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Something that's never made sense to me about stocks: Unless you're extremely wealthy, any money you are able to save (outside of retirement money) is probably

Something that's never made sense to me about stocks: Unless you're extremely wealthy, any money you are able to save (outside of retirement money) is probably money you are going to want to use for something to improve your life in the semi-near future. Buying a house or car (or just a better one) for example. With that assumption in place, under what circumstances does investing in index funds make any sense whatsoever? The entire market crashes on occasion due to herd mentality, and yet even given that level of risk index funds still take many years to appreciate in value significantly. It seems like an absolutely terrible place to put money that isn't specifically intended for retirement or something like a 529 plan.

hamstercat 9y ago
It's pretty popular in the Financial Independence crowd, where the goal is to get enough money to be able to live on interest alone. It's not for the extremely wealthy, rather the somewhat high-income middle class. You can even make it work with less income if you can manage to cut your expense. Most people adjusts (ie: increases) their spending when they get additional income, but it doesn't have to be that way. In the end it's a lot about trade-off, like for exemple do you prefer stuff like going out to restaurant, owning a car, etc.
- pc86 9y ago
  The FI crowd is 90% expense management and 10% investment. It seems like most folks there have a goal to stop working but are willing to do that and live like a pauper the rest of their lives. If that works for them, great, but I'd much rather work at a job I love, make very good money, and enjoy my life, rather than "retire" at 35 and live on $24k/yr in interest for the rest of my life. I'd love to see a Financial Independence plan around growing [a] business(es) and retiring early but not crazy early (40-55) and living on a substantial middle/upper-middle income for several decades.
  - hamstercat 9y ago
    That's one way of doing it, but there's no one-size-fit-all solution. Some do what you said and just stop spending anything. Not everyone retires either, it's just that they do work they like because they can afford it rather than having to. It's really a personal experience, I know myself I don't feel like my life is missing anything even if I'm putting money aside to my future. I'm still traveling at least once a year, and I eat pretty good food all the time. At the same time, I don't have a car and rent one whenever I need one.
  - fpgaminer 9y ago
    > I'd love to see a Financial Independence plan around growing [a] business(es) and retiring early but not crazy early (40-55) and living on a substantial middle/upper-middle income for several decades. That's roughly my plan. My goal is to achieve financial independence, but my wife and I will continue working even after that. FI just gives us the freedom to do work the way we want. My current projections put us at retiring roughly when we hit 40. I just started my own business, which I hope to grow into a indiehacker/lifestyle type business; not a rapid growth startup. Just something I like working at and that earns a reasonable income. All that said, I'm not sure why you think $24k/yr is a pauper lifestyle. In fact that's roughly our yearly expenses once we achieve "initial FI" * . That's in Southern California, and we hardly live like paupers. By the way, I never got involved in the FI "crowd". I read through /r/personalfinance in the past, and check it occasionally. It's definitely very heavily expense management. Makes sense, since most people are really bad at expense management. And there is definitely not a lot of discussion about where to draw the line between cutting expenses and having fun. I can imagine that FI specific communities would be much worse in that regard. But I think all of that is driven by the fact that these communities are composed of, well, everybody. And most everybody can only dream of maxing their IRA. For people in the HN crowd financial management is quite a bit different. We need advice on what to do after we max our 401k! (HINT: Start your own company and do a solo 401k). I think a lot of us are also very privileged already in what work we do. If you're a programmer, you can generally find a programming job you life that pays very well. For most everybody else, finding a job you life is either rare, or would mean taking a massive pay-cut. So while most people dream of FI being an escape from work, I think a lot of the HN crowd is like me; dreaming of FI as just ... freedom. Freedom to take a year off and work on a startup. Freedom to work for a local company for $150k/yr instead of working for Google to earn that fat $300k/yr. EDIT: * Forgot to clarify that "Initial FI", for us, occurs after our house is paid off so $24k/yr is without a mortage. I editted out long-winded sections of my original comment and forgot to clarify :P
    - ryandrake 9y ago
      Jeez, $24k/yr is my housing budget alone, and I went out of my way to live in a cheap area, multiple hours from work.
  - ryandrake 9y ago
    I've read some of those web sites and they're insufferable. Buy a house in cash so you have no payments, shop only at Goodwill, collect rain water for drinking, and never, ever get sick, and you, too can retire at 40!!
    - kcorbitt 9y ago
      Sure, there are people in the FI crowd trying get by on $15k a year. Not my cup of tea, but if they're happy that way I say more power to them. But the community is a spectrum -- there's also a fairly large contingent (composed mainly of doctors, engineers and other high-income workers) whose savings at early-retirement time seem to cluster around ~$3M, allowing for retirement spending of $90-100k. That buys a solid lifestyle by almost anyone's standards. Obviously, that's predicated on having a high-earning career and taking saving seriously, but it's totally doable in 10-20 years.
