eevBLAB 92 - The Wealth Equation

[EEVblog]

How to build wealth. It's not rocket science.

00:00 - How to build wealth
01:29 - The Wealth Equation
02:41 - Investing is NOT the way to get wealthy!
03:35 - The #1 way to build wealth is...
04:11 - Different forms of income
05:01 - Expenses
07:47 - Don't buy a new car or new iPhone!
08:48 - Asset investment return
09:51 - Pesky inflation
10:26 - Being your own bank and real estate investment
10:54 - Emergency cash
11:42 - Screw you money
12:03 - The benefit of offset accounts and property loans
13:19 - Other asset classes
14:53 - Spead your risk across a balanced asset portfolio
15:38 - Things can BOOM or BUST
17:02 - The BEST wealth driver is your business!
21:35 - The power of asset utilisation for reducing expenses
22:34 - Let's go the spreadsheet
28:30 - The big takeaway is...

[golden_labels]

Hey, there is one investment that is quite certain, available to people with little money and having very high ROI. It’s called increasing one’s skills.

If you have $100 to invest that, forget about shares, cryptocurrencies, options. Finish a single course related to your trade and have your wage increased. 200% return within a year, if not better.

[nctnico]

Next subject: how to have a good time (as in quality of life) while creating wealth...

[pixitha]

The link to the spreadsheet on the youtube video seems to be broken/404?

[EEVblog]

The link to the spreadsheet on the youtube video seems to be broken/404?

Fixed

[nctnico]

BTW: one item missing from the list is: Don't borrow money to buy consumable stuff like electronics, cars, etc. In the end you pay double! Borrowing money for stuff that has no ROI at all is a sure way to stay poor. The money you piss away on interest payments can't be used to invest/save so it is a 'double whammy'.

Maybe it is mentioned in the video somewhere (couldn't find it) but I'd like to emphasize this.

[SiliconWizard]

Yes that's true. Leveraging loans to make wealth is almost an art anyway. For the layman, loans are just negative wealth.

Now the examples you mentioned are not an absolute. For instance, if you don't have the cash to buy a car, but owning one allows you to get a good job, or do business, or whatever, then it can be an investment in itself. You just have to reflect on what it will bring to the table. Of course, if it's for consumption only, then it's a lot of wasted money.

[EEVblog]

BTW: one item missing from the list is: Don't borrow money to buy consumable stuff like electronics, cars, etc. In the end you pay double! Borrowing money for stuff that has no ROI at all is a sure way to stay poor. The money you piss away on interest payments can't be used to invest/save so it is a 'double whammy'.
Maybe it is mentioned in the video somewhere (couldn't find it) but I'd like to emphasize this.

The car loan thing was going to be in the video but I forgot.

[Poe]

Although I doubt your equation holds revelations for anyone, it at least starts a discussion that's desperately needed.

Please note that the offset account is entirely an Australia thing.  You keep bringing it up, but in most other parts of the world you DO have to borrow money and it's expensive and difficult and it favors those that already have money.

Inflation, insufficient pay increases, taxes, debt and actual quantified expenses should have been be discussed.

Inflation is extremely overlooked.  This year, that's going to especially impactful. 

• If you didn't get a >5% raise this year, you got a pay decrease.
• If your income has only doubled in the last twenty five years, you've never received an actual raise.
• If you don't push for a cost of living raise every year, you're causing everyone else to get paid less.
• Pay since the 90s hasn't really increased yet cost of living has doubled.

Your spreadsheet has a constant 5% raise.  Would be fascinating if you polled your audience to see what the average raise rate is.  I'd bet it's not 5%.  Most people take promotions with additional responsibility and consider that a raise.  It is NOT.  Companies use this tactic to keep wages low.

Expenses add up to way more than anyone ever thinks and are a GREAT for perspective.  It's not just the frivolous expenses like coffee or a new car.  The 'essential' and forced expenses (social security, medical) are so often brushed aside, but are excessive and account for such a large percent. 
In your example, the person would have to be earning MUCH more than $50k if they had any hope to save $25k.  After removing >$10k for taxes, ~$4k to social security, $15k for health insurance... etc.
https://www.nerdwallet.com/article/finance/monthly-expenses-single-person-family
People who go through the exercise of actually adding up all the realistic expenses don't bother persuing a career in 'massage therapy' or 'McDonalds manager' because they can easily see they'll never buy a house or retire.   

