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Space Fish posted:Ramit Sethi's one weird trick to double your salary: negotiate or simply get a high-paying job. I did this and all of a sudden I was way behind on my retirement savings, per the multiple-of-salary targets! But then my next job was lower-paying so I was back on track again. I don't really know how to use those targets.
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Nov 17, 2023 23:40
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Interesting data from Vanguard. Basically, people who started investing during bull markets picked a high equity allocation and stuck with it. A good reminder that having a proper investment plan is important for long term investors. Vibes based investing might lead you to take too much or too little risk.  edit: archive link to the article, which was interesting drk fucked around with this message at 23:32 on Nov 18, 2023 |
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Nov 18, 2023 23:18
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It looks like the personal finance space is (rightly) ganging up on Dave Ramsey for claiming that an 8% withdrawal rate is safely sustainable in retirement. For anyone who would like to see an excellent demonstration of the math behind why his 8% withdrawal rate is wrong Rob Berger did a great video on the topic. I found it to be the clearest explanation of sequence of returns risk I have found anywhere.
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Nov 22, 2023 16:41
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Antillie posted:It looks like the personal finance space is (rightly) ganging up on Dave Ramsey for claiming that an 8% withdrawal rate is safely sustainable in retirement. I very much like Ramsey's plan to get out of debt. I also like the rule around 15 year mortgages and not exceeding 25% of you income after after taxes are taken out and I agree with paying your house off early, even if your rate is sub 3%. The rest I think is mostly a load of BS. daslog fucked around with this message at 17:33 on Nov 22, 2023 |
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Nov 22, 2023 17:24
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Ramsey is great for people who are absolutely awful with money. I’m talking the guys who cash their 401k to buy jet skis and have maxed out credit cards at 23% APR. If you read this thread, he’s not for you.
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Nov 22, 2023 17:37
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I am actually far more interested in the content this has generated around sequence of returns risk than anything Dave has said. I now understand sequence of returns risk much better than I did before. For that reason I am glad Dave is around. You just never know where the next piece of useful information is going to come from. The internet is the index fund of human knowledge.
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Nov 22, 2023 18:04
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The main issue with Dave Ramsey's advice is that it's a mix of genuinely smart advice for people who are terrible with money and some godawful advice, weird religiously-based shaming, and predatory product shilling, and the people who need the good advice the most are typically not equipped to separate the good advice from all the other nonsense. In my experience watching family members who are bad with money getting swept up in the Ramsey ecosystem, it can certainly help people but because it's hard to separate the wheat from the chaff, the chance of it being a net negative impact on their lives is much higher than zero than it ever should be for something so important.
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Nov 22, 2023 18:43
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ramsey was useful for me in college undergrad because i had never seen any financial education of any kind and he was literally on the radio just listening to his show on my commute to school and later work got me interested in personal finance and i outgrew him in a few months after using his methods to get outta debt i think he's good to have around because he reaches people that would never willingly seek out this kinda info
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Nov 22, 2023 19:04
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daslog posted:I very much like Ramsey's plan to get out of debt. I also like the rule around 15 year mortgages and not exceeding 25% of you income after after taxes are taken out and I agree with paying your house off early, even if your rate is sub 3%. Unless there is a large rate variance I never understood going for 15 year loan and the higher payments. Life stuff happens and it feels like more people should get the 30 but pay it like a 15 for the increased flexibility. I guess the argument against that is people have to actually make the extra payment.
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Nov 22, 2023 19:04
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It would be interesting to pull out the good parts from the awful poo poo and create a flowchart. Maybe if I have some spare time...
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Nov 22, 2023 19:05
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spwrozek posted:Unless there is a large rate variance I never understood going for 15 year loan and the higher payments. Life stuff happens and it feels like more people should get the 30 but pay it like a 15 for the increased flexibility. I guess the argument against that is people have to actually make the extra payment. We tend to emphasize maximizing every dollar in this thread and downplay the psychology of managing finances. It's too tempting for many people to finance a car instead of making the extra payment.
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Nov 22, 2023 19:12
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daslog posted:We tend to emphasize maximizing every dollar in this thread and downplay the psychology of managing finances. It's too tempting for many people to finance a car instead of making the extra payment. telling people they should only take a 15 year mortgage and only at less than 25% of their take home is a fantasy for many people. even spending less than 25% of your take home on rent isn't possible for many, and to me is overly conservative to the point of seeming out of touch and useless as advice for people today.
