Transcription
A lot of people listen to this. And if I go back, if I go back just over 10 years in my life, I would have been sat listening to this conversation in £7,000 of debt. And I would have thought, God, like becoming a millionaire, that's a, that's a million miles away. No pun intended. To become a millionaire, I'm going to have to earn so much more money. And at the time, I was working in call centers. It, it would have just felt so far away. And I say, you know, people are struggling to feed their children, let alone become a millionaire. Is it far away for the average person?
It's far away if you don't know the strategy. There's a strategy to getting out of debt. There's a strategy to building wealth. There's a system.
How much of it is just earning more money? Because when I have these conversations on my show, I think the surprisingly untouched territory is we don't teach people how to become more valuable so that they can earn more money. A lot of it's about like index funds or savings, whatever. But how much of it is just like, I need to get higher valued skills in the market?
We know for a fact that making more money doesn't make you rich. So, so people can go, as I told you earlier, like from $100,000, they can go from $50,000 to $100,000 and still be broke. They can go from $100,000 to $200,000 a year and still be broke. They can go from $200,000 to $300,000 and still be broke. In the US, when you take households that make $150,000 a year, one out of three of them are still broke. When you peel back the curtain and you ask why is that? Well, we know things cost more, but we also know there's massive lifestyle creep, right? You get, you get around other people who are making more money and then you spend more money. And the reality is these phones are designed to get you to spend everything, right? Today, with the algorithms, there's better technology today than there's ever been to get you to spend more money. And nobody wants you to spend money once. They want you to spend money for a lifetime, right? It's a lifetime value of a customer. So, there's a battle for our income. And everyone wants a piece of it. Starts with the government. Like you go to work and you go to work at 9:00 and you actually work from 9:00 to 12:00 for taxes. Now, this is an important lesson, actually. The government doesn't ask you to budget to pay taxes. They take your taxes from you automatically. They take social security from you automatically. They're, they take the money from you automatically because they know you won't have anything to give if they don't take it from you. Then people work from 12:00 to about 3:00 for housing and food, and then from 3:00 to 5:00 for all the rest, all the rest of things. The people who build wealth in America, and really all over the world, they do something different. They keep the first hour a day of their income.
What do you mean by that?
So, what that means is whatever you earn, you could be making minimum wage, you could be making $20 an hour, $30 an hour, $40 an hour. Whatever you earn, the first hour a day of your income has to go to you. You're the first person who gets paid.
And you mean you have to save it, invest it?
You have to invest it. So, how do you invest the first hour of your day without paying taxes? The answer is you pay yourself first using a 401k plan. So, if you have a job with a retirement account, 401k plan, you sign up and you use that plan. Now, I can't just stop right there, right? Because, because it sounds so simple, like, okay, I'll use my plan. No, you have to know the formula to using your plan to be rich. We know after 40 years now exactly what you need to do if you want to be a millionaire. I can tell you how to become a millionaire starting in your 20s so that you're done by the time you're in your mid-50s. You save a little, one hour of your income is 12 and a half percent of your gross revenue. I went online today to look at what's the latest statistics with 401k millionaires. The new stats that just came out from Fidelity. There are 654,000 people in Fidelity 401k plans that are now millionaires.
What is a 401k?
Okay. Because you know, we've got a lot of global listeners. There's different types of 401k in every country.
So, in the US, a 401k plan is a retirement account. It is a retirement account that the company has set up, right? And it allows you to put money away tax-deductible. They call it pre-tax.
