Hypothetical economics question

[Teaching3bears]

What if a leader of a country gave a million dollars to each citizen? (The leader would either allow the country to go into debt or just produce the extra money or something) How would that affect the economy of the country?  In order to motivate the people to continue working the leader would tax those who did not work a very high amount but would not tax those who did work on their million dollars.

This question is coming from my son who wants to understand economics better.

 

[Katy]

You know how after the stimulus money went out there was really high inflation? The same thing would happen. The price of everything would exponentially increase. There will always be limited resources and unlimited wants.

[pinball]

5 hours ago, Teaching3bears said:

What if a leader of a country gave a million dollars to each citizen? (The leader would either allow the country to go into debt or just produce the extra money or something) How would that affect the economy of the country?  In order to motivate the people to continue working the leader would tax those who did not work a very high amount but would not tax those who did work on their million dollars.

This question is coming from my son who wants to understand economics better.

 

Maybe @Bootsie will chime in and suggest some resources for your son. 
 

[frogger]

Give your son another hypothetical question so he can think it out. If your ship sank and you ended up on a deserted island with ten other people, would finding 10 million suddenly make you all rich?

Money is just an IOU, a value holder. It is the goods and services that people produce that make us wealthier. If you end up with lots of cash chasing the same few goods, it just increases the price of the goods or in other words, makes the cash less valuable since it is less rare. 

[gardenmom5]

where is the money coming from?  printing it? (drives inflation.  see weimar republic where farmers could ***pay off the farm with a dozen eggs***) taking it from peter to pay paul?  it doesn't just magically appear.  

I would start by having him read the fiscal advice given to those who win large lottery payouts about "should they take the lump sum, or payout over 20 year?".  (and how; if for those who have to ask why they should take the payout  - -  they should take the 20 year payout.)

you HAVE to consider psychology of how people spend money vs. save.

we used to use a financial planner that was sought by the NFL to advise their players ( he turned them down, he simply didn't have that kind of time and he wanted to help regular people. - he's been pretty successful doing so.) - Sports players can make a lot of money, but it is incredibly common for them to be broke when they're no longer playing because of how they handled their money when they were playing.  I have an acquaintance whose bil is a retired NBA player.  It's even more common in the NBA.  (certain star players get a lot of coverage, but they are very much the exceptions.)

and I know people with regular jobs, who've saved a lot.   I know one older man whose school teacher father socked away over $1M - back when $1M really was something.   Amy Dacyzyn of the Frugal Gazette had the same thing.  Lived on a very average salary, but it's how the money was spent.

Edited August 22, 2021 by gardenmom5

[Bootsie]

To begin with, just giving everyone $1 million would be highly inflationary.  The money we use today is really nothing more than a token.  If you go to any type of carnival at which you exchange your dollars for tickets to buy food you can think of what it would be like for the carnival to tell people instead of getting 4 tickets per dollar you will get 1,000,000 tickets per dollar--what would happen?  Instead of needing 4 tickets to buy a drink, the vendors would want 1,000,000 tickets to purchase a drink.  Or, if you play monopoly, what would happen if everyone started out with twice as much money; it would impact the prices people would be willing to pay for the properties (inflation) but there would be no more properties (wealth) for people to purchase.  

For the second part, taxing discourages behavior.  So, taxing those who work less would discourage leisure (and encourage work).  Theoretically, that is the direction taxing leisure (not working) would have on society.  However, the implementation of such a move would be fairly complex--how do you measure work?  Simply number of hours?  How productive the work is?  Over what time period?  The answers to each of those questions would have some impact on the incentives that the policy gives people and the choices that they will make. 

[BlsdMama]

2 hours ago, gardenmom5 said:

 

and I know people with regular jobs, who've saved a lot.   I know one older man whose school teacher father socked away over $1M - back when $1M really was something.   

These stories tend to be passed down but one wonders - there must have been more to it than just savings... I mean, “back when” also would have been “back when” salaries. School teacher? $40k at best. 25 years later, he only made a million total. So how one would have lived? There’s more to that story and I suspect compound interest and investing is the only potential possibility.... 

