Free Money Finance

Becoming a Millionaire on an Average Salary

Here's a video from Dave Ramsey detailing the story of a millionaire who never had a large salary.

The overview:

Jason averaged around $70,000 a year while serving 31 years in the military, and has now built a $2 million net worth.

His keys to success:

• No debt
• Save for a long period of time to let compound interest work
• Live below your means
• Educated himself on how to handle money
• Worked to earn more (being deployed)
• Took advantage of tax-advantaged investments and benefits
• Automated his investments
• Ignored the financial news -- stayed the course

Great, basic advice.

He also said that anyone can become a millionaire no matter what they earn. It's simply saving as much as you can for a long period of time and letting your investments compound.

So consider this post one for those who do nothing but make excuses. If you want to become wealthy, it's not that hard. Just do the basics over time and the rest takes care of itself.

15 Habits of Self-Made Millionaires

Business Insider lists 15 habits of self-made millionaires. The ones that I identify with the most are:

• They read consistently.
• They exercise.
• They pursue their own goals.
• They get up early.
• They have multiple sources of income.

A few details on each of these:

• I used to read a TON when I was working (lots of stuff on business) and I still do today (though now I read more on money, self-improvement, health, and for fun.) Some of my most recent recommended reads are Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers, Washington: A Life, and The Simple Path to Wealth: Your road map to financial independence and a rich, free life. All good books! I read a lot of blogs and websites as well (plus listen to podcasts) which could count as "reading".
• I work out six times a week -- three with weights and three cardio. I also walk at least 14k steps a day, swim once or twice a week, and hike often. That's one thing about early retirement: there's plenty of time to get into/keep in shape. I've worked out much of my life but never as much as I am now -- and I'm loving it!
• I set goals every year and then track them daily to make sure I'm making progress every day. Have done this for years and credit it with being a key reason I was able to accomplish many of my key goals.
• I have been a night person most of my life. But I had to force myself to get up since that's what my employers would demand. Surprisingly, I'm up even earlier in retirement. The reason? I have things I WANT to do not HAVE to do. A great book on the power of getting up early is The Miracle Morning: The Not-So-Obvious Secret Guaranteed to Transform Your Life (Before 8AM). Some even say getting up early can make you wealthy!
• I have several sources of income including rental properties, P2P loans, dividends, blog income, and interest. I've either had or been developing these for years -- helping prepare myself for retirement.

Those are the ones that fit me best. How about you? Do you identify with any of these -- or maybe some others on the list?

Frugal Spending Habits of Millionaires

As a contrast to high earners who can't control their spending, here's a post on the frugal spending habits of millionaires. The highlights of how rich people spend:

• 8% shopped at Goodwill stores
• 20% used coupons
• 64% said they lived in a modest, middle-class home
• 28% mowed their own lawn to save money
• 44% only purchased used cars
• 19% managed their investments themselves – they did not use financial advisors in order to save money
• 60% said they were frugal with their money
• 81% used credit cards that offered reward dollars. This way they could get something for free
• 41% spent less than $3,000 on their annual vacation

Some good stuff to comment on here:

• We've shopped at Goodwill and similar stores. You can get some good stuff there at great prices, though it's a bit hit and miss and you have to dig for the values.
• The not only use coupons but probably stack multiple discounts and ask for better prices.
• Buying a house you can afford is a big key to becoming wealthy. Doing so helps you pay off your mortgage early which limits the downward drag of debt. It also helps you control tons of other expenses related to home ownership. This is why the house you buy determines your wealth.
• We've never paid anyone to mow our grass. Either I've done it or my son has. It saves money plus gives some good exercise. Thankfully we have a small yard now anyways.
• I deviate from many millionaires on cars since I buy new. But I get great deals on new cars and drive them forever.
• I manage my money myself. Heaven forbid I'd use a financial advisor!!!
• We are moderately and selectively frugal. You don't have to re-use toilet paper and make your own toothpaste to save money. If you have a good enough income, you have plenty of room to spend AND save.
• I certainly use credit cards for cash back and make a good amount each year doing so. Now that my daughter is off to college, we're paying her tuition with credit cards and earning a fortune.
• We spent less than $3k on vacations for years (we simply went to see relatives when the kids were young). Once the kids got older, we went on a few cruises and have traveled much more.