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Nov 22, 2023 19:36
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spwrozek posted:Unless there is a large rate variance I never understood going for 15 year loan and the higher payments. Life stuff happens and it feels like more people should get the 30 but pay it like a 15 for the increased flexibility. I guess the argument against that is people have to actually make the extra payment. Google says its about a 1% difference at the moment (roughly 7% vs 8%). Over the course of 10+ years, that is a lot of money. Inept posted:telling people they should only take a 15 year mortgage and only at less than 25% of their take home is a fantasy for many people. even spending less than 25% of your take home on rent isn't possible for many, and to me is overly conservative to the point of seeming out of touch and useless as advice for people today. But yes, this is the problem. Saving on interest is great, but if you cant make the payment on a 15 year mortgage, its irrelevant.
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Nov 22, 2023 20:20
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Inept posted:telling people they should only take a 15 year mortgage and only at less than 25% of their take home is a fantasy for many people. even spending less than 25% of your take home on rent isn't possible for many, and to me is overly conservative to the point of seeming out of touch and useless as advice for people today. I don't agree with this line of thinking because to me it sounds like an excuse to go deep into debt because 'everything is just so expensive these days' (my quote not yours). Long term debt is to be avoided even if it means putting off a house for a few more years. It's much harder to build wealth over time if you are paying on a 30 year note. Is Gen Z getting screwed? Absolutely. Does that mean they should go deeper into debt to get the same opportunity that my generation had? No, it doesn't. An example for why I think a 15 is the right thing to do. Assume a $500,0000 home purchase, 7.5%, with 20% down ($100,000. don't get me started on people who put down 5%. That's just a terrible idea, and if you can't even save up 20%, then you are just not ready for home ownership.) Total interest paid is $267,448 on the 15 year note. On a 30 year, the total interest paid is $606,868. The difference is $339,420, which could have been invested over the life of the mortgage which could have been invested for retirement and turned into a real nice nest egg. Now I understand that people want a house real badly, and prices have shot up, and there is lots of pressure from family and friends to buy a house. However, just living is expensive too. Cars have shot way up in price, daycare is insane, etc. Going back to our example, The monthly payment is about $2800 a month, assuming property taxes and insurance are included. Doing the math out and applying the 25% rule, household income after tax withholding needs to about $11,200 a month. 15% ($1680) of that should be put away for retirement because we all know Social Security cuts are coming in the next years. That leaves $6,720 a month to live on. Between student debt, daycare, groceries, cars, home maintenance, and everything else that's going to go pretty quick. In my opinion, if you can't buy a house and meet the the 25% rule, then you need to save more for the down payment. That might mean picking up a second job, but I think it's worth it because going deeper into debt isn't a good path to long term prosperity. daslog fucked around with this message at 21:56 on Nov 22, 2023 |
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Nov 22, 2023 21:47
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There are a lot of home buyers who cannot save $100k no matter how long they save, they are getting some money from their parents, making a low down payment, and will have a mortgage payment close enough to their current rent that the difference is never going to add up to being able to afford a 15 year loan. In practical terms, there's a segment for whom "never get a 30 year loan, always a 15" actually means "do not buy a house, ever, but spend just about as much on rent, and have no equity when you retire, so rent throughout your elderly years too." I don't think we can ignore the huge number of people in America for whom home ownership was the only realistic and attainable pathway into the middle class and a comfortable retirement when we tell someone they just shouldn't buy a house ever because they can't make the payments on a 15. It's true that it involves more risk, pushes people harder on their monthly budgets, and some people wind up with significantly less money in savings in retirement because a 30 was less optimal than a 15 for them. But I think we can't ignore the people who just cannot make payments on a 15 year note for any home close enough to where their families and careers are anchored, but can make payments on a 30. To me the imperative is education: people choosing whether and how to buy a home need to understand what a 30 is costing them compared to a 15, and have the financial literacy and experience with dealing with money to really get at a gut level what that cost is and means, not just see the numbers on the page. Then they can make well informed choices.
