Every 25 Year Old Needs to See This Chart... (Uh, no...)

[MJ DeMarco]

http://finance.yahoo.com/news/every-25-old-america-see-200000319.html

Uh no... not exactly, unless that is, you plan on being like every other lemming on the planet.

Let me fix the headline.

Every 25 Year Old Needs to See WHO is promoting this chart.

And then ask yourself...

Why? What does JP Morgan have to gain by having every 25 year old indoctrinated to this ideology?

 

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[PaulRobert]

OPM. The bank has free money to invest with and make 100x on that money while Susan, Bill, and Chris are stuck in a nauseous smelling subway commute everyday until those "golden years."

 

[socaldude]

CASH.

LIQUIDITY.

The dream of every Bank and Mutual Fund.

Not to mention fees and interest rates(12%-29.99%credit cards).

You want to get rich? Start a Bank or a Mutual Fund don't join one LOL.

 

[jazb]

What a terrible way to live life

 

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[MoneyDoc]

OMG!!!! I can buy 5 gold canes!!!! 1 million dollars by 65!!!


Sad thing is.. This is what most people live for...

 

[mememan]

I don't know what rate they are using, but any investment type worth their salt will tell you that, in the coming years, the S&P 500 will be *lucky* to return 6%-7% per year on average. Take out inflation of say 3% and the results are even worse.

Oh, and in any sort of retirement account, you are giving the government 50+ years to figure out how to get that money. I have no doubt that those in their 20s and 30s will see something happen when they are in their retirement years that will suck out any sort of value they got from their investments.

Also, if you can't touch the money without permission, it isn't yours.

 

[Sean Corroon]

Millionaire at 65? no thanks !!!

 

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[Mike Kavanagh]

"golden years."

I instantly think of those catheter commercials every time I read these two words.
It disgusts me.

 

[Veloce Grey]

The comments section underneath that article/advert is incredibly depressing reading. It's amazing how well trained people are to think in such limited terms.

 

[The-J]

They don't mention the interest rate, funny that.

A good level of inflation is 2% per year. Sometimes it's higher, sometimes it's lower. Let's assume the economy is always good, which has to be the worst assumption one can make.

Most savings accounts here offer about .5% interest. If you've got more money you can get a 2% one.

Nominal interest rate - inflation rate = real interest rate

2% - 2% = 0%.

You're getting nothing.

.5 - 2% = -1.5%.

You're losing money.

a 30-year bond gives 3% per year. Your money is increasing by 1%. 72 years to double your $100,000 investment in terms of real purchasing power, ladies and gentlemen!

Some bonds give better returns, like 6%. Still, 4% in real terms, not a lot of money. 72/4 = 18 years to double your $100,000 investment in real terms.

Roth IRA: I've heard people say that their plan got them like 10% this past year. Wow. Wonder what it got them in 2008?

Not only that, how many jobbers actually have $200,000 saved up at the age of 25 or 35? Not many. Why? Because your friends are getting new houses and cars and you wanna be just like them. Why not? You make almost six figures!

Hope, time, lifestyle servitude and bad math. And yet so many of my contemporaries are hoping it works for them when in reality, it doesn't work for most people. It's being shouted at them from every angle, so certainly they have to believe it.

 

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[Polarbeans]

First of all I would like to make a statement, which I'm sure many of you agree with: Saving cash is NEVER bad (unless you live in Zimbabwe and the inflation is a couple of thousand percent).

With no buffert or savings you will never reach any sort of wealth. But using the method of saving as a road to wealth is never working. There has to be some sort of multiplier.

Well I invest in the stock markets and I'm a good trader?
Cool story. I bet you make a lot of cash and life is chillin'. No?

IF you are making a lot on the stock markets and you know how to earn big bucks this way - Congratulations, you are not saving to wealth, you are working to gain wealth. I think trading on the stock market works and it is possible to gain high yields. But it takes too much time; it's just you and your money gaming the market. If you are a broker you game with someone else's money and then you do not save.

--------------------

Here is my graph:

I just compiled a spread sheet for you to download.

I have yet to correct potential errors in the sheet so there might be some flaws (considering I did this during coffee break at work). The areas that are in gray are formulas that you can alter if you like, but the point is that the gray cells will spit out the results of your input.

The input then goes into the yellow cells.