In most countries, you have a deductible retirement account, but it depends on the country, too, right? Like in Canada, it's a different type of plan than it is in Australia, than it is in Italy, than it is here in the UK. Almost every country, though, has some form of retirement account, and has the ability to put money away automatically. Here's the problem, and I'll use the US specifically because it's where I do most of my work. In the US, those who have a 401k plan, the ones that are millionaires, what they did, here's the formula, the exact formula. They saved 14% of their gross income. And their employer had a small match on top of that. And then how they invested the money is key because it's not enough to just put money in these 401k plans. You have to be invested for growth. And growth means stocks, right? So, you'd have to have, and the actual specific allocation in these 401k millionaires I just talked about was about 70% stock and 30% bonds. Okay. Now, what are people doing that aren't achieving this? Well, the average American saving maybe 3 or 4%. Maybe 5%. If they have a 401k plan, people who don't have 401k plans in many cases aren't even doing this. They can, they can open up an IRA account, but in most cases, they're not doing that. So the whole secret is not budgeting, not using discipline, having the money move right from your paycheck. Paycheck gets deposited automatically, and then it moves the day it hits your bank account automatically, first for retirement. Then later, we'll talk about building a security account, building a dream account. The key is that the money moves automatically. So in the United States now, there's, by the way, 24 million millionaires now. So we've seen an increase of 8 million millionaires to 24 million millionaires in the US in just 20 years. How did they do that? There's two primary escalators to wealth. That is stocks and real estate. And if you're not in stocks and you're not in real estate, you are being left behind.
When you say real estate, does that mean having a mortgage and owning a home?
It's owning a home or owning REITs?
REITs. Real estate equity, investment, trust. So, that's another way to buy real estate without actually having to own the home, but you don't get the same level of returns.
I mean, this is, um, this is one of the hot topics of conversation we've had on this show several times is many of my guests that are sort of financial advisors say that owning a home is a bad investment. I think from what I understood from the research and from reading your books that you feel differently about that.
Yeah. I mean, I couldn't feel more differently. When we look at where is wealth created in the United States and also abroad, it's in two places. It's in home equity and it's in the stock market. So, when you look at housing and you take someone who owns a home, and we'll talk about it, I know it's hard to buy homes right now, but when you look at people who own a home versus people who rent, homeowners in America, follow this for one second, homeowners in America are worth 40 times more than renters. So, the average homeowner in America today is worth over $400,000.
But this doesn't establish causation. I, that doesn't mean that buying a home made them rich, right?
It actually does. And I'm going to go through that here. So, the average renter is worth $10,000, right? So, why, why does buying a home build wealth? And how much wealth in the United States is now in home equity? Wall Street Journal just ran an article on this, came out two days ago. There's $34 trillion now in home equity in America. This number has gone up 90% since before COVID. The other money is in retirement accounts, which is 60, 70% in stocks. There's $45 trillion now in retirement accounts. So, those two things alone equal $80 trillion, right? Like when you want to go like, where are the breadcrumbs? Where is wealth being created? It's right in front of us. Now, the problem that we have in the United States, but also look, we're here in London right now. The problem we have in so many cities is that real estate keeps going higher and higher and higher and people's incomes are not keeping pace with the cost of buying a home. So, when someone comes on a show like this and says, "Look, you don't have to buy a home. It's cost more to have a house than rent." You, you know, I, I watched one of the shows. I won't say who it was. It doesn't matter. They all say the same thing. Don't buy a house. You'll be trapped. You'll have to pay, you'll have to pay real estate taxes and you'll have to pay insurance and things break. They go through all these expenses and it, it makes it sound like, "Oh yeah, if I rent, it'll be cheaper." No. Who, who do you think pays these expenses when you rent? You do. The landlord passes the cost of these expenses on to the renter ultimately. Why do they do this? Because people who buy real estate buy it for an investment. They buy it for an investment. They're not, they're not subsidizing these costs. So, it's a hard thing to hear and especially when you're young. Like I have a, a son who's 22. He's in Chicago. He's going to move to New York City. It'll be extremely hard for him to buy a place in New York when he starts working right away. Just will be. Probably won't for two or three years. A lot of young people when they move to a major city, they can't afford to buy right away. When I came out of college, like you, I was in credit card debt. I had $12,000 in credit card debt. I remember opening up my bills and having the room spin and thinking, I'm never get out of credit card debt. How am I going to buy a house? But I did. And in fact, I didn't buy a home when I was young by myself. I bought a home with a best friend. So, how did I get my first house? First house we bought was a quarter of a million dollars. We put 10% down and my best friend and I, Andrew, we split that down payment. So, we each put $12,500 down. This is how we scraped it together. The house was a complete fixer-upper and we didn't have enough money to make the mortgage payment, so we rented out bedrooms. And we had friends rent bedrooms and that helped us cover our mortgage. We scraped it together and that's what a lot of people do when you're young. But if you don't get in the game of home ownership and you rent in your 20s and you rent in your 30s, you're going to turn around in your 40s and having not built any net worth. When I wrote The Automatic Millionaire 20 years ago, two things have happened since then. The stock market has gone up in 20 years 600%.
