In this blog I will list some of my top Quora answers for the last few days, which focused on many interesting subjects.
Table of Contents
In the answers shared today I focused on:
- Is it possible to be financially free without being a millionaire? If so, what are the options?
- Why do people take financial risks? Or perhaps everybody needs to take financial risks because taking no risk is impossible?
- Why is it possible for people earning 50k to seem like they are rich?
- Which country has done the best in terms of the economy with coronavirus? South Korea? China? New Zealand? The answer might surprise you.
- Most people believe that debt is bad, but is all debt really bad? If so, why do many successful people, businesses and governments use it? Clearly risks remain when taking out debts, so should most people avoid it entirely, or use it strategically?
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.
Can you be financially free without being a millionaire?
It depends on a range of factors. The most important ones are:
- Your living costs. If you are living in a very cheap city or country, you can live off a portfolio which is worth hundreds of thousands and not millions. For example $600,000 = $2,000 a month (24k a year) based on the ultra conservative 4% rule. That is liveable in more countries and cities than you might expect. The academic that created the 4% rule has also updated his calculations and suggested that most people can take out 5% or more per year.
- If you have other sources of income – It is hard to value business assets. It isn’t like an ETF, stock or bond. They can’t be (usually) sold quickly. Yet if you earn income relatively passively, you can be free without needing loads of capital. Simple example. Let’s say somebody is an Amazon affiliate and they are on Google page 1 for countless terms. They get affiliate commissions for books or other Amazon services. It takes them 2–3 hours a month to maintain the website, or they outsource that work. In this case, somebody can earn enough to live, without being a millionaire on paper.
In reality though, having more capital still pays, because you don’t always want to rely on “rented real estate”.
What I mean about that is that platforms like YouTube, Amazon and countless others can change their policy.
A few years ago, as an example, YouTube changed their monetisation rules.
It resulted in some people losing a lot of money.
In addition to that, things can always change. Inflation is relatively stable in most developed countries – typically 2%-3% most years.
In some fast developing countries, in comparison, the cost of living can shoot up more quickly for obvious reasons.
The point being, it might be possible now, in 2020, to retire off a $500,000 portfolio in countless emerging markets. That might change in 2030 or 2040 however.
So, the simple answer to your question is yes, but it is more difficult, and having more capital and your eggs in numerous baskets makes sense.
Best to hope for the best and be optimistic, but plan for the worst.
Why do people take financial risks?
One of the main reasons is there is no such thing as a risk-free option.
People who think they are taking no risks are often taking more risk.
Let me illustrate with a point. How many people have lost money from buying and holding the S&P500 for say 35 years?
Zero. Not one person.
How many people have lost money due to depreciations in currency and inflation?
I would estimate billions. I am not just speaking about extreme cases like Germany in the 1930s or hyperinflation inbound Zimbabwe.
I am speaking about more recent trends. Since 2008, anybody that has left their money in the bank in the US, UK, Mainland Europe and Japan has lost money to inflation.
Do the maths. Average UK inflation, to give one example, has been 2.7% since 2008 according to the Bank of England – Inflation calculator.
The average saver has been lucky to get 0.7%. Losing 2% to inflation over 12–13 years = about 26%-27% compounded.
A big loss. Just less painful, obvious and in your face as a direct loss.
Hence why inflation is often referred to as the silent killer of wealth.
Another point to make is that almost any wealthy person has taken calculated risks.
Most people go from one extreme to the other:
- Be very greed, too cautious and aggressive and thinking they can get rich ultra fast. This is maybe 10%-20% of the population.
- People who are terrified of losses. This is 50%+ of the population.
People who can take calculated risks consistently have a major advantage.
Of course, it depends on your situation. If you are 22, you should, take more risks than if you are 62.
If you are already wealthy, there is a strong argument to be a little more conservative, but not ultra-conservative.
But the basic fact reminds that fortune tends to favour the brave.
As an immigrant (now citizen) with a pretty decent job making $150k, I am trying to understand how natural born Americans have so much money to spend. People with 50K jobs seem to live like kings and queens. Is it inherited money they are spending?
I have never lived in America but looking at the statistics, some of the same trends exist as in other developed countries.
In most developed countries, and many developing countries for that matter, it is possibly to live above your means due to a range of issues.
- The cheapness of debt and long mortgages.
- The increases in households earning two incomes. Coupled with the first point, this means that many people earning 50k can live in fancy houses if they leverage up, together with their partner. This has been given a new name – “house-or”. People who live in giant houses but have little disposable incomes.