He must ask other questions, rather than one in a bubble... but it’s an interesting starting place. 

Edited August 22, 2021 by BlsdMama

[gardenmom5]

1 hour ago, BlsdMama said:

These stories tend to be passed down but one wonders - there must have been more to it than just savings... I mean, “back when” also would have been “back when” salaries. School teacher? $40k at best. 25 years later, he only made a million total. So how one would have lived? There’s more to that story and I suspect compound interest and investing is the only potential possibility.... 

He must ask other questions, rather than one in a bubble... but it’s an interesting starting place. 

the joys of compounding interest, even with saving accounts. (the earlier you get compounding interest working for you, the more you make.)  This is a big benefit for those who "get" interest, they will make money.  vs "paying" interest.

yes - it is how you Spend (or don't) money.

eta: there are people who think they only need to make minimum payments on cc cards. (smh.)  One year, we paid ONLY $100 extra per month on our mortgage.  It was early in the life of the mortgage, when MOST of the payment goes towards interest, and very little is applied to principle.  That $1200 extra we paid in one year all went to principle . . . . it was the equivalent of paying seven YEARS on the  mortgage.

Edited August 22, 2021 by gardenmom5
clarification

[Bootsie]

1 hour ago, BlsdMama said:

These stories tend to be passed down but one wonders - there must have been more to it than just savings... I mean, “back when” also would have been “back when” salaries. School teacher? $40k at best. 25 years later, he only made a million total. So how one would have lived? There’s more to that story and I suspect compound interest and investing is the only potential possibility.... 

He must ask other questions, rather than one in a bubble... but it’s an interesting starting place. 

If one saves $100 per month and it can be invested at 12% per year (which is about what the long-run average return in the stock market was in the 20th century with an average stock portfolio), in 40 years they would have $1,176,477.25.  

[Katy]

A more interesting calculation is how much can be saved if they live really cheaply (at home, in exchange for chores), and invest 90% of their net income in a no-cost index fund vs 50% vs 10% when they are young.  Then stop investing vs keep investing.  It’s such a difference to live cheap when young, invest the money, and then stop investing but not withdraw until retirement. 

[Bootsie]

The average return earned on the investment has a major impact on how much someone will have in the future.

To have $1 million in 40 years if you earn a 12% return, you need to invest $85 per month. 

If you earn a return of 11%, you need to invest $116

If you earn a return of of 10%, you need to invest $158 per month

If your return is only 9%, you need to invest $214 per month.  

if your return is only 6%, you need to invest $502 per month.

 

[Faith-manor]

4 hours ago, Katy said:

A more interesting calculation is how much can be saved if they live really cheaply (at home, in exchange for chores), and invest 90% of their net income in a no-cost index fund vs 50% vs 10% when they are young.  Then stop investing vs keep investing.  It’s such a difference to live cheap when young, invest the money, and then stop investing but not withdraw until retirement. 

That is one of the purposes of the big, multi-generational house in Alabama. Our adult kids are welcome to get jobs in the Huntsville area and live there without rent just contributing to food and utilities, helping with mowing and repairs as needed. Auto insurance is so much cheaper there so keeping a vehicle to commute to work WAY more economical than here in Michigan, and cars don't get damaged from all of the winter road salt which seriously weather's the undercarriage of cars here and costs a lot in maintenance. Hopefully they will take advantage of it. It would be one way for them to have significant savings at a young age.

[pinball]

5 hours ago, gardenmom5 said:

the joys of compounding interest, even with saving accounts. (the earlier you get compounding interest working for you, the more you make.)  This is a big benefit for those who "get" interest, they will make money.  vs "paying" interest.

yes - it is how you Spend (or don't) money.

eta: there are people who think they only need to make minimum payments on cc cards. (smh.)  One year, we paid ONLY $100 extra per month on our mortgage.  It was early in the life of the mortgage, when MOST of the payment goes towards interest, and very little is applied to principle.  That $1200 extra we paid in one year all went to principle . . . . it was the equivalent of paying seven YEARS on the  mortgage.