Okay? So, if you had a $100,000, just that has gone to $600,000. If you bought a house, the house has gone up 400%. So, when you read this book with all these, there's a, a whole chapter of updated success stories. There are a lot of ordinary people that started saving $5, $10, $5, $20 a day, bought a starter house, and today they're millionaires.
So, am I not better off renting and investing in the stock market versus buying a house? Because obviously when I, when I buy a house, I'm paying a premium on the house so that I can get a mortgage. I want to bust this myth because what happens is people come on, they go, the stock, look, I can tell you right now, the stock market over the last 20 years has averaged over 10% annually. People go, the returns are better in the stock market than real estate. Yeah, but that's not an apples to apples comparison. Why you buy a piece of real estate? When you buy a home, people don't typically pay cash for their first house. They put down 20% and they borrow the other 80%. So, you take like an example of a, take a $200,000 home. $200,000 home, you put 40 grand in. Home goes from $200,000 to $400,000 in 10 years. This has happened to so many people in the last five years since COVID. There are markets all over the US where housing prices have gone up 100 to 200%. So, a person buys a $200,000 home, they borrowed 80%. It's doubled. So, they've made $200,000 in profit. They didn't put in $200,000, they put in 40. So, they got a five times return on their down payment. They go to sell their house. They don't pay taxes on the gain because when you own a home, at least in the United States, you own a home for over two years. If you're single, you get $250,000 in tax-free gains. If you're married, you get over half a million dollars in tax-free gains. You get tax deductions on the mortgages. So, what happens is people come here and they go, "You know what? You shouldn't be, you shouldn't be tied down. You need to be flexible when you're young. You don't want to have the responsibility and you should take the extra money and you should put it in a mutual fund." And you know what happens in the real world, Stephen? People don't do that. They rent an apartment that's nicer than what they can afford and they spend all their money and then they turn around in their mid-30s and they have no equity because they haven't bought anything and they also haven't saved money. It is an absolute freaking myth that people take this extra money that they could have used to buy a house and they're going to put it in the stock market. They don't do that. And that's why also, by the way, corporate America got into the game of buying up real estate all over America, houses, and building apartments to rent to an entire generation, hoping these people never buy this. Like 10 days ago, Trump came out and basically said he wants the institutions out of buying up all the homes in America. Why does he want to do that? Because he, because he recognizes how serious of a problem it is to have a generation of Americans who are renters. I'm telling you, when you look at average Americans, average, I'm talking about ordinary Americans. When you look at where their wealth is, it's in home equity and it's in the stock market. And this is the last thing I'll say, generational wealth is created for better or worse through home equity. So, when you look at why, you know, you asked the question about causation, if a family doesn't buy a home, the likelihood the next generation can buy a home is very low because it's when someone dies, the money that is in the house, that home equity is often what transfers to the next generation, helps the next generation buy a house. I was looking at some stats here because I want to, what I want, I wish I could sit down all of the guests that have been on my show that have had a difference of opinion and have said that buying a house is a bad investment.
It could be a really interesting conversation.