Interest rate: First you put in the interest rate you would like. This is the effective rate and my sheet compounds it annually.
Real Return: Under it there is the Real return which is what the formulas use to compound (Real Return takes inflation into account).
Amount Saved: the saving you do each year (I used 5k just for the sake of the discussion)
Growth: this is not an input but a growth that I calculated (VERY arbitrary). I figured the rule of 80/20 could be put to use here and if you work 100 % in your own business, it will return a growth rate of 80 %. As you can tell this is not how it works in real life but I use this for two reasons: firstly you should work 80 % and learn 20 % of your time, hence the 80/20 rule. Secondly I use the rule of 80/20 for the sake of the spread sheet, i.e. this sheet is to be used to visualize the potential in fast lane and not to analyze actual performance (duh).
Amount: There has to be some sort of amount put into the formula to get an actual number. You can view the principal of 100 as your first yield/dividend/revenue/profit or whatever. I think of it as profit.
Inflation: the inflation you would like. In November 2014 the inflation rate was 1.3 % (US)
h/day worked: this is the amount of hours you work each day. This alters the growth by a good amount (given you work a decent amount of days). Maximum is 24.
days/week: days per week worked. This alters the growth by a high amount (given you work a decent amount of hours). Maximum is 7.
h/month: Amount of hours you work each month. Computed from the two inputs above.
Annual workload: this will be the amount of workload you have each year, i.e. the amount of hours worked per year. This model does not account for any free time. The time you input is the time assumed worked. As you will see; the workload will increase for both fastlaners but also for Chris, Susan and Bill. But they will not earn any extra for it (at least not here, and probably not in life either).
Multiple: this is the multiple used for computing an exit price for the fastlane. This is arbitrary of course and there are different multiples for different industries/shape of the company/cash pools etc etc. just pick something and play around with it.

In the graph above it takes about 6 years to catch up with the slowlaners who save and live frugal.
If you want to add the exit amount to the graph above it looks like this:

If you want to add your own exit amount you can do this by putting the amount FROM cell J25 INTO cell H26 (copy this: =J25)

When I "finished" the model I thought that no person work for full workload all the time, so I should've probably added a natural way to decline the workload exponentially to the end, but you will have to imagine the decline^^


------

Again this is not a model that is fulfilled in any way, nor was this its purpose. I only wanted to visualize the fastlane and thought that "sharing is caring"

Disclaimer: This graph and its model is not intended to be used as financial advice, guidance or help in any way. I do not take any responsibility of its correctness should you use it in any other way than was intended.

 

[Kak]

I actually do something similar.... Among other things But I feed it with my business not a job.

At 10 percent anually, my plan B has me worth 27 million by age 65 without even growing my contributions.

I don't understand why we can't do both. Imagine contributing 8000-20000 per month to an account like that.

 

[The-J]

But I feed it with my business not a job.

That's literally the difference. The average joe simply doesn't make enough money. It's not the market's fault: it's actually pretty predictable over the course of years and decades. A business is scalable, controllable, and if it doesn't work you cut your losses (or take your gains) and put it into something else.

The Sidewalker has a savings and debt problem. Making it in the Sidewalk is impossible because they lack the discipline to manage their money, whether they make $10/hr or $10m a year.

The Slowlaner has an income problem. If you wanna make it in the Slowlane, you need to be happy with your meager sum and 40 hour work week. You need to be happy putting away 20% of your paycheck that you never touch (Not a problem for a Fastlaner!). You need to be happy with 2-4 weeks vacation time a year. If you wanna make more money as a Slowlaner, you need to pay with your time. Bankers make six figures, but work 60+ hours. Doctors, mid-high level managers, and lawyers, too. And you need to be happy with that.

 

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[RHL]

Not hard for JP Morgan to make money when they're lending yours out at 4-8% interest and only paying you .25%.

 

[Even Steven]

I had a conversation with a guy tonight, he's a Vietnam vet. He was talking about being retired, and he said this:

"If you can retire early, do it. I retired at 66, and my health started going downhill right after that."

Yet another reminder of the empty slowlane promises.

 

[Ninjakid]

Personally I don't feel so bad for people who buy into this.

If they really wanted to be wealthy, they would make a plan, and make it a reality.

Instead, someone tells them "hey, you can have a million dollars" and they think "hmmm a million would be nice." Being wealthy isn't vitally important to them, so they won't really be missing out.

 

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[daivey]

not everyones going to be successful in business... at least this will allow people to have some cash for retirement. and it does work. as for the comments about 2008, market bounced back the year after.

 

[Rawr]

On my FB feed today:

"Congrats to my mom, after 33 years with <bank name>, she's finally retired! Now go see the world!"

I wonder how many countries she'll visit and how different of a perspective she'll get at 66...

 

[MJ DeMarco]

not everyones going to be successful in business

True...

But not everyone's going to be successful following this ridiculous plan either. If it worked, more than half of 65+ year olds would now be millionaires, wouldn't they?

 

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[DeletedUser394]

-0.25%. Yeah baby!! http://www.cbc.ca/news/business/swi...tive-interest-rate-to-devalue-franc-1.2877770

To echo what some have said already, but what a lot of people discount on here... The stock market isn't bad. Not at all.

There's a huge difference between using the markets to generate passive income, and using the markets as a way to 'build wealth'.