So, that's how I stack up to the habits. Do you identify with any of these?

Are Millionaires Smarter than Others?

Money asks if millionaires are smarter than the rest of us. 

I changed the title of this post because I'm not one of the "rest of us". :)

Anyway, here are their key thoughts:

It does seem, in general, that smart people pull down fatter paychecks. Jay Zagorsky, an economist and research scientist at The Ohio State University, found that every additional point a person scored on an IQ test correlated with between roughly $200 and $600 a year in income. In other words, a person with an IQ of 130 would earn between $6,000 and $18,500 a year more than someone with an IQ of 100.

But Zagorsky also found that the same isn’t true when it comes to wealth. “There seems to be no relationship between intelligence and net worth,” he said, because there are different factors at work.

“In general, businesses tend to want to hire smarter people and pay people more, but just because you have a higher income doesn’t mean that you’re more likely to save it or are better at building that wealth,” he said.

In fact, when Zagorsky charted IQ against people’s likelihood to have financial struggles like paying bills late, declaring bankruptcy and maxing out their credit cards, people with the highest IQs were more likely to have financial instability than those with just slightly above-average scores.

Several thoughts on this:

• We've talked about the relationship between intelligence and income previously. For details, see Intelligence is Linked to Income, but Not to Wealth and Intelligence Still Linked to Income, Not Wealth.
• As those posts also detail, intelligence is not tied to wealth. Just because you're smarter and make more money doesn't mean you have the skills to build wealth.
• In fact, it appears that intelligence may be inversely related to wealth generation. A good example: doctors and lawyers generate much lower levels of wealth than expected based on income.
• Why is this the case? My guess is that smarter people earn more because they are, well, smarter. And as such they likely add more value to their employers. More value = higher pay. But the skills needed to become wealthy don't focus as much on intelligence. Here you need traits like self-control, patience, and discipline. If you look at the seven traits of The Millionaire Next Door, you'll see that intelligence is not on the list.

IMO, it's good to be both smart but disciplined as well. If you can combine these two traits, you can generate substantial wealth.

Thoughts from a Millionaire Couple

Dave Ramsey shares the story of a millionaire couple. Here are the highlights:

Jeff and Dee of Atlanta have a net worth of $2.8 million. But they didn’t win the lottery. They became wealthy after decades of smart saving and sensible spending.

When he began working as a computer technician decades ago, Jeff’s salary was just $13,000. So when the opportunity came to work extra hours, he jumped at it. His workweek went from 40 hours to 80 hours—and his income doubled in the process.

These days, the couple saves upwards of 25-30% of their household income for retirement. How? They don’t hoard money, but they also don’t waste it. They still shop at Walmart and buy $20 shoes. They’re just normal folks.

"It’s probably been five or six years since we’ve been millionaires" Jeff says. "But again, it didn’t change our lifestyle or what we did or how we did it."

To them, being a millionaire isn’t about hoarding your money. It’s about securing your future. It’s about leaving a legacy for your kids and giving generously. And it’s about enjoying the rest of your life without worry.

A few thoughts here:

• They didn't have a high income -- at least at the start. It doesn't say how much they make now, but $13k a year wasn't much, even many decades ago. So they had to have kept their spending low to create as much gap as possible.
• He worked hard. Working 80 hours a week is amazing. The article says he spent at the 80-hour mark too and when his time went back to 40 hours a week, he was in trouble. So the path to wealth wasn't a straight line for them.
• Saving 25-30% of your income is pretty good. Looks like they do it by being frugal when they need/want to be.
• Nice net worth growth if they just became millionaires six years ago and now have $2.8 million. Something is working! Just another illustration that the first million is the hardest. 