I think you’d have to pay $1200 extra a year EVERY YEAR and then you’d see something like 5 to 7 years off a 30 year mortgage.

I was just playing around on a calculator that does this.

[Bootsie]

12 minutes ago, pinball said:

I think you’d have to pay $1200 extra a year EVERY YEAR and then you’d see something like 5 to 7 years off a 30 year mortgage.

I was just playing around on a calculator that does this.

It will depend upon the amount borrowed (so how significant an extra $100 is) and the interest rate, but this looks like it is in the right range for most mortgages.

If you borrow $100,000 at a 5% interest rate for 30 years, your monthly payment will be $536.82.  If you added $100 to that each of the first 12 months, making a $636.82 payment, and then continued with your $536.82 payment it would reduce you would have the loan paid off in 350.5 months--reducing your mortgage length by about 9 1/2 months.  

When mortgage rates were extremely high, though, it could have wiped out 5-7 years off a 30 year mortgage.  If you borrowed $100,000 at 18% interest, your monthly payment was $1507.  Adding $100 for the first 12 months would reduce the length of the mortgage by about 6.5 years

[pinball]

6 minutes ago, Bootsie said:

It will depend upon the amount borrowed (so how significant an extra $100 is) and the interest rate, but this looks like it is in the right range for most mortgages.

If you borrow $100,000 at a 5% interest rate for 30 years, your monthly payment will be $536.82.  If you added $100 to that each of the first 12 months, making a $636.82 payment, and then continued with your $536.82 payment it would reduce you would have the loan paid off in 350.5 months--reducing your mortgage length by about 9 1/2 months.  

When mortgage rates were extremely high, though, it could have wiped out 5-7 years off a 30 year mortgage.  If you borrowed $100,000 at 18% interest, your monthly payment was $1507.  Adding $100 for the first 12 months would reduce the length of the mortgage by about 6.5 years

Let’s hope we never see mortgage rates at 18% (again).

[Bootsie]

8 minutes ago, pinball said:

Let’s hope we never see mortgage rates at 18% (again).

Although I wouldn't mind being able to lend short-term, virtually risk free to the US government at 14%...

[BlsdMama]

6 hours ago, Bootsie said:

If one saves $100 per month and it can be invested at 12% per year (which is about what the long-run average return in the stock market was in the 20th century with an average stock portfolio), in 40 years they would have $1,176,477.25.  

That’s my point. It can’t simply be “socked away.” It would need to be invested. 👍🏼 

Edited August 22, 2021 by BlsdMama

[Teaching3bears]

8 hours ago, Bootsie said:

To begin with, just giving everyone $1 million would be highly inflationary.  The money we use today is really nothing more than a token.  If you go to any type of carnival at which you exchange your dollars for tickets to buy food you can think of what it would be like for the carnival to tell people instead of getting 4 tickets per dollar you will get 1,000,000 tickets per dollar--what would happen?  Instead of needing 4 tickets to buy a drink, the vendors would want 1,000,000 tickets to purchase a drink.  Or, if you play monopoly, what would happen if everyone started out with twice as much money; it would impact the prices people would be willing to pay for the properties (inflation) but there would be no more properties (wealth) for people to purchase.  

For the second part, taxing discourages behavior.  So, taxing those who work less would discourage leisure (and encourage work).  Theoretically, that is the direction taxing leisure (not working) would have on society.  However, the implementation of such a move would be fairly complex--how do you measure work?  Simply number of hours?  How productive the work is?  Over what time period?  The answers to each of those questions would have some impact on the incentives that the policy gives people and the choices that they will make. 

I really  the idea of trying variations on Monopoly to illustrate this!

[gardenmom5]

1 hour ago, pinball said:

I think you’d have to pay $1200 extra a year EVERY YEAR and then you’d see something like 5 to 7 years off a 30 year mortgage.

I was just playing around on a calculator that does this.

