http://www.crestmontresearch. com/pdfs/Stock%20Economy.pdf

They have some other neat stats on the site if you are into that sort of thing.

I put a space before com, othewise it didn’t seem to work?

Comparing GDP and investment returns is not apples to apples. Stock market returns long term are about triple GDP, which is to be expected.

@Gary “If a country is growing at 2% or 3% / year, how is the “average” person in that country supposed to grow their investments by 10% (or even 5%)? ”

It may seem obvious that if an economy only grows by 2-3% (after inflation), stock markets must be limited to this, but that is a misunderstanding. GDP is based on total production, which would be the sales of all companies. The stock market is based on a multiple, say 15 times, the profits.

It sales grow by 2-3% plus inflation, profits normally grow at a much higher rate. This is because all companies have fixed costs. For example, if a company has half its costs fixed and half variable, a 5% sales increase would normally increase the variable costs by 5%, but not the fixed costs, which would mean the profit would increase by 10%. The typical stock prices is a multiple of the profit.

This is why stock markets grow far faster than the economy.

Ed

We have the same Guilty Pleasure! lol… Is Pad Thai one of your favourites? lol..

I would like to know that too. The article calls the 5% return a conservative estimate. How am I supposed to make that much? Or even more? In the world we live in today, I don’t think many people can get there. I know I can’t. And whenever I ask the question, I get no answer.

It’s misleading when you think that it’s going to make you rich. It’s misleading to tell a person making 20k / year that ““regardless of the size of your paycheck, you probably already make enough money to become rich”.

It’s misleading to assume stock market growth rates that are triple the GDP and then to ignore inflation when we just spent 15 years at a steady 3%. He basically presents impossible numbers to under-educated readers. The only major countries growing anywhere close to 10% are India and China. And that’s post-inflation. None of the G8 countries have experienced even 5% GDP growth in the last few years. If a country is growing at 2% or 3% / year, how is the “average” person in that country supposed to grow their investments by 10% (or even 5%)? Sure, some people will pull it off, but how can everyone?

It’s misleading to use compound growth numbers on non-compounding investments. Non-dividend stock growth doesn’t “compound”. It’s constantly going up and down. At best you hope it grows enough to “be there” when you need to cash out. (maybe you’ve noticed the 12-year death spiral on US stocks?)

It’s misleading to ignore inflation when we know (based on scientific research) that people are very bad at comprehending numeric inflation over long periods of time.

It’s misleading to tell people that they should “pay down their mortgage fast” when the numbers don’t really support this. In fact, there are lots of good reasons not to pay down your mortgage right away. If you’re successfully saving that 18% of your income and you’re doing continuous professional education and you still find yourself with money at the end of the month, then maybe it’s time to start paying down the mortgage. But the % of the population capable of doing this is very small.

Look, don’t get me wrong, I save 10%+ of my income and I’m making well over the median number. But I don’t in any way believe that it’s somehow going to “make me rich”. At best it’s provided a small buffer for a big life event. I’ll probably be able to afford the retirement I want, but it’s definitely nothing like the 25-year retirement he’s selling in the book!

And remember these would be with after tax dollars so it removes that consideration.

Or perhaps think of it this way – you make $50,000 per year and you get a 2.5% raise. After taxes perhaps you net $750 of the $1,250 raise. Well by eliminating your daily “insignificant” expense you have provided a similar benefit to a better than inflation raise.

I agree with many of your points. It’s nothing new or original because it’s an older book. I agree that he exaggerates estimated rates of return which he believed more likely to come true at the time of publishing. For anyone whose read the Wealthy Barber lately, it’s even more out of date!

The thing I like about David Bach is that he has a passion for personal finance and communicates clearly. It’s simple personal finance. I simply don’t see how saving 10%-18% of your income for the future is either harmful or misleading.

