Review: Millionaire by Thirty

Every other Sunday, The Simple Dollar reviews a personal finance book.

millionaire by thirtyOver and over again, I get encouraged by readers to review the “hot” personal finance book of the moment – the one that describes an investment or personal finance plan that takes great advantage of the situation of that moment in time.

I usually avoid reviewing such books. The advice that I find useful to review and discuss is advice that’s timeless – advice that works well no matter what’s going on in the world. Spending less than you earn always works. Buying very broad-based index funds always works. Getting your personal spending habits under control always works.

But investing in a specific genre under the belief that it’ll always make great returns? Not so much, and that’s the basic premise behind many of these “timely” investment books.

Millionaire by Thirty is perhaps the most egregious example of this I’ve ever seen. It came out on April 30, 2008, and as I read it in early September, the advice inside is laughably outdated. There are quite a few interesting (and timelessly correct) principles in there, but so much of the book is based on market conditions circa 2005 that the entire work comes off like a train wreck.

Let’s walk through it, if for no other reason than to see the dangers of betting your entire financial plan on the vagaries of current market conditions – and why I usually don’t review books like this.

1 – Wake Up and Step Out of the Financial Darkness
The book opens with an impassioned argument for financial education, which I certainly agree with. Far too many people leave school with only the most minimal understanding of how to manage their money or plan for their future. It’s no wonder so many people are having financial troubles – there’s so much temptation and very little education on how to handle it. One problem here, though, is that the chapter also makes a case that a person fresh out of college with no assets and a $30K job can transform that into a net worth of $1 million in just ten years. That’s not realistic without an incredible amount of luck – you can’t turn lead into gold.

2 – Mapping Your Future
Here, the Andrews lay down some very sensible basic principles for people fresh out of college to follow. You don’t need everything your parents have. Save 10%-30% of your income. Don’t assume a pension or Social Security will help you in retirement. Tax-deductible interest is better than non-tax-deductible interest. Relationships are more important than money. It’s better to be flexible when you’re young – go with the flow a bit. The advice here is bedrock stuff – and it’s the best stuff in the entire book, in my opinion.

3 – The Millionaire Mindset
The advice starts to go off the rails here. In principle, the advice is good: spend way less than you earn, then take the difference between the two and invest that money in something that will earn a good return. That’s great! That’s the way to go! The only problem here is that the authors are already beginning to hint strongly that a person should take their extra money and use it to buy additional real estate, particularly housing. It’s a theme that much of the book relies on, and it’s flawed – you need to diversify your money. Real estate is just one option – and it’s not a guarantee of returns.

4 – Pay Yourself First
Millionaire by Thirty devotes a chapter to this very strong bedrock principle – before paying the bills, sock some money away for yourself. As mentioned in chapter two, the Andrews are in favor of socking away a substantial amount – they suggest 10 to 30%, but hint that even more is a good idea. My belief is that you should set a strong but reachable goal for yourself. Try saving 5% of your paycheck, then push yourself upward until it’s really a challenge for you to reach without incurring a decent level of discomfort in your life. You might be surprised how much you can save before it gets painful. Once you’ve found that line, stay just on the “safe” side of it.

5 – Don’t Give Uncle Sam Gifts
Again, the advice here is generally solid. It’s a good idea to sock some of your money into 401(k)s and Roth IRAs to reduce your income taxes, and it also can be a good idea to file long form for your income taxes and collect as many deductions as you can. Doing these things minimizes your taxes at the end of the year and thus keeps more of your money in your pocket.

6 – From Renter to Homeowner in One Leap
And here’s the point where the book’s advice goes into the trash. Here, the Andrews basically suggest that everyone should buy a home immediately because the equity is going up up up and they can refinance that home in a year or two to get lower rates. Even if you get a 95% mortgage right now, they say, that’s fine, because you can refinance in a year or two when the house is worth 15% more and have a much lower interest 80% mortgage. Then, you can continue to tap that growing home equity with home equity loans.

This is advice that only works in a housing market gone mad, as we had early in this decade. If you were prescient enough to do this in 2001 and didn’t overextend yourself in 2005 or 2006 when the market was at the peak, you would have done well by this advice. If you did anything but that, you got your salad eaten. Amazingly, the Andrews were so positive about this advice that they pointed people towards taking out adjustable rate mortgages to get on the bandwagon.

The people that this book was written for are fresh out of college. These people would be leaping into ARMs without down payments. Such a move only works if the housing is going absolutely bonkers – the housing bubble, in other words. If you followed this advice now, you’d be broke.