      - ryandrake 9y ago
        Do-able? Maybe. High-earning is an understatement though. If you want to reach $3M in 20 years, you'd need to save about $100K per year, assuming, say, an annually compounding 4% interest rate across your savings and investments. A lot of people who might consider themselves high-earners don't even make that much in a year, let alone are able to save it. Even assuming you're a gambler and put all your savings into stocks and get that mythical "steady 7%" return, you need to set aside $75K every year to reach $3M in 20 years. I'm not claiming to be the world's best saver, but I think I live frugally enough, and after 20 years into a fairly good tech career, my savings is an order of magnitude+ less than that.
        kcorbitt 9y ago
        I don't think a 7% interest rate is unreasonable. One of the advantages of planning on early retirement means that you can take on a lot more risk with your investments, eg. putting everything into stocks (which isn't really "gambling" -- over long periods they've only ever gone up). If the markets are totally hammered the year you want to retire, no problem -- just keep working a few more years until they recover. And saving $75k a year is also quite reasonable if you have a high income, like a doctor or well-compensated engineer. I’m only a couple years into my career and am supporting my wife and kid, but we’re on track to save a bit more than that this year. Of course, the lifestyle choices we make aren’t for everyone, and that’s fine. But they’re also not totally crazy. We can save that much still live about as well as the median American, and a lot better than the median human.
  - mancerayder 9y ago
    What confuses me most is how people expect to pay for healthcare costs, which keeps going up. I'm an independent contractor and it costs me 1k a month. More than double with family.
- Uroboric 9y ago
  Personally, if I was dependent on my assets for the income I use to eat, I wouldn't want those assets to be ones that can wildly swing in value. If I had enough other investments that the stocks were just icing on the cake that wouldn't be an issue, but that kind of goes back to my point of being extremely wealthy and having truly extra money you can park in risky stuff.
cujo 9y ago
Numbers. It's all about how you feel about that risk of crashing vs the potential payout. Say I'm squirreling away $5k a year for a new car in 4 years. Every year I put in another $5k, so by the end, I've put in $25k. If I put that in a typical savings account, I earn 0.1% and come out $50 ahead. Effectively 0, or losing value once you throw in inflation. Go with stocks, at a 5% return, I end up with over $27k, and at 8% I have over $29k. It's also true that I could lose value, and that's the gamble. So it's a matter of your comfort level, obviously, and if you can't afford to lose the money, don't invest. But in many many cases, the reward outweighs the risk. I view it that I'm much, much more likely to get a return > 0.1% than experience a loss over 5 years, and I'm willing to accept the risk.
- Uroboric 9y ago
  Savings accounts aren't the only option though. Bonds will return like 2-3% depending on the type, without the occasional dramatic crashes in value.
  - tdb7893 9y ago
    The issue is that even after dramatic crashes my impression is that stocks generally beat bonds long term. That means that if one person put all theirs in stocks and the other in bonds the one in stocks is likely going to have more money later, even if the market crashed a few times in between.
    - Uroboric 9y ago
      I agree with your point entirely, but my point is that most people don't just sock money away for decades if it isn't specifically retirement money. Usually it is saved for some medium-term goal, which stocks could potentially spoil. Aside from that risk, why even deal with the psychological effect of that uncertainty for a paltry gain?
      - shakestheclown 9y ago
        Most people can't come up with $2k in case of an emergency. Most people are living paycheck to paycheck. Don't be most people. There is a compromise between living for the moment and living for the future. If you are saving for a house then you can move those investments to a less risky investment option but still a better return than bonds or interest. Keep your medium-term investments separate from your retirement account. I have short term, long-term non retirement, and long-term retirement accounts. The gain isn't paltry. The difference between a 2% rate of return and a 5% rate of return for $5k initial + $50/month over 30 years is around $22k. If you do $200/month it's $59k.
austenallred 9y ago
Where are you investing your retirement funds? Your 401(k) or IRA can be in index funds, too.
- Uroboric 9y ago
  My retirement funds are in stock index funds. That and my daughter's 529 are the only stocks I own. Everything else is bonds, cash and real estate.
UK-AL 9y ago
Because some people value retiring a few years earlier over having biggist house or best car. It also allows you build up capital to say start a business or take some years out.
- Uroboric 9y ago
  I'm not sure if my original post just wasn't clear enough or something. Retirement is great, my point was about non-retirement money. Building capital for a business is exactly the kind of medium-term goal I was referring to, where you wouldn't want it getting spoiled by a market crash at the wrong time.
  - UK-AL 9y ago
    Normally you mix with bonds to get the level of risk you want