--ETA: - it was ONE year - that's what the interest rates were like.  It was the early 80s.  That's why ARM (adjustable rate mortgages) became a thing.  After Regan came in, the prime rate (affecting the mortgage rate) started dropping (instead of climbing to the insane levels it was under carter.  the ARMs encouraged people to buy, knowing if the prime rate dropped, the interest rate on their mortgage would drop too.

Ok - dh's background is banking.  and he spent his time as an internal loan auditor.   I got information overload in the early years.   very. overload.

you need an amortization function calculator to do this.  not a regular calculator - and you need to take into account how loans work.  (re: amortization tables.)

the way mortgage loans (and car loans) work is in the beginning - the broker collects the interest you will owe over the life of the loan.  You payments are NOT evenly distributed between the capitol and the principle over time.   Early on, very little of the payment is applied to principle, most of it is applied to interest.  If you buy a $400,000 house (which could get you a condo around here), it's still $400,000 of *capital*. - but, by paying extra in the early years, you will reduce the interest you pay in the early years.  e.g. with a $1000 mortgage payment,  early years payment distribution is $900 to interest, and $100 to capitol.   by the end of the 30 year period, it might be $50 interest, and $950 principal.  (I'm just throwing numbers, but the gist is correct.)

so- by paying extra no matter when, it is applied to the principle.  *however*, in the  early years - you skip out on A LOT of interest, and it will move you years through your 30 year loan.  Later, it will move you ahead by a month or two,  not nearly as fast.  In the end -you still have to pay that $400,000 of capital back.  By paying extra - you're cutting down how much interest - and only interest - you pay.

Edited August 23, 2021 by gardenmom5

[gardenmom5]

24 minutes ago, BlsdMama said:

That’s my point. It can’t simply be “socked away.” It would need to be invested. 👍🏼 

  a savings account is "an investment".  I pays you interest.  these days - the interest it pays tends to be lower than the inflation rate, but it is still PAYING you money for socking your money in the bank.

it doesn't have to be the stock market, doesn't even have to be CDs.  currently, 401ks are popular.  My grandmother loved "savings bonds" (which came out during WWII to get money for the gov't to pay for the war. - their interest rates sucked.  she gave one to 1dd when she was born.  Dh promptly chased it in (they're NOT worth the face value until at least seven years after it was purchased) and put it in a 12 year CD at a much higher interest rate.

- my grandmother was very frugal (and completely unsophisticated about money).  She paid cash for her house.

[gardenmom5]

1 hour ago, pinball said:

Let’s hope we never see mortgage rates at 18% (again).

or 21.5% . . . .   

[pinball]

11 minutes ago, gardenmom5 said:

Ok - dh's background is banking.  and he spent his time as an internal loan auditor.   I got information overload in the early years.   very. overload.

you need an amortization function calculator to do this.  not a regular calculator - and you need to take into account how loans work.  (re: amortization tables.)

the way mortgage loans (and car loans) work is in the beginning - the broker collects the interest you will owe over the life of the loan.  You payments are NOT evenly distributed between the capitol and the principle over time.   Early on, very little of the payment is applied to principle, most of it is applied to interest.  If you buy a $400,000 house (which could get you a condo around here), it's still $400,000 of *capital*. - but, by paying extra in the early years, you will reduce the interest you pay in the early years.  e.g. with a $1000 mortgage payment,  early years payment distribution is $900 to interest, and $100 to capitol.   by the end of the 30 year period, it might be $50 interest, and $950 principal.  (I'm just throwing numbers, but the gist is correct.)

so- by paying extra no matter when, it is applied to the principle.  *however*, in the  early years - you skip out on A LOT of interest, and it will move you years through your 30 year loan.  Later, it will move you ahead by a month or two,  not nearly as fast.  In the end -you still have to pay that $400,000 of capital back.  By paying extra - you're cutting down how much interest - and only interest - you pay.

I used a calculator on a website specially designed to play around with mortgage numbers like this and how early payments and lump sum payments change interest paid and payoff dates.

like Bootsie said, my numbers were in the right range for most mortgages.

