Blog Post Screw the 401(k) let’s do Hookers and Blow!

[Matt]

Before we get started Hookers and Blow (or H&B) is the generic term given to any spending that is considered wasteful, and for some, a lot of fun. This notion of 401(k) OR H&B is one that most of the conservative financial sites throw at us constantly, of course, they don’t think about what they are saying, so I have to bring out the hooker card.

How many charts have you read showing the power of saving for retirement early vs late? They are lauded as being groundbreaking concepts that everyone must understand, and to an extent I think people should – but we should also learn to move through such concepts, absorbing, refining and evolving. What all these articles focus on is concept of Compound Interest – certainly an important concept that should be taught to all high school students. But what these articles are really promoting (perhaps without always knowing it) is the bigger concept of a Forced Savings Plan.

Sure, there is value in company matching to 401(k)s – huge value, but that isn’t the message, the message is do it sooner, and you will have so much more money.

Compared to whom?


Compared to the Clown to the left of you, who spends his weekends flying to Vegas for a binge filled H&B session, yeah, you’ll probably have more money in your 401(k) than him. But what about the Joker to the right of you who is a landlord by 30? Loading money into retirement accounts reduces monthly cash flow, and also reduces non retirement savings. So while Tom has a nice 401(k) balance that he can touch in 40 years, Jerry might have the opportunity to buy an investment property. Compound those two paths over a lifetime, and it is a lot less clear who the winner will be, though Jerry certainly has the advantage in that his investments are not restricted by his age.

So kids – don’t do too much H&B and think about saving, though the 401(k) isn’t the only route.

The post Screw the 401(k) let’s do Hookers and Blow! appeared first on Saverocity Finance.

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[sriki]

LMAO....You post this today as I was about to create a thread in the financial section about this:

After contributing only a fraction of the annual limits for HSA and 401k over the past few years, we decided to max them for this year and set our allocations.

Rough calculations showed me that a good chunk of my net pay will now be unavailable because of this. There might be some life style changes for the first half of the year as we have some other planned expenses in addition. I am hoping that we will get used to this and become more savings oriented than living in the moment. (I am still not sure how my wife feels about hookers in vegas)

This also got me to write/ask about something that's on mind for a while. Many financial sites talk about tax-advantaged accounts (401k/HSA/collage savings/etc) and how max'ing them can do wonders. No argument there. Then, I find a few more advanced articles/sites/people (case in point as @Matt did here) who talk about other avenues of savings/investments such as stocks, rental, etc. The rental one is intriguing to me and want to discuss that.

Having a rental property is a great thing to have in general. For this case, let's look at a scenario where someone is acquiring a rental without adding any debt. So, whatever rent (- expenses for upkeep) generated by that property is profit/ROI. But, maintaining a rental involves some work and it also ties up some of the liquidity that a person has. Is there more/less value to buying empty lots/land, holding for a few years and selling for profit than buying a rental with more upfront investment but with a rental revenue stream and a house with its intrinsic value? I find holding onto empty lot and selling works better in more populated places (read Asian countries and high population density cities everywhere) and know a few people who made a lot of money that way.

Looking at population growth trends for the entire world and also regionally, there is a distinct decline in growth rate. But, there is growth. The decline is also "enhanced" because year on year base for calculating the percentage is also increasing. What I mean by that is say the world population is 1000 people at the end of 2010 and another 1000 people are born in 2011. The growth rate in 2011 is 100%. Say, 1500 people are born in 2012 but the growth rate in 2012 is now 1500*100/2000= 75% though more number of people are born. The point I am trying to make is in general population is increasing and so is the demand for commodities, housing, etc.

Is there a place for buying and holding land in an investment/saving plan?

 

[Matt]

Hey @sriki I think you raise some good points, the most important one for me is:

There might be some life style changes for the first half of the year as we have some other planned expenses in addition. I am hoping that we will get used to this and become more savings oriented than living in the moment.

I think that the goal is to feel this 'pinch' and then get more creative. You want the baseline to be that you feel poor all the time, and want to find creative ways to earn more and spend less. It's a psychological trick to keep on raising the waterline so you don't get lazy. But then once you start thinking like that more, where you funnel these extra resources is important.

There is definitely a place for your land options in an investment plan, I think the questions are:

• When?
• How Much?

By the same token, you could start investing in startups too - but you need enough of a financial foundation to move onto the next investment type. The second question, 'How Much' is really the key to it all. This raises up diversification issues - if you are 100% invested in land hoping for a big payday, you bring in a lot of risks, these should be baked into your expected ROI from the investment. The feeling I get from reading your post is they are somewhat akin to an IPO/10 bagger. You want a piece of that for sure, but only with play money (which can still be substantial).

Taking that concept further - would you like to invest in a Dividend star like HCP, or in a tech firm like Aruba (I hold both) I put about 10x more into HCP than Aruba since the dividends are much more stable, but I play with a couple of K in a firm like Aruba in case they are acquired. The thing is, when waiting for the Aruba payday, I get my cash flows from boring old HCP.

So if you go into land, I would suggest that you consider not putting all your eggs into that basket, and if you can afford a speculative buy, then go for it.

Personally, if I was to buy land, I might be more inclined to build on it, or otherwise gain an inflow, I don't like investments that just sit there waiting for something to happen. One that I thought of in the past was a farmshare - you buy the farmland and rent it out to farmers who are starting out, they then keep it well maintained, and you get rental income.

 

[sriki]

I am not much into this as I do not have enough capital. I also do not think I will have enough capital to let my money locked like that for years but I did that once. A couple of years ago, I bought a small piece of land which was 60% funded by my tax returns (they were pretty high that year) and money saved. I still hold that land but it's small enough drain on my resources that I could handle it.

There are different ways people play the buy and hold land. One is buy and hold for a certain period of time and sell it off completely. Many times, the people holding do so in the hopes of eventually selling it to a developer/builder who builds houses/condos. So, some sell the land such that they get say a percentage of the value of it as cash and a few of houses/condos that will be built on that land. The exact math of who comes out on top is subject to valuation and desirability of said neighborhood but one that appeals to many in the few instances I know about.

This is similar to to buying into speculative stocks/startups but not equivalent since stocks/start-ups are mostly a niche. They serve a particular community or sell a certain product (which could sell a lot and make a lot of money) but not as basic as housing. However, the principles of risk and diversification holds true to both.

This was more of a thought experiment for me as I have seen more people get insane amounts of returns on this type of investment than any other type. But, then, the risks are so too that only people who can get out with their skin intact should consider this type of play. This might not work so well in this country though as there is an abundant amount of land available for the population it supports to get to a high demand of empty lots.

 

[Sunny]

I just started to have this discussion with a friend who has been encouraging me to think beyond the stock market in searching for investment returns. We have been thinking about an investment property but it's been hard finding something that would be cash flow neutral/positive in our area and I'm reluctant to be a landlord for a property out of state.