Where super savers scrimp

Where super savers scrimp
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They scrimp notably on homes especially, and also on transportation (cars).

I did that when I was younger . . . lived in a small home . . . and I’ve only bought one new car during my entire life. Currently happily driving a 2005 MGM (Mercury) which is a beautiful car some folks might think is a tad bit old. Second car? No.

Here is the writeup:

The No. 1 thing people with fat savings accounts scrimp on that you likely don’t

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Wow.

Principal (“Study”'s source) website:
“*Customers pay a level annualized program fee equal to .85% of the customer account balance”

Housing and cars are your two biggest longterm expenses before medical kicks in, so yeah that’s where I saved money to get to ER at 51.

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The “they scrimp on homes” argument is bogus for two reasons.

First, here’s a slightly better article about (and the link to) the TD Ameritrade study mentioned in the first paragraph. The study does not at all suggest that housing is a key to bigger savings, and I think it’s illogical to draw such a conclusion from that study. It didn’t even mention absolute numbers – only percentages. It’s much easier to save a higher percentage of income for retirement and spend a lower percentage of income on housing IF THE INCOME IS HIGH ENOUGH. I don’t see any mention of the income levels of the survey participants. Also if you use MMM’s definition of “savings rate”, mortgage principal repayments are included in savings, so the whole study would have to be recalculated.

Second, housing has been increasing in value at or faster than inflation (unless you buy near a peak and can’t wait to sell before the values recovered). I would think that people who buy as much house as they could afford (especially with a low interest rate mortgage) in a good area could end up wealthier than those who buy smaller homes and stash away the difference.

I agree about used cars. You don’t have to be a genius to know that buying new cars is more expensive than buying used cars. Also The Millionaire Next Door taught us that millionaires tend to buy used American cars and drive them into the ground. Personally I prefer Japanese cars. The argument for American cars was that they’re cheaper to maintain, but I think that’s been disputed, and Japanese quality is better. Only German cars are expensive to maintain, cause they suck. :wink:

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Counting the principal as savings only works if you subtract the opportunity costs of that equity (which are MUCH higher than the sub-4% mortgages many have).

Primary residence provides the additional benefit of a place to live in. So, yes, it still very often makes more financial sense than renting. But on average SFR barely rises faster than inflation after adding in maintenance and property taxes. 1% over inflation is terrible long term returns. If you leverage up (around 4X is the most that’s reasonable), it doesn’t help you because mortgage rates are more than 1% more than inflation.

They’re going to hit a hard limit at some point very soon as well, it’s unsustainable for housing to keep rising more than wage growth. How will housing increase to where the ownership cost is more than 100% of income? If it’s assumed to keep rising faster than wage growth (which is only slightly over inflation), and housing is already on average 37% percent of income (first article I found claimed that, I didn’t vet the best possible source… https://www.businessinsider.com/how-to-save-more-money-2017-8) then in a very short number of years we’ll get where required housing spend is at absurd and impossible percentages of income. On top of that, we’ve been at a sustained “lowest possible interest rates” environment for an unprecedented time period now. And that’s been propping up house prices. Negative-interest rates seem to be the only way the trend could keep up. Any other ways housing prices could keep rising faster than wages?

YMMV of course, some markets will see faster price growth, while others will continue to decrease in property value even though we have the mortgage rates propping up prices. If you correctly predict the direction your specific market will go is way up, and you leverage ~4X with 20% down, then it’s more profitable.

The linked study in that one is somewhat interesting. 17% of the “super savers” have a wealth target for FI of only $500-999K. I guess I can retire now. Oh wait.
Only 9% of the super savers group plan to retire under 55.
Guess I have to wait 20 years.

Those two results don’t really agree with me considering the “super savers” designation in the study as very useful. But they don’t give a concrete definition that I saw.

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I don’t think so. Savings rate = money saved / money earned. It’s not a ROI calculation.

With a mortgage there’s leverage, so with 20% down, 1% increase in property value is 5% ROI (2% increase is 10% ROI, etc). 1% over inflation is an excellent ROI if you don’t have too much equity.

I agree that housing might not keep rising at much more than inflation and might even come down from the current levels, but I think keeping up with inflation is a reasonable guess for the long term.

Their definition is anyone who saves 20% or more is a “super saver”. It’s not really sufficient for early retirement (of the FIRE kind) without drastic lifestyle cuts in retirement. I agree that it seems useless.