[gardenmom5]

3 minutes ago, pinball said:

I used a calculator on a website specially designed to play around with mortgage numbers like this and how early payments and lump sum payments change interest paid and payoff dates.

like Bootsie said, my numbers were in the right range for most mortgages.

mortgages today - with interest rates as low as 2.5% (I think that was about the bottom) are a heck of a lot lower than when we purchased our house.  (our interest rate was double digits.)

Even 1dd, has refinanced her house a couple times in the last seven years to lower her interest rate.  

[Bootsie]

53 minutes ago, gardenmom5 said:

--ETA: - it was ONE year - that's what the interest rates were like.  It was the early 80s.  That's why ARM (adjustable rate mortgages) became a thing.  After Regan came in, the prime rate (affecting the mortgage rate) started dropping (instead of climbing to the insane levels it was under carter.  the ARMs encouraged people to buy, knowing if the prime rate dropped, the interest rate on their mortgage would drop too.

Ok - dh's background is banking.  and he spent his time as an internal loan auditor.   I got information overload in the early years.   very. overload.

you need an amortization function calculator to do this.  not a regular calculator - and you need to take into account how loans work.  (re: amortization tables.)

the way mortgage loans (and car loans) work is in the beginning - the broker collects the interest you will owe over the life of the loan.  You payments are NOT evenly distributed between the capitol and the principle over time.   Early on, very little of the payment is applied to principle, most of it is applied to interest.  If you buy a $400,000 house (which could get you a condo around here), it's still $400,000 of *capital*. - but, by paying extra in the early years, you will reduce the interest you pay in the early years.  e.g. with a $1000 mortgage payment,  early years payment distribution is $900 to interest, and $100 to capitol.   by the end of the 30 year period, it might be $50 interest, and $950 principal.  (I'm just throwing numbers, but the gist is correct.)

so- by paying extra no matter when, it is applied to the principle.  *however*, in the  early years - you skip out on A LOT of interest, and it will move you years through your 30 year loan.  Later, it will move you ahead by a month or two,  not nearly as fast.  In the end -you still have to pay that $400,000 of capital back.  By paying extra - you're cutting down how much interest - and only interest - you pay.

The loan maker does not collect the interest you will owe over the life of the loan at the beginning of mortgage or car loans.  The lender collects the interest that is due on the loan balance for that month.  So, if you have $100,000 loan at a 5% interest rate, the first month the interest you owe is $100,000 * 0.05/12 = $416.67.  Your payment is $536.82, so the difference (536.82-416.67= 120.15) goes to principal reduction.  The second month of the loan your balance is 100,000-120.15 = 99,879.85; so the second month you owe the lend interest on that (slightly lower) balance.  The second month your interest payment is 99,879.85 * 0.05/12.  It is because the outstanding balance decreases each month that less is paid in interest and more is paid in princpal each month.  

You do not need a special calculator to do this, although a financial calculator will allow you to do it quickly.  Use an Excel spreadsheet these calculations can be done very quickly

[BlsdMama]

1 hour ago, gardenmom5 said:

  a savings account is "an investment".  I pays you interest.  these days - the interest it pays tends to be lower than the inflation rate, but it is still PAYING you money for socking your money in the bank.

it doesn't have to be the stock market, doesn't even have to be CDs.  

I understand what you’re saying and I’m not saying you’re wrong, I simply think sometimes we accept an anecdote at face value when there is likely more to the story. Look at this way:

 

 Once upon a time there was a teacher and let’s pretend he averaged $40k over forty years even back when $1 million “was something “ - which likely means it was give it take more than ten years ago at the END of his career which makes it unlikely that he did average $40k.  Now, let’s say he managed to crazily save half of what he earned even through those years, and we’ll say he even saved $20k from the very first year  though we all know that wasn’t at all likely because it was what? 1960? ETA - the average teacher salary in 1960 was approximately $5k so you see what’s I’m going here.... 