Overall they are a lot like the millionaires we interview here at FMF and have applied the same millionaire principles to become wealthy.

If they can do it, so can you!

Another Millionaire Couple with Average Income

Following up on You Can Build a Fortune on a Small Income, here's a piece from Dave Ramsey about a couple that didn't make a fortune but became millionaires. Some details:

Even though they didn't have a huge salary early on, the pair established their saving goals and then lived a modest, comfortable life year after year. In fact, their household income over the past two decades only averaged around $70,000.

But because they invested early and often, the power of compound interest began to seriously multiply their nest egg.

Becoming a millionaire doesn't take a silver spoon—it takes an iron will.

"You can build wealth," Shawn says. "It doesn't take a college education, and it doesn't take someone who has wealthy parents and inherits a lot of money. It's really about putting in the work, having a plan, and working together to make that a reality."

So let's review the facts:

• They had a decent but not a huge income.
• They were committed to saving as much as they could (they wanted to grow their gap to be as large as possible).
• They invested their money and saw it multiply.

As I've said, becoming wealthy is simple, but not easy. This means the concepts to growing your wealth are simple to understand (just those three points above) but not easy to implement (because it requires discipline, something the average American is lacking in spades.)

Anyway, consider this yet another example that you do not need to make a huge income to become wealthy.

That said, it is a lot easier to become wealthy the more you make. ;)

12 Habits of Millionaires

Money lists 12 habits of millionaires as follows:

1. Millionaires are super savers.
2. They get an early jump on building wealth.
3. They value hard work.
4. They invest for the long term.
5. They don't take crazy investment risks.
6. The majority seek out advice.
7. They value education.
8. They splurge but within reason.
9. Some aren't above serious economizing.
10. They shop at discount stores.
11. They tend to be planners.
12. They are givers and not gamblers.

Here's my take on these:

1. Got to agree that saving is a key part of building wealth. In the details of the piece, 58% say "saving early and often" was a top contributor to their success. That's because it gives compounding a looooooong time to work and time is the most important ingredient for investment success. FYI, 38% list "controlling spending" and "smart investment choices" as keys to success while 26% say "earning a lot of money" is a key. I guess they'd go for "saving" over "earning" in that debate.

2. Covered that issue above.

3. 95% say "hard work" contributed to their success. The other factors were: education (83%), smart investing (79%), frugality (78%), and risk taking (57%). This seems like the right order of priority for me as well.

4. Yes. If you "invest" then it's much better to go for the long-term view. If you need money soon, it's not good to tie it up in investments that could go down in the short-term (but will likely be up over the long haul).

5. 60% classify themselves as having a "moderate" risk tolerance. 22% say "aggressive". I'm probably in the moderate camp but have pushed the envelope a bit (mostly in my asset allocation which has always been heavy in stocks).

6. 62% rely on a financial advisor to help manage wealth. This is where I break from the pack. I am my own financial advisor. I do use professionals for things like taxes and estate planning, but I am in charge of the overall plan myself.

7. 86% say getting a college education is very important and 82% are college graduates. I would say the right education is important. I would NOT advise getting a $150k degree (and having student loan debt) for a job that pays $25k a year -- it just doesn't make financial sense. On the other hand, my MBA was probably one of the best money moves I've ever made.

8. 92% spent money on vacations in the past year. When our kids were growing up, most of our vacations were trips to see family. As they got older, we took some more expensive trips (one trip to Disney and three separate cruises). You can still save/invest even while spending on something expensive like a cruise, but you have to have moderate and selective frugality. In other words, you have to pick and choose what to spend big bucks on and reap your savings from the other things that don't matter to you as much.

