Author Topic: Newbie: how can investments be viable?  (Read 5765 times)

Vilx-

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Newbie: how can investments be viable?
« on: March 04, 2013, 04:40:06 AM »
Reading around the web the advice about "how to get rich" is invariably the same - you must invest money.  But this confuses me on several accounts:
  • The classical "what if everybody did this" question. If everybody invested money, then everybody would get rich, but that then would simply make everyone equal again. And, since human beings can only produce so much goods and services per day, all this shuffling of money around wouldn't have accomplished anything but inflation, right? (Actually, since the amount of money in the system is limited, how can everybody get rich?)
  • Reading around in this forum it seems that around $24k/year is a level of normal, frugal spending for a family of 3. Also, as MMM says, a stock market pays around 10%/year. So that means, to get a living by trading in stock market, you need an ass whooping $240,000 to begin with. So... where do you normally get it (short of robbing a bank)? Even if I could put $200 aside every month (which I can hardly imagine), it would take me a 100 years to get to that point. I suppose compound interest might halve the time, but... it just doesn't add up to me.

Antipodean

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Re: Newbie: how can investments be viable?
« Reply #1 on: March 04, 2013, 04:54:04 AM »
Hi Vilx:

Have read of jlcollinsnh blog for an answer to your first question:

http://jlcollinsnh.wordpress.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/

As for your second question...for homework I suggest reading from post one of Mr Mustache's Blog:)

grantmeaname

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Re: Newbie: how can investments be viable?
« Reply #2 on: March 04, 2013, 05:34:35 AM »
Welcome!

Reading around the web the advice about "how to get rich" is invariably the same - you must invest money.  But this confuses me on several accounts:
  • The classical "what if everybody did this" question. If everybody invested money, then everybody would get rich, but that then would simply make everyone equal again. And, since human beings can only produce so much goods and services per day, all this shuffling of money around wouldn't have accomplished anything but inflation, right? (Actually, since the amount of money in the system is limited, how can everybody get rich?)
Why would everyone being equal be a bad thing?
Regardung your second question: If more people are investing, the amount of invested capital increases, which allows companies to increase their capital intensity (the ratio of capital to labor they use in production), which allows the same-sized or shrinking workforce to be increasingly productive - think automation and robotics widespread across the industries in which it's only beginning to make economic sense. The amount of work produced by human beings in a day would increase. That increased prosperity could be captured by both owners of capital and workers, hopefully - but if you're both a worker and an owner of capital, some of the gains would certainly head your way. And lastly, the amount of money in the system hasn't been limited since the Gold Reserve Act of 1934 has been passed, but you're also confusing the money supply with the price level. The price level is the average price of goods and services, as measured by a tool like the CPI. The money supply is the volume of money in the nation's economic system. That's a key difference, even if it's unintuitive.

Quote
  • Reading around in this forum it seems that around $24k/year is a level of normal, frugal spending for a family of 3. Also, as MMM says, a stock market pays around 10%/year. So that means, to get a living by trading in stock market, you need an ass whooping $240,000 to begin with. So... where do you normally get it (short of robbing a bank)? Even if I could put $200 aside every month (which I can hardly imagine), it would take me a 100 years to get to that point. I suppose compound interest might halve the time, but... it just doesn't add up to me.
Saving $200 a month is hardly gonna get you there. Most of the forum members are saving half their income or more, which is really not nearly as hard as it sounds. If you're interested in learning how, check the top 10 MMM posts. If you're interested in why it works, check out The Shockingly Simple Math Behind Early Retirement

kt

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Re: Newbie: how can investments be viable?
« Reply #3 on: March 04, 2013, 05:48:10 AM »
mmm has lots of tips on reducing your savings in a lot of different ways and many of these are quite different from your usual money-saving tips. they do assume that you are willing to put in some effort (at least initially) into changing your lifestyle so it is more frugal/affordable (e.g. getting used to less heating/ac).
however, i can see where you're coming from on the savings front. the other half of the equation is to earn more as well as saving more/spending less.
i often get disheartened by the figures on here and people who make it seem easy. i live on less than 9,000 a year ($13,500) and probably save around 1/4 of my income (on top of what i put aside for tax). but that's not a huge amount looking at the graphs and the prospect of maintaining this for the next 30 years seems rather... tiring? i know the benefits and the long term pay off and what not. but that's a long time!!
for me i think about 10 years would be ideal! so i guess i now need to earn enough so i can save 60-70%. (i honestly do not think i can live on much less than I currently do).
the maths does add up. however, you do need to be able to save a significant amount. and if you are on a low income there is realistically only so much you can save.

