Author Topic: The "everybody seems wealthy" illusion is it really just all fueled by debt?  (Read 90100 times)

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
You guys are killing this post!
It died long ago.

nobodyspecial

  • Handlebar Stache
  • *****
  • Posts: 1469
  • Location: Land above the land of the free
You guys are killing this post!
It died long ago.
It's not dead it's just resting, pining for the fjords etc etc

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8891
  • Registered member
Quote
Consider that almost everyone on this web site is either paying off debt or investing aggressively..  Are you saying we don't save any money here?

No, I'm saying that paying off debt isn't savings, and I'm saying you save money to make investments.  Again, it's a pedantic distinction, but especially the part about debt repayment not being savings, it's a distinction.

Ok, so are you "happy" if someone says they are investing their savings by paying off their mortgage vs investing their savings in the stock market?

No, one doesn't "invest in paying off" they "retire debt". 

Quote
It feels like you are being intentionally pedantic about the word choice here, to the point you'd rather be "right" than use terminology which is more commonly understood.

I'd argue no one "understands" paying off debt as savings.

Have you ever heard of the transitive property? 

aspiringnomad

  • Pencil Stache
  • ****
  • Posts: 862
Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

As a finance person, I AM applying a precise definition:  "keep and store up (something, especially money) for future use."  I don't get how sending money to someone else to pay a debt meets the strict definition of "keep and store up."  Your problem is that you are confusing "investing" with "saving".

When you pay down principal, you "keep and store up (something, especially money) for future use" in the form of equity. What happens to the amount of that equity vis a vis the market is just as immaterial as what happens to index funds you've invested in. Look, I'm not arguing in favor of home ownership at all - I agree with Kaspian that there are opportunity costs people neglect to account for when deciding whether to buy or rent - I am simply arguing for an accurate, fact-based accounting system from which to calculate savings. Why some can't seem to grasp it boggles my mind.

It's obvious by this point that you won't believe me, but perhaps you'll take MMM's word for it? If so, see: http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

In particular, the box titled "Joe's Spending" and the first line reading "Interest portion of his $2500 mortgage payment: ($2000)" (emphasis mine). The obvious implication is that the principal portion does not count towards spending, and thus counts towards savings.


DollarBill

  • Pencil Stache
  • ****
  • Posts: 902
  • Age: 45
  • Location: Austin TX
The "everybody seems wealthy" illusion is it really just all fueled by debt?
« Reply #304 on: January 27, 2016, 06:53:43 PM »
Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

As a finance person, I AM applying a precise definition:  "keep and store up (something, especially money) for future use."  I don't get how sending money to someone else to pay a debt meets the strict definition of "keep and store up."  Your problem is that you are confusing "investing" with "saving".

When you pay down principal, you "keep and store up (something, especially money) for future use" in the form of equity. What happens to the amount of that equity vis a vis the market is just as immaterial as what happens to index funds you've invested in. Look, I'm not arguing in favor of home ownership at all - I agree with Kaspian that there are opportunity costs people neglect to account for when deciding whether to buy or rent - I am simply arguing for an accurate, fact-based accounting system from which to calculate savings. Why some can't seem to grasp it boggles my mind.

It's obvious by this point that you won't believe me, but perhaps you'll take MMM's word for it? If so, see: http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

In particular, the box titled "Joe's Spending" and the first line reading "Interest portion of his $2500 mortgage payment: ($2000)" (emphasis mine). The obvious implication is that the principal portion does not count towards spending, and thus counts towards savings.
I hate to stick my nose in this but I agree with counting the equity in your house...which is also "Real Property"...which is as considered a Capital Asset. If you sell a capital asset for more than you bought it then it's a capital gain. If it's less than you bought it then it's a capital loss.

https://en.wikipedia.org/wiki/Capital_asset
« Last Edit: January 27, 2016, 06:56:14 PM by DollarBill »

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
[...]

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward. ...