9. Ok, I do three of the four things that they list as "serious economizing": using coupons, mow their own lawn (actually my son does it), and shop at Goodwill (FYI, we also shop at Costco, Walmart, and used to shop at Aldi when we had one in our city). Why not? Why pay more for something than you have to?

10. Now we get to the places that Money deems "surprising" to see millionaires shop at: Amazon, Walmart, and the like. Why is this surprising? Probably because all the Money editors who are not millionaires shop at Nieman Marcus and Saks Fifth Avenue.

11. I do have a to-do list (like 67% of millionaires), write down goals (like 67%), and network close to 5 hours a month (like 79%). It's the small things that add up over time and these do pay off if you use them day after day over the course of years.

12. 97% donate to charity (we do too) and 74% spent no money on gambling the past 12 months (neither did we).

In the end I match pretty closely with this list.

How about you? Which of these do you follow and which do you ignore?

Millionaire Interview 17 Update

The following is an update to Millionaire Interview 17.

My FMF millionaire #17 interview took place almost 3 years ago. The biggest change for me since then has been my job. At the time, I hated my job. It affected my mood very negatively and looking back, I was probably on the edge of depression. A few months after the original interview posted, I found another job that was more suited to me, still in software development, but with saner management and it turned my work life around. It's been more than two years now, and I still really enjoy my current job and previous stresses (both mental and physical) are significantly reduced.

Another big change was 2 years ago, we bought and moved to a new home (better schools/bigger yard for the kids, better neighborhood). Thinking to get started in real estate investing, we rented out our old house, but after a year, decided landlording wasn't for me and sold at a small loss. (With the constant repairs and dealing with tradespeople, I was just glad to be rid of it). It turns out my old and new home are almost exactly alike financially (equal home values, same mortgage rate, virtually identical mortgage balances when we sold the old and bought the new) and my one year of rental income vs. expenses was pretty much break-even. So this foray into real estate didn't affect my financials much other than about a 20K loss (when closing costs are factored in).

3 years ago, I reported that our annual expenses totaled $85K. I lied, unintentionally. I have since figured out that I left out about $7,000 of expenses, for an actual total of $92K (Sorry about that). I have tightened up my expense tracking a bit since, and I can more confidently say that now our annual expenses total $90K.

Our expenses went down mainly because our kids are in school now, so daycare expenses have gone down by 50% (still need after-school care and summer daycamps though). My wife's and my commutes have also collectively decreased by 75%, so I've seen our gas expenses decrease by 50% (Why not 75%? Probably because weekend and non-work driving pattern remain the same). Just these two categories alone reduced expenses by $10K. Other categories have gone up though (kids' activities now that they are older; resurrected some hobbies now that kids are more independent), but overall, we have a 2K reduction in annual expenses from 3 years ago. Take that figure with a grain of salt though, given how well my expense tracking system was working back then.

Between a job change and raises, our combined salary is now 270K, up from 230K before. And our net worth has grown to $1.8 million from $1.2 million before. That is about $200K/year increase, but we don't net anything near that. The growth has been more due to stock investments appreciation and increase in our home equity, but saving about $90K a year also helps.

While I record all our income and expenses, I still don't track them very well. I'll track our net worth monthly, and further look at income/expenses every 3 to 6 months, maybe, but as long as the net worth figure keeps growing, I don't worry too much about eking out all the savings that we might be able to. I rather spend that time with my family and on hobbies. When our net worth figure dips significantly is when I will dig in to find the cause. Sometimes it's a big one-time expense, other times it's the stock market dropping.

I should, however, work on improving our investment portfolio. I know there is a lot of room for improvement there. I said 3 years ago I am starting to clean it up. I have, to my credit, by consolidating some 7 accounts into Vanguard accounts of each type (Rollover IRA, Roth IRA, regular brokerage) and getting rid of some holdings (for negligible profit) from back when I was following the stock tip of the month, but that's the extent of it so far. We're currently invested in various ETF's and mutual funds in a mostly lazy portfolio style, but I don't rebalance as I should and don't track them well either. Our 401k's are solidly in target retirement date funds though, and I'm thinking now to just move our entire portfolio to target retirement date funds, given how well they seem to be doing compared to my other haphazard portfolios, and given my lack of will to properly take care of them. I'm too lazy to even do lazy portfolios properly! I don't care to think where we'd be now if I did have a coherent investment strategy...

