

I have been dating someone in the PR biz and these "top 10" style articles are a new PR vehicle. You can pack 10 or more client mentions into one article.

pg3• 18 years ago

Seems a likely theory. Probably the bits that seem wrong are the client mentions.

fallentimes• 18 years ago

Why would rich people not rent Ferraris?

known• 18 years ago

With cash in hand, we

1. Spend 2. Save 3. Survive 4. Invest

We are rich if we are investing cash!

10 Things Millionaires Won't Tell You

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