There's actually a reported Alberta case where some guy persuaded his "friend", Mr. Hajduk, to enter into almost that exact transaction. Mr. Hajduk later sued his former friend. His basic argument was that the transaction was unfair, but the Court was not too sympathetic:

                   It is inherent in the notion of enforceability of bargains that the exchange of values need not be an exchange of equivalents. In other words the parties are free to make good bargains and bad bargains, and the transaction does not cease to be a bargain because it is very profitable to one of the parties to it.
Hajduk v. Gabourie, 2014 ABQB 177 at 41 (quoting a secondary source).
« Last Edit: January 27, 2016, 07:59:07 PM by Cathy »

DividendMoney

  • 5 O'Clock Shadow
  • *
  • Posts: 49
    • Dividend Money
[...]

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.

Given the strength of Iowajes opinion on the matter, I'm surprised that he hasn't taken me up on the offer yet.  :)

I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward. ...

There's actually a reported Alberta case where some guy persuaded his "friend", Mr. Hajduk, to enter into almost that exact transaction. Mr. Hajduk later sued his former friend. His basic argument was that the transaction was unfair, but the Court was not too sympathetic:

                   It is inherent in the notion of enforceability of bargains that the exchange of values need not be an exchange of equivalents. In other words the parties are free to make good bargains and bad bargains, and the transaction does not cease to be a bargain because it is very profitable to one of the parties to it.
Hajduk v. Gabourie, 2014 ABQB 177 at 41 (quoting a secondary source).

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8010
  • Location: United States
if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward.
This will give you access to cash for investing and still allow you to keep the same 'expense' for a place to live. 

PM me with address to send my offer to purchase and rental contract agreement.

Deal?

No. My neighborhood doesn't allow rentals.

I don't understand why it bothers you so much that some people keep track of their accounting in a different way than you do.  When I no longer have a mortgage payment, I'll be able to save money- because I can essentially live "free" in a home already paid for- with a rental that would never happen. So buying is better in that respect, because eventually it will allow me to save money. But the money towards the house is a PURCHASE. It's not savings. I'm spending the money to buy something that I now own. Just like I do when I get a new pair of jeans or a dinner plate. That thing cost me money. After I bought it, it still has value. I could later transfer it to someone else and exchange money for it.  But selling a house is no different than selling any of my other possessions. It may be worth more than I paid. It may be worth less. I don't know until the sale happens, so counting on it as "savings" is foolish, IMO. I actually did sell a dinner plate for twice what I paid- great investment. There is almost no way my house will sell for twice what I paid. The last house I sold sold for less than what I paid.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Have you ever heard of the transitive property?
Don't go dragging math into this conversation to confuse us!

Think

  • 5 O'Clock Shadow
  • *
  • Posts: 88
if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward.
This will give you access to cash for investing and still allow you to keep the same 'expense' for a place to live. 

PM me with address to send my offer to purchase and rental contract agreement.

Deal?

No. My neighborhood doesn't allow rentals.

I don't understand why it bothers you so much that some people keep track of their accounting in a different way than you do.  When I no longer have a mortgage payment, I'll be able to save money- because I can essentially live "free" in a home already paid for- with a rental that would never happen. So buying is better in that respect, because eventually it will allow me to save money. But the money towards the house is a PURCHASE. It's not savings. I'm spending the money to buy something that I now own. Just like I do when I get a new pair of jeans or a dinner plate. That thing cost me money. After I bought it, it still has value. I could later transfer it to someone else and exchange money for it.  But selling a house is no different than selling any of my other possessions. It may be worth more than I paid. It may be worth less. I don't know until the sale happens, so counting on it as "savings" is foolish, IMO. I actually did sell a dinner plate for twice what I paid- great investment. There is almost no way my house will sell for twice what I paid. The last house I sold sold for less than what I paid.


A home is vastly different than a pair of jeans.  You have to know this.  You can't rent out your jeans and you lose money on jeans.  If you took out a loan for a pair of jeans costing 100 you couldn't even expect to receive 100 when you sell, let alone appreciation.

Many people diversify their portfolios with real estate.  Not with jeans.