hamstercat 9y ago

It's pretty popular in the Financial Independence crowd, where the goal is to get enough money to be able to live on interest alone. It's not for the extremely wealthy, rather the somewhat high-income middle class. You can even make it work with less income if you can manage to cut your expense. Most people adjusts (ie: increases) their spending when they get additional income, but it doesn't have to be that way. In the end it's a lot about trade-off, like for exemple do you prefer stuff like going out to restaurant, owning a car, etc.

pc86 9y ago
The FI crowd is 90% expense management and 10% investment. It seems like most folks there have a goal to stop working but are willing to do that and live like a pauper the rest of their lives. If that works for them, great, but I'd much rather work at a job I love, make very good money, and enjoy my life, rather than "retire" at 35 and live on $24k/yr in interest for the rest of my life. I'd love to see a Financial Independence plan around growing [a] business(es) and retiring early but not crazy early (40-55) and living on a substantial middle/upper-middle income for several decades.
- hamstercat 9y ago
  That's one way of doing it, but there's no one-size-fit-all solution. Some do what you said and just stop spending anything. Not everyone retires either, it's just that they do work they like because they can afford it rather than having to. It's really a personal experience, I know myself I don't feel like my life is missing anything even if I'm putting money aside to my future. I'm still traveling at least once a year, and I eat pretty good food all the time. At the same time, I don't have a car and rent one whenever I need one.
- fpgaminer 9y ago
  > I'd love to see a Financial Independence plan around growing [a] business(es) and retiring early but not crazy early (40-55) and living on a substantial middle/upper-middle income for several decades. That's roughly my plan. My goal is to achieve financial independence, but my wife and I will continue working even after that. FI just gives us the freedom to do work the way we want. My current projections put us at retiring roughly when we hit 40. I just started my own business, which I hope to grow into a indiehacker/lifestyle type business; not a rapid growth startup. Just something I like working at and that earns a reasonable income. All that said, I'm not sure why you think $24k/yr is a pauper lifestyle. In fact that's roughly our yearly expenses once we achieve "initial FI" * . That's in Southern California, and we hardly live like paupers. By the way, I never got involved in the FI "crowd". I read through /r/personalfinance in the past, and check it occasionally. It's definitely very heavily expense management. Makes sense, since most people are really bad at expense management. And there is definitely not a lot of discussion about where to draw the line between cutting expenses and having fun. I can imagine that FI specific communities would be much worse in that regard. But I think all of that is driven by the fact that these communities are composed of, well, everybody. And most everybody can only dream of maxing their IRA. For people in the HN crowd financial management is quite a bit different. We need advice on what to do after we max our 401k! (HINT: Start your own company and do a solo 401k). I think a lot of us are also very privileged already in what work we do. If you're a programmer, you can generally find a programming job you life that pays very well. For most everybody else, finding a job you life is either rare, or would mean taking a massive pay-cut. So while most people dream of FI being an escape from work, I think a lot of the HN crowd is like me; dreaming of FI as just ... freedom. Freedom to take a year off and work on a startup. Freedom to work for a local company for $150k/yr instead of working for Google to earn that fat $300k/yr. EDIT: * Forgot to clarify that "Initial FI", for us, occurs after our house is paid off so $24k/yr is without a mortage. I editted out long-winded sections of my original comment and forgot to clarify :P
  - ryandrake 9y ago
    Jeez, $24k/yr is my housing budget alone, and I went out of my way to live in a cheap area, multiple hours from work.
- ryandrake 9y ago
  I've read some of those web sites and they're insufferable. Buy a house in cash so you have no payments, shop only at Goodwill, collect rain water for drinking, and never, ever get sick, and you, too can retire at 40!!
  - kcorbitt 9y ago
    Sure, there are people in the FI crowd trying get by on $15k a year. Not my cup of tea, but if they're happy that way I say more power to them. But the community is a spectrum -- there's also a fairly large contingent (composed mainly of doctors, engineers and other high-income workers) whose savings at early-retirement time seem to cluster around ~$3M, allowing for retirement spending of $90-100k. That buys a solid lifestyle by almost anyone's standards. Obviously, that's predicated on having a high-earning career and taking saving seriously, but it's totally doable in 10-20 years.
    - ryandrake 9y ago
      Do-able? Maybe. High-earning is an understatement though. If you want to reach $3M in 20 years, you'd need to save about $100K per year, assuming, say, an annually compounding 4% interest rate across your savings and investments. A lot of people who might consider themselves high-earners don't even make that much in a year, let alone are able to save it. Even assuming you're a gambler and put all your savings into stocks and get that mythical "steady 7%" return, you need to set aside $75K every year to reach $3M in 20 years. I'm not claiming to be the world's best saver, but I think I live frugally enough, and after 20 years into a fairly good tech career, my savings is an order of magnitude+ less than that.
      - kcorbitt 9y ago
        I don't think a 7% interest rate is unreasonable. One of the advantages of planning on early retirement means that you can take on a lot more risk with your investments, eg. putting everything into stocks (which isn't really "gambling" -- over long periods they've only ever gone up). If the markets are totally hammered the year you want to retire, no problem -- just keep working a few more years until they recover. And saving $75k a year is also quite reasonable if you have a high income, like a doctor or well-compensated engineer. I’m only a couple years into my career and am supporting my wife and kid, but we’re on track to save a bit more than that this year. Of course, the lifestyle choices we make aren’t for everyone, and that’s fine. But they’re also not totally crazy. We can save that much still live about as well as the median American, and a lot better than the median human.
- mancerayder 9y ago
  What confuses me most is how people expect to pay for healthcare costs, which keeps going up. I'm an independent contractor and it costs me 1k a month. More than double with family.
Uroboric 9y ago
Personally, if I was dependent on my assets for the income I use to eat, I wouldn't want those assets to be ones that can wildly swing in value. If I had enough other investments that the stocks were just icing on the cake that wouldn't be an issue, but that kind of goes back to my point of being extremely wealthy and having truly extra money you can park in risky stuff.

