Screw the American Dream, #Retire Rich Instead

One of my favorite bloggers/authors – James Altucher – reminded me via a recent blog post he wrote, that people who write, should tell stories.

So here are the stories of two of my friends who bought houses in their early working careers, because that’s what the man told them to do... chasing ‘the American Dream,' with home ownership at its very core, as a foundation for wealth creation.   

I prefer to call it a classic middle-class debt trap, because as is the case with all other things middle-class, debt is the ball and chain that keeps you tied to your cubicle, day-after-day, year-after-year!

My friends are well educated, both having read and completed post-graduate studies with majors in business management.  Both enjoyed above-average incomes for 25+ years.  They were married, one with two kids.  The other – along with his spouse – adopted underprivileged children and cared for the kids, as if they were their own.  Good, average, ordinary, salt-of-the-earth, middle-class Americans.

One bought a house in 1989 for $226,500, worth an estimated $700,000 today.  The other bought a similar-sized house in 1986 for $285,000, worth about $1,000,000 today.  Justification for the difference in estimated resale price... the usual mantra: location, location, location…

Both would like to sell because a 4-5 bedroom house is not suitable for 'empty nesters.'  The illustrative resale values above obviously assumes they would each be able to find a buyer. Purchase prices & estimated selling prices courtesy Zillow.

Let’s conservatively estimate that over 25 years, the total, additional carrying cost on the house (interest, property tax, maintenance, etc.) was about $150,000 – reasonable?

Take a good look at the chart above.  The stodgy old DOW (blue line) delivered a 730.8% return on investment (ROI) over ‘the same’ period.  The orange line shows the S&P 500 performance.  Shaded vertical lines on the graphs indicate U.S. recessions.

An investment in DOW stocks, instead of a house, would have delivered:

1. $226,500 (purchase price) + $150,000 (‘operating costs’) = $376,500.  Invested to deliver 730% over the period:  Present Value of $2,748,450
2. $285,000 + $150,000 (‘operating costs’) = $435,000.  Invested to deliver 730% over the same period: Present Value of $3,175,500

You may counter and suggest that my simplified calculation doesn’t take tax breaks (e.g. for mortgage interest) into consideration.  You could also suggest (as middle-class people often do), that “one has to live somewhere.”  Neither of these – or other, similar arguments – devalues what I’m demonstrating.

I can offset tax breaks that you may have benefited from against other costs that you had incurred, e.g. filling your home with worthless stuff like furniture (as measured in investment value terms, and not usefulness or utility of the products).  Consider the additional things that you needed like lawnmowers, snow blowers, window coverings, upgraded kitchens and bathrooms… no contest in assessing these hard costs vs. tax savings on mortgage interest.

Debt includes mortgages, car leases, student loans (sometimes for multiple generations), credit card debt, and more.  That debt is the only thing that causes you to spend your life behind a cubicle, doing work that you don’t enjoy, 'locked down' daily in a place you may despise, working with and answering to people you may not even like, etc.  Dreamily spending hours of your life looking out the window, if you are fortunate enough to have earned a window seat.

You didn’t need the fancy house you live in; you simply wanted it and bought it with ‘other people’s money.’  The people who lent you the money are getting wealthier and wealthier, selling your debt to others and investing your savings (if you have savings)… while you dutifully pay off your loans to those same masters.

More importantly, consider this: if you owned stock, instead of a house, you would not need to find one buyer wiling to pay you the highest price for your used home.  You could simply sell it at any time; generating the cash you needed at that time, when you needed it.  No open houses, no dealing with realtors, no fixing and cleaning, etc.

But, you may yet ask what my actual point is, and that would be a fair question. 

It is simply this: debt is the middle-class trap.  The wealthy use debt (leveraging) as a means to make money... not to burden themselves with recurring, ongoing costs!  That is one of the reasons why the so-called 1%ers become ever-wealthier, and you don’t.

While you continue to use debt to fund a lifestyle more lavish than what you’re able to afford, keep that ball and chain within sight of your cubicle, because you’re simply screwed… perhaps even for life!