To assuage those who say home value shouldn't be included in net worth, here are the numbers without home value. Our home is conservatively worth $650k, with a mortgage balance of $350K. Take away this $300K of home equity and our net worth is $1.5 million. Some people want to say the mortgage should be further subtracted, for a net worth of $1.15 million. So there you go, depending on how you want to calculate net worth, mine is one of $1.8, $1.5 or $1.15 million. Even if I was posing as a millionaire before, no one can argue I'm not one now!

So that's my update. Better job, increased income while expenses stayed flat, net worth increased due mostly to stock investments and home value appreciation. I'm not doing anything more than the practical creed, "spend less than you earn." But I am thankful that our high income allows my family to enjoy a good quality of life and, at the same time, to save a significant amount for our future.

Millionaire Interview 23

Today we have a brand new installment of Millionaire Interviews.

This post is a bit unique in that it contains an original interview I did in the summer of 2013 plus an update as of now.

The original interview was posted on a site I no longer run.

So today's post will work like this:

• My questions will be in bold and italic font
• The original (2013) answers will be in black text
• The updated (2016) answers will be in bold red text

Hopefully that's not too confusing for everyone.

With that said, let's get started!

+++++++++++++++++++++++++++++++++++++++

How old are you (and spouse if applicable, plus how long you've been married)?

I’m 50 years young. My wife is a couple years younger. We’ve been married for 16 years.

Since my last update, I’m now 53 years young.

Do you have kids/family (if so, how old are they)?

We have two children - 15 and 11.

Kids are now in high school.

What area of the country do you live in (and urban or rural)?

I was born and raised in the San Francisco Bay Area. Cost of living is high compared to the rest of the country but most of my family lives here so no plans to move. Surprisingly, my house and neighborhood would be considered rural. All my neighbors have large plots of land and some own horses.

We continue to live in the same house. The only change is we refinanced to a 15 year mortgage which has allowed us to pay down our principal quicker.

What is your current net worth?

Around $1.1 million.

Since 2013, our net worth has increased to $1.7 million. The increase is mostly due to Home and Stocks.

I’ve heard the first million is the hardest. That is true for me and the second million is coming much quicker!

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

I use Yodlee to track all my financial accounts which allows me to get a snapshot of my net worth.

Assets

• Home - $600k
• Emergency Fund - $60k
• College Fund - $10k
• Checking Account - $10k
• Retirement Accounts - $650k
• Stock Options - $90k

Liabilities

• Home Mortgage - $300k
• Credit cards are paid off in full each billing cycle.

Assets

• Home - $1m
• Emergency Fund - $50k
• College Fund - $20k
• Checking Account - $10k
• Retirement Accounts - $850k
• Stock Options - $0k

Liabilities

• Home Mortgage - $210k
• Credit cards are paid off in full each billing cycle.

During my refinance, I added a Home Equity Line of Credit (HELOC). This allows me to decrease my emergency fund.

Some notes:

After eight years, I was laid off from my previous company. The good news is I received a generous severance package which allowed me to search for a new job without dipping into my emergency fund.

The new job I found paid comparable. One difference is they didn’t offer stock options but they do have a generous 401k matching program. I receive 100% match for the first 6% I contribute. They also provide a bonus 401k (in addition to the annual bonus). This has allowed me to add $100k to my 401k in a little over 2.5 years.

Because I have a new driver in the house, I purchased another commuter car for myself. As with my other cars, I paid cash and bought used.

I continue to believe in slow and steady wins the race. I’ve looked at retirement calculators and feel I’m on track to hit FIRE before 60. Theoretically if I included Social Security Benefits, I could retire now!

