Suze Orman and Mr. Money Mustache are both WRONG

Apr 13, 2019

Contributed by Chad Payton

I’m assuming that you have read the recent exchanges between Suze Orman and Mr. Money Mustache on the topic of the FIRE movement. I tend to be more in line with the FIRE movement philosophically, however, I think that they are both playing an inefficient financial game that may or may not set them up for financial independence. The debate is interesting when you step back and analyze what they are actually arguing. They both maintain that you should accumulate net worth over time and at some point, based on a set of assumptions, begin to withdrawal for cash flow. The investing strategy is more or less the same. Put your money into the market with a diversified strategy consisting primarily of paper assets. The only real difference is the magic number of how much to accumulate prior to the drawdown phase. Suze maintains that you should build up between 8-10 Million dollars and Mr. Money Mustache says it can be done with $500k - $800k and maintain an after-tax annual income of $40,000. Suze and Mr. Money Mustache are both playing a dangerous game with so many assumptions. There is a better way to produce stable income that increases your control, increases your return, reduces risk and provides generous tax benefits.

The problem with the typical financial strategy that both Suze and Mr. Money Mustache employ is that it is inefficient. That fastest way to build wealth is to efficiently utilize smart leverage and the velocity of money to acquire real assets that produce positive cash flow. In other words, how can I use my money and other people’s money in the most efficient way to purchase time-tested assets and repeat the process as fast as possible? The vehicle that is available to anyone in the United States is investment real estate. It’s efficient because you get paid in several different ways: cash flow, loan amortization, tax benefits, and appreciation. In the market, you only make money if your paper assets appreciate or you use the dividends as cash flow. The gains are taxed as either personal income or at the capital gains rate, two of the highest rates. Typically, your money is stagnant inside a vehicle for long periods of time to avoid penalties or to defer taxes. Deferring does not eliminate taxes, it is simply shifting them to a later date. It’s a gamble to assume that I will need a lower income or that tax rates will be lower in the future. I’m willing to bet against both of those assumptions. Real estate, when bought properly, will provide positive cash flow through rents that exceed all costs and reserves. The tenant will be paying down the loan for you. On paper you will show a loss because you are able to depreciate the value of the house over 27.5 years, thus you will pay little or no taxes after you write this off in addition to the cost of a property manager, taxes, interest on a loan and maintenance. Appreciation is icing on the cake, but I don’t plan for it. The best part is that your income is indexed to inflation over time with rising rents and asset values. 

I won’t go into great detail, but it’s easy to see how a family of 4 can create $60k in annual after-tax income just through cash flow. It’s possible to purchase a turn-key investment property where someone else finds a property to renovate and places a tenant, then manages the property for you. You can purchase this with your federally backed bank loan. With a 20% down payment, you can acquire full ownership of a property that you don’t have to manage. A typical single-family property costs around $100k and will provide about $250/month of cash flow after reserves. It would require an initial commitment of a $20k down payment and around $5k of closing costs and reserves for a total of $25k. Provided both parents are working, you can repeat this process 20 times (10 federally backed loans each). That will provide about $5k/month in relatively passive cash flow. To fully implement this plan you will need $500k of capital. A lot of people balk at this number, but it can be done over time.  As long as you are disciplined enough to save the cash flow and add that to your savings rate, this will accelerate with time. The cash flow will begin to snowball and will ultimately enable you to purchase more cash flowing assets. If you are committed to following this strategy, you can become financially independent in a very short time and your wealth will continue to grow so that you can continue to purchase more cash flowing assets in perpetuity.

I said earlier that I agree with Mr. Money Mustache from a philosophical standpoint. I agree that you can be happy with any amount of income. But, why not grow your wealth so that you can affect more change in the world and maximize your experiences. I agree that you should spend money on what truly matters to YOU. I embrace this philosophy and am very conscious of how I spend my money. I would argue, however, that it is very easy to defer too much in the sake of financial independence. The only time that we truly own is the present, we should enjoy it as much as humanly possible. I also agree that financial independence is not about retiring to do nothing; it will free you from trading your time for money. It gives you the freedom to pursue your passion regardless of whether or not it is producing income. Where we differ is that I no longer trust my money in the Wall Street roller coaster of fear and greed. Inflation exacerbates the problem as your wealth is silently eroded. The government continues to create money and our dollars are quietly becoming less valuable. Anyone on a fixed income that is not indexed to inflation will suffer greatly due to this government-directed phenomenon.  There is a better way to create sustainable and scalable wealth that is hiding in plain sight. All you have to do is to educate yourself and take action. 


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