Vilx-

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Re: Newbie: how can investments be viable?
« Reply #4 on: March 04, 2013, 05:51:04 AM »
I don't think that everyone having an equal income is a bad thing (though that's a good topic in and of itself). I'm just wondering how it would be (would everyone be able to lead a satisfying lifestyle?) and whether investing money moves the society towards that situation or away from it. And what is the ethical choice?

Saving half of my income sounds extreme. I'm having a hard time seeing where I could cut anything away. But that's a topic for another category (and I should do some more research/thinking before I ask that question here). Still, I guess that's the goal that needs to be met in order to achieve financial independence. Thank you!

AlexK

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Re: Newbie: how can investments be viable?
« Reply #5 on: March 04, 2013, 06:51:48 AM »
The argument that it won't work because what if everybody did it doesn't hold water. Are you seriously worried that everyone will save 50% of their income and get rich? I'm worried they will spend 150% of their income and sponge off the ones who save!

The fact that it is possible to live pretty well with a minimum wage paycheck is what we exploit to allow us to retire early with a normal salary. If your wages are that low right now you really need to look for ways to increase your income. Some people choose to work a job with low pay because it is something they really enjoy, and that's OK, but in that case working 40 years shouldn't be too bad. If you hate your job and it has low pay you need to find a new way to make money.

Also on the expenses issue, do you have cable TV, fancy car, an extra room in your house, prestigious neighborhood, private school for kids, high cost smart phone? When you ask most people about such things they usually come up with a list of excuses why they can't cut back. Most people will work till they die.

Vilx-

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Re: Newbie: how can investments be viable?
« Reply #6 on: March 04, 2013, 07:29:31 AM »
My income is quite fair, but so are my expenses. Unfortunately none stand out as explicit luxury items that I could do without (or do with cheaper versions). I suppose it never does. But at the moment I'm not yet ready to publicly discuss my finances (if ever). As for your list of luxuries - the only thing that might be a "yes" is a 2004 Volvo S60 that I'll be paying for until the start of 2015. I plan to drive it as long as possible.

Alan2

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Re: Newbie: how can investments be viable?
« Reply #7 on: March 04, 2013, 07:42:45 AM »
since the amount of money in the system is limited

The money in the system isn't limited.  There's fractional reserve banking (http://en.wikipedia.org/wiki/Fractional-reserve_banking) and quantative easing (http://en.wikipedia.org/wiki/Quantative_easing) to name but two methods where money just pops into existance.

cparlette

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Re: Newbie: how can investments be viable?
« Reply #8 on: March 04, 2013, 07:47:03 AM »
My income is quite fair, but so are my expenses. Unfortunately none stand out as explicit luxury items that I could do without (or do with cheaper versions). I suppose it never does. But at the moment I'm not yet ready to publicly discuss my finances (if ever). As for your list of luxuries - the only thing that might be a "yes" is a 2004 Volvo S60 that I'll be paying for until the start of 2015. I plan to drive it as long as possible.

It's your choice if you don't want to discuss details of your finances on the internet, but I'd just like to mention to you that if you can hardly imagine setting aside $200 per month, then either your income is not good or your expenses are not good.

arebelspy

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Re: Newbie: how can investments be viable?
« Reply #9 on: March 04, 2013, 08:02:30 AM »
Others have provided some good responses, but I'll add in some thoughts.

Reading around the web the advice about "how to get rich" is invariably the same - you must invest money. 

I disagree.  But that's a separate topic from the rest of your post that warrants its own thread/discussion, so I'll leave it at that for now.