Compound interest is great (An honest 7% real investment return might be optimistic BTW) when you start at zero and instantly start a job that allows you to save $25k.  Most people don't start at zero though.  In highschool they'll buy a cheap car to get to a job that can't even pay for the gas and car repairs.  They might go to college and accumulate tens of thousands of dollars of debt getting a degree.  Not just due to tuition, but typically credit card debt from 'frivolous' expenses like buying books that are not covered by their tuition, or paying for rent because living expenses are not paid for by tuition or getting their car fixed or buying food.  Once they start their first job, they now have to waste a decade paying down the high interest rate debt.  If they're lucky, they can start saving for retirement when they're 40.

[nctnico]

Inflation is great if you have a mortgage for a home though. Your debt decreases in value every year while your home might increase in value (depending on the location and quality of the building).

[bdunham7]

BTW: one item missing from the list is: Don't borrow money to buy consumable stuff like electronics, cars, etc. In the end you pay double! Borrowing money for stuff that has no ROI at all is a sure way to stay poor. The money you piss away on interest payments can't be used to invest/save so it is a 'double whammy'.

You have to do the math.   A decade ago we bought a car and had the money to pay for it in hand.  However, I was able to get a 4-year loan for a lower interest rate than I could get on a 10-year deposit certificate--from the same bank!  The only risk was that interest rates would go up and I'd be stuck with a low-performing CD, and that didn't happen.  Once you factor in that the amount of interest on the loan declines with the balance while the interest on the CD increases the same way, it might make sense even at the same interest rate.  We ended up making 4X the interest that we paid.  Unfortunately, U.S. tax policy takes a bunch of that back as interest you receive is taxable but what you pay is not generally deductible. 

Which brings up my tidbit of financial advice:  A penny saved is more than a penny earned because it is tax-free.   

[EEVblog]

Inflation, insufficient pay increases, taxes, debt and actual quantified expenses should have been be discussed.

You can't have a detailed and useful discussion of everything in one video. In fact it's best if you don't.

[AG6QR]

As an engineer, when I was recently graduated and just starting out, the problem I had with financial planning is that there are just way too many unknowns.  Rate of inflation?  Rate of return on investments?  Cost of housing during my retirement?  Amount of future salary increases I might expect?  Cost of starting a family?  When I might start a family?  Cost of healthcare?  Amount of government assistance that might be available to me in old age?  I'm aware of the math behind compound interest, so if I know how much money I need to have accumulated on the day I retire, given an interest rate, and time until retirement, the math I learned in engineering school taught me how to do an amortization calculation and compute exactly how much money I need to save to reach that goal.  But I don't actually know any of those numbers to within even a single digit of precision!  And I don't know what my savings goal should be because, at 21 years old, I can't possibly predict what my retirement expenses are going to be!

That was a while ago.  I recently told my boss that I plan on leaving soon, and I won't be looking for another job.  He should hire my replacement and let me help in the training.  Or not, that's his choice.  But my annual salary now represents such a tiny percentage of my net worth, I'm not motivated to work for another year for such a small increment.

How did I get from there to here?  I didn't know any of the numbers accurately, but I did know one thing with absolute certainty:  The only way to accumulate wealth is to consistently spend less than I bring in.  Another thing I knew was that it's easier to control spending than income, at least in the short term.  I decided to save 10% of my income.

At first I kept track of every penny, and kept a book with expenses categorized monthly.  It wasn't easy, but it allowed me to make my financial decisions at home, while looking at the big picture of the whole month's expenses, instead of making decisions when out at a store, thinking only of what I wanted to buy.  I always included a little "splurge" money in the budget for fun toys, but it was a controlled amount.  When I went shopping, I knew how much was in my splurge account, so I knew how much I could spend guilt-free.

I never saved less than 10%.  I figured that, among my colleagues, there was probably at least one of them who was making 10% less than me, and one making 10% more, and an outsider would have difficulty looking at the three of us and putting us in order.  All I had to do was live like the guy who was making a little less, and I'd accumulate wealth.

As my salary increased, I let my expenses increase at a slightly smaller rate, so I was saving more than 10% of my income. It got easier as time went on.  My savings rate crept up to around 20%.  I got quite a bit more casual about keeping exact track of things, but I always made sure I was spending significantly less than my earnings.

I'm not a genius investor.  I invested mostly in broad-based stock mutual funds, not trying to pick a few big winning stocks, but being content to accept the average rate of return of the whole market. In hindsight, if I had invested in Apple, Google, or Amazon, I would have done much better.  But it's easy to forget that a lot of smart investors invested in DEC, Yahoo, Webvan, RadioShack, pets.com, or similar. I would not have been smart enough to guarantee picking Google over AltaVista or Yahoo.

I never used a professional financial planner, because I had a relative who was one, and I watched him accumulate mounds of debt while trying to sell foolish investment schemes to unsuspecting clients. Maybe they're not all so bad, but I figured I could pick my own investments and do my own budgeting.