7 – Real Estate Equals Real Wealth
Oh, but wait – it gets better. In the next chapter, the Andrews suggest tapping the equity in your home (it’s growing 10-15% a year, right?) after a few years and use it to invest in more real estate. Buy another house and rent out one or the other. Even if you’re deep into two different mortgages, you’re fine because of the escalating equity in both houses, right? Following this plan leads to bankruptcy outside of a housing bubble. It only works if housing prices are going up at least 10% a year, and that won’t be happening again any time soon.

8 – Think Smart Now, Retire Smart Later
Here, the Andrews back off and take a look at different investment options so you can begin to diversify if you own multiple houses (never minding that you’re not diverse at all if you’ve got all your money in real estate at this point). Most of their discussion makes sense – stocks are risky, bonds and cash are safe, and tax deferment and sheltering is good – until the end, where they conclude that the best possible investment is universal life insurance.

9 – Insure Your Future Financial Well-Being
And here’s the trifecta. The Andrews spend a chapter explaining how you can lock the huge returns you’re getting on your real estate investments into insurance contracts. The idea is that you take out home equity loans on your rapidly-growing-in-value housing investments and use that cash to buy very large universal life insurance policies. Once you’ve done that, you can then borrow against these policies and use them as steady income for life. This works, according to them, because you can use the huge increases in value in your properties to get way ahead of your universal policy, then borrow against the balance tax free later on while the value continues to grow.

There’s only one problem here – it all relies on the houses holding or increasing their value. Otherwise, you’ll be holding a ton of loans on a devaluing property and the home equity fuel for this rocket dries up, leaving you holding a poorly-funded life insurance policy, some rapidly devaluing properties, and a bunch of debt. In other words, you’re increasing your risk by doing this, and it only works if properties are still going up like a rocket – when that stops happening (like now), you’re in massive trouble because you’re greatly indebted to the hilt to buy something that has reducing value and a bad life insurance policy.

This is why I avoid books like this. This idea works in a complete bubble where the housing market keeps skyrocketing. If it starts to chug and collapse (as any skyrocketing market eventually does), the advice ranges from bad to dangerous.

10 – Touch All the Bases
Millionaire by Thirty finishes with some good general life advice: the real value in life isn’t money, it’s the people and relationships you build. Money just makes it possible for you to have the freedom to enjoy those relationships thoroughly.

Some Thoughts on Millionaire by Thirty
Here are three things I think about Millionaire by Thirty.

All over the place, the principle is correct – the problem is in the specifics. The Andrews are absolutely correct that spending significantly less than you earn and putting the difference into investments is a great way to go especially when you’re young. You are far better off investing that money than just blowing it. The problem comes with their specifics – putting all of it into real estate and owning multiple houses is a really bad idea.

Diversity is the key that they’re missing. Chapters six, seven, and nine are the real troublemakers here, because they encourage people to dive right into the housing market as an investment and, as the value keeps going up, borrow against it for either more housing or investments that require a constantly-growing amount of cash in the next several years. This only works if your investments go up 15% to 20% a year or so – and a diverse investment won’t do that. A non-diverse investment might be able to do that for a while, but it’ll be followed by some disastrous years – and if you’ve invested yourself to the hilt in something that’s dropping like a rock, well, that’s the life that ARM holders are living right now.

When you get the specifics wrong, it casts doubt on the many bedrock principles that are correct. The Andrews are right on so many things in this book. So many of the basic principles are completely right: spend less than you earn, invest the difference, push yourself to reduce personal spending, and so on. But when you combine that with a really bad piece of information – that the housing market will always go up 10-15% a year – it can make the good principles look bad.

Is Millionaire by Thirty Worth Reading?
In a word, no.

Millionaire by Thirty is a very excitingly written example of irrational exuberance. The Andrews offer a reasonable plan if you’re holding an investment that will just keep going up over the next ten years at a rate of about 10 to 15% a year, year in and year out.

Unfortunately, current events have shown us very clearly that what goes up must come down. And that’s why I usually avoid books like this. When people begin to buy into the hype that a particular investment is inherently superior to all other investments and that they open the door to untold wealth, they’re about to crash. There is no such thing as a free lunch. Instead, stick with good, basic personal finance. Just spend less than you earn and save the rest. If you decide to invest it, be diverse with that investment and also realize that many investments have risk and usually the higher the returns, the higher the risk. The Andrews (and other hype-based books) forgot that last part.

Think I’m being harsh? I’m being nice compared to many of the Amazon reviewers.