You can put x amount of dollars away for 40+ years, or you can start a business, cash out much sooner, put a lot of it in the markets, and collect your dividend checks on the beach.


I really don't think many people are actually invested in any capacity though. I'd be curious to know what percentage of households/individuals have over $10k in the markets (via stocks, bonds, mutual funds, whatever).

I'm pretty sure it'd be quite low.

Just picked the first random search query, and they say 54%.

http://www.gallup.com/poll/147206/Stock-Market-Investments-Lowest-1999.aspx

I don't even understand how most people are going to be able to retire at any age. It makes no sense whatsoever.

 

[DeletedUser394]

True...

But not everyone's going to be successful following this ridiculous plan either. If it worked, more than half of 65+ year olds would now be millionaires, wouldn't they?

I agree with you 100%, but you are giving people too much credit in assuming that they would actually follow any sort of plan in the first place.

The math actually checks out. (If a person contributed x amount of dollars per month, etc). The first problem is that people have unrealistic expectations of returns, and they are also emotional, irrational, lack discipline, etc.

The second problem is that even if they do follow their plan, that money becomes devalued over time, so the million won't be worth nearly as much ($480k ish) come retirement.

In my immediate family, I can think of only 2 people that I know to have any investments of any kind (and ... you guessed it, they are well off via the sale of their businesses). The other two dozen have nothing, or even negative net worths.

 

[GuestUser140]

What should 25 year old Fastlaners do with their cash?

If the business does well, but is nowhere near making $1M+/year, do you reinvest what's needed and put the rest in a steady low interest acount (of your own, not the government's)? Or even a simple savings account?

 

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[H Z]

The Sidewalker has a savings and debt problem. Making it in the Sidewalk is impossible because they lack the discipline to manage their money, whether they make $10/hr or $10m a year.

The Slowlaner has an income problem. If you wanna make it in the Slowlane, you need to be happy with your meager sum and 40 hour work week. You need to be happy putting away 20% of your paycheck that you never touch (Not a problem for a Fastlaner!). You need to be happy with 2-4 weeks vacation time a year. If you wanna make more money as a Slowlaner, you need to pay with your time. Bankers make six figures, but work 60+ hours. Doctors, mid-high level managers, and lawyers, too. And you need to be happy with that.

Yep definitely. I work with 2-4 people around my age 20 & 21, 25? And they have trouble paying for rent and bills and sometimes spend their money on quite useless things. I've been saving about 80-90% of my paychecks since I started working when I was 17 and moving on to today where I'm only 18 I've already accumulated over $10K. Not to brag because I know that's probably nothing to some of you, but to see that I have been able to say NO to the useless things some people do/buy when they're young, I'm quite pleased with myself and I know I will be able to use this money for good in later years to start a company and more then likely make thousands and having millions sitting around while I sleep while others are still looking for which bank will help them retire in their 60's or 70's because of their money miss-managing problems.

BTW: I make $10 /hr and I got a pretty good job working for a Doc who yesterday had an Audi A7 and today got himself a nice BMW 650i.

Work first, play later.

"Men are born ignorant, not stupid. They are made stupid by education." - Bertrand Russell

What kind of education are you educating yourself with? What the banks are telling you? Hahaha.

 

[SBS.95]

On my FB feed today:

"Congrats to my mom, after 33 years with <bank name>, she's finally retired! Now go see the world!"

I wonder how many countries she'll visit and how different of a perspective she'll get at 66...

That's both sad and incredibly terrifying.

 

[daivey]

True...

But not everyone's going to be successful following this ridiculous plan either. If it worked, more than half of 65+ year olds would now be millionaires, wouldn't they?

First, the majority of people out there are clueless about finance and sticking to a plan. Second 1/2 the population that can afford to follow this plan, does not. They are impatient and dont believe or understand it, or can't look far enough in the future to believe it will work. They spend their money on frivolous shit. When the markets crash they get scared and pull out. Instead of buying more, they think the world is ending. Like clock work history repeats itself every couple of years.

When you hear sob stories about how the 2008 financial crisis destroyed retirement plans and people are now forced to work. How?? If you had invested in a balanced portfolio, MOST balanced portfolios dropped maybe 10 to 20% MAX in 2008/2009 at the worst point. And in the very next year they recovered. A 20% dip in a portfolio in 1 year, will not wipe out your retirement plans. But on top of that, people are greedy. When the times are good they want to ride the waves. They don't want to re-balance when the times are good into conservative funds.

You dont follow the plan, you are impatient = you fail. Just like you will fail in business and in everything else.

I work as a financial advisor I see it first hand every single day.. The majority of my clients are just like this. Markets crash - time to pull out im scared. Markets do well - time to buy at the top. Or, they never buy and never do anything or amount to anything. The money sits there earning 1%, a negative return when you factor inflation.

