#10 The Money Edition
How much does the government owe you? What about your parents?
Back in my 20s, when I worked in coffeeshops making $8 an hour plus tips, I never worried about money. My paycheck was around $1,000 a month and I took home another $400 or so each month in tips. I could pay my rent ($600 for a room by the beach), and groceries and still have enough left over for a beer at the local bar. It was a great life; the best way to spend my 20s.
Now I make around $100 an hour and I worry regularly about money — not because I don’t have it but, ironically, because I do. Am I investing it well? Am I saving enough for retirement? Am I saving too much? Should I be selling stocks? Should I be buying real estate? Or the reverse? The questions and second-guessing are limitless. As our savings and investments grow, you’d think that I would be grateful and happy. Instead, I increasingly worry that I’ll make a bad investment decision.
I am grateful that Iris and I have financial freedom. It’s wonderful to not stress when your car breaks down or someone invites you to an overly-priced restaurant. But it’s also human nature to feel stressed when your “hard-earned money” seemingly disappears as the stock and housing markets decline.
If you have ten minutes to spend with me today, I’d like to reflect a bit about money and its role in our lives; I want to poke at the stories we tell ourselves — or at least the stories I tell myself — about what I’ve earned and what I deserve.
People are really angry about student debt relief
I’m sympathetic to those who are angry about the $10,000 of student debt relief. For instance, Fox News interviewed some manufacturing workers in Pennsylvania and they responded:
It's not going to affect the people that are here, the people that are actually out doing all the work. Biden's going to help the people in the bigger cities because that's what he wants.
A lot of those families are rich. They have the money to pay it off, so they get a break and they get to sit on their couch and their kids are stuck with a degree they can't even use.
I don't think a plumber should be paying for a doctor's free medical school.
[The steel foundry] is always hiring people, these college kids can always come here on their time off and work and pay their debt back.”
I have to read about their opinions, of course, because I don’t know any manufacturing workers. But I do have a lot of highly educated, middle-class friends with deferred student loans. Most of them have household incomes between $150,000 - $250,000 per year. Some drive Audis and Teslas; others spend summers in Europe. And so I totally get the anger of a 50-something plumber in Pennsylvania (average salary of $60,000 with a marginal tax rate of 33%) who doesn’t want to help cover the student loans of a 30-something product manager in San Francisco earning $150,000 and spending $20 each morning on third wave coffee & avocado toast.
Forgiving student loans (rather than, say, subsidizing child care or nursing school or teaching credentials) strikes me as a poor strategy by Democrats to regain the support of the working class. It’s also a reminder that college graduates are more politically influential — at least in the Democratic party — than plumbers, caregivers, and manufacturers. The sociologist and documentary filmmaker Astra Taylor — who studied at Brown ($65k per year) and then the New School ($50k per year) — makes a compelling argument in the New York Times that anyone with any debt should support loan forgiveness. But we won’t hear from the blue-collar worker or flight attendant without that Ivy League degree.
And yet we barely talk about inheritance
The idea of inheriting money doesn’t occur to me. Until that is, I meet people whose lifestyle or house is clearly unrelated to their job and personal finance. I don’t expect any inheritance, and so any money in my lifetime will come from work and investment. In a way, there is comfort in that certainty. Still, I was surprised after looking up the median inheritances by age group and income level from the Fed’s Survey of Consumer Finances:
Those are medians, not averages. The average inheritance is over $700,000 because the extremely wealthy leave their children a lot, which surely leaves them also feeling insecure and entitled. A popular retirement planning platform says that their average user sets the goal of leaving their children with over $2 million. Crazy. How can anyone get worked up over $10,000 of loan forgiveness when so many others get $2 million just because they were born to rich parents?
Actually, I lied about not getting an inheritance
Until I started writing this, I had forgotten that I did receive an inheritance. When I was 5-years-old, my mother married my adopted dad, which is why I have a Japanese last name. He was 30 years old at the time. His parents were probably just starting to think about their own retirement, and they were certainly not expecting to become the grandparents of a freckly white kid.
25 years later, they passed away. I was 30 when I received a completely unexpected check for $10,000 — the same amount they left each of their grandchildren. I had just (finally) landed a real job with a real paycheck and I didn’t need the money, didn’t know what to do with it, and considered donating it all to a charity like Chris McCandless from Into the Wild.
Instead, I invested half in Apple and half in Netflix and ended up doing very well for myself. By the time Iris and I bought our house in 2014, those $10,000 turned into at least $25,000 and allowed us to (just barely) make the down payment. I’m describing this because seemingly small amounts of money turn into larger amounts of money and we can easily convince ourselves (like I did) that our good fortune comes from hard work and smart investment decisions more than luck and well-timed gifts.
