4 ms·

I've seen this example going around because it's such an egregious example of attributing to hard work what was essentially just gifted, but I think "wealth is

by idrios 6y ago

I've seen this example going around because it's such an egregious example of attributing to hard work what was essentially just gifted, but I think "wealth is accumulated through habits" is not wrong. It's really just a statement about compound interest, that if you live frugally and invest you'll end up with tons of money. The statement is better characterized as something like "wealth is the product of habits and opportunity", where the only measurement we can quantify is a person's wealth, and our society is struggling to reconcile whether unwealthy people simply have poor habits (their fault) or poor opportunities (society's fault).

TeMPOraL 6y ago
I'm going to say something heretical here, but: I'm increasingly convinced that the whole compound interest thing is bullshit. Not math-wise, the math checks out. Just propaganda-wise. In practice, with interest rates available to general population, a typical person isn't going to accumulate any meaningful wealth unless they were already wealthy. Say you're saving $500 a month for 10 years, on an account with 5% interest rate. After 10 years, you have $76,281, i.e. $16,281 over the $60,000 you put in. It's just 27% more - and that's assuming you can find an investment with real 5% interest rate, and without taking inflation into account. It's also assuming the banks won't pull off something funny, or that your country doesn't redenominate your currency. In this scenario of continuous savings, it takes about 27 years for the interest to double the amount of money you have. Again, if you can find something that pays you real 5% of interest. The real rates on low-risk accounts seem to be sub-1% these days. I've been running some back-of-the-envelope calculations like these every now and then, and I'm yet to see a scenario in which compound interests gives me anything in a reasonable time frame. As it is, my wealth-accumulating strategy is just "spend less, and earn more" - with the latter part doing almost all the difference. But I can only pull this off because I'm privileged to work in tech industry, which has more money than it knows what to do with - it's not something I can recommend to my relatives with more mundane jobs. (I guess I could get into real estate investment? I think I have too low risk tolerance for it, and I also have plenty of ethical concerns about getting rich off flipping houses.) The trick with "if you live frugally and invest you'll end up with tons of money" is that unless you take risks and are lucky, "end up" is likely to come around your retirement age, when you'll have little use for "tons of money" except paying for medical bills - so you'll pass it on to the next generation, to give them a shot at the life you wanted to have.
- nitrogen 6y ago
  Part of the "habits" thing is that they have to span horizontally across family and friends, and vertically across generations. A private village of people all pulling together will be far more effective than any one person pulling alone.
- lotsofpulp 6y ago
  >the whole compound interest thing is bullshit Writers probably mean compounded investment returns from the public markets. I would be surprised if anyone thought an FDIC insured bank account was going to have an interest high enough to get you anywhere.
- idrios 6y ago
  Honestly, I agree with everything you just said. I will say that if you continue the pattern for 20 years you end up with $200k, of which $83k was made in interest -- and after 30 years you'll have $400k, $200k made from interest. Meanwhile, the S&P 500 averages about 11% interest annual. The article is vague on some details, but if you did what it sounds like the man in the article did and invested $500/year into the S&P 500 from 18 until 98, you would have $240 million at the end. But that's money that you would never be able to spend because it's only accumulating for as long as it's still in the S&P 500. This millionaire would wear clothes with holes in them, and probably never traveled or spent money on any of the things outside of basic necessities. I wouldn't enjoy that lifestyle. Also, as will definitely be pointed out by someone, $500/year is not bad for any person with a reasonable income. But $500/year for someone living paycheck to paycheck is not possible.
  - jfengel 6y ago
    The GP was talking $500/month rather than $500/year. That's a fair bit of money. It's nearly half the wage of a US minimum wage worker (and over half their paycheck, once taxes are taken out). Even if you get a $15 minimum wage (as some places already have), it's still asking somebody to put away 25% of what they earn. That seems very unlikely. Not impossible, but a lot of life circumstances could easily result in it being impossible.
  - 6y ago

by idrios 6y ago

TeMPOraL 6y ago

I'm going to say something heretical here, but: I'm increasingly convinced that the whole compound interest thing is bullshit. Not math-wise, the math checks out. Just propaganda-wise. In practice, with interest rates available to general population, a typical person isn't going to accumulate any meaningful wealth unless they were already wealthy. Say you're saving $500 a month for 10 years, on an account with 5% interest rate. After 10 years, you have $76,281, i.e. $16,281 over the $60,000 you put in. It's just 27% more - and that's assuming you can find an investment with real 5% interest rate, and without taking inflation into account. It's also assuming the banks won't pull off something funny, or that your country doesn't redenominate your currency. In this scenario of continuous savings, it takes about 27 years for the interest to double the amount of money you have. Again, if you can find something that pays you real 5% of interest. The real rates on low-risk accounts seem to be sub-1% these days. I've been running some back-of-the-envelope calculations like these every now and then, and I'm yet to see a scenario in which compound interests gives me anything in a reasonable time frame. As it is, my wealth-accumulating strategy is just "spend less, and earn more" - with the latter part doing almost all the difference. But I can only pull this off because I'm privileged to work in tech industry, which has more money than it knows what to do with - it's not something I can recommend to my relatives with more mundane jobs. (I guess I could get into real estate investment? I think I have too low risk tolerance for it, and I also have plenty of ethical concerns about getting rich off flipping houses.) The trick with "if you live frugally and invest you'll end up with tons of money" is that unless you take risks and are lucky, "end up" is likely to come around your retirement age, when you'll have little use for "tons of money" except paying for medical bills - so you'll pass it on to the next generation, to give them a shot at the life you wanted to have.

nitrogen 6y ago
Part of the "habits" thing is that they have to span horizontally across family and friends, and vertically across generations. A private village of people all pulling together will be far more effective than any one person pulling alone.
lotsofpulp 6y ago
>the whole compound interest thing is bullshit Writers probably mean compounded investment returns from the public markets. I would be surprised if anyone thought an FDIC insured bank account was going to have an interest high enough to get you anywhere.
idrios 6y ago
Honestly, I agree with everything you just said. I will say that if you continue the pattern for 20 years you end up with $200k, of which $83k was made in interest -- and after 30 years you'll have $400k, $200k made from interest. Meanwhile, the S&P 500 averages about 11% interest annual. The article is vague on some details, but if you did what it sounds like the man in the article did and invested $500/year into the S&P 500 from 18 until 98, you would have $240 million at the end. But that's money that you would never be able to spend because it's only accumulating for as long as it's still in the S&P 500. This millionaire would wear clothes with holes in them, and probably never traveled or spent money on any of the things outside of basic necessities. I wouldn't enjoy that lifestyle. Also, as will definitely be pointed out by someone, $500/year is not bad for any person with a reasonable income. But $500/year for someone living paycheck to paycheck is not possible.
- jfengel 6y ago
  The GP was talking $500/month rather than $500/year. That's a fair bit of money. It's nearly half the wage of a US minimum wage worker (and over half their paycheck, once taxes are taken out). Even if you get a $15 minimum wage (as some places already have), it's still asking somebody to put away 25% of what they earn. That seems very unlikely. Not impossible, but a lot of life circumstances could easily result in it being impossible.
- 6y ago