The clients that have stayed invested and continued to pump money into those balanced funds that we "peddle" are doing fine though. Annual compound average return is 7% per year. That's a double of your portfolio every 10 years.

 

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[daivey]

I agree with you 100%, but you are giving people too much credit in assuming that they would actually follow any sort of plan in the first place.

The math actually checks out. (If a person contributed x amount of dollars per month, etc). The first problem is that people have unrealistic expectations of returns, and they are also emotional, irrational, lack discipline, etc.

The second problem is that even if they do follow their plan, that money becomes devalued over time, so the million won't be worth nearly as much ($480k ish) come retirement.

In my immediate family, I can think of only 2 people that I know to have any investments of any kind (and ... you guessed it, they are well off via the sale of their businesses). The other two dozen have nothing, or even negative net worths.

didn't read your post before I posted mine. spot on.

 

[Polarbeans]

I really don't think many people are actually invested in any capacity though. I'd be curious to know what percentage of households/individuals have over $10k in the markets (via stocks, bonds, mutual funds, whatever).

I'm pretty sure it'd be quite low.

Just picked the first random search query, and they say 54%.

http://www.gallup.com/poll/147206/Stock-Market-Investments-Lowest-1999.aspx

I agree with you that it would've been a very interesting number. But then again it is a number that will be hard to compute. It's not a matter of just asking households if they own stocks or not.

When we regard this type of statistics it usually includes indirect ownership, such as ownership via retirement plans, mutual funds and other structured products.

What I'm saying is; there is a huge difference between owning stock directly and owning stock indirectly.

"Households directly own 38 percent of the US equity market," he wrote. "However, the total effective household ownership is closer to 80 percent when combined with indirect ownership in the form of mutual funds (20 percent), pension funds (16 percent), and insurance policy holdings (7 percent)."

http://www.businessinsider.com/chart-stock-market-ownership-2013-3?IR=T

As I stated, it is a hard number to complie. But one thing can be certain and that is a lot of people do not have direct influence over their investments (savings) especially in countries were investor protection via legal systems are high and market participation is highly facilitated, i.e. Scandinavian Law countries and Common Law countries - Search for investor protection La Porta and look around if you are more interested.

Western countries have all of the latest facilities for financial freedom yet we don't use them to their full potential. Heck I can log into my bank account from my iPhone and get market data from US, UK, EU, China etc. All for free and in real time, I can trade stocks, bonds, mutual funds, Futures, indices, currency all for a very low commission and sometimes free. 100 % of the people in my position can do exactly the same but they wont... Why? Because they do not commit to their strategy. They lack commitment and when the market goes bear they say: "omg, what do I do?" ...The question should've been answered BEFORE you even invested, and this goes for many things: ask yourself this before you get into something, build a strategy, and see it through.

When the markets crash they get scared and pull out. Instead of buying more, they think the world is ending. Like clock work history repeats itself every couple of years.

I think pulling out early is good, if you know what you are doing and it's about cost control. If you pull out in panic you are in the wrong place from the very start.

It's not about the ending of the world but can mean the end for some households or individuals. Buying more, as in buying low is usually a good decision. Buying to get a lower acquisition cost per stock might not be such a good idea just for the sake of getting a lower cost/stock. You need to follow a strategy.

 

[Even Steven]

I was in a HoneyBaked Ham store today to pick up a ham for Christmas, and I saw a plaque about the founder saying thus:

"In 1957, with only $500, Hoenselaar opened the first HoneyBaked Ham Company store in Detroit – a store still in existence today."

Made me imagine an investment adviser saying something like "You know, if you invest that $500 in the market now, in 40 years it'll turn into thousands of dollars." Or, you know, you could create a multi-million dollar business out of it. Either way.

Full disclosure, the founder died in the 1970s, so he obviously didn't see it grow to it's full potential, but there were at least multiple locations opened by the time he died.

 

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[MotiveInMotion]

Awesome infographic! Just proves your point in Chapter 20 about compounding interest.

Make the Fastlane business, liquidate or use income/savings and put a large sum to compound, and get passive income for life. Don't trick yourself into thinking a few hundred dollars will compound to a massive amount while you're alive.

A question: what types of accounts are we talking about when the money will actually be deposited? Checking? Savings? Bonds?

Thanks to anyone who can clear this one up!

 

[raden1]

I use to think like this until very recently. Hell, even in high school we took a Dave Ramsey's finance class which is basically the same idea. I thought I was ahead of the curve with that class!

Now of course, I realize I don't have to be a millionaire by 65.

I'm 18 almost 19 now... I could probably be a millionaire in my early twenties.

About a month ago I got back from a seminar about business. The guy talking said through sheer hard work and 12 hour days you could be a millionaire in one year. Past that it is about working smarter not harder.

I gotta get that self-discipline kickin' though. It is better than where it was, but it is wayyyy behind where it needs to be.