But my house IS three times our family’s income! How can you be so learned in economics and yet refuse to admit that a house is a vehicle for long0term economic growth?
You buy a house, pay it off over 30 years, and it appreciates in value. You get a gimmie sale at retirement that’s a helluva tax shelter. So you get a roof over your head (and in my case, assuming a sane market) a $750,000 windfall. Move to a smaller house in a cheaper part of the US and w00t.
So I got a question. We’ve all been talking about saving up for retirement, and people have mentioned that by saving a little bit now, it’ll return big later.
I just checked the DJIA for the past 10 years, and today it is essentially where it was 10 years ago (actually, minus a few hundred, but whatever).
So take someone in my situation - entered the working force in 1999-2000, started puting money into a 401k right away. I missed the dot-com boom, but didn’t miss the post 9/11 slump. Things eventually rebounded and regained their losses, then in 07/08 they went up, only to slump again. All the while I’ve been diligently contributing double digits to my 401k. Conventional wisdom is to not freak out and sell when its low, but that also means that I didn’t sell when it was high, because the most important thing was that I was contributing, right?
The end result? The market has done barely anything for me in the past 10 years. Sure, my 401k balance has increased, but 90% of that is my own contributions.
So here is the question: is this the middle class mindset? Put money away, but not being a financial analyst, I ‘blindly’ put money into a 401k that is managed for me because I know very little about trends in value of international funds, large cap growth, small cap, precious metals, etc, etc.
I once heard someone say it is foolish to pay someone else to manage your money, and I’ve also heard others say that a financial planner/analyst is about as accurate as a monkey throwing darts at stock symbols on a dart board. Those two things make me think maybe I should spend more of my own time analyzing the financial markets and making my own decision.
On the other hand - there are people who do that for their living - with access to loads more information than I have. Why not pay a small amount to those people on the idea that in the end, I’m still better off with their help than without. Besides - if they make a mistake, its likely that MILLIONS of other people have been caught in the same boat, and relatively speaking, I’m better off than if I made the mistake on my own. In other words, if I lose everything - the economy has tanked and everyone is in the same boat.
Kind of a security in numbers thing. So maybe that exemplifies the middle class mindset? Its not worth taking a big risk for big payoff (like starting your own company), and there’s also a security in numbers sorta thing going on.
This is very true.
I work in the investment world for a living. I will concede it is boring. It is my chosen profession and I find investments and talking about them to be boring. That being said, few things will pay greater dividends than understanding some very basic investment concepts. Doing this alone won’t make the difference, but it will get you there much faster.
For example, I would guess that very few people know how much their investments cost. Every mutual fund has an expense ratio that is a drag on your return. That cost directly impacts the returns you can expect to achieve. I would guess that not one in ten people can quantify what they pay and how it compares to the average investor.
For all the talk about asset allocation and rebalancing of portfolios, almost no one bothers to apply the well accepted principles of the two strategies. Almost every firm will offer an optimal allocation for a given risk level, and rebalancing is as easy as clicking your mouse. Most people view this as just too much of a hassle and as a result they may be investing, but they end up taking more or less risk than they intended and they are investing in a fundamentally haphazard manner.
There is a fundamental misconception in your post. The odds that anyone you hire will be able to divine the coming trends and counsel you as to the correct investment path is nearly nil. The odds that the time you might spend studying the markets will lead you to discover some latent skill in piloting your 401k through the murky waters of the future is also just about nil.
I am a financial planner and the great majority of competent planners focus on building a responsible allocation across many different asset classes. This is done with a long term focus and minimal shifts in anticipation of where the market will go next. We know that given enough time (like over your working life) an individual’s investment returns will tend to smooth. The practical application of this is that if you have experienced a bad ten years, it is somewhat more likely that the next ten will be better than average. I can tell you that I am under no illusion that I can separate ‘good’ stocks from ‘bad’ any more than a monkey could.
If you want to improve your chances of success, focus on minimizing the costs of the investments you use, understand the risks you are taking, and diversify in a way that minimizes risks to the extent possible.
I think a lot of it has to do with aggressive and conservative investments. My Wife and I are mostly on track in diversified funds. At 50 years old, we are still pretty aggressive.
Since things have taken a dive, we have lost about 1/3 of our investments. It sucks.
BUT, we are still buying with every paycheck. Buying MORE, since values are now down. I guess I’m optimistic. When values change, we will own more because of the current down trend and got them at a lower price. It should help our portfolio when it comes time to become conservative.
I feel sorry for those that were still very aggressive when values fell and they needed to cash in. That’s poor fund management though. Ride the rough waters, and BUY if you can ride them out.
