[ceejayoz]

> "Wealth is accumulated through habits" is a great story to tell people but it seems very often to be complete BS.

I see a lot of these.

One of my favorite examples is https://www.businessinsider.com/how-ebony-horton-paid-off-22....

"How one 31-year-old paid off $220,000 in student loans in 3 years" is the exciting title.

You have to get to paragraph #7 to learn "work at your parent's charity" is one of the techniques. Paragraph #8 tells you another trick is "be gifted a condo". #9 tells you the third one is "have grandma pay your rent".

[idrios]

I've seen this example going around because it's such an egregious example of attributing to hard work what was essentially just gifted, but I think "wealth is accumulated through habits" is not wrong. It's really just a statement about compound interest, that if you live frugally and invest you'll end up with tons of money.

The statement is better characterized as something like "wealth is the product of habits and opportunity", where the only measurement we can quantify is a person's wealth, and our society is struggling to reconcile whether unwealthy people simply have poor habits (their fault) or poor opportunities (society's fault).

[TeMPOraL]

I'm going to say something heretical here, but: I'm increasingly convinced that the whole compound interest thing is bullshit. Not math-wise, the math checks out. Just propaganda-wise. In practice, with interest rates available to general population, a typical person isn't going to accumulate any meaningful wealth unless they were already wealthy.

Say you're saving $500 a month for 10 years, on an account with 5% interest rate. After 10 years, you have $76,281, i.e. $16,281 over the $60,000 you put in. It's just 27% more - and that's assuming you can find an investment with real 5% interest rate, and without taking inflation into account. It's also assuming the banks won't pull off something funny, or that your country doesn't redenominate your currency. In this scenario of continuous savings, it takes about 27 years for the interest to double the amount of money you have. Again, if you can find something that pays you real 5% of interest. The real rates on low-risk accounts seem to be sub-1% these days.

I've been running some back-of-the-envelope calculations like these every now and then, and I'm yet to see a scenario in which compound interests gives me anything in a reasonable time frame. As it is, my wealth-accumulating strategy is just "spend less, and earn more" - with the latter part doing almost all the difference. But I can only pull this off because I'm privileged to work in tech industry, which has more money than it knows what to do with - it's not something I can recommend to my relatives with more mundane jobs.

(I guess I could get into real estate investment? I think I have too low risk tolerance for it, and I also have plenty of ethical concerns about getting rich off flipping houses.)

The trick with "if you live frugally and invest you'll end up with tons of money" is that unless you take risks and are lucky, "end up" is likely to come around your retirement age, when you'll have little use for "tons of money" except paying for medical bills - so you'll pass it on to the next generation, to give them a shot at the life you wanted to have.

[idrios]

Honestly, I agree with everything you just said. I will say that if you continue the pattern for 20 years you end up with $200k, of which $83k was made in interest -- and after 30 years you'll have $400k, $200k made from interest. Meanwhile, the S&P 500 averages about 11% interest annual. The article is vague on some details, but if you did what it sounds like the man in the article did and invested $500/year into the S&P 500 from 18 until 98, you would have $240 million at the end.

But that's money that you would never be able to spend because it's only accumulating for as long as it's still in the S&P 500. This millionaire would wear clothes with holes in them, and probably never traveled or spent money on any of the things outside of basic necessities. I wouldn't enjoy that lifestyle.

Also, as will definitely be pointed out by someone, $500/year is not bad for any person with a reasonable income. But $500/year for someone living paycheck to paycheck is not possible.

[voisin]

Another thing not considered is how much harder it becomes to maintain the return at higher bases, while diversifying so that there are no major drawdowns. And on the topic of drawdowns, I think this is the biggest flaw in compound interest mythology - a minor drawdown (permanent loss of some capital) in the early years causes disproportionately large effects on the end result. Best to run a Monte Carlo simulation using some assumptions for inflation, range of returns, etc. There are various websites that do this for you.

[jfengel]

The GP was talking $500/month rather than $500/year. That's a fair bit of money. It's nearly half the wage of a US minimum wage worker (and over half their paycheck, once taxes are taken out).

Even if you get a $15 minimum wage (as some places already have), it's still asking somebody to put away 25% of what they earn. That seems very unlikely. Not impossible, but a lot of life circumstances could easily result in it being impossible.

[kamaal]

There was a post on r/CryptoCurrency a few days back about Fidelity, they did some analysis and figured most profitable accounts belonged to people who were dead.

People under estimate the kind of discipline it takes to both DCA and HODL things on the very long run. And it goes without saying, starting early does matter.

>>The trick with "if you live frugally and invest you'll end up with tons of money" is that unless you take risks and are lucky, "end up" is likely to come around your retirement age, when you'll have little use for "tons of money" except paying for medical bills - so you'll pass it on to the next generation, to give them a shot at the life you wanted to have.

Never understood this logic. Nobody starts ex-nihilo. Giving whatever little edge you have to your kids doesn't seem like an evil thing to me at all. The thing is it takes very little to give your kids that head start.

Or your kids have to write things like these when they reach middle age too.

And if you live long, you will just have lots to complain about your younger self.

[nitrogen]

Part of the "habits" thing is that they have to span horizontally across family and friends, and vertically across generations. A private village of people all pulling together will be far more effective than any one person pulling alone.

[biolurker1]

All your argument is based on your ignorance of what investing and compounding means. Not interest rates. Investing in stocks, bonds and assets. Nobody ever has implied that you can build wealth by saving accounts.

[croon]

Would you care to elaborate on what relevant difference there is between 5% interest in a savings account and 5% growth of stock portfolio?

Compound interest is compound interest. 5% or 7% or 11% matters, where that comes from doesn't.

[biolurker1]

There are no savings accounts with interest comparable to stocks. If that was so nobody would invest in stocks because one has big risk and the other zero. You are very financially illiterate and I don't mean it as an insult. Sadly these things should be taught at schools. Also, there are currently no 5% saving rates in any of the big currencies.

[tstrimple]

It literally doesn't matter if there are savings accounts with 5% interest. The example was illustrative and focused on the percentage, not the vehicle through which it was earned. You're being pedantic to the point of distraction here and not adding any value to the subject at hand.

[lotsofpulp]

>the whole compound interest thing is bullshit

Writers probably mean compounded investment returns from the public markets. I would be surprised if anyone thought an FDIC insured bank account was going to have an interest high enough to get you anywhere.

[tehwebguy]

Struggling to find more because they don’t share common searchable text in the tweets but this has become the default format for these stories, on Twitter at least:

https://twitter.com/gavnugent/status/1359633577483378690

This is not to say it’s the majority of scenarios or anything, but it is funny to see how many headlines say something about how some “weird trick” helped people become millionaires and then the story mentions a significant inheritance or gift.

[jl2718]

That sounds tough. Everybody else just voted Democrat.

[CrazyPyroLinux]

That sounds dumb.

[nibsfive]

$20M net worth at 27 while being financially independent at 17 years old here. AMA.

[AdmiralAsshat]

Please tell us how you built your vast empire while starting with only a meager $1mil loan from your father.

[nickkell]

Did you inherit your wealth?

No further questions

[davnn]

Invested in crypto? :)

[55555]

Sure, I'll bite. You said AMA, after all. So please tell us your story briefly.

[EliRivers]

What was the habit that made you rich?

[monkeybutton]

It was making your daily coffee at home and forgoing avocado toast, wasn't it?