More Thoughts on How to Have a High Net Worth

Here's an excellent comment left on my post titled How to Have a High Net Worth:

When I was just out of school I read a business book (maybe the author was Mackey, can't remember) that recommended that the best way to become a CEO and achieve a high net worth is to always take the job with the highest salary. The rationale is that the high salary will justify you taking on more responsibility that you can then leverage into a higher salary. I can say the advice worked because 12 years after I read the book I became a CEO!

The key to a strong net worth (without lottery wins or inheritances) is to take the best paying job and grow your career while being fairly frugal and delay your gratification. Don't go into debt for sure, that is a trap you should avoid. Buy your cars using cash you saved- car financing is a waste with high interest rates. Low interest rates means you overpaid on the price of the car as you could have negotiated instead of taking financing.

Another key to a high net worth is having good negotiation skills. This doesn't mean acting like a used car salesman, but knowing the power and limitations you have whether you are a buyer or a seller. This skill is so important it's accountable to over 50% of my net worth. This was through negotiating job offers, something essential to getting a higher salary and a higher responsibility. Spend the time to learn the art of negotiating. There is nothing inherently cheap or negative about it. It's really about the give and take of the setting of human aspirations.

Once you save up enough money buy your residence for cash. You will find your net worth will continue to climb (no interest payments) as well as having a very strong cash flow. Now you can also start to think about not working.

Last things to build net worth is look at optimizing your tax burden based on incentives in the tax law (dividend vs capital gains, etc). You can also play some riskier investments such as individual stocks as long it's below 20% of your overall net worth.

That said my biggest contributor to NW was savings from salary. Given my reduced expenses today I can save well over $100K per year in my current job, or about 50% of my pretax income.

Great, great stuff. I know I've said it again and again and again, but it's really true: the basics of having a high net worth aren't that difficult. You simply need to grow your career/earnings while keeping your wants/desires/spending under control. Do that for a decent amount of time and you'll end up rich!

I also appreciate the comments about negotiating. If you know how to negotiate well, it will help you on both ends of the above equation. It will help you earn more as you'll be able to negotiate higher/more frequent pay increases (whether with your current employer or a new one). In addition, it will likely help you succeed in your career (again, leading to higher pay) since being able to negotiate is a valuable skill in almost any profession. On the savings side, being a good negotiator will save you hundreds if not thousands of dollars every year. Put these two (higher salary and less spending) together and you're on your way to a much higher net worth thanks to being a good negotiator.

Comments

[Gone]

Ok but not everyone can be the CEO. Someone earning north of 200K isn't going to have the problems of someone earning only 20 or 25% of that. The problem is motivation. It's much more motivating to watch your NW grow by $8000 per month because you can envision what that money can otherwise do. It's much less motivating when your NW is only growing by $800 or for a lot of people, by just $80 --- barely enough to pay the gas bill! Those in lower income brackets can apply the theory with the top button buttoned, but logging in and looking at that piddly amount looking back at you can actually be demotivating and depressing. And one cure for that kind of depression is to pull it all out and blow it and say the heck with it!

[MonkeyMonk]

I disagree somewhat with his car-buying comments. I agree in principle with the idea of paying cash but when companies are offering no-interest or 0.9% financing it's a hard deal to pass up.

When negotiating price you should *always* give the impression that you're going to finance with the highest rate offered. Then, once a price has been agreed upon, decide what is the best purchase option -- even if that means paying cash outright. Personally, I always try to convince them to put as much of the purchase price on my reward cards as possible, which I then immediately pay off.

[Strick]

Saving half of your salary gets you to financial freedom just as quickly at $80K as it does at $200K (because you have proven you can live off of $40K instead of $100K). Sure its better to have a higher net worth, but its the ratio of expenses to net worth that determines my end game, financial freedom.

[Mike Hunt]

I wrote that post so will try and respond to the comments.