The concept you are missing is extremely simplistic, yet kind of hard to explain in on a message board, but let me give it a shot.
Your investment isn’t one big shot into the stock market. You put in a fixed amount every paycheck/month/quarter.
So imagine you were investing $500 every month into an index like SPY that tracks the S&P500. When it is trading at $100 you’ll buy 5 shares. If it goes up to $250 the next month, you’ll buy 2. Next month it’s down to $50 so you buy 10. And the next month it’s back to $100 so you buy 5 more.
After 4 months the stock has stayed flat. You invested $2000, bought 22 shares and now your investment is worth $2200.
Did I really refuse to admit that? I believe what I said was that the trick is to figure out how much house you should buy.
Yup, that is exactly what you are supposed to do. And it is exactly how a middle class individual can become rich.
There are only two pitfalls you need to avoid:
[1] Realize that you can’t simply sell your house when ever you feel like it. That’s what I was saying about the “don’t invest money you need within 5 years.”
[2] Avoid making yourself house poor. If you want your house to appreciate it needs upkeep, maintenance, and remodeling work. That means having the money available and not tied up in mortgage payments. In the end, you’ll be far better off choosing a house that is $100 cheaper a month, and saving that money in a special account designated for house projects.
Now, if you scroll back a few posts, someone mentioned that they didn’t want to move and instead opted to sink $6000 a year into taxes. One of you will become rich, the other won’t.
Oh, I understand the concept of dollar cost averaging (woohoo! do I get a prize? 
). That is a major reason why I didn’t freak out too much when the market tanked, because I knew that I was soon going to be buying a bunch of shares at a much lower price. But I was kinda kicking myself for not paying more attention to things, because maybe I could have avoided the fall.
To be honest, while I said that the market hasn’t done anything for me, I’m probably not looking at it from the right point of view. I’d have to go back through 10 years of contributions, total them up, see what that total is and compare to the current value. Maybe I’d be surprised at the difference, in a good way.
But we’re not here to talk about my personal situation - I was just asking the higher level question of whether the approach of ‘Let me put money away into a 401k program and let someone else manage it until retirement’ is part of the middle class syndrome we are discussing. Certainly things like knowing which funds the allocations go into, periodic rebalancing, risk level with various funds, etc come into play, and you do what you can to tune things - but after a certain point, unless you dedicate a few hours per week to keeping up on things, you are more or less throwing darts at a board.
Simple answer to your question: yes, it is a middle class mindset to hand all your money to some one or some thing and hope they have your best interest in mind.
At the very least, you should be able to assign a level of risk. People 25-35 can and should take more risk. They have time to let the market fall and come back up again. A person 55 and over needs to progressively have less and less risk until it’s zero approaching retirement.
And at the other extreme, you don’t need to go as far as picking individual stocks unless you are really prepared to do the constant homework that is involved. Like I said, and index fund does just fine and outperforms something like 95% of managed funds.
This in general is how my wife and I have approached our funds. I like to think that right now I am buying on sale and the dividends will pay down the road. I am 50, and as I mentioned upthread I plan on retiring at 55. But my ‘retirement’ is more of an adjustment in the type of work I do for a living, thus I am not likely going to adjust my portfolio risk much from what a typical 55 year old would, even though technically I am retired. But my goal and plan is to not start drawing on those funds until early 60’s so I think my risk is relative to that goal.
Your last statement though is what caught my eye. I know a guy, a good friend, who did two stupid things. First he sold a bunch of stock right at the bottom of the market because it was tanking. Bad move as he sold at the worst possible time. Then I found out he had a portfolio risk like a 30 year old should have, even though he was within a couple of years of retiring! He got caught up on those good returns and pushed things, then panicked when the market tanked. I know the temptation is there but damn you need to adjust your risk to where you are at in life. I doubt he can recover now to be honest.
Someone upthread mentioned that the last ten years have been rather flat, and they have. But traditionally over time they haven’t and although you can’t predict the market it is more then likely going to go up then down, but it is a gamble and that is why you diversify to minimize that risk as best you can.
It is about risk and I don’t like risk either. So I try and spread that risk out as much as I can. Our different funds we are pretty diversified across a wide range of stocks/bonds and good index funds, etc. My wifes 401k is much more aggressive then mine is, but mine has a wider range of options. I have property too as another form of diversification. Property is great but it isn’t as fluid as stocks/bonds, etc. I think it is a part of a good portfolio but it is just part of one. Too many people in my opinion bank on their home as the majority of their retirement funds.
