The June 24, 2013 issue of Forbes entitled The 2013 Investment Guide Special Issue is a must read for parents and teachers who want to educate our youth about how to achieve financial independence. The cover accurately describes the content of the issue: “money magic top secrets from wealth wizards.” Of particular note are the 20 brief profiles and suggestions from some of America’s foremost experts on wealth such as Warren Buffett, Jack Bogle, Ron Baron and Robert Schiller. Each of these profiles is no more than a few paragraphs and contains just two or three major insights to becoming wealthy. This material is beautifully written and edited and can easily be comprehended by even middle school students.
As one example of this material, the editor who interpreted Schiller’s definitive research on residential housing, stated that “the American dream of building wealth through home ownership is a fallacy.” Schiller is quoted:
I’ve documented that the home prices in real terms didn’t increase from 1890 to 1990. [But] bubble thinking . . . it’s still fresh in our minds.
My own research findings are congruent with Schiller’s. In Stop Acting Rich I mention that it took the equivalent 100 high income producing homeowners [with annual incomes of $200,000 or more] who live in homes with a market value of $1 million or more to produce just 65 millionaires. Millionaire, in this context, refers to those households with investments of $1 million or more. This includes everything from stocks, equity in private businesses to income producing real estate. It does not include equity in one’s home. In contrast, for those millionaires who live in homes in the less than $300,000 range, it took the equivalent of only 100 high income producing homeowners to produce 211 millionaires.
. . . wealthy households are much more highly diffused geographically than are high-income-producing households. There are nearly three times more millionaire households (1,138,070, or approximately 28.3 percent of the total, versus 403,211, or about 10 percent of the total) living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1 million or more.
In summary, my research indicates that one’s ability to transform income into wealth is inversely related to the market value of one’s home as well as those of one’s neighbors. For most people in this country, owning a home is superior to renting. But the key to building wealth is to live in a home that one can easily afford. Most millionaire next door types whom I have studied report that they never purchased a home that was more than three times the value of their annual income.
3 thoughts on “Forbes Article-A Required Reading Gem”
Nice article as always.
Although I find that what you take from it depends on what one classifies as assets, investments or wealth.
If this article did ‘include equity in one’s home’ as such, the results of the example would be vastly different.
I recall learning that a home was an inflation hedge. What ever you put into it you got back (on average). In my experience after three homes that still holds true.
Dr. Stanley expounds on why he doesn’t include home equity in net worth in some of his books. But suffice it to say, for the equity in your home to be a real asset, you have to be able to extract it.
If you would:
1) re-read the quote above from Robert Schiller and
2) recall the recent mortgage crisis we went through, home values do not always go up, and homes are not always easily liquidated assets.
The point is, if you want to be rich you are much more likely to get there buying an easily affordable home than you are by stretching yourself thin with mortgage payments because your home “is an investment”.