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Nov 22, 2023 22:13
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Advocating for a 15-year over a 30-year is a bit disingenuous because your monthly payment is ~$1,000 less per month which is extremely important for life needs in the meantime. During those first 15 years, you can take that $180,000 of post-tax income and invest it in interest-bearing cash management vehicles which will also defray some of the "extra" interest costs or more likely go towards helping with the costs of raising a child and/or a cocaine addiction. Most homebuyers will likely retire right around the time the 30-year mortgage is up so their cashflows are freed up significantly at that time. $1,000 a month is a life changer for most people. Generally speaking, for first-time homebuyers, they need more cash now than they do in 15 years. So a 15-year mortgage hurts their immediate liquidity situation in exchange for better long-term net worth, but with investments and rates the way they typically are, it's probably better to get a 30-year, refinance it any time interest rates drop (which isn't guaranteed but is nowhere near remote), and invest the cash you don't need until you do-- potentially in an IRA. Also, not for nothing, the mortgage interest deduction means that you'll get a break on the interest paid on your mortgage which tips the scale a bit in favor of the 30-year. Strictly speaking, it's also just better to buy a house with a pile of cash.
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Nov 22, 2023 22:13
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daslog posted:The monthly payment is about $2800 a month, assuming property taxes and insurance are included. Doing the math out and applying the 25% rule, household income after tax withholding needs to about $11,200 a month. Thats $134k a year post-tax. Median post-tax household income is $65k according to the latest census data I could find (2021). No one realistically expects the poorest households to be able to afford a $500k house, but what you are suggesting is that 80% or so of households cant afford a $500k house.
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Nov 22, 2023 22:20
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drk posted:Thats $134k a year post-tax. That is exactly what I'm suggesting and I do understand that lots of people won't agree with me.
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Nov 22, 2023 22:38
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"Afford" is a super ambiguous term. I'd recommend being extremely crisp on what "afford" can mean if there's a desire to keep on this thread. The marginal decision between 15 and 30 is an interesting one. The math is actually non-trivial to do properly. Generally I think something like "if the difference in payments is enough to push the expense from Okay -> Not Okay, then that's a signal that maybe you're buying too much house."
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Nov 22, 2023 22:43
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If you argue people should only ever use 15 year mortgages then you are arguing that most people should never own a home. Since a mortgage is basically a forced savings account its one of the best, and often only, ways to get most people to save. Locking the majority of the population out of that for their entire lives sets them up for financial failure. The median home price in the US is ~$410,800. With 20% down you are looking at either $2,425 for a 30 year fixed at 8.076% or $2,982 for a 15 year fixed at 7.178% before taxes and insurance. $557 a month is a big deal. Its straight up over 10% of the median household's take home pay. Never mind that the $82,160 down payment is well above the median post tax household income of ~$65k in the US. Most homes are dual income so if your single, well, forget ever being able to afford a home. Sure you can build wealth just fine without owning a home but most people will never have the knowledge or discipline to do that. They need to buy a house to be able to save any meaningful amount of money. Even if it means paying the extra interest that a 30 year fixed incurs vs a 15. daslog posted:That is exactly what I'm suggesting and I do understand that lots of people won't agree with me. Its not that I don't agree with you. A 15 year is mathematically superior to a 30 year. The problem is that without a 30 year most people literally cannot ever own a home. And without owning a home most people literally can't (or won't) save money for retirement. So asking people to only take out 15 year mortgages just doesn't work. In my example it cost $132,112 more for the 30 year. That's an awful steep price to pay to be able to save money for retirement but its better than not saving at all. Edit: Going further into the numbers keeping your mortgage payment at 25% of your income would mean that you need an income of ~$116k to buy the median house on a 30 year mortgage with 20% down or an income of ~$143k to buy that same home on a 15 year with 20% down. That's nearly twice the median household income in the US. And none of this is accounting for taxes and insurance. Antillie fucked around with this message at 02:12 on Nov 23, 2023 |
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Nov 23, 2023 01:49