Because you might die at 66.
I believe you should live within your means and plan for retirement. I also believe that you should budget some money to enjoy life. I like going out to eat, having a few drinks with friends and going on trips with my girlfriend. These things make life worth living.
I would say that exemplifies the middle class mindset precisely. People here talk about “not needing to be rich” but it isn’t about that, IMHO. It’s about living the life you want to live. Granted the middle class is pretty much everyone who isn’t poor or super rich. But I think of the middle class mentality as one of mediocrity. It is a life spent doing what you are told and fitting in with your neighbors so that you can get by in their institutions and aquire a comfortible amout of stuff.
Most people are not willing to risk giving up their “stuff” and living a little less comfortibly if it meant following their true calling in life, assuming they even have one.
emacknight, I want to thank you sincerely for your input here. Your posts have been very much in line with what I believed was the best course of action for financial growth, and have also shown me where I have been going wrong.
The truth is, I just realized I’ve been living middle class when I should be living like I’m dirt poor in order to make the best out of our situation. Fortunately I’m in a good position to turn things around - 27, married, no children, about to graduate with a Master’s degree and enter the workforce next year. We also have a lot of nice things that will last through some lean times.
Some things we are doing right - we have $40k in retirement and $20k in savings. Our investments are pretty aggressive and we plan to phase them into less risky ventures as we get older. It is our feeling that we should live on a single income if possible. According to your millionaire planner as long as we keep investing $6k annually we will be millionaires by age 56. Our current plan is to invest $10k annually, so we’re not doing too badly in the retirement department I guess.
Some things we are doing wrong - I am attending a very expensive ($40k annual tuition expensive) graduate school and have accrued mountains of debt. All my life people have been saying, ‘‘Student loans are good debt’’ and dismissing my concerns, but I don’t believe there’s any such thing, frankly. In order to really focus on attacking the debt while still maxing out our Roth IRA contributions, we have to make some serious lifestyle changes starting today. As in, starting today, we’re poor. Your words have helped prompt those changes, so I thank you.
You mentioned a lot of reasons you think the middle class don’t become wealthy
-ignorance
-contempt for the rich
-weird views on retirement
For me the fundamental problem is just that my brain doesn’t work that way. It’s a constant struggle to just not go out and buy something if I want it. It’s bizarre, I’m disciplined in so many other ways - I’m a 4.0 student for chrissake. But when it comes to money, I can be so hedonistic. It’s not like I do it on purpose - it’s like $10 here, $30 here, and before I know it I’ve spent $5k on eating out (true story, this year.) I’m just colossally stupid when it comes to money.
Obviously it’s not impossible for someone like me to be wealthy - I really think we’re going to get there because I at least have the sense to pay my investments first. But I have a serious handicap. It’s a constant effort. Whereas a lot of this stuff might be obvious or second nature, it’s not to me. And I can’t even blame a bad upbringing for that. My mother actually does live in a cheap motel (just like your example!) and works a crap job and lives consistently below her means. She’s never poor for long. It’s amazing. My grandfather is the perfect example of the ‘‘millionaire next door.’’ Extremely modest lifestyle and yet at one point he easily supported 8 people following his retirement and at 70 years old is looking to purchase a second home for rental income. It took the man until this year to finally break down and purchase a computer. It’s like the ‘‘frugal gene’’ just totally skipped my generation.
I’m not trying to use that as an excuse - if anything, I’m trying to use it as a warning that people like me have to extra careful - but hopefully it will help some of you understand, it’s not second nature to everyone. In my case, it goes against my nature.
I’m ofted cited as being too analytical, to a fault. While your statement that the market is more than likely going to go up rather than down is true, and is the basis of how I invest - my concern is the obvious one about using past performance as a guide.
At a high level, the US economy is based on, and depends to some extent on, debt. It is a consumer driven capitalist economy - the more money that flows around, the better things go. Contrast with China, for example, which is more investment based.
No financial empire in history has lasted and continued to stay on top. There is a possibility that the US economy could come crashing down, considering the enormous debt we accrue. Some debt is needed, but there can be such a thing as too much. The problem is that no one knows where this tipping point is.
When you consider the current status of the world - economies have generally been booming since the industrial age, bouyed by the discovery of oil (the marvel that oil is - high density energy in a stable, transportable form) - and you consider that worldwide oil production has peaked - one could make an argument that the future is very foggy simply because the basis of the world economy over the past 100 years is becoming more fragile.
It used to be that the dollar was the standard currency. While that is still true, there has been talk for some time that it may not remain that way. Aside from the oil issue and the dollar issue, there are many other factors involved.