If you don't believe real estate is an investment, then you have to apply that same rule to rental properties. 

Have you heard of equity?  Equity in real estate is actually not that different than equity in a house. 

JCfire

  • Stubble
  • **
  • Posts: 145
Forget fueled by debt, alot of it can be adequately explained as "fueled by not saving so much".  If I had a savings rate of 5% instead of 50%, I'd be on a fairly typical retirement track and I would appear massively more wealthy/spendy than I currently appear, because alot of that extra spending would be on highly visible luxuries (travel, car, etc)

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Forget fueled by debt, alot of it can be adequately explained as "fueled by not saving so much".  If I had a savings rate of 5% instead of 50%, I'd be on a fairly typical retirement track and I would appear massively more wealthy/spendy than I currently appear, because alot of that extra spending would be on highly visible luxuries (travel, car, etc)
Yeah, that too. I had a period of $120K+ gross and minimal savings... I don't even have expensive tastes, just little things that added up. It's wild.

DollarBill

  • Pencil Stache
  • ****
  • Posts: 902
  • Age: 45
  • Location: Austin TX
The "everybody seems wealthy" illusion is it really just all fueled by debt?
« Reply #312 on: January 28, 2016, 11:42:26 AM »
if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward.
This will give you access to cash for investing and still allow you to keep the same 'expense' for a place to live. 

PM me with address to send my offer to purchase and rental contract agreement.

Deal?

No. My neighborhood doesn't allow rentals.

I don't understand why it bothers you so much that some people keep track of their accounting in a different way than you do.  When I no longer have a mortgage payment, I'll be able to save money- because I can essentially live "free" in a home already paid for- with a rental that would never happen. So buying is better in that respect, because eventually it will allow me to save money. But the money towards the house is a PURCHASE. It's not savings. I'm spending the money to buy something that I now own. Just like I do when I get a new pair of jeans or a dinner plate. That thing cost me money. After I bought it, it still has value. I could later transfer it to someone else and exchange money for it.  But selling a house is no different than selling any of my other possessions. It may be worth more than I paid. It may be worth less. I don't know until the sale happens, so counting on it as "savings" is foolish, IMO. I actually did sell a dinner plate for twice what I paid- great investment. There is almost no way my house will sell for twice what I paid. The last house I sold sold for less than what I paid.


A home is vastly different than a pair of jeans.  You have to know this.  You can't rent out your jeans and you lose money on jeans.  If you took out a loan for a pair of jeans costing 100 you couldn't even expect to receive 100 when you sell, let alone appreciation.

Many people diversify their portfolios with real estate.  Not with jeans.

If you don't believe real estate is an investment, then you have to apply that same rule to rental properties. 

Have you heard of equity?  Equity in real estate is actually not that different than equity in a house.
In financial economics, capital refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assets, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an asset is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the asset will produce. With the further assumption that people agree on the probability distribution of future cash flows, it is possible to have an objective Capital asset pricing model. Even without the assumption of agreement, it is possible to set rational limits on capital asset value.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8891
  • Registered member
if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward.
This will give you access to cash for investing and still allow you to keep the same 'expense' for a place to live. 

PM me with address to send my offer to purchase and rental contract agreement.

Deal?

No. My neighborhood doesn't allow rentals.

I don't understand why it bothers you so much that some people keep track of their accounting in a different way than you do.  When I no longer have a mortgage payment, I'll be able to save money- because I can essentially live "free" in a home already paid for- with a rental that would never happen. So buying is better in that respect, because eventually it will allow me to save money. But the money towards the house is a PURCHASE. It's not savings. I'm spending the money to buy something that I now own. Just like I do when I get a new pair of jeans or a dinner plate. That thing cost me money. After I bought it, it still has value. I could later transfer it to someone else and exchange money for it.  But selling a house is no different than selling any of my other possessions. It may be worth more than I paid. It may be worth less. I don't know until the sale happens, so counting on it as "savings" is foolish, IMO. I actually did sell a dinner plate for twice what I paid- great investment. There is almost no way my house will sell for twice what I paid. The last house I sold sold for less than what I paid.