I also bought a house and paid off the mortgage. I had to live somewhere, and I like the idea of being insulated from the ups and downs of the real estate market. Whether the price goes up or down is of no great concern to me, because I'm going to continue living here regardless. Once the mortgage was paid off, that freed up quite a chunk of money to increase my investments.

I didn't know exact numbers starting out, and I still don't know the numbers looking forward.  But I will say that, over time, the compounding of investment returns was way beyond my wildest dreams.  I won't tell you what my starting salary was, but I will say that, after working 39 years and saving between ten and twenty percent, letting earnings compound, I now have 216 times that first year's salary saved up. I would not have believed that when I started. Sure, there's been inflation, I've had raises, and my expenses are much higher now than they were then.  The stock market could crash and wipe away half my savings.  But still I think it turned out okay.

[bdunham7]

I now have 216 times that first year's salary saved up. I would not have believed that when I started. Sure, there's been inflation, I've had raises, and my expenses are much higher now than they were then.  The stock market could crash and wipe away half my savings.  But still I think it turned out okay.

If I may ask, what was that multiple say just 4 or 5 years ago?

[AG6QR]

I now have 216 times that first year's salary saved up. I would not have believed that when I started. Sure, there's been inflation, I've had raises, and my expenses are much higher now than they were then.  The stock market could crash and wipe away half my savings.  But still I think it turned out okay.

If I may ask, what was that multiple say just 4 or 5 years ago?

It was around 150.  So a lot of the gain has happened recently.  It's definitely the case that recent gains in the stock market have been above average, and I can't count on them being sustained at that rate.  Plus, I've been investing a larger than usual fraction of my salary, so that also has helped things grow for the past five years.

But it's also the case that, with steadily compounding earnings, the more you have invested, the faster it grows.  If the growth rate were continuously compounded at a  constant annual percentage, and if no outside investments were coming in, the compounded growth rate would be exponential.  Varying rates of return certainly add an element of unpredictability to things, but still, the trend is toward ever more growth when you have more invested.

For a period of one year, between 5 and 6 years ago, I was unemployed.  I had been laid off.  Expenses kept coming, and I took my family to vacation in Italy for three weeks (had been planned before the layoff notice came).  Even with no salary, my net worth increased during my year of unemployment. That was eye-opening.  Unemployment was my taste of "practice retirement".  I ended up finding an enjoyable job that paid significantly better than the one that laid me off.  But now I'm ready for work to be over.

[EEVblog]

For a period of one year, between 5 and 6 years ago, I was unemployed.  I had been laid off.  Expenses kept coming, and I took my family to vacation in Italy for three weeks (had been planned before the layoff notice came).  Even with no salary, my net worth increased during my year of unemployment. That was eye-opening.  Unemployment was my taste of "practice retirement".  I ended up finding an enjoyable job that paid significantly better than the one that laid me off.  But now I'm ready for work to be over.

Beware the busts and prolonged dead periods.
I can remember sitting at my desk at work during the dot com bubble in 2000 and watching my stock portfolio going up more in one day then I earned in a week and thinking "why am I working?"
Sydney housing boom never ends? LOL
I bought my home at the peak in 2004 and then it was a 5 year flat period where prices went nowhere or even backward. And that wasn't the first time a 3-5 year flat period hit the market in the preceeding 20 years.

[Bicurico]

Great video, especially for younger people.

However, at least where I live, it is virtually impossible to get a job where you can save any money earned at the end of the month, unless you live a very poor life...

Example:

First job as an engineer pays net 800€/month.
Rent is minimum 500€/month.
Then you need to pay for food, transport, clothes.
You basically have to share the flat to have ends meet.

That's for university graduated engineers!

No wonder people move to other countries or are unhappy.

Main fault is the excess taxes.

Your video is therefore great to illustrate that if you have to spent all you earn, you will never evolve financially and are basically a slave.

[ali_asadzadeh]

AG6QR Strategy is working great (it's written in the richest man of babylon) , I started as 15% saving when I started my job, Now it has reached 25% of the income, But recently I have found that if I could design and make around 26 ~ 32 different products for my own company, I can gain much more, sooner. (maybe 2 or even 3 products can be designed in a single year)

[Bicurico]

Funny how this important subject got so little discussion.

I know this is a technical/engineering forum/blog/vlog, but thumbs up to Dave for taking his time to do this.

Especially younger people get no education at all in school or university about personal finance. They might get one economics class, but that is a different subject, as it applies to companies or states.

