Millionaire by Thirty: The Quickest Path to Early Financial Independence was written by Douglas R. Andrew and his two sons, Emron and Aaron.
The book takes a different approach than many financial authors in that it doesn’t advocate cutting up your credit cards, paying off all your debt, or discouraging you from drinking a latte every day for forty years. Apparently this is a slam against Dave Ramsey and David Bach, both of whom are recognized as knowing a thing or two about personal finance! But many people arrive at wealth from different directions and this book certainly advocates an approach that many in the personal finance community will find uncomfortable, especially in the current credit and real estate climate.
The book uses a lot of anecdotal evidence, story-telling, and reminders that Emron and Aaron, ages 26 and 27, are millionaires because of information used in the book. Peppered throughout are conversations that the sons have had with classmates and friends, none of whom seemed to have a clue about how their money works. Supposedly, the boys were able, in only four years, with incomes of only $30,000 each, to amass personal net worths in excess of $1 million each and assets in excess of $1.5 million. They also claim to have passive income streams of $3,500 per month and portfolio incomes of $1,000 per month.
The book is divided into ten chapters:
Chapter 1 Wake up and step out of the financial darkness
In other words, be open to some different approaches to wealth.
Chapter 2 Mapping your future
Mostly Chapter 2 was a big pep rally, working to convince the twenty-somethings that they are in a great position to make something of themselves. I agree.
Chapter 3 The millionaire mindset
This was the chapter of the three point list. Nothing new here! With money, you can either spend it, lend it, own with it.
Chapter 4 Pay yourself first
This chapter had some potential because the premise is sound, but it’s sample budgets were completely unrealistic. On a $3,500 per month income, only $450 to pay all state tax, Federal tax, local tax, Social Security, Medicare? Um, no. Just the Social Security and Medicare would be over $250, leaving only $200 to pay state and Federal taxes.
Chapter 5 Don’t give Uncle Sam gifts
Don’t allow the government to withhold too much money in taxes during the year, itemize your taxes aggressively, and invest only in tax free or tax deferred retirement plans.
Chapter 6 From renter to homeowner in one leap
Borrow, borrow, borrow from anyone you can find so you can get into your first home. Borrow the down payment from the seller, parents, friends, relatives, or anyone you can and then get an interest only mortgage.
Chapter 7 Real estate equals real wealth
Refinance your home as often as possible to “pull put” equity for investment into more real estate. Acquire as many properties as possible with this method and continually refinance to gain access to those equity dollars.
Chapter 8 Think smart now, retire smart later
Your IRA and 401(k) may not be the best investment vehicles to save for retirement. Investments should pass the “LASER” test, liquid, safety, and rate of return. Only one investment meets all these: maximum funded, tax advantaged life insurance contracts.
Chapter 9 Insure your future financial well being
This chapter went into detail on the advantages of those maximum funded, tax advantaged life insurance contracts.
Chapter 10 Touch all the bases
Wealth is more than money so spend time with your family. Seek clarity, balance, and focus in your life. Abundance creates more abundance.
What I liked
The book starts on solid footing by suggesting that recent college graduates should not be in a hurry to pay off their student loans, because the rates are usually low and the interest deductible. Okay, that makes sense. The authors also recommend buying a home, instead of renting, because mortgage interest is deductible and houses usually appreciate. Usually, but not always. I would personally advocate buying a home, but in a far different way.
What I didn’t like
The authors seem to forget that when a home is refinanced over and over, there are significant fees as well as the possibility of the home losing value and the mortgagee being “upside down” in a home, owing more than the home is worth, sometimes much more. I’m sure you can still find the interest only mortgages the authors advocate, but at what transaction costs? The examples used in the book mention no transaction costs, like fees for continuously refinancing, or points on mortgages.
Arguing that real estate is a great way to become a millionaire reeks of late night infomercials. They advocate buying numerous properties, arguing that real estate is safer than stocks. Try telling that to the huge number of people facing foreclosure. Safer? The current housing and credit crisis has taught many people that real estate isn’t entirely safe.
Let’s just say you borrow $15,000 of $30,000 to use as a down payment to buy a $300,000 home. If it appreciates 10 percent in one year — don’t laugh, the book uses this growth percentage number quite a bit — then, in theory, you have made 200 percent on your money (except that you still have to pay back that other $15,000). But as the theory goes, you put down only $30,000 (10 percent of $300,000), and the house, on paper at least, is now worth $30,000 more than you paid.
The National Association of Realtors says on its Web site (see page 23 of the pdf file) that typically “home values rise at the general rate of inflation plus 1.7 percentage points.” Now, since 1926 inflation has averaged about 3 percent/year. If we use the Realtor’s numbers, the average house price has risen only about 5 percent a year, and that ignores the current real estate downturn! By comparison, stocks over that time have returned 10.4 percent, annualized, and bonds 5.5 percent.
They also assume that people can easily find an interest free mortgage with only 10 percent down. Assuming you were able to find this mortgage opportunity, the authors advise you to take that $30,000 out of the house, by refinancing, and use the profits to buy another house or to fund another investment.
If this book had come out in 2006, a lot of this would have seemed to have made sense, but because the economic, credit, and real estate climate has changed so much, these ideas seem risky and wrong.
Timeless advice is timeless for a reason.
It doesn’t change under different market conditions and doesn’t rely on timing the market, any market, even the real estate market.
1. Spend less than you earn.
2. Avoid high interest debt on non-appreciating assets (sometimes this includes real estate).
3. Set aside money for emergencies.
4. Invest for the long term in reliable, trusted, understood investment vehicles using tax advantaged accounts where possible.
5. Avoid being a “borrower.” The truly wealthy don’t have to lie awake at night wondering if they will have to pay off everything because a loan is called.
I’ll be the first to admit that I don’t know everything and that there are many roads to wealth. In some markets, the advice in this book will work, but it isn’t the best of advice in my opinion. But, if you would like the opportunity to win a FREE COPY, simply leave a comment on this post. I’ll draw a name to win my advance copy on Friday evening, May 30th!
[tags]millionaire by thirty, money, personal finance, real estate, housing crisis, book, credit, debt, house, interest, review[/tags]