It would be a really interesting conversation. What I've done as an alternative to that approach is I've pulled up what they've said and I'm going to give you some of the things they've said just so, so you can rebuttle them, um, and have your say on them. One of the things that they often say is that long-term real inflation-adjusted home price appreciation in the US is about 1% annually, and one of my guests cited Robert Shiller as the evidence of that. After maintenance, which usually equals 1 to 2%, um, property taxes, which equals about 1%, insurance, and transaction costs, the net real returns approach roughly zero on average. So, when you say housing is a great investment, are you referencing the gross appreciation, which is the, the, the total appreciation, or the net returns after taxes, maintenance, insurance, and selling costs?
So, when you dig into these kind of numbers like this, what they are is they're numbers, but they're not real world, right? And so, like, when you, when you talk to someone who owns a home today and they've owned it for 20 years, and you ask them how much of your net worth is now in the equity in your house, over 50% of their net worth is in their house. You will see people on your YouTube channel that literally, if you read the comments, and I'm sure you do. I do. Where people say it's not true. There was, I read a comment yesterday on your YouTube page. All I know is I bought a house and it's gone up in value three and a half times. And the rent when I bought the house was $1,200 and the rent today to buy that, if I had that house, if I was renting it, would be $4,000. So, the thing is, you have to understand is that rents always go up, Stephen. Like I lived in New York City for 18 years. When I moved to New York City in 2001, a really nice apartment, a nice apartment was like $6,000 a month. When I left New York, that same apartment was $25,000 a month. Follow the, follow the insanity of that math. Now, that apartment went from being a $2 million apartment to a $5 million apartment. So, I could have, [clears throat] been renting it, but in my case, I owned it and it went up in value $3 million. So, I have friends who have been renting in New York for 20 years. They have built no net worth. I have no vested interest in this conversation. Meaning, I don't sell real estate. I'm not a real estate agent. I'm not selling real estate. I've just seen in the real world how people have built wealth. The, the, the McIntyres in this book, The Automatic Millionaire, when they came into my office and they were worth $1.8 million and he was 52 and able to retire having earned an average of $40,000 a year. All their money wasn't in the stock market. They had bought a home in San Leandro, California, what he, what they called a middle-class neighborhood. Their home at the time was worth about $300,000. They had paid their mortgage off and they had bought one more house on their street. They rented the first house. They bought a second house on their street. They paid that mortgage off. And so they owned two homes free and clear. One house they got income from. One house they lived in with no debt. And then they had saved money in their 401k plan.
So, if I was a young person or not even a young person, a middle-aged and older person who took my down payment that I was going to pay into the house, let's say it was, say my down payment was $20,000 and I put that into the S&P 500 instead, over the long run, won't that grow larger than the total home equity potentially?
Here's why the index fund theory doesn't work. You can't live inside an index fund. You, [snorts] can't live inside a mutual fund. You have to live somewhere. As long as you're alive. Here's what people should do. Take a look at what you're paying in rent. Now, ask yourself a question. If I am paying $5,000 a month in rent, which lots of people are, right? Do you know people paying $5,000 a month in rent?
Yes.
Okay. So, they're paying $60,000 a year. Let's take that number.
Yeah.
So, over 10 years, they're going to spend $600,000 in rent.
Yeah.
If the rent doesn't go up.
Yeah.
In 20 years, they're going to spend $1.2 million in rent. If the rent doesn't go up. In 30 years, they will have spent $2 million in rent if the rent doesn't go up. But the rent does go up. So, the question you just have to ask yourself is, am I going to take all this money that I'm spending on rent and never build anything? And if you really believe that renting is better than owning, then you should still consider the idea of buying something that somebody else rents. Because I promise you, somebody's getting rich in the transaction. If you're the renter, you're not the one who's getting rich in the transaction of renting. It is a great short-term solution, renting. [snorts] It is not a great long-term wealth-building solution.
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