I’m sharing the details of my personal finance because this stuff doesn’t get talked about openly nearly enough, and the difference between someone retiring with $2M versus $20k can be the difference of just a few investment decisions at key moments in life. We bought our house in 2014 for $512,000. In April, at the peak of the housing madness, Zillow estimated that it was worth $1.1M. Because the value of our house grew so quickly, we were able to refinance at a lower rate and pull out $75,000 of “free cash,” which we invested in an S&P 500 index fund and saw nearly double in value in a short amount of time. (For real: if you invested $75,000 in Vanguard’s VOO index fund in December, 2018 then it would be worth $142,500 three years later. Of course, the stock market has fallen since last December, but it’s still up 35% over the past three years.)
12 years ago, I unexpectedly received a $10,000 inheritance check. Right around the same time, I stopped working in coffeeshops and started earning a knowledge worker’s monthly paycheck, which I mostly put away into an investment account. Here’s what I have learned:
If you can’t figure out how other people seem to have more money than you, they probably got it from mom and dad. (And maybe we should start talking more openly about this stuff?)
If you want to become wealthy, investments matter more than salary. Salary only matters as a way to make investments.
Growing your wealth will relieve the stresses of a broken-down car or hospital bill, but it will bring new stresses and regrets about your investment decisions.
Meaning is made, not bought. Same with fun. Working in philanthropy, I meet a lot of extremely wealthy people who aren’t any happier or more fulfilled than my friends who work as teachers, personal trainers, and baristas. They have less financial stress, for sure, but their lives aren’t more meaningful.
An unprecedented wealth transfer from boomers to millennials
On capitalism:
In an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth. So the fact that rich kids can swan aimlessly from gap year to internship to a job at father's bank/ministry/TV network – while the poor kids sweat into their barista uniforms – is not an accident: it is the system working normally.
We are in the midst of “The Great Wealth Transfer” from Boomers to Millennials:
“Americans can expect to inherit $72.6 trillion over the next quarter century, more than twice as much as a decade ago, in the latest indication of how soaring markets are poised to bolster the next generation of the ultra-rich.” ~ Bloomberg
There are 618,000 millennial millionaires in the US, and they're on track to inherit even more wealth from the richest generation ever ~ Business Insider
The world’s richest individuals—those with a net worth of at least US$5 million—will be passing down $15.4 trillion of wealth to the next generation by 2030 ~ Barrons
Millennials’ wealth more than doubled to over $9 trillion since the pandemic began, but Baby Boomers are still worth almost 8 times as much ~ Fortune
By 2030, millennials will hold five times as much wealth as they do today. ~ Business Insider
Almost half of all U.S. wealth transferred from the end of 2020 through 2045 will come from the top 1.5% of households ~ Bloomberg
For the ultra-rich, bequests will often end up in dynasty trusts, which can hold wealth that “will accumulate tax-free for an unlimited number of future generations.” Case study: Phil Knight of Nike.
In other words, a subset of the so-called “unlucky generation” is about to get very lucky over the next couple of decades. But it’s not going to make them any happier. As Meredith Haggarty writes for Vox, most millennials don’t want to grow up in a society that rewards the lucky.
Die with zero!
I have read dozens of books about personal finance and investing. The covers trick me into thinking that I will learn some secret insights that will make me a better investor. But no, it all comes down to the same basic advice: spend less, save more, invest a little each month in a low-fee index fund like VOO, and don’t touch it.
There are only two books about money I recommend:
The Psychology of Money by Morgan Housel
Die With Zero by Bill Perkins
Both books emphasize that saving and investing some money is good, but saving and investing too much money could actually be counter-productive to your (and your kids’) happiness and sense of meaning. At a certain point, stop investing your money and start investing in your relationships, communities, and hobbies.
Like all things in the Age of Abundance, moderation is the key. We don’t need more (information, food, books, friendships, music, travel plans, tv shows, money). Rather, we need more intentionality about what makes us happy and fulfilled.
A Useful Tool
It can be difficult to visualize the magic of compound growth. One of the reasons Warren Buffet, Bloomberg, and Soros are so rich is because they’re so old. They just let their investments keep growing over time. Look at what happens if you let $1,000 grow at 10% every year (the average annual return of the stock market over the past 100 years):
Now, imagine that you spend $20 per month on Netflix premium, $15 on Hulu, $15 on HBO Max, $15 on Amazon Prime, $8 on Disney+ and $10 on Spotify. That adds up to $1,000 per year. If you invested that money in the stock market instead, in 70 years you might have $800,000.
I’m not suggesting that every transaction should prompt retirement anxiety. Just the opposite: the goal of financial literacy should be to think less about money, not more. I spent $6,000 on a new bike last year. If I had invested that money instead, it would be worth $700,000 by the time I’m 90. But no, I’d rather have the $6,000 bike now.
Mint.com helps Iris and me track our purchases and investments and savings goals. It only takes us about 30 minutes each month, we have a quick conversation about what, if anything, we want to do differently for the next month, and then we forget about it.
Kudos
Kudos to all of us. The economy may feel bad — the so-called “vibecession” — but it has never been easier to find a job and nearly all of us have more money in our bank account than we did at the start of the pandemic. That is especially true of the lowest-income households. I love it.
Have a wonderful week,
David