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If the point is that a 15-year mortgage costs less in interest than a 30-year and therefore is the ideal way to purchase a home, wouldn’t buying a house with cash be the ideal way to purchase a home? And if someone is trying to say that if you can only afford the payments on a 30-year but not a 15-year, you shouldn’t buy a house… why not move the goal posts to say if you can only afford a house by taking on a massive amount of debt, you shouldn’t buy a house? There’s a lot of factors in play when purchasing a house and fixating on any one of them is absurd. Not only that, where you buy your house is a huge determinant in whether or not it’s a good idea to dedicate a greater proportion of your income towards housing. In some places like VHCOL cities you’re just going to spend more money on housing flat out. There’s a floor in house prices that’s very high and your other option is renting which also has a very high floor. The crazier thing is relying on your house to function as your retirement, which is what is currently the case for boomers because then they need to sell their home to have money for food. Granted, their house appreciated in value 400000x in the last 4 years but it’s still a lovely financial structure for retirement. jokes fucked around with this message at 02:18 on Nov 23, 2023 |
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Nov 23, 2023 02:16
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jokes posted:The crazier thing is relying on your house to function as your retirement, which is what is currently the case for boomers because then they need to sell their home to have money for food. Granted, their house appreciated in value 400000x in the last 4 years but it’s still a lovely financial structure for retirement. I agree its a really lovely system. I'm just not sure how we could end it without either loving over people who need their home equity to be able to feed themselves in retirement or loving over the younger crowd by taking away the most effective retirement savings method most people a) have potential access to, and b) will actually use if given the chance. Although I guess the latter is already happening to some extent. Antillie fucked around with this message at 02:41 on Nov 23, 2023 |
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Nov 23, 2023 02:37
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Probably a huge can of worms here, but I'd argue the most effective retirement savings method most people a) have potential access to, and b) will actually use is... social security. Everyone has access to it, and actually using it is mandatory for wage earners. I am very aware that benefits may be reduced in the future or the retirement age may be raised, but its a better system than hoping everyone will buy heavily leveraged real estate and that prices will only ever go up.
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Nov 23, 2023 03:00
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I just wish I could FIND a $500k house to buy. SoCal suxx.
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Nov 23, 2023 03:08
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To ensure a comfortable retirement you cannot rely solely on social security, real estate will be a significant component at most income levels. Particularly in the U.S, where the scale is especially tilted towards real estate as a wealth building tool.
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Nov 23, 2023 03:12
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Sock The Great posted:To ensure a comfortable retirement you cannot rely solely on social security, real estate will be a significant component at most income levels. Particularly in the U.S, where the scale is especially tilted towards real estate as a wealth building tool. I completely agree one should not rely on social security, especially in high cost of living areas. But, the reality is that many people do: SSA posted:We find that about half of the population aged 65 or older live in households that receive at least 50 percent of their family income from Social Security benefits and about 25 percent of aged households rely on Social Security benefits for at least 90 percent of their family income. https://www.ssa.gov/policy/docs/ssb/v77n2/v77n2p1.html
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Nov 23, 2023 03:28
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I'm still fairly new to finance, and probably making far less than anyone in here, so grain of salt and all that. But I was under the impression that houses make terrible assets (zero diversification, need constant maintenance, very prone to physical damage and outright destruction from all sorts of causes). So as someone whose entire monthly take-home pay would barely cover a 30 year mortgage as defined by some of the examples in this thread, it's really hard for me not to take daslog's view and wonder why I should even entertain the idea at all when I could just sock a few hundred a month into my IRA and get much less riskier returns over that same timeframe.
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Nov 23, 2023 03:59
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I read an article earlier this week on renting versus buying, and its actually somewhat complicated. A lot of Americans have the impression that renting is throwing money away, when in reality home owners "throw away" a lot of money on interest, taxes and insurance that renters do not. Additionally, the opportunity cost of buying a home is non trivial. The article I linked is long and pretty... mass market-y, but the take away I got was that its certainly not always better to buy.