Glaring problems:
– The book contributes basically nothing that is “new” or “original”.
– All of his book numbers are based on unrealistically high returns. If the market is paying 10%, what the heck are you doing paying down your mortgage quickly.
– He practices lots of bad “inflation-free” math while still talking about retirement. Talking about “dollars” and then “30 years from now” is just a poor way to explain it. We know that people are bad at correctly fathoming those types of numbers.
– Paying down a mortgage quickly is actually a large risk for many people, especially in 2010 in the age of the highly mobile worker. Let’s face it, if you have 5k in your pocket with a mortgage on one side and an empty emergency fund on the other, you put the money in the emergency fund. Houses are very illiquid and this current crisis strongly demonstrates the problem of being “pinned” to a location.
– He relies heavily on the 401k as an investment tool. The RRSP is a very good tool, but the 401k is an anemic tool for many people. It’s far from automatic, often carries a higher overhead (costs and personal time) and lots of employers are doing only small matches these days (if any).
– He also makes mistakes in the way he calculates 401k growth.
– He relies heavily on stock market investments ignoring the fact the average worker will see significantly better return by investing in education.
– He regularly insists that “regardless of the size of your paycheck, you probably already make enough money to become rich”. This is trivially false for most definitions of “rich”.
– His suggestions for wealth creation involve saving large amounts of your personal income. It’s the same problem as the wealthy barber.
– His “Latte Factor” concept completely ignores the fact that now you’re not getting your caffeine. He’s constantly “eliminating waste” without quantifying the waste. In fact, his whole “Latte Factor” concept assumes that you have enough that you are wasting significant amounts of resources that should instead be scuttled away.

Instead of talking about the things you could be doing with your money, or even aligning your monetary spending with your priorities in life, he just focuses on telling you to stop drinking not lattes. Note that he never suggests that you make lattes at home, just that you stop spending the money all together.

This book isn’t just bad, it’s harmfully misleading.

Its not a matter of being safe, I am a responsible person.
I work 6-7 days a week and only ‘go out’ every couple weeks. I will be 25 soon and I have always known planning for the future is more important (for me) than just having as much fun doing whatever I want. There’s a reason 90% of people my age don’t have over $5k saved.

That being said, there is a cheap alternative to everything you deserve. It may not be quite as appealing as the latter (or the latte) but it can still fulfill your ‘gotta do it!’ fix.

Jk, I reside in Vancouver as well. And being as expensive as it is, by making small sacrifices and being ‘frugal’, you will find its not so hard to save money. Although many breakfast places cost $12+ for a meal, there are a good few that are under $8 and even under $5 for the same quality of food guaranteed.
Don’t have to eat at Colby’s steakhouse every night ;)

I am indeed a coffee drinker but fortunately my employer is providing semi-strong coffee that will take care of my fix.

Discipline and sheer will power is the key!

Even safer is wait till you get home to drink.

I will also never drink at clubs/bars, as $5-9 for 1 drink is a huge waste of money. Why not buy from store and drink at home before going out?

I do eat out sometimes, but not when I don’t have food at home. This puts the idea in your head that when you have no food, you have to go out and eat. Making food at home is enjoyable (more so with someone else), maybe because I cook for a living?
This also means I am able to eat at work, for free, meaning I save a tonne of money!
$8/day * 6 days * 52 weeks = Nearly $2,500/year just on 1 meal a day.

But some of you argue that you would rather keep eating out and buying that coffee? It’s a low risk investment, that pays high.

Ps. I agree 5% is a conservative number. There are many places to invest that will yield a much higher Percent. They are higher risk than a GIC or Dividends, and you need to keep them for more than 1 or 2 years.

Till then,

Jean

Great article. I agree that spending on the things you really enjoy is how you should use your money (assuming you can afford it).

I can add to your list of ways to save money painlessly, so you can spend it on what you enjoy. Here are the 4 most expensive wastes of money we commonly see:

1. New cars – You can get a reliable used car for half the price if you buy 2-4 years old. The depreciation in years 1 & 2 is huge. The rule of thumb is that the depreciation in the first hour you own a car equals all repairs & maintenance for the life of the car.
2. “5-year Fixed Mortgage Trap” – The average Canadian wastes $23,000 after tax during their life because they fell into the Trap and took a 5-year fixed instead of a variable or 1-year (based on a study by Manulife). I believe that every single Canadian that every took a 5-year mortgage wasted money (based on a study by a mortgage broker comparing 1-year to 5-year mortgages since 1950).
3. Credit card interest – You have this right.
4. Too many renovations – Many people spend far too much on renos and don’t realize that usually only 20-40% of the cost is added to the value of the home (unless you DIY). Most of the cost is for your personal use.

The new car and renovations might be something you really enjoy, so perhaps spending money on it is still worth it to you, but these are expensive and common ways to waste money.

Ed

S&P/TSX Composite Total Return Index (including dividends but pre-tax and pre-inflation)
* 10 years to August 31, 2009 – 9.41%
* 20 years to August 31, 2009 – 8.86%
* 30 years to August 31, 2009 – 10.76%
* 40 years to August 31, 2009 – 9.77%
* 50 years to August 31, 2009 – 9.80%

Subtract 1-2% for MER
Subtract 2% for inflation
Subtract 1-2% for taxes
Subtract 1-5% unless you are 100% invested in equities

= a whole lot less than 5% . . .