Gone- I have to disagree with you. Growing net worth and delaying gratification is all about setting your expectations. Even if you save $80 per month, that's $1000 per year. If you have a goal of buying an LCD TV cash, that means you can get it in 7 months. That's pretty motivating if you don't have an LCD TV.

When I started working after summer jobs and internships, I had a Masters and worked as a Project / Design engineer for $42K per year in South Bend, Indiana. I remember feeling bad paying $595 a month for rent (this was back in 1996) and a year later moved into a house with 2 other guys where my rent contribution was $140 per month! His mom owned the small house and he just had to cover the mortgage that he split 3 ways. It was a cold drafty house with 1 bathroom and one of my roommates stayed in the basement. I lived like that for 18 months - it was the best housing deal I ever had. Saved that extra money and invested it (only to lose it later in the crash of '01 but that didn't matter- it was the good habit I picked up that made all the difference).

Today I can compare myself to the multi-millionaires and billionaires and feel pretty bad about saving $100k per year. In fact for the amount of work I have to put in it's almost not worth the effort. But I still keep my motivation somehow. It's always easier to compare up, and when you compare down it makes you feel better temporarily. Being happy where you are is the key to a happy life.

Moneymonk,

I tried to negotiate a car the way you mentioned but the base price would be different if it was financed vs buying outright. I've found getting the best price firsthand with internet research is the best way to go but I could be wrong. The last new car I bought was in 2000.

Best everyone,

Mike

[Pop]

"Once you save up enough money buy your residence for cash."

That applies to who, people who live in Iowa, and people who wait till they're 45 to buy a home?

[bob smith]

I disagree about paying off your house in some situations. For example, if you are in an area that is prone to natural disasters (hurricanes), and a disaster happens, the home insurance companies will just claim bankruptcy or make you fight tooth and nail to get your money. If you only owned 5-20% of your house, you don't take as much of a hit as if you owned 100% of it.

[rwh]

Hey Pop: I live in Iowa. Am I supposed to feel insulted by that?

[Strick]

Bob Smith - I don't understand how the loss is different whether you own 100% of the home of have 5% equity and the other 95% owed on a mortgage, the mortgage doesn't dissapear with the house.

[F]

Hey Mike,

I really appreciate you take the time to share your experience with us. I’m taking advantage of this opportunity to ask a question or two.

QUESTION 1: "Deliver a strong multiple of your salary in measurable value to your company" (quote Mike Hunt). Can anyone give examples of how they did exactly that in a non-sales role? I can put a $$ value on 1 or 2 entrepreneurial projects I've initiated within the company, but not on my actual job (project management, not always with measurable ROI).

QUESTION 2: What would you say has been the main driver/motivator throughout your career? Reason for asking is that motivation/purpose has turned into a serious roadblock for me. I'm an engineer by education with 2 years of work experience in pure business roles, more specifically in a graduate programme in a multinational (Europe). I’ve worked/explored as hard as I can, both on and off the job. However, my initial (strong) motivation has really dwindled as I've come to realize how small my impact is on the company, and how *cough* eagerly anticipated *cough* my more innovative suggestions. (Remember, I'm young, I want to change the world! :-) So, as I am drawn to big picture / strategy / entrepreneurship, I typically end up in some staff function, discussing company policies of questionable relevance or preparing reports for the high ups (what happens to those reports afterwards is not always clear). While I like the breadth of such roles, I feel I'm not accomplishing anything, nor am I challenged in ways where I could really shine (improvising, innovating). My personal motivation, once my main asset, is now working against me (burning out). When I think of switching to a line function, possibly in a smaller company, I am confronted with a narrow working field (often as a specialist, yuk!), whereas it’s really the big picture story that motivates me. I'm so ready to jump, but where to? I always saw business as a competitive, engaging game, but where is it in the real world?

I wholeheartedly agree with FMF that to get wealthy, you want to grow your career – which requires going the extra mile day after day, which requires strong motivation. For some people (including my surroundings) a fancy title is all you need, but apparently it is not for me. Does anyone have advice on how to get this roadblock out of the way? Has anyone been in a similar situation and gotten themselves out?