 

Even so, $20k per year times 30 years at savings account rates (taking into account that compound interest here not actually at play because the first year he wold have only saved $2500 not the $20k and so on...) you get a figure of $600,000... Now, I’ll grant you, $600k is nothing to sneeze at. I’m just saying we (and I mean myself as well) tend to hear stories that have grown and we accept them for a myriad of reasons but, when we pause to think of them, tend to be unlikely. I’m not saying impossible because there are varying scenarios but the concept that a person in a lower paying white collar field could simply rely solely on savings account interest and save million(s - today $$) is unlikely.

ETA: I will say alternative scenarios exist here. My grandma was a schoolteacher. She got her degree and began teaching around 1970. They retired with quite the nest  egg and it allowed my grandfather to live comfortably through retirement until his death. He was a Depression kid and took frugality very seriously. I can still remember him teaching me the proper way to peel a potato because a potato peeler was far too wasteful. ♥️ He told me they were very poor when the kids were little and I asked him how they became comfortable. He said they were used to raising kids off his salary so when Grandma began teaching they saved every penny and his brother was into investing. So these stories exist and I don’t disbelieve you at all. I just believe IMHO more is required there than simple saving for comfort to become a reality in retirement.  

 

Edited August 23, 2021 by BlsdMama

[Bootsie]

21 minutes ago, BlsdMama said:

I understand what you’re saying and I’m not saying you’re wrong, I simply think sometimes we accept an anecdote at face value when there is likely more to the story. Look at this way:

 

 Once upon a time there was a teacher and let’s pretend he averaged $40k over forty years even back when $1 million “was something “ - which likely means it was give it take more than ten years ago at the END of his career which makes it unlikely that he did average $40k.  Now, let’s say he managed to crazily save half of what he earned even through those years, and we’ll say he even saved $20k from the very first year  though we all know that wasn’t at all likely because it was what? 1960? ETA - the average teacher salary in 1960 was approximately $5k so you see what’s I’m going here.... 

 

Even so, $20k per year times 30 years at savings account rates (taking into account that compound interest here not actually at play because the first year he wold have only saved $2500 not the $20k and so on...) you get a figure of $600,000... Now, I’ll grant you, $600k is nothing to sneeze at. I’m just saying we (and I mean myself as well) tend to hear stories that have grown and we accept them for a myriad of reasons but, when we pause to think of them, tend to be unlikely. I’m not saying impossible because there are varying scenarios but the concept that a person in a lower paying white collar field could simply rely solely on savings account interest and save million(s - today $$) is unlikely.

ETA: I will say alternative scenarios exist here. My grandma was a schoolteacher. She got her degree and began teaching around 1970. They retired with quite the nest  egg and it allowed my grandfather to live comfortably through retirement until his death. He was a Depression kid and took frugality very seriously. I can still remember him teaching me the proper way to peel a potato because a potato peeler was far too wasteful. ♥️ He told me they were very poor when the kids were little and I asked him how they became comfortable. He said they were used to raising kids off his salary so when Grandma began teaching they saved every penny and his brother was into investing. So these stories exist and I don’t disbelieve you at all. I just believe IMHO more is required there than simple saving for comfort to become a reality in retirement.  

 

Even if the same amount is not put into the savings account each year, compound interest still is at play.  The problem because a bit messier because a separate calculation must be done each year.  Of course, if someone thinks of "socking money away" simply as putting it in a shoe box or burying it in the backyard, the amount will not grow.  Individual results will vary depending on the variables and market conditions during any particular time horizon, but financial theory and financial mathematics suggest that it is possible with fairly "average" assumptions to retire a millionaire through frugal living and disciplined financial management.  

[gardenmom5]

14 hours ago, Bootsie said:

 

You do not need a special calculator to do this, although a financial calculator will allow you to do it quickly.  Use an Excel spreadsheet these calculations can be done very quickly

 

Dh was a loan auditor.  He made his living auditing loans.  You do need an amortizing calculator to do them properly (much easier than it was 40 years ago.)  Amortization tables are now generally available online.  

when we were paying $100 extra - they most certainly did collect most of the interest up front.  2dd and her dh are skipping ahead by paying extra on their mortgage - though not nearly as dramatically.