First, you never live "free" in a house you paid for-- there's always opportunity cost for the cash, and conversely imputed rent regardless of whether your HOA actually allows rentals.

Second, Volatility does not turn an investment into an expenditure.  I even disagree with others that negative return turns an investment into an expense.  Look at the institutions that bought negative rate bonds in europe.  This can be reasonable in the face of deflation.

No, an investment is something you do because you expect it will give you monetary advantage.  If you expect paying off your loan is giving you an advantage over the cash sitting in checking, you are certainly investing that cash. 

To reiterate, you don't have to count it as savings of you don't want... But in that case you have to ignore the original purchase of the home as an expense.  You can't double count it as a $300k expense in year one, then a $1.5k (or whatever) monthly expense thereafter.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8010
  • Location: United States
Quote
First, you never live "free" in a house you paid for-- there's always opportunity cost for the cash, and conversely imputed rent regardless of whether your HOA actually allows rentals.

Which is why I said "free" and not free.

Quote
No, an investment is something you do because you expect it will give you monetary advantage.
So the house isn't one. Because I don't expect that it will. The only expectation I have for it is that it gives me a place to live.

Quote
To reiterate, you don't have to count it as savings of you don't want... But in that case you have to ignore the original purchase of the home as an expense.  You can't double count it as a $300k expense in year one, then a $1.5k (or whatever) monthly expense thereafter.
I don't track my expenses, only the amount of money I don't spend (savings; which I compare against my salary to determine my savings rate. Expenses are meaningless to me.).  But if I did- I would only record it as I spent it- as that is the money going out. Unless you pay cash, a house doesn't cost $300k one year and then $1.5k monthly. It more likely costs $80k one year, and then $1.5k monthly.
« Last Edit: January 28, 2016, 02:15:22 PM by iowajes »

libertarian4321

  • Handlebar Stache
  • *****
  • Posts: 1382
I'm glad to see this discussion of paying off the mortgage versus "investing," because I think it needed a fresh take, er brawl, after the 374 similarly inconclusive threads on the subject...

DollarBill

  • Pencil Stache
  • ****
  • Posts: 902
  • Age: 45
  • Location: Austin TX
The "everybody seems wealthy" illusion is it really just all fueled by debt?
« Reply #316 on: January 28, 2016, 03:50:50 PM »

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8891
  • Registered member
Quote
First, you never live "free" in a house you paid for-- there's always opportunity cost for the cash, and conversely imputed rent regardless of whether your HOA actually allows rentals.

Which is why I said "free" and not free.


That's also why I said "free"

Quote
Quote
No, an investment is something you do because you expect it will give you monetary advantage.
So the house isn't one. Because I don't expect that it will. The only expectation I have for it is that it gives me a place to live.

Living "free" in a house is a "monetary advantage"

Quote
Quote
To reiterate, you don't have to count it as savings of you don't want... But in that case you have to ignore the original purchase of the home as an expense.  You can't double count it as a $300k expense in year one, then a $1.5k (or whatever) monthly expense thereafter.
I don't track my expenses, only the amount of money I don't spend (savings; which I compare against my salary to determine my savings rate. Expenses are meaningless to me.).  But if I did- I would only record it as I spent it- as that is the money going out. Unless you pay cash, a house doesn't cost $300k one year and then $1.5k monthly. It more likely costs $80k one year, and then $1.5k monthly.

Ok, so you don't track expenditures, you track cashflows.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: The "everybody seems wealthy" illusion is it really just all fueled by debt?
« Reply #318 on: February 02, 2016, 01:55:09 PM »
I'm glad to see this discussion of paying off the mortgage versus "investing," because I think it needed a fresh take, er brawl, after the 374 similarly inconclusive threads on the subject...
Excuse me sir, I reached a conclusion on the subject long ago. The inability of the benighted masses to see the light of my reasoning is truly N.M.F.P.~!