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True for saving in general. Not so true for saving counting at parity in the context of “being on the way to” having a target amount of funds for retirement. That takes expectation of future compound growth.

There’s leverage but that leverage isn’t free. A 4% mortgage is much more than 1% higher than inflation – although this is overpenalizing. The leverage wouldn’t multiply the property tax or maintenance. So at 4% we’re probably closer to a wash on returns by leveraging for the “average” SFR. The leverage only helps if the property is expected to return more than the opportunity cost of the mortgage interest.
It’s also probably reasonable to know for short-term an area is one of those that will appreciate faster than average, but guessing 30 years out seems less reasonable.

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Took me a bit to understand what you’re saying. You’re right, the future compound growth calculation can’t use the savings rate as is, because a portion of it might not grow at the market rate.

I think we can also agree that homeownership is likely to beat renting in most cases. But you disagree that buying a more expensive property would make you richer in the long term than buying a cheaper property, all else being equal?

Doesn’t everyone max out their 401k contributions before they start buying real estate?

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Doesn’t the answer to that depend on the return on investment of the equity you’re not putting in a property? Especially if buying the most home you can afford prevents you from investing in tax-deferred accounts invested in securities.

Plus for me, having most of your wealth in just one property seems like it runs counter to the theme of asset diversification. Whatever real estate market (not to mention a bit of luck) you have available to you is certainly gonna impact your returns in ways you don’t control easily.

Finally, it may also depend quite a bit on your work. If you have to move every 3-4 years, your returns are gonna be hurt by the transaction fees.

That said, I totally agree on cars. Buy a reliable used car (aka let another sucker take the initial depreciation loss) and run it into the ground is a very good way to go. Especially now that many cars are very reliable. Our last one cost us $13k over 17 yrs (and would have kept up fine if someone else had not totaled it). Plus, you’ll also save on insurance in the process. Very hard to beat although you have to be fine with not keeping up with the neighbors’ midlife crisis $60k Model 3. :wink:

Another one way to scrimp is food costs. Cooking all your meals, packing lunches, and almost never dining out means real savings that only get bigger the larger your family gets. For us 5, going out to anything non-fast food is basically a $100 affair with two teenagers and a tween. Comparatively, our grocery shopping bill is about $700/month. Dining out twice a week would double that.

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We didn’t. We only 401K’d up to the company match until we bought a house. We saved as much as possible to put as large a down payment as possible. We then began maxing the 401Ks.

We, unlike so many successful people here, have a huge aversion to debt. I understand the logic of leverage, but my brain can’t seem to understand it when I try to sleep. :confused:

I thought TMSY was being sarcastic. It’s neither easy nor reasonable to max out 401k contributions for a majority of people. Median individual income is ~$40K/yr. The tax savings at that level are too low and you’d never be able to save enough for a downpayment.

SF price growth.

You’re assuming that the land and/or house can’t be put to better use. For example, SF converted to townhouse, or SF converted to 3 or 4 plex and so on? See the Oregon zoning law for an example.

It’s easy to pick an area that’s grown more than the average in the past. The future 50yrs is more difficult.

Im sure Detroit property prices looked like they were only going straight up in the 90’s…

I didn’t make assumptions, I referred to average home prices, not a select few “hot” markets

Yeah I think that key missing data point is very important here.

If you make $200k its a whole lot easier to save a higher % of it and spend a lower % on housing vs someone who makes $50k.

I think this is the TD Ameritgrade report :

Its from this year, talks about 20% “super savers” and has the detail that those so called super savers spend 14% of income on housing vs 23% for other people.

I don’t see any mention of the income levels of the people but …

It says up front :
"This survey was conducted online
within the United States by The
Harris Poll on behalf of TD
Ameritrade from September 28th –
October 6th, 2018, among 1,503 U.S.
adults aged 45 and older with over
$250,000 in investable assets,
including 750 who are financially
independent or on the path to be.*

Thats not the whole population and its certainly not poor or low income people.

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http://www.thomasjstanley.com/2012/02/millionaire-next-door-myth-4-used-cars/

" for every one millionaire that is used vehicle prone there are two who tend to buy new vehicles."

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“65 percent avoid high-interest debt” … that statistic stunned me. For the 35% who don’t avoid high-interest debt, why put money into savings that could be used to avoid high-interest debt? It’s hard to imagine how they can beat the risk-adjusted after-tax returns.