My net worth allows me to relax a little whenever I get stressed at my job. I’m not at a point where I can retire but I definitely can breathe easier if I lose my current position.
My biggest concern if I retire early is how I’ll pay for health benefits.

Next steps are to help my kids with college costs. I haven’t fully funded their college savings but I expect to pay some inline as well as receive loans or financial assistance. My last resort is to dip into my retirement accounts.

Bottom line is spend less than you make, have an emergency fund, buy your principal residence and fully fund your 401k. These steps will allow you to get to financial freedom.

Everything below is still pretty much the same.

I didn’t list my cars or other purchases as assets since they depreciate over time. We own a 4 year old minivan and a 5 year old hybrid both which we paid cash for.

Although I’ve owned my home for over a decade, the principal has not declined much since I’ve refinanced over the years. My original rate was over 7%. We just refinanced to a 15 year mortgage at under 3% and are on track to pay it off around my retirement. The monthly payment ($2000) is the same as when I first bought the house. I have done many improvements including kitchen remodel, bath remodel, backyard remodel and replaced all the windows.

My emergency fund is currently in CDs and Money Market account. I don’t consider this fund an investment but it sure gives me peace of mind and allows me to sleep through the night. I also pay all my bills as soon as I get them including credit card bills, property tax, insurance, etc.

My college fund for my children is low but I’ve always heard it’s more important to save for retirement than college. I do have relatives who have college funds earmarked for them which eases some concern.

My retirement accounts consist mostly of Index Funds. Just turning 50 this year, I’m contributing the full amount to a Roth 401k ($17.5 + $5.5k catchup). The Roth contribution is post tax which allows me to save more now since I won’t be paying taxes later. I have other retirement accounts that are non-Roth so I’ll have to assess which accounts to draw from when start withdrawing money.

Although stock options, can be volatile, they only account for less than 10 percent of my assets. I’ve cashed in other stock options in the last few years.

What is your annual income?

$150,000. My wife stays at home with the children although she spends most of her time driving them around to activities.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

My job is my main source of income.

What is your annual spending?

My general budget is:

• PITI (principal, interest, taxes, insurance) Mortgage - $32k
• Home repair - $4k
• Utilities - $6k
• Auto Maintenance (repair, gas, insurance) - $8k
• Groceries - $7k
• Entertainment (eating out, vacation, etc.) - $8k
• Clothing - $2k
• Medical/Healthcare - $4k
• Charitable Giving - $14k

How did you accumulate your net worth (what did you do, what happened, etc. -- this is where you can tell your story and give readers insight into how you became wealthy)?

Slow and steady wins the race. I never made more than $25k a year until I was 28 years old. I made $40k at my first job out of MBA school and felt rich. For a year or so, I got into a little credit card debt but after I came to my senses, I paid off my school loans ($12k) and my recently purchased car ($13k) so I could purchase my first home when I was 31 years old.

Spend less than you make. I’ve always looked at how to save money including purchasing used cars instead of new, living in a less expensive house/neighborhood than a bank would say I could afford and buying things on sale or used. Some would say living on one income in the SF Bay Area is impossible but we’ve done it and still been able to save.

Always be grateful for what you have. I’ve been tithing (contributing 10% of my net income) to my church for the last twenty years. Since my mindset is to live on 90% of my income, it’s helped me be disciplined in my other financial responsibilities.

Take advantage of financial opportunities at work outside of your base income. For example, if your company has a 401k match, contribute at least that much to gain the match. I used to have an ESPP (employee stock purchase plan) at work and even though my budget was tight, I’d buy company stock at 15% below market rate and then sell six months later if I needed to pay expenses.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

Surround yourself around like minded individuals. It’s important to have a few close friends/family that you can discuss financial matters. I’m inspired talking with people whose net worth is greater than mine. I’m encouraged when I can help others get their financial house in control.