 

[Bootsie]

10 minutes ago, gardenmom5 said:

Dh was a loan auditor.  He made his living auditing loans.  You do need an amortizing calculator to do them properly (much easier than it was 40 years ago.)  Amortization tables are now generally available online.  

when we were paying $100 extra - they most certainly did collect most of the interest up front.  2dd and her dh are skipping ahead by paying extra on their mortgage - though not nearly as dramatically.

 

I am a finance professor and my students have homework and test questions to do these without the use of an amortizing calculator (or the use of amortizing tables).  They do the math that the tables are based upon and which are programmed into an amortizing calculator. A calculator that is programmed with amortizing functions cannot perform any algorithm that canot be programmed into it.  The amortizing claculators need to be programmed to do the problems correctly--it is not that an amortizing calculator is need to do the problems properly.  And, amortized loans existed long before a amortizing calculators were invented.  

More interest is charged early in a loan because the outstanding balance is higher as I described the in the example.  So, the lender is collecting most of the interest that will be collected from the loan early on because you are paying interest on a larger amount.

[Jann in TX]

15 hours ago, BlsdMama said:

I understand what you’re saying and I’m not saying you’re wrong, I simply think sometimes we accept an anecdote at face value when there is likely more to the story. Look at this way:

 

 Once upon a time there was a teacher and let’s pretend he averaged $40k over forty years even back when $1 million “was something “ - which likely means it was give it take more than ten years ago at the END of his career which makes it unlikely that he did average $40k.  Now, let’s say he managed to crazily save half of what he earned even through those years, and we’ll say he even saved $20k from the very first year  though we all know that wasn’t at all likely because it was what? 1960? ETA - the average teacher salary in 1960 was approximately $5k so you see what’s I’m going here.... 

 

Even so, $20k per year times 30 years at savings account rates (taking into account that compound interest here not actually at play because the first year he wold have only saved $2500 not the $20k and so on...) you get a figure of $600,000... Now, I’ll grant you, $600k is nothing to sneeze at. I’m just saying we (and I mean myself as well) tend to hear stories that have grown and we accept them for a myriad of reasons but, when we pause to think of them, tend to be unlikely. I’m not saying impossible because there are varying scenarios but the concept that a person in a lower paying white collar field could simply rely solely on savings account interest and save million(s - today $$) is unlikely.

ETA: I will say alternative scenarios exist here. My grandma was a schoolteacher. She got her degree and began teaching around 1970. They retired with quite the nest  egg and it allowed my grandfather to live comfortably through retirement until his death. He was a Depression kid and took frugality very seriously. I can still remember him teaching me the proper way to peel a potato because a potato peeler was far too wasteful. ♥️ He told me they were very poor when the kids were little and I asked him how they became comfortable. He said they were used to raising kids off his salary so when Grandma began teaching they saved every penny and his brother was into investing. So these stories exist and I don’t disbelieve you at all. I just believe IMHO more is required there than simple saving for comfort to become a reality in retirement.  

 

I taught in 1988-- my salary (teaching special ED including a 'stipend') was $17500....  My dad started teaching at that same school in 1977-- he made a whopping $8000 and that included stipend for being a band director AND salary for being a bus driver!!

 

[Danae]

2 hours ago, gardenmom5 said:

Dh was a loan auditor.  He made his living auditing loans.  You do need an amortizing calculator to do them properly (much easier than it was 40 years ago.)  Amortization tables are now generally available online.  

when we were paying $100 extra - they most certainly did collect most of the interest up front.  2dd and her dh are skipping ahead by paying extra on their mortgage - though not nearly as dramatically.

 

Or take a good algebra class. I learned how to do it in high school, and I know it's covered in AOPS Intro to Algebra.  How do you think they got the numbers for the tables?  