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Nov 23, 2023 04:50
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Jabarto posted:I'm still fairly new to finance, and probably making far less than anyone in here, so grain of salt and all that. But I was under the impression that houses make terrible assets (zero diversification, need constant maintenance, very prone to physical damage and outright destruction from all sorts of causes). So as someone whose entire monthly take-home pay would barely cover a 30 year mortgage as defined by some of the examples in this thread, it's really hard for me not to take daslog's view and wonder why I should even entertain the idea at all when I could just sock a few hundred a month into my IRA and get much less riskier returns over that same timeframe. You are correct. A house is a terrible investment in most cases. It costs a bunch of money in upkeep, repairs, taxes, and insurance that you never get back. It is also highly unlikely to keep pace with the S&P500 over the long term. But that said it is still an investment in a practical sense. Or at the very least a savings account that tends to slightly outpace inflation and is somewhat hard to pull money from. A savings account that keeps up with inflation that is hard to pull money out of isn't great as investments go. But its a great thing for most people. It fits what most people need so well that most people desperately need it for their own good. Sure it often results in scary levels of over concentration into a single asset but it still better than trying to live off of just social security. That said owning a home does provide a couple of key financial benefits. First it makes your housing costs relatively stable. A fixed rate mortgage payment will mostly only vary with property taxes. And at least in my state there is a cap on how much the taxes are allowed to go up each year regardless of how much the value went up. Rent tends to go up over time in a way that fixed rate mortgage payments just don't. This can be a serious hedge against inflation. Second, mortgage payments eventually end. You will eventually own the home and that payment will drop off the expense side of your budget. You'll still be on the hook for property taxes but in many states people over the age of 65 get a pretty serious discount on property taxes. And third, you now own something that is worth a bunch of money and unlikely to go down too much in value. This is where that hard to access savings account comes in. Many people fund their retirement with a reverse mortgage. Or they downsize/relocate to a cheaper area and use the difference to fund their retirement. In an ideal world everyone's employer would offer a 401k with a good match and low cost index fund investment options and everyone would put in 15%+ and fund an IRA on the side and nobody would need home equity to fund their retirement. But that is not the world we live in. The average person contributes little if anything to their 401k (if their employer even offers one, not all do), takes it out as a "bonus" when they change jobs, and doesn't even know what an IRA is. In this world of non existent financial literacy getting people to save *something* in a place where they can't easily access the money is exactly what most people need. Edit: The fact that you are reading things like this thread and a) know what an IRA is and b) are willing to invest in one makes you very different from most people. Antillie fucked around with this message at 05:36 on Nov 23, 2023 |
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Nov 23, 2023 05:29
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Jabarto posted:I'm still fairly new to finance, and probably making far less than anyone in here, so grain of salt and all that. But I was under the impression that houses make terrible assets (zero diversification, need constant maintenance, very prone to physical damage and outright destruction from all sorts of causes). So as someone whose entire monthly take-home pay would barely cover a 30 year mortgage as defined by some of the examples in this thread, it's really hard for me not to take daslog's view and wonder why I should even entertain the idea at all when I could just sock a few hundred a month into my IRA and get much less riskier returns over that same timeframe. Your primary residence isn't really an investment (It is but also kind of not). You need a place to live. There are lots of reasons to buy but "as an investment" really isn't very high on my list.
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Nov 23, 2023 05:49
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Antillie posted:That said owning a home does provide a couple of key financial benefits. First it makes your housing costs relatively stable. A fixed rate mortgage payment will mostly only vary with property taxes. Well, stable except when you need a new roof. Or have a major plumbing incident. Or get a pest infestation. Lumpy CapEx maintenance items can wreck the unprepared.
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Nov 23, 2023 06:19
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CubicalSucrose posted:Well, stable except when you need a new roof. Or have a major plumbing incident. Or get a pest infestation. Lumpy CapEx maintenance items can wreck the unprepared. I had both of the first two happen at my last place. Homeowners insurance covered them both for a flat deductible. Thankfully I never had pests. But yeah, owning a home can be very expensive. It really does make a chunky emergency fund a necessity. I really wish people would stop worshiping home equity as some magical path to wealth. But as crappy of a path as it is, its the only path most people are willing to take for one reason or another.
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Nov 23, 2023 06:25
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CubicalSucrose posted:Well, stable except when you need a new roof. Or have a major plumbing incident. Or get a pest infestation. Lumpy CapEx maintenance items can wreck the unprepared. Your point about stability is correct, nevertheless these scenarios can all happen in a rental with a lovely/negligent landlord. I know a lot of people who were screwed over by landlords and it's weird they don't come up more in rent/own conversations.
