Q&A Of Blog Questions
Here is a list of questions I have collected and already replied to. I thought they were good ones to reply to on here as a blog post. I think it’s important to ask such questions to as many different people as possible to get as many answers as possible and choose what best fits you. I am convinced that, just like in medicine, there is no one right way of doing things.
1. How much money is enough money? When do I know I have saved enough?
This healthcare professional has the majority of her debt paid off and has about $100k saved up in cash. She wanted to know how much to save and if there was in fact a time when she could stop saving and enjoy her income.
The amount you need to save depends on what you need that money to do and whether that money only has potential energy or kinetic energy.
If your money is kept in savings then it only has potential energy and when the time comes when you need to withdraw from it then you simply will divide your annual expenses by how much you have saved – that will give you how many years your money will last.
If the money is invested, it has kinetic energy, generating a little income as it’s saved. That income could even generate enough income to cover your expenses. It might need to generate x-dollars per year in order to match your annual expenses. If your investments have a rate of return of 10% a year then you need (x-dollars/0.10) saved up.
In my own situation, my basic monthly expenses are $1,000/month or $12,000/year. My portfolio should give me a return of somewhere in the 3% range after fees/taxes. Therefore, I need $400,000 ($12,000/0.03) saved up in order to cover my ongoing monthly expenses without having to work.
For a person who will continue to generate income from work forever, they don’t need any money saved up besides a little emergency cash – somewhere around 6-12 months of your monthly expenses.
Alternatively, save a bolus of money which will grow based on the rate of return of your investments over the next few decades so that once you are at the ripe, wrinkly age of retirement, it will be enough to cover your anticipated expenses. If you invested $300k now and let it grow at 5% a year, in 30 years you would have $1.3 million in your retirement account.
2. Why do you have bonds in your investments? Bonds don’t seem to be doing very well and their future looks bleak.
Companies issue public stock in order to have more investment capital and they take out bonds in order to have more investment capital. Not only do companies issue bonds but so do governments.
I have no idea how bonds will perform in the future. I know that they are part of my investment strategy which I painstakingly came up with after many hours of research and a few years of experience. No major event has taken place so disruptive that it would make me reconsider my bond allocations.
You likely have bonds but don’t consider it a bond. Your cash holdings are essentially bonds. As far as I’m concerned, feel free to hold whatever percentage you want in cash instead of bonds. I am sure my financial adviser could give you a better explanation why it’s good to be in bonds but this is the best I can do.
Always feel comfortable with whatever you’re investing in. So many individuals would be better off never setting foot onto the Wall Street investment scene and instead holding their money in cash, CD’s, T-Bills, etc. In order to do this, you should have other layers of strategies built into your retirement scheme – not hard to do.
3. What the fuck is up with taxes?! The more I work the more tax I pay, what’s the solution to this problem?
You pay taxes for the right to exist within the borders of your country. Your country is a business, your existence is a means for companies to make money. The surest way for such companies to get some of your money is to keep you employed.
From the young age of attending school you are taught how to shut the fuck up, sit still, follow directions, think in a linear fashion, pick among 4-5 different choices and you are cleansed of any independent thinking which would disrupt the money making flow of society.
You are essentially a money-making machine for others who already figured the system out. You are a tax-generating machine for the biggest businesses in the world.
However, you aren’t fully hurt by this taxation concept. In order to keep things “fair”, those who make the least amount of money from employment are taxed the least. In fact, it’s not a fairness issue but by giving them a tax break, these individuals are indentured slaves to the system – throwing them a bone. You can capitalize on this (sadly).
If you want to pay less taxes you have 2 options:
- Earn less taxable wages
- Write off more on your itemized deductions
I have written posts on this in the past, and this one. It’s a really fun topic and it’s really not that hard to drop your tax rate to ridiculously low percentages.
4. Everyone I know who is rich has real estate. I am debating whether I should get into it, what are your thoughts on real estate for someone 5 years out of residency making a little less than $300k a year?
‘Everyone who is rich, has real estate‘ is not the same thing as ‘real estate is what makes everyone rich‘. MOST of those who own real estate represent the antithesis of wealth. Real estate is a means of generating wealth among many other options.
Before deciding on real estate as a means to generating more income or increasing one’s net worth, it’s necessary to accept the following concepts:
- Investment real estate is very different from the real estate you know as a homeowner.
- It takes a lot of time and effort to get a real estate business off the ground and running smoothly, just like any business.
- You need to define a real estate business’ time commitment and likely rate of return so that you are comparing apples to apples.
Let’s address the first one. Most of us live in homes and have paid rent or have owned real estate through a mortgage – and so we are told that it’s really easy to become a real estate investor because we already have intimate knowledge of this.
Okay, then it should hold true that because most of us eat food at restaurant we should have intimate knowledge of the restaurant business and should be able to succeed opening one.
On to the second concept. A real estate business requires impeccable bookkeeping, cost cutting, immediate servicing of the clients’ issues, risk strategizing to prevent major loss and will require a hefty financial and time commitment either initially and sometimes ongoing.
I read quite a few real estate blogs and the fact that the writers put so much emphasis on documenting and presenting the time they spend on their real estate business is suspect. Not only is it not accurate but it also doesn’t factor in the time it took to gain the expertise they possess.
Yes, practicing medicine is incredibly easy for me. I would never call what I do difficult – at least not the practice of medicine. However, the time it took to learn that shit was long and hard. Furthermore, I have to deal with human personalities which come in the shape of patients, bosses, managers, schedulers, nurses and colleagues. I have to deal with a ton of paperwork and worry about lawsuits.
Finally, the third concept. How much time do you think you will need to invest to learn real estate investing? And once you have put in that upfront effort, how much ongoing effort is needed? Also, what do you expect your rate of return to be?
My rate of return at my job at Kaiser, when I was working full-time, was somewhere in the $93/hour range after accounting for taxes. After accounting for licensing, CME’s, board exams, admin crap, and commute time it was something absurdly low – <$30/hour.
My rate of return now is closer to $250/hour. Bless you retirement!
My rate of return from my securities investments is (should be) somewhere in the 3-5% range a year. So if I invest $100,000 over a couple of decades then I expect that, on average, my money will give me a return of somewhere around $3,000-$5,000 per year. Some years my $100k will be worth only $80k or even $50k. Then it will go up to $150k and drop back down – up and down goes that rollercoaster.
Residential real estate investors claim rates of return in the 8-15% range. I do believe these numbers from what I have seen and from what my friends generate investing in real estate. However, unlike mainstream index fund investing, there is a shapely bell curve when it comes to real estate investment returns. Where will yours be?
Most months your tenants will pay rent. On occasion you will have expenses to repair the property, have the property sit unoccupied, consult a lawyer and pay a CPA. So your income will have fluctuations just like the securities above.
If you can accept the limitations of such an investment then you are at least entering it as logically as possible. This should allow you to make the right decisions.