Also, it seems goverments in EU and US (and probably in the remaining democratic countries) prefer to keep the population illiterate when it comes to personal finance, money, the banking system, etc. If a bigger part of the population knew about it, they would certainly understand how much corruption there is.

Also, at least in the EU, it seems that the left wings/socialists have been focussed and worried so much about the "poor" and the "less fortunate" that they forgot where the tax money comes from. It seems that if a regular tax-paying citizen even so manages to save up to 10-20% of his monthly income and invests it in a secure manner, after some years the goverment wants a share of this money - as if it cannot be that the little man/woman managed to gather some wealth.

Finally, to finish my little rant, the most stupid tax is the tax on property. You save a lifetime to purchase a house. You paid taxes on your income, you paid VAT, you paid a lot of other taxes and fees to purchase the house. And now that it is yours, you have to pay 2-5% of its market (!) value per year as tax. WTF! Why?

And because of that, elderly people who bought their house/apartment 30-40 years ago in the suburbs, now have their house in the middle of the city (because of growth). As a result the house, which was purchased in todays money for 100.000 Euro is now worth 500.000-1.000.000 Euro! And suddenly the old owners cannot afford the tax on their property anymore and have to move out.

You might say that at least they get rich in doing so. But no: because houses in the outskirt are more expensive, too. And old people do not like changes.

The whole system is f*cked up and I can only recommend to teach personal finance to younger people you deal with, just like Dave did in his video. Big thumbs up.

Regards,
Vitor

[SiliconWizard]

Let's not get into deep political or even philosophical stuff here. But just saying - the "system" is tailored to make money "circulate" constantly, otherwise it would quickly die under its own weight, and the fallacy of never-ending growth. The faster money circulates, and the longer the illusion will last.

That's IMO one of the main reasons "static" property, such as houses, have less favorable taxing overall than stocks, for instance, at least in many western countries these days. Wasn't always the case.

[Poe]

Below is a common infographic which attempts to encourage early investment:


To me it actually reinforces something more important:   

Debt accrues debt, wealth accrues wealth and although there's amazing freedom today, there's still no better indicator of where you'll end up than where you start.  

Imagine the difference between a college kid that has his bills paid and one that's on his own.

The lucky kid starts saving right out of school and ends up further down the compound interest curve.  The part that's nearly vertical.  This kid is more likely to push for raises or switch jobs to advance.

The unlucky kid pays all their own bills through college and graduates tens of thousands in debt.  Works hard to pay it off, but the interest doubles the debt.  Eventually pays it off, but this kid is not able to actually invest until >10 years later.  One large medical expense early on can eliminate the possibility of retirement.

This is all regardless of effort or making the correct decisions.  It's a cycle of wealth division in society.

[Thomas Bowman]

Great video on how to build wealth! I particularly liked how you broke down the wealth equation and emphasized the importance of multiple sources of income. Your advice on keeping expenses low and investing in assets such as real estate and business was very helpful. The concept of being your own bank and utilizing asset utilization to reduce expenses was also a new idea for me and I will definitely be implementing this in my own financial strategy. Overall, this video was a comprehensive guide on building wealth and I appreciate the practical tips and examples you provided. Thank you for sharing!

[EEVblog]

Great video on how to build wealth! I particularly liked how you broke down the wealth equation and emphasized the importance of multiple sources of income. Your advice on keeping expenses low and investing in assets such as real estate and business was very helpful. The concept of being your own bank and utilizing asset utilization to reduce expenses was also a new idea for me and I will definitely be implementing this in my own financial strategy. Overall, this video was a comprehensive guide on building wealth and I appreciate the practical tips and examples you provided. Thank you for sharing!

I smell a bot...

[pope]

Great video on how to build wealth! I particularly liked how you broke down the wealth equation and emphasized the importance of multiple sources of income. Your advice on keeping expenses low and investing in assets such as real estate and business was very helpful. The concept of being your own bank and utilizing asset utilization to reduce expenses was also a new idea for me and I will definitely be implementing this in my own financial strategy. Overall, this video was a comprehensive guide on building wealth and I appreciate the practical tips and examples you provided. Thank you for sharing!

I smell a bot...

Why?

[EEVblog]

Great video on how to build wealth! I particularly liked how you broke down the wealth equation and emphasized the importance of multiple sources of income. Your advice on keeping expenses low and investing in assets such as real estate and business was very helpful. The concept of being your own bank and utilizing asset utilization to reduce expenses was also a new idea for me and I will definitely be implementing this in my own financial strategy. Overall, this video was a comprehensive guide on building wealth and I appreciate the practical tips and examples you provided. Thank you for sharing!

I smell a bot...

Why?

It. Reads. Like. A. Bot.
Plus the username has no relation to the name in the registered email.