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July 13, 2006


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One question that occurred to me from that book was their formula for wealth was linear with age while compounding would lead to geometric growth, so was this a linear approximation to the post midlife crowd or does their consumption rise with wealth.

You have gotten me addicted to personal finance blogs, and to yours, as well. Thank you! We've been married nearly 30 years. For all but the last five or so, we carried little to no debt. Then, the unthinkable happened--we prospered! And the more money we made, the more we spent.

We're turning things around now. Mine is not a personal finance blog, but the past ten entries or so have focused on de-cluttering, paying down, and starting over--with no regard for the Joneses whatsoever. It feels great!

Thank you for all the great inspiration you provide!

Here are my 6 personal finance rules for attaining a high net worth. These rules borrow heavily from my favorite book, "The Millionaire Next Door," by Dr. Thomas J. Stanley.


1. Live frugally.

• Create an artificial environment of scarcity by “paying yourself first” (i.e., automatically withdrawing money from your paycheck and checking account to fund investment accounts). If it doesn’t hurt, you’re not saving enough.

• Show a purchasing bias in favor of assets that appreciate and against assets that depreciate (e.g., new cars, boats, clothes, restaurant food, home furnishings, vacations, and time-shares).

• When spending your precious after-tax dollars, learn to delay gratification. Pity and avoid – don’t befriend and emulate – people who fake wealth by displaying a high-consumption lifestyle (i.e., the “big hat, no cattle”-type).

• Never incur consumer debt. Pay cash for everything except your primary residence.

• Borrow money to acquire your primary residence only if the mortgage balance represents less than twice your annual realized income.

2. Live responsibly.

• Maintain an emergency fund equal to at least 6 months of expenses.

• Adopt healthy exercise, diet, and sleep habits. Avoid vices. Pursue inexpensive hobbies that preferably include your family and friends.

• Make a will, a durable power-of-attorney, and a medical power-of-attorney. Review the location and contents of these documents with family members, but don’t otherwise dwell on your death or the extent of your wealth.

• During your working years, carry long-term disability insurance equal to at least 60% of your gross income. Pay the LTD premiums with after-tax dollars so that you receive any benefits tax-free. At least 10 years before retiring, buy a long-term care policy with inflation protection. Pay the LTC premiums from your health savings account.

• Select the highest possible deductible on your auto and homeowner policies and do not submit small-dollar claims. Choose replacement-cost homeowner coverage and keep a current inventory of your personal property in a safe-deposit box. Maintain your auto and homeowner policies with the same carrier and buy an umbrella policy from that carrier.

3. Live morally.

• Remain humble, decent, and content. Determine God’s purpose for your life, and demonstrate your thankfulness to God by striving to fulfill that purpose.

• Get and stay married to a spouse who shares your values.

• Do not provide “economic out-patient care” to your children. Instead, “teach them to fish” and act as a role model for frugal, responsible, moral, and economically-productive behavior.

• Give to others both before and after you acquire wealth.

• Measure your wealth not by the things that you can buy with money, but by the things that you would not trade for money.

4. Be economically productive.

• Emphasize perseverance over pedigree, integrity over intellect,, and economic opportunism over economic security.

• Either own your own business or make yourself invaluable to your employer. If you are an employee, gravitate to revenue-generating (rather than administrative or technical) positions or responsibilities, then insert yourself into the revenue streams you help generate by ensuring that your compensation is directly tied to the company’s financial performance.

• Use lifetime learning to deepen your subject-matter knowledge in your primary field and to acquire new and relevant skills.

• No matter what your field or occupation, the ability to sell – a product, an idea, or your value to others – is a crucial and underrated skill.

5. Suppress your realized income by diverting earned income to pre-tax savings accounts, and grow your unrealized income and net worth by investing after-tax money in assets that appreciate either tax-free or tax-deferred – particularly a Roth IRA and real estate.

• Never allow your realized income times 1/5 of your age to exceed your net worth. For example, if your net worth is $400,000 and your age is 40, then you should never realize more than $50,000 of your earned income (i.e., $50,000 (realized income) x 8 (age factor) = $400,000 (net worth)). Reward yourself with additional realized income only after you have commensurately increased your net worth. The alternative is the “rat race” (i.e., the earn-and-consume treadmill).