Consume blogs, podcasts and books on finance. I’m constantly reading finance blogs, listening to podcasts or reading finance books. Must read is the Millionaire Next Door. This changed my and many others mindset of what millionaires look like.

What are you currently doing to maintain/grow your net worth?

Stay the course. Invest fully in 401k.

Do you have a target net worth you are trying to attain?

I’d love to retire with $1.5-2 million net worth. I feel comfortably on track as long as we don’t have a financial meltdown near my retirement age.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

I hope to get a less stressful job in the next 5-10 years. My emergency fund allows me to stress less if I ever get downsized.

Is there any advice you have for FMF readers regarding wealth accumulation?

Most of my advice is above.

How Big is $1 Million?

Ha! Here's an article from Dr. Thomas Stanley that hits on a few messages I have regularly addressed:

• $1 million is "not much these days." My contention is that it doesn't make you fabulously wealthy, but it makes you wealthier than most people.
• Financial journalists may know how to write about money, but they don't know how to manage it.
• Many "experts" advising you about managing your money aren't wealthy themselves and/or can't seem to take their own advice.
• Where you live has a BIG impact on how wealthy you'll become.

Here are some highlights from the piece along with my comments:

In an editorial in The New York Times, it was stated that:

A million dollars used to be a magic number, a sign of permanent affluence.  You made it!  But now it won't buy you . . . [the array then follows].

I have found that journalists have a tendency to discount the importance of "a measly million dollars."  Most of the journalists that I have come into contact with felt compelled to tell me that they are having a difficult time accumulating wealth.

I have noticed the same thing. People who are in the media writing about finances and yet are not wealthy themselves. They often leave little comments and clues that tip you off that they aren't the best money managers, but these are often passed over quickly so they can get back to their "great" advice.

The first person who blurted out in my presence, "a million, that's nothing anymore," was a young trust officer who "dressed rich."  Yet when asked he admitted [red faced] that his net worth was well below $1 million.  And I've been listening to this mantra throughout my career!  He is not alone, especially in the finance industry.  I find that most investment counselors who pan the million dollar figure are not very good at their craft.  Note that within the sample of 121 stock brokers/investment counselors profiled in my book,  The Millionaire Mind, "only 1 in 3 (34.4%) had a net worth that exceeded expected levels for those within the same age/income cohorts."  In contrast, for millionaire business owners, it was 77.4%.

Currently only about 8% of the 115M households in this country have a net worth of $1M or more.  If one of your children came home the last day of high school and said, "I graduated 8th out of 100 in  my class," you might likely be pleased.

Here's the number I've been looking for for so long. No, $1 million isn't what it used to be, but it's more than 92% of Americans have -- and that's pretty good in my book!

He then moves into a series of comments that demonstrates how $1 million really is a lot compared to the averages:

The median net worth of the household is $94,000.  This means that if you have just a $1M net worth, you are 10.6 times better off than the norm.  I'd call this meaningful! The median realized annual household income in the US is $53,000.  So again if you are at the $1M mark in net worth, you have the equivalent of nearly 19 times the typical household's income.

Then he gets into the cost of homes as well as the prices in one city versus another:

The meaning of having a $1M net worth is a function of the market value of the home/community in which you reside.   Currently in the US the median market value of a single family home is about $175,000.  You can buy 5.7 of these if you have a net worth of $1M.  Even better, move to South Bend, IN where the current sales price of a home is approximately $90,000.  With your wealth, you could buy 11 of these homes!  But if you insist on moving to San Francisco, the median price is nearly $870,000.

A few thoughts from me to wrap up:

• $1 million is "not much these days." My contention is that it doesn't make you fabulously wealthy, but it makes you wealthier than most people.
• Financial journalists may know how to write about money, but they don't know how to manage it.
• Many "experts" advising you about managing your money aren't wealthy themselves and/or can't seem to take their own advice.
• Where you live