3.Consumer debt and staggered payments. Look at cars. In some countries, getting a luxury car over 3–4 years on credit isn’t as easy, cheap or efficient.
4. Sometimes inheritances and other one-off sources of money. A small percentage also have family support.
5. The internet has made buying “stuff”, or at least a lot of things, cheaper. So, some people can consume a lot and not get into debt.
Of course there are many people who earn more than 50k, and GDP per capita is closer to 70k in the US now.
Regardless, income, consumption and wealth aren’t always linked.
Some wealthy people act in a very modest way, and live humbly, whilst some people on average incomes act flash.
It often depends on the person and their values. What is clear though, is that in modern society, it is possible to “look rich” even if you are not.
Social media doesn’t help either, as people can now not only show off to people next door, but people living miles away.
I remember when I started working full time (at 16) I was into pool in the UK.
I went to bars (yes it was possible to get into bars before the age of 18 until relatively recently) and practice for a bar team.
At that time, there were 2–3 players who came in daily, and spent a lot of money.
Only later on did I realise that they were always living on the edge, and were only one unexpected disaster away from being in debts.
What country has handled the coronavirus pandemic efficiently? How and why?
There is a country which is forgotten for political reasons, as it is self-governing, so only a de facto country.
I will give you a clue
- They have never locked down
- They have had only 7 deaths
- They will grow faster in 2020 than 2019. Yes that isn’t a typo.
- They will grow faster than Mainland China for the first time since 1991.
- It is democratic and has been for years, with the vast majority of the population supporting this.
- Their GDP per capita reached developed country status relatively recently, despite being dirt poor in 1949.
- The population speaks Chinese as a first language
No lockdowns. No downturns. No big authoritarian moves. Growth.
I am speaking about Taiwan of course:
The second best country? Maybe South Korea. No lockdowns and the economy will only shrink a bit this year.
From a purely health point of view? Maybe New Zealand. You might be seeing a trend here.
Don’t let anybody fool you that you need an authoritarian government or response to get the best outcomes, or that “Asians” have a different culture so don’t like democracy.
The population of Taiwan and Korea has been equally as disciplined as any authoritarian country.
Even the US, for all the issues, is only 3%-4% below its pre-coronavirus GPD height, and should fully recover by 2021.
Is it better to live debt-free?
For the majority of people, the answer is yes, because the types of debts that are taken out are destructive.
A great example of that is the credit card. Most credit cards charge up to 20% per year, with 15%-18% being normal.
Some charge much more:
Despite this, it does depend on the debt itself.
Here are some examples of why not every debt is bad
1. Mortgage debt on a primary residency. It is a misconception that renting is always dead money. Sometimes renting can be cheaper. Yet what is true is that leverage (debt) can improve your returns on real estate.
2. Debt on buy-to-let homes. Like the first kind of debt on a primary residency, you can leverage up on second homes. It has gotten harder though. In the 1990s and 2000s, it was relatively easy to do this in many countries. In recent times, however, many governments have made it more tax-inefficient to be a landlord, and getting credit has gotten more difficult.
3. A business. If debt is costing you 2% from the bank, and you can invest it in ads, production or any other area, then it will more than pay for itself. Most of the biggest firms in the world use debt to grow. Just like real estate though, it comes with risks.
4. Student loans. In many parts of Europe and the UK, student loans are only a debt on paper. Often times, they are more like a graduate tax, whereby you don’t need to repay it if you lose your job or are lowly paid . Therefore, it works on the same progressive principle as tax incomes. This makes it the most benign form of debt perhaps for most people, although I do understand that the American system works differently .
So, the bottom line is, you need to know what you are doing with debt.
It isn’t true to say that all debt is bad. Most wealthy people and businesses and for that matter governments use it.
Culturally speaking, we have been taught to be afraid of debt and assume that it is always a bad thing.
But it works on the way up in business and real estate, and can kill you on the way down.
Even many professionals can’t deal with that risk in a proper fashion.
Every time there is a big downturn, like in 2008–2009, a bunch of professional and non-professional real estate investors and business people go bust.
That means that debt, if used, has to be controlled.
In the article below I focused on the following areas:
- Which financial moves have I made that have defied conventional wisdom and paid off? Do we need to make a distinction between investing and business, which are two different domains after all?
- Which industries will never be the same again due to the global pandemic? Perhaps every industry or will some be impacted more than others?
- Should lottery winners invest their winnings straight away or seek advice or knowledge first?
- Many people know the expression that “you shouldn’t put all your eggs in one basket”. Yet are there occasions when diversification can increase risk, rather than lower them?
Click below to learn more.