This begins what I hope will be a series of book reviews. Let's get started with the book that got me so mad. It's called Millionaire By Thirty: The Quickest Path To Early Financial Independence.
Millionaire By Thirty? More like: Potentially Lose Your Shirt In The Next Housing Bubble
I was hopeful when I picked up the book. Look! it has "financial independence" in the title! I like financial independence! But I immediately became skeptical.
Here, see what you think. This is from the first page of content, the author's note:
This book is not like other personal finance books out there:
- It does not instruct you to cut up your credit cards in a race to be debt-free. Why? Because being totally debt-free can actually cost you money.
- It does not encourage you to send in extra principal payments against your mortgage. Why? Because your mortgage can be one of your biggest friends in achieving wealth.
Are you skeptical yet? As you can see the book starts off anti-Mustachian, and it just keeps heading in that direction.
- It does not discourage you by suggesting ideas like socking away the cost of a latte a day for forty years to become a millionaire. Why? Because there are much better ways to speed along the path to financial freedom.
The first few chapters are alright. "Mapping Your Future", "The Millionaire Mindset", "Pay Yourself First". Kind of wishy-washy to me, kind of repetitive. The anecdotes feel contrived. For example, chapter one begins: "Do you feel like you're in a fog when it comes to your finances?". The next paragraph is about a time the authors visited San Francisco and it was foggy. Hooray for metaphors!
But nothing bad yet. I was still with them when they recommended buying a home instead of renting. Sometimes you can find house where the mortgage is about what you'd pay in rent, then part of the payment you're paying yourself and the other part is tax-deductible. That sounds good to me. But I'll admit, it's riskier than renting. The authors don't mention that. They also recommend making the smallest possible down payment. Why? Because you can get a higher return on that money elsewhere. "Equity has no rate of return" they tell you. Isn't making pre-payments on your mortgage like making an investment with a guaranteed rate equal to your mortgage rate? No, they say, it earns you zero (I should point out that they are wrong).
Chapter 7 is titled "Real Estate Equals Real Wealth". It's about how every few years (because housing prices always always always go up, right?), you should refinance your home, take out a bigger mortgage, and invest the difference. The sometimes-implicit sometimes-explicit assumption, in order for this strategy to work, is that you can earn a guaranteed rate of return of at least your mortgage rate. This is a big assumption! There are no such investment opportunities that are liquid, safe, with a high rate of return, as they claim.
They also really really don't like paying taxes, so much so that anything that's tax deductible is awesome. Here's the way I see it though: just because mortgage interest is tax deductible doesn't mean I'm not still throwing money away on interest. You're just throwing away less money in interest. For example, a mortgage at 4.5%, when you're at a marginal federal income tax rate of 25%, is like paying an interest rate of 3.375%. Pretty good, but it's not like they're giving you money. You're still paying interest of 3.375%.
They talk about how banks arbitrage by borrowing at low rates and lending at higher rates to make a profit, and that you can do this too. But they neglect to mention that this is risky business! Banks are operated by professionals, and even professionals can get it wrong (see, for example, the 2008 subprime meltdown). Seriously, if you do a cash-out refinance to pay 5% on your mortgage, and invest the money in the stock market expecting a consistent 8% return, you are fooling yourself and you're going to lose your shirt one way or another. Not to mention that most of the lending banks do is making mortgages to homeowners like you. You expect to turn around and get a better rate of return elsewhere? Ugh. Dummy.
I'm not going to go through some of the other points they make because it isn't worth it. If you do read this book, read it as a cautionary tale of what not to do, and use it as an exercise to debunk personal finance fallacies.
Ironically, the first edition of "Millionaire By Thirty" went to press in April of 2008. At this time housing prices were dropping (see above chart) and the worst was yet to come. The authors could scarcely have been more wrong in their advice.
One last thing I'll leave you with. I briefly mentioned in an earlier post the guy we bought our house from. He had over a dozen houses in the area, and purchased them in the early 2000s. We bought our house at a lower price than comparable houses partly because it wasn't renovated and partly because he had to get rid of it because he didn't have renters and he couldn't make the payments. In fact, in our cluster, the two lowest sale prices of the past two years have been from this same guy, and the other one was a foreclosure. Judging from the HUD-1 form from our settlement, and seeing that the guy owed about $70k more than he bought it for (and thus got zero dollars from selling the house), I'd venture to say he did exactly what the authors of "Millionaire By Thirty" recommended. Word on the grapevine is that he was going bankrupt.
Pretty bad advice if you're trying to come out ahead.