That of course is an oversimplification - the world economy is tightly tied with the US economy, and it (the world) has a vested interest in seeing the US economy do well. That is a saving grace.
On the other hand, 30-40 years ago, the world had a different set of issues and the economies managed to get by and prosper.
All that said (because that tangent is getting into great debates territory), my point is just that you could have a bunch of people doing the right things, investing with the idea that their assets will increase in value - only to find that by the time they retire, everything is worthless (ala Russia in the early 90’s). Those that survive and still have enough to live on will likely take the view of ‘why didn’t these people do something smarter with their money when they had the chance?’
So basically - what you said - can’t avoid some risk, but do what you can to mitigate it. It’s just that whenever I hear the story about the market always going up, my instinct is to say ‘yeah, but…’
I think there’s a LOT of leeway there. The $24k in student debt I accrued getting my degree was the best $24k I’ve ever spent because it opened so possibilities that wouldn’t be available otherwise. The only other way for me to have gotten that degree was to have my parents pay fully for my education. Since they are obviously older than I, it made a lot more sense for me to take on the debt rather than them taking on the debt because I have more years to recover from the setback. Not that I actually had the option of them paying for my education - I was just throwing that out as an example.
I will also echo thanks to emacknight as well. While I’ve been doing a decent job of things in my own life, he has encouraged me to start paying a bit more attention - at least to the point of looking into this double-dip recession possibility, and possibly making some minor changes in order to reduce any losses that might come about.
Oh, and I’m going to play with that millionaire calculator. Maybe I’ll win the game
Just wanted to add to this - it’s probably a matter of priorities. I’ve always been one of those people who just doesn’t put that much value on money. I recognize now that I probably don’t value it enough, but it’s hard, when you value so many other things above money, to be a wealthy person.
I don’t mean that in a sanctimonious way, because if there is anything I’ve learned over the last year, it’s that money can give you the power to serve your values. I acknowledge there’s something problematic about thinking that money doesn’t matter that much. But that’s really how I’ve thought all of my life, and it explains why I have a tendency to spend it so readily.
My Mom keeps teasing me that she’s going to make me read her favorite book, ‘‘Money is My Friend.’’ I think I’m going to have to tape that to my mirror or something and repeat it as an affirmation.
$24k sounds like a perfectly reasonable and manageable about of student debt.
How about $100k? Because that’s how much my Master’s degree costs. I was very fortunate to only owe $10k for my undergrad education due to scholarships. My husband owes $47k for his Ph.D. So that’s $160k of student loan debt for our household.
My FIL is a financial adviser and he is unconcerned about our debt. ‘‘Only pay the minimum,’’ he says, ‘‘And invest the rest.’’ My husband, who is a super savvy organized disciplined frugal person, says you have to think of it in terms of net worth, and we have so much toward retirement already, and there is so much we can do to continue growing wealth. It doesn’t really make me feel better. I hate debt. I worked very hard to get out of credit card debt, and now I have a bunch of student loans.
Yeah, I went to the most expensive, most prestigious schools I could. I value education for education’s sake. I mean I really do. I wanted the best possible education I could get and the privilege of a first-rate education is worth any amount of money to me. Because I paid more for the better education, I will be worth more in the field. And I’m certainly going to have more career opportunities than I would with my B.A.
I don’t regret my choice, but it does scare me a little. And it will mean major sacrifices in the next three years. The sad thing is, I realized tonight it didn’t have to be that way. I could have done it for cheaper–even at the same school. I just accepted the loans I was offered and took that as my budget rather than seeing if I could cut back on expenses and take out fewer loans.
I wish to god I could have a do-over on last year. But since you can’t go back in time, you can only go forward, that’s what I’m going to do, starting today. I’m going to get by this year on as little as humanly possible and then when those payments kick in the real challenge starts.
Good thing I don’t value money that much. Not gonna have any for a while. 
I think it is good to be skeptical. But I assume some of your funds are international funds right? Part of a diversified portfolio would (in my opinion anyways) include some international funds to offset what you said above.
The other way I also look at this, rightly or wrongly, is that it is all sort of relative. If the market here crashes badly and I lose half of my earnings, it is likely that every investor has done the same thing right? A few made out but many if not most lost the same percentage I did. So I retire with half of my funds but then so did everyone else. I guess from my viewpoint I can’t control what I can’t control so I don’t worry about it. I look at it as a long term issue, not a short term. So I try and not worry too much about the ten year gains or losses.