@FMF: if you feel like making a new blog post out of question 2, I'd be more than appreciative! My reason for posting straight away is that here Mike might see it, and frankly I’m curious as to what he’d say. :-)

[Mike Hunt]

Pop,

I bought my condo in cash for $180K when I was 32, as my first purchase. This is in Asia where I've been working the last 3 years- key factor for me was the purchase price was 100 times monthly rent and it's in a good location in a growing city. I thought about buying in NJ before that but the prices and property taxes were so inflated it was a waste of money and renting for $1k per month was a much better deal. A few people told me I'd be priced out forever and renting is throwing away your money- glad I didn't listen to them.

F,

I worked as Program Manager in my career. Usually you are judged on how well you meet schedule, manage customer / internal expectations and budget. If you do really well you get promoted but it's easy to get stuck in pgm mgmt. I'd say try something else if you can but be patient to wait for something better before jumping. You are already in a good role as you get to see many parts of how your company runs.

All for-profit companies care about 3 things- revenue, profit and cash flow. That's really it. Everything like customer loyalty, quality, productivity, cost down / innovation, moving locations, inter-company pricing, etc all stem from the top 3 metrics because the idea is that if these sub-metrics are delivered, the top 3 get delivered. Remember this and you will go far.

Whether you are in a line or a staff function you must find a way to link your sub-metrics into the top 3. A good mgmt team will have this structure in place for every department but many companies don't do this so well. If your company falls into the latter, I'd still say do the best you can to link your work into the sub metrics that feed the top 3. If you are successful it should get the attention of top mgmt. If not put the deliverable on your resume and shop it to another company who will surely appreciate that contribution if they need to hire!

It's good to get experience in both staff and line functions. In a staff function you see more strategy but it's harder to deliver measurable value unless that link is strong and defined. In a line role you have a clear link to the company bottom line but you usually get overwhelmed into the day to day / firefighting and can't think about the strategy. But if you can plan on mid term goals in a line function that is connected to strategy it's easier to deliver really strong bottom line results. Get involved in making or touching the product (or service) and with the customer and you will do well.

For Question 2, the desire to keep learning more has been the guiding light in my career. I get bored really easily and if I'm not challenged or growing for a few weeks or months I get restless. So in that sense I'm in a good role now as it's too much to handle. Once I get comfortable I will look for something tougher but I don't see that anytime soon.

Good luck to you and let me know if you have more questions.

-Mike

[FMF]

Mike Hunt --

Can you email me (http://www.freemoneyfinance.com/2005/04/free_money_fina_4.html)? I've been trying to get in touch with you.

[F]

"Get involved with product and customer, deliver mid-term measurable value, and you will do well." I am putting this paraphrase on my wall as we speak ... so that I don't get side-tracked anymore in the corporate complexity (for staff functions) and to ban the idea that all line functions are firefighting only.

I had to laugh when I read that you "get bored really easily". So do I, and it has worried me at times, so it's reassuring to see that it hasn't stopped you from doing great in your career. I now feel I just need to focus on that paraphrase on my wall, and I'll stay motivated and do well.

P.S. Asia, that sounds awesome. Countries like Singapore... how's the job market there right now, compared to the US/EU?

[Mike Hunt]

FMF,

Will contact you via email.

F,

Glad I could help offer some advice you could use.

I live & work in Thailand. The job market is pretty bad here (and even worse in Singapore, many ex-pats losing their jobs and leaving the country) but the difference with the US is that people naturally save more and many people fully own their own place or can live with family. They are not so close to the line saddled with debt like the US. Disposable income is much higher- everyone goes out to eat all the time (lower cost options) and continues to shop but at a lower rate.

The SE Asian export markets are way down and that certainly hurts. But people are used to getting by during tough times, and should do pretty well.

High level jobs for foreigners are few and far between, especially at US salaries but they do exist. You just have to be patient and get lucky with finding an opportunity. I was lucky, as when I finished an earlier role I found a new one within 6 months.

-Mike