• Keep your realized income down – and within the formula described above – by diverting your earned income to pre-tax savings accounts (e.g., a non-qualified deferred compensation account, a 401(k) account, and a health savings account funded through your employer’s cafeteria plan).

• Grow your unrealized income and net worth by investing your after-tax money in assets that appreciate either tax-free (e.g., a Roth IRA account, a variable life insurance policy, a 529 college savings account, and municipal bonds) or tax-deferred (e.g., real estate, public-company growth stocks, and private companies). As a top priority, fully-fund your Roth IRA each year that you qualify to contribute.

• Place at least half of your investment portfolio in a no-load S&P 500 index fund (preferably a Vanguard fund), but always have some exposure to small-cap domestic stocks, foreign stocks, REITS, and bonds. Buy managed mutual funds or individual stocks only in the small-cap space where the markets are less efficient. Avoid complex investment strategies; be an investor, not a trader. Dollar-cost-average your stock purchases and rarely sell; it’s time in the market, not timing the market.

• Most multi-millionaires are either business owners or real estate investors. Thus, if you are not a business owner, then the best destination for your after-tax money is investment real estate. After you have grown your investment portfolio to at least 10 times your annual realized income, diversify your assets by purchasing at least one residential or commercial building every two years. Apply the discipline that each building must “cash flow” immediately upon purchase (i.e., all rent receipts must exceed all mortgage, tax, maintenance, and insurance payments). Achieve this cash flow through a combination of a sufficient purchase-discount and a sufficient down-payment.

6. Liquidate retirement accounts in a way that maximizes compounding, and title assets in a way that minimizes estate taxes and probate.

• Subject to any minimum required distributions (MRDs), liquidate retirement accounts in the order of least-tax-favored to most-tax-favored. First, access investments that are treated as ordinary income upon withdrawal: a non-qualified deferred compensation account and a 401(k) account. Second, access investments that are tax-free upon withdrawal: a variable life insurance policy (loans against the cash value) and a Roth IRA.

• Never title real estate between generations. Instead, shelter all capital gains from real estate through a lifetime series of 1031 exchanges, then distribute the real estate at death and allow your heirs to inherit the real estate at its stepped-up basis (i.e., its value at the time of your death).

• Avoid probate for all your investment accounts by either designating a beneficiary or using a transfer-on-death (TOD) provision. Name your adult children – not your spouse – as the beneficiary of your Roth IRA to gain the maximum compounding effect from the stretch-IRA rule.

• If married, use a bypass trust to fully exhaust each spouse’s estate-tax exemption. Ensure that any insurance policy on your life names an irrevocable trust – not you individually – as the owner so that the death benefit is not included in your estate for estate-tax purposes.

I disagree that "anyone can become wealthy." I don't think it's possible to become wealthy on a minimum wage income, especially if you have student loan debt.

@Minimum Wage:

There is one person who is to blame for your situation. Would you like to find that person and tell him to stop holding you back? Here's how you find that person: go stand in front of a mirror, and look into it.

For your information, the line underneath "anyone can become wealthy" in FMF's post is a link. Did you follow it and study all the information provided and linked? Of course not -- you were too busy composing your whine.

What do you expect to get from reading and whining on personal finance blogs? Any advice is rejected by you. Always some excuse. And you aren't getting much sympathy, certainly none from the regulars.

So I ask again: why are you here?

No, I really don't expect you to change or stop whining. It's really OK with me -- a certain amount of comic relief is welcome.

"• Never allow your realized income times 1/5 of your age to exceed your net worth. For example, if your net worth is $400,000 and your age is 40, then you should never realize more than $50,000 of your earned income (i.e., $50,000 (realized income) x 8 (age factor) = $400,000 (net worth)). Reward yourself with additional realized income only after you have commensurately increased your net worth. The alternative is the “rat race” (i.e., the earn-and-consume treadmill)."

Impossible for many people (those born without the silver spoon in mouth) until you reach a certain age. For example, if you graduate from college with a starting salary of $40K at 21 years old, you'd be expected to have $168K in the bank. When myself and many other graduate from college, we are stuck with $30K+ in debt, and not by choice.
On the other hand, this number is not enough for when you are older. For example, if you are 55 years old, and make $80K/year, you'd only have to have a net worth of $880K. That's not very aggressive and with employer matching, only requires a savings rate of 5%. So this formula is highly skewed.

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