This post Rich Dad Scam #7: “All Debt Is Bad” appeared first on Daily Reckoning.
Today’s is the seventh issue in your series on Rich Dad Scams—lies perpetrated on the poor and middle class by the rich.
If you’ve been following along, you may see some patterns in Rich Dad Scams. Several of them go together, and they all come from the same mindset.
Saving money, living below your means, and this Rich Dad Scam, “All Debt Is Bad,” all come from one place: fear of money.
Just like all the other scams, the idea that you have to eradicate debt from your life to be successful is a lie, and it gets repeated because people don’t have a financial education. They don’t understand what money actually is, how it works and how to put it to work.
There’s no doubt about it, from an early age we teach our children the value of saving money. “A penny saved; a penny earned,” we chime. And when they are a bit older, we spin tales of the magic of compounding interest. Save enough, children are told, and you’ll be a millionaire by the time you’re ready to retire!
That was Rich Dad Scam #5: “You Need to Save Money.”
But, we don’t tell them about historically low interest rates, or the power of inflation to eat away at the value of money over time… we may not even be fully aware of these inconvenient financial truths ourselves. These realities cheapen millionaire status every single day.
It seems as if the “wisdom” to save your money is timeless, in that it won’t go away, even though it’s proven to be wrong. Even today you find “financial experts” who push the save to be a millionaire myth.
Playing with Numbers
Take for instance this video shared on Business Insider, “How much money you need to save each day to become a millionaire by age 65“. Breaking it down by age, it gives the following amounts:
- Age 55: $156.12 per day / $56,984 per year
- Age 50: $73.49 per day / $26, 824 per year
- Age 45: $38.02 per day / $13,879 per year
- Age 40: $20.55 per day / $7.500 per year
- Age 35: 11.35 per day / $4,144 per year
- Age 30: $6.35 per day / $2,317 per year
- Age 25: $3.57 per day / $1,304 per year
- Age 20: $2.00 per day / $730 per year
If you’re in your twenties or thirties, you’re probably feeling pretty good about these numbers. You might even be tempted to think it’s worth it to start saving your money. After all, who doesn’t want to be a millionaire by the time they’re 65?
If you’re in your forties or fifties, you’re probably looking at those numbers and feeling a huge pain in your stomach. I don’t know many middle class families with an extra $10K to $56K to save each year.
Now, here’s the kicker, at the end of the video, the following assumptions (or should I say disclaimers?) are given:
“For simplicity sake, the calculations assume a 12% annual return and don’t take taxes into account.”
That indeed is some magical compounding interests-and mythical too. Let’s break this down a bit.
What’s a realistic return?
In the last 30 years or so, there has only been one time where interest rates on CD’s reached 12%. That was for a 5-year CD in 1984. Over the last decade, the S&P has only returned 8.65% on average. In the same time period, the 3-month T-bill has returned 0.74% and the 10-year T. Bond has returned 5.03%. In fact, if you look at this chart by Aswath Damodaran, you’ll see that since 1928, you’ll be hard-pressed to find any standard investment or savings vehicle that returns 12% over a sustained period of time.
Perhaps you’re ready to concede the point that 12% is lofty in terms of return assumptions, but maybe you’re still pretty comfortable with the idea of a 10%, 8% or even a 6% return.
The problem is, not only does the video assume a high rate of return that most people will never achieve, but it also does not factor in taxes, which can eat up significant portions of your returns.
For instance, savings account interest is taxed at a marginal rate. This simply means that it is taxed at your income bracket. So if you’re taxed at a 25% rate for your income of say, $65,000 a year, you’re savings interest earnings are also taxed at that rate.
You can begin to see how this pop financial advice begins to quickly fall apart.
Savers Are Losers, but Who Is the Winner?
For years, I’ve preached that savers are losers. Hopefully the examples above will open your eyes as to why.
But the question becomes, why would financial advisers continue to push savings? As always, follow the money. The traditional vehicles by which most people save allow for financial institutions to charge fees. These fees can be especially devastating to a retirement account like a 401(k). Take this example from “USA Today”:
Let’s say, for instance, you save $10,000 a year for 30 years in your 401(k). If you average 7% returns annually and pay 0.5% in annual expenses, you’ll finish with about $920,000 saved. However with 1.0% in annual fees, that total drops to a little less than $840,000 – and if you suffer 2.0% in annual fees, your finishing total is just under $700,000.
Adding them all up together, lower returns that most models assume, losses to taxes, and payouts to financial institutions in the form of fees completely decimates the assumptions made by the Business Insider video, and frankly, most savings models out there. Savers truly are losers, and it’s the financial institutions that win.
So, if savings isn’t the way to become rich, what should you do?
The short answer is take out loans.
Isn’t Debt Bad?
The Rich Dad Scams we identify are the ways the rich stay rich and make sure the poor stay poor.
That can be counterintuitive, especially when some of the scams—like living below your means and saving money—seem …read more
From:: Daily Reckoning