Edited August 23, 2021 by Danae

[Katy]

There are entire reddit boards dedicated to people who choose high paying jobs and invest half or more of their income every year before they buy a house, get married, or have children. It isn't easy, but if you choose a high paying field but keep spending like a broke college student, it can be done.  You can make more money from investments than from your job in far less than 20 years.  Often less than 10.  Search for FIRE (financial independence retire early.  Variations include FatFIRE (where you want to be flashy with high income and show off money. Doctors often choose this).  LeanFIRE (retire really early on only enough to do so, try to look poor.  Having watched this for years, it seems common in particularly socially awkward engineers.  They often get bored and go back to work). Others do this enough to have financial security but then choose remote-work nomadic type jobs.

[Faith-manor]

46 minutes ago, Katy said:

There are entire reddit boards dedicated to people who choose high paying jobs and invest half or more of their income every year before they buy a house, get married, or have children. It isn't easy, but if you choose a high paying field but keep spending like a broke college student, it can be done.  You can make more money from investments than from your job in far less than 20 years.  Often less than 10.  Search for FIRE (financial independence retire early.  Variations include FatFIRE (where you want to be flashy with high income and show off money. Doctors often choose this).  LeanFIRE (retire really early on only enough to do so, try to look poor.  Having watched this for years, it seems common in particularly socially awkward engineers.  They often get bored and go back to work). Others do this enough to have financial security but then choose remote-work nomadic type jobs.

We had friends that put off having children until they had been married five years. Each had a great job right out of college and married right away. The lives on one salary and banked the other. They owned their house outright which made it easy to continue saving even with kids. They are very well set for retirement.

We will have enough in three years to be nomads, and plan on it. Dh will still work remote, but we will have hotspot for phone internet and a signal booster so he can work form wherever.

[BlsdMama]

7 hours ago, Jann in TX said:

I taught in 1988-- my salary (teaching special ED including a 'stipend') was $17500....  My dad started teaching at that same school in 1977-- he made a whopping $8000 and that included stipend for being a band director AND salary for being a bus driver!!

 

Isn’t that crazy?! 

[BlsdMama]

5 hours ago, Faith-manor said:

We had friends that put off having children until they had been married five years. Each had a great job right out of college and married right away. The lives on one salary and banked the other. They owned their house outright which made it easy to continue saving even with kids. They are very well set for retirement.

We will have enough in three years to be nomads, and plan on it. Dh will still work remote, but we will have hotspot for phone internet and a signal booster so he can work form wherever.

Comparatively, we did not put off having children, had a million (kids), wiped out our retirement due to ALS and our back up plan involves life insurance and living with one kid each month in rotation... ETA That last part is a joke but we have teased them about it forever.

We laugh so we don’t cry. It’s okay if you laugh or use us as a tale of caution. I’d keep the kids but ditch the ALS - that’s where the real money went. 🤦🏼‍♀️ Feel free to use us a tale of caution. And he is not on a teacher salary....

Edited August 24, 2021 by BlsdMama

[Faith-manor]

2 minutes ago, BlsdMama said:

Comparatively, we did not put off having children, had a million (kids), wiped out our retirement due to ALS and our back up plan involves life insurance and living with one kid each month in rotation... ETA That last part is a joke but we have teased them about it forever.

We laugh so we don’t cry. It’s okay if you laugh or use us as a tale of caution. I’d keep the kids but ditch the ALS - that’s where the real money went. 🤦🏼‍♀️ Feel free to use us a tale of caution. And he is not on a teacher salary....

I am so sorry, BlsdMama! The way we approach healthcare and disabling diseases in this country is a crime. No one in a nation as wealthy as this one should be wiped out for medical care and in home alterations. It just boggles my brain that people still defend the system.

I am just so sorry.

[ealp2009]

The books, The Millionaire Next Door and the Next Millionaire Next Door by Thomas Stanley, are pretty interesting and have some detailed data on who is a Millionaire, where they get their money, and their personal habits.   I have been thinking about reading it with my kids and discussing.   

Edited August 24, 2021 by ealp2009