cujo 9y ago

Numbers. It's all about how you feel about that risk of crashing vs the potential payout. Say I'm squirreling away $5k a year for a new car in 4 years. Every year I put in another $5k, so by the end, I've put in $25k. If I put that in a typical savings account, I earn 0.1% and come out $50 ahead. Effectively 0, or losing value once you throw in inflation. Go with stocks, at a 5% return, I end up with over $27k, and at 8% I have over $29k. It's also true that I could lose value, and that's the gamble. So it's a matter of your comfort level, obviously, and if you can't afford to lose the money, don't invest. But in many many cases, the reward outweighs the risk. I view it that I'm much, much more likely to get a return > 0.1% than experience a loss over 5 years, and I'm willing to accept the risk.

Uroboric 9y ago
Savings accounts aren't the only option though. Bonds will return like 2-3% depending on the type, without the occasional dramatic crashes in value.
- tdb7893 9y ago
  The issue is that even after dramatic crashes my impression is that stocks generally beat bonds long term. That means that if one person put all theirs in stocks and the other in bonds the one in stocks is likely going to have more money later, even if the market crashed a few times in between.
  - Uroboric 9y ago
    I agree with your point entirely, but my point is that most people don't just sock money away for decades if it isn't specifically retirement money. Usually it is saved for some medium-term goal, which stocks could potentially spoil. Aside from that risk, why even deal with the psychological effect of that uncertainty for a paltry gain?
    - shakestheclown 9y ago
      Most people can't come up with $2k in case of an emergency. Most people are living paycheck to paycheck. Don't be most people. There is a compromise between living for the moment and living for the future. If you are saving for a house then you can move those investments to a less risky investment option but still a better return than bonds or interest. Keep your medium-term investments separate from your retirement account. I have short term, long-term non retirement, and long-term retirement accounts. The gain isn't paltry. The difference between a 2% rate of return and a 5% rate of return for $5k initial + $50/month over 30 years is around $22k. If you do $200/month it's $59k.

austenallred 9y ago

Where are you investing your retirement funds? Your 401(k) or IRA can be in index funds, too.

Uroboric 9y ago
My retirement funds are in stock index funds. That and my daughter's 529 are the only stocks I own. Everything else is bonds, cash and real estate.

UK-AL 9y ago

Because some people value retiring a few years earlier over having biggist house or best car. It also allows you build up capital to say start a business or take some years out.

Uroboric 9y ago
I'm not sure if my original post just wasn't clear enough or something. Retirement is great, my point was about non-retirement money. Building capital for a business is exactly the kind of medium-term goal I was referring to, where you wouldn't want it getting spoiled by a market crash at the wrong time.
- UK-AL 9y ago
  Normally you mix with bonds to get the level of risk you want