I am not as analytical as you say you are, or emacknight–Your world frightens and confuses me -I am just a simple caveman…wait, that isn’t right. But I just listen to my broker and put my money away each month and let time takes it toll. I rebalance when I am supposed to and I never buy a stock unless I know a little about the company, etc. But I would be lying if I didn’t acknowledge that luck is a big part of it as well.
Well, yes and no. Yes, there will be enough money to retire (fingers crossed), but I still don’t think a mil in savings is rich because if you don’t touch the principal (nevah touch the principal, dahling), the earnings of a mil is just a middle class income. I’m not going to have a rich lifestyle; it’ll still be middle class. The “luxury” of not having to work after retirement is, by some definitions, rich. But perhaps one thinking that having a mil invested is rich is a middle class attitude in itself.
Also, I don’t want to give the impression I’ve been Mr. Sensible my whole life. When I was younger, I racked up debt, lived paycheck to paycheck, etc. It took some time and lesson-learning (not to mention sick good luck in real estate) to get on track.
Eh, whatever…not so much of an argument, I guess. But this is sort of the crux of the matter. Middle class is a bit of a fuzzy concept; you can call one end of it rich and the other end poor, but not just in terms of income.
I’d say it still depends - mostly on the ratio of the debt taken vs the expected income bump. So in my case, the $24k of income resulted in a certain multiplier for income, and if that multiplier stays constant when obtaining a degree in a profession that requires $100k in debt, then its all relatively the same, all else (employment opportunities, job security, etc) being equal.
I think the value of happiness has to be taken into account. If your masters degree allows you into a position where you enjoy your job, whereas having a bachelors keeps you in a position where your job is not very enjoyable - then you may be in a situation where you are more poor in a monetary sense, but you’re ok with that because you can spend 40 years in a field without wanting to go postal.
There’s more middle class thinking for you - justifying a situation that keeps one in the middle class
All in all, though - the definition of middle class is so broad that its a difficult thing to quantify the mindset. I am in the middle class, but I approach things very differently than one of my best friends who is also middle class. He is a mechanic, his wife a teacher. They have a daughter and have a second on the way. They both earn an honest paycheck, just bought a house and thanks to his wife, he is much better financially now than he was 10 years ago. However, he wants to spend part of next years tax returns (from the first time homebuyers credit) on an irrigation system for his lawn, so that it looks as nice as his neighbors lawn was when he was growing up.
I also have a thing for my lawn - its somewhat of a minor hobby, and during the nice growing season, I take some pride in how my lawn looks. However, I wouldn’t dream of spending the thousands it costs to get an irrigation system put in. It’s been very hot here in the northeast this year, and large sections of my lawn have gone dormant and are brown. It looks kinda like crap. But its summer time, so its not growing much now anyway. Once the cooler weather of the fall comes, it’ll spring back to life and look as thick and lush as it did during the spring.
I allow a ‘keeping up with the Joneses’ attitude only enough to keep my house and property from starting into the cycle of disrepair. My friend, on the other hand, seems to want to show off a bit, rather than set aside the tax return for investment, or use it for something that’ll pay more dividends in terms of house value. Two middle class families, two very different mindsets.
olives - I don’t want to pick on you, but you asked.
You are getting a $100k worth of debt dilettante degree. You are going into Social Work, which you do need a Masters for, but which seldom pays well enough to really justify the degree - social work is one of those labor of love fields that you don’t choose for the financial benefits it brings. And you really don’t - at this point - want to be a social worker - you want to be a mom. That isn’t a plan to turn money into more money (which is how one moves up the security ladder).
On the other hand, you have some definite advantages - in laws who are wealthy is a big one - they aren’t likely to let you starve and are fairly likely to “treat” you to the luxuries your debt load and income wouldn’t sensibly permit (most of my friends with wealthy parents or grandparents get very nice vacations out of the deal - so at least that doesn’t go into their own budget, nor do they feel like they are deprived of them. It also isn’t unreasonable to believe they might help fund your kid’s college, or do some other things that would take some financial pressure off you). Plus you have a husband whose income potential is pretty good, once he gets his PhD done.
I think that other hand weighs pretty significantly in the equation and can’t be left out. Those details are a little extraordinary.
As I said, class ain’t just about how much you make; it is more about how you make it, and the attitudes towards a host of other issues that implies.
There is a correlation between class - how much you make - whether you are financially secure, but it is NOT a direct or inevitable correlation.
Auto factory workers are a good example. My B-in-law is one, and with overtime he pulls in a shitload of cash, just as you say; he owns a house, two cars and a speedboat. But he’s clearly working class (and proud of it - a solid union man).