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Nov 23, 2023 06:31
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Antillie posted:
What I have seen for friends and family over the years is that when their careers really take off with dramatic pay increases the 30 year can work out. If they don't get those big pay raises, then they end up in this spot where they defer maintenance on their house for too long and have to take out a HELOC to fix their roof, replace their boiler, etc because the haven't been able to put aside the money. The 25% pay 15 year rule forces you to be in a position where you can be better prepared for those long term expenses. In the end, it's all about not over-extending yourself. People who participate in this thread for the most part will fall in the category of being able to plot out their expenses and will probably be OK. If they fall down, it's most likely because they buy into the debt lifestyle of buying new cars with loans, taking out second mortgages, boat loans, etc.
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Nov 23, 2023 13:37
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Heh, Vanguard giving a little history lesson here.
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Nov 23, 2023 14:05
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smackfu posted:Heh, Vanguard giving a little history lesson here. very impressed that you've had a portfolio since the great depression
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Nov 23, 2023 15:38
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I understand that the 15 year mortgage will cost less in total interest than a 30 year, but there seem to be some situations where one can come out ahead with a 30 year. For example, if I have a 30 year fixed at less than 3%, and if I invest my spare cash in something with a higher expected return, would I not still come out ahead vs a 15 year payment schedule?
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Nov 23, 2023 17:33
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SamDabbers posted:I understand that the 15 year mortgage will cost less in total interest than a 30 year, but there seem to be some situations where one can come out ahead with a 30 year. For example, if I have a 30 year fixed at less than 3%, and if I invest my spare cash in something with a higher expected return, would I not still come out ahead vs a 15 year payment schedule? It’s so fact dependent. Are people factoring in savings from the mortgage deduction? What if you rent out a room or whatever. You’d basically need to do a a super complex model of tons of variables to know, do things like a rainbow real options model tiered with Monte Carlo simulations; and that ignores the behavioral economics aspect. For many people if they do the 15 year they will spend less. Plus it’s hugely dependent on interest rates when you start the mortgage.
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Nov 23, 2023 17:44
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daslog posted:The 25% pay 15 year rule forces you to be in a position where you can be better prepared for those long term expenses. I agree that this is super important. But I think the 25% of your income bit is the important part. The 30 vs 15 year thing isn't that big of a deal. Is a 15 year better in the end? Sure. Does that mean the 30 year isn't still a good idea? Not at all. Personally I am sitting on a 30 year fixed at 2.9%. It makes absolutely zero sense for me to put even a single penny of additional principal on my loan when tbills and money market funds are paying over 5%. Given that I have 28 years left on the loan the stock market also makes sense as a place to park the money I could be putting towards paying down the loan early. Even a boring intermediate bond fund like SPBO is highly likely to beat my mortgage over the next 28 years, never mind something like VTI. Now if I had a rate of over 6% then yeah I would be paying it down on a roughly 15 year schedule. Having a 30 year gives me that flexibility and makes it easier to keep cash on the side for repairs and maintenance. The 30 year exists and is popular because it is a good idea and a much more realistic option than the 15 for most people. The fact that the 15 year is a great idea doesn't invalidate that. Don't let perfect be the enemy of good. Antillie fucked around with this message at 18:24 on Nov 23, 2023 |
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Nov 23, 2023 18:01
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pseudanonymous posted:It’s so fact dependent. Are people factoring in savings from the mortgage deduction? What if you rent out a room or whatever. Yeah, I am ignoring the behavioral aspect, which is why I bolded "if I invest my spare cash in something with a higher expected return" rather than spending it. For the sake of discussion, if I pay extra towards the principal, I'm essentially buying a guaranteed return at the fixed mortgage rate, right? So making an extra $1000 mortgage payment locks in the ~3% return, but if I put that $1000 in a 1 year treasury yielding 5% then I'm making more interest than my mortgage is charging on that same $1000 and get the diversification benefit of not being quite so concentrated in a single asset. If I instead purchased $1000 of VTI or VOO with an expected annual return of 7-10% over the long term, would I not be even better off at retirement than if I'd purchased more equity in my home? It seems like the only way to lose in this scenario is if my home's market value outpaced the market average significantly by the time I'm ready to sell it. Antillie posted:I agree that this is super important. But I think the 25% of your income bit is the important part. The 30 vs 15 year thing isn't that big of a deal. Is a 15 year better in the end? Sure. Does that mean the 30 year isn't still a good idea? Not at all. ^ Beat me to it
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Nov 23, 2023 18:14
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