  • The classical "what if everybody did this" question. If everybody invested money, then everybody would get rich, but that then would simply make everyone equal again. And, since human beings can only produce so much goods and services per day, all this shuffling of money around wouldn't have accomplished anything but inflation, right? (Actually, since the amount of money in the system is limited, how can everybody get rich?)

Production is not a zero sum game.  If we could only produce so much goods and services per day, quality of life wouldn't grow (I.e. as more humans got added, they'd only be able to produce to care for the new humans).  Instead, due to technology advancements and such, more production can happen, and quality of life can grow. 

That is, even if we all invest, we can all see benefits from it.  (And then there's the obvious aside that most won't, few will.)

  • Reading around in this forum it seems that around $24k/year is a level of normal, frugal spending for a family of 3. Also, as MMM says, a stock market pays around 10%/year. So that means, to get a living by trading in stock market, you need an ass whooping $240,000 to begin with. So... where do you normally get it (short of robbing a bank)? Even if I could put $200 aside every month (which I can hardly imagine), it would take me a 100 years to get to that point. I suppose compound interest might halve the time, but... it just doesn't add up to me.

See this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Worry about saving a good percentage of your income, rather than some small dollar amount.

Saving half of my income sounds extreme.

Does it?  That's about the median savings rate of people on these forums.  Or, to put it another way, over half of us here save more than 50% of our income.

http://www.mrmoneymustache.com/forum/welcome-to-the-forum/mustache-poll-how-much-do-you-save/

Maybe you just need to change your perspective/mindset.  :)
« Last Edit: March 04, 2013, 08:05:40 AM by arebelspy »
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Vilx-

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Re: Newbie: how can investments be viable?
« Reply #10 on: March 04, 2013, 08:26:52 AM »
I disagree.  But that's a separate topic from the rest of your post that warrants its own thread/discussion, so I'll leave it at that for now.
I'm interested in reading about that. Basically all I've heard is to "make your money work for you", which means some kind of investment (stocks, real estate, lending it to someone, depositing in a bank, etc). Care to make a new thread, please? :)

Maybe you just need to change your perspective/mindset.  :)
Of course. That's why I'm here. :)

OK, I get the message here and I have formulated my next question, but that's something that warrants it's own thread in another category. See here.
« Last Edit: March 04, 2013, 08:46:50 AM by Vilx- »

brewer12345

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Re: Newbie: how can investments be viable?
« Reply #11 on: March 04, 2013, 12:58:06 PM »
I know the emphasis here is on cutting expenses to free up cash to save and invest.  There is another way: keep your expenses flat and grow your income.  That might require starting a side business, pursuing a degree or professional designation, changing jobs, etc., but it is a perfectly viable way to grow wealth over time.

arebelspy

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Re: Newbie: how can investments be viable?
« Reply #12 on: March 04, 2013, 01:20:27 PM »
I know the emphasis here is on cutting expenses to free up cash to save and invest.  There is another way: keep your expenses flat and grow your income.  That might require starting a side business, pursuing a degree or professional designation, changing jobs, etc., but it is a perfectly viable way to grow wealth over time.

And I don't do either.  My income and expenses are more or less flat.

But there's a big enough gap between them that I have a decent savings rate (70%, which has - naturally - been flat for several years).

I'm not interested in spending less, nor do I want to earn a whole lot more (and do the necessary work that comes with it).  I enjoy what I do, and am good with that level.

It's a very different mindset, but once you get a LBYM mindset, you can pretty much go on autopilot, save the surplus, and you'll eventually get rich while enjoying life and not having to cut expenses or increase income.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

chucklesmcgee

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Re: Newbie: how can investments be viable?
« Reply #13 on: March 04, 2013, 06:52:08 PM »
Even assuming you're only able to save $200 a month, you'd hit $240,000 in savings in 25 years. with a somewhat generous estimate of 10% returns in the markets.

However, your salary should grow well above inflation if you're getting promotions and moving on to bigger positions. Additionally the family of three for which you're saving will likely include another working spouse. If you maintain a frugal standard of living even as your paycheck increases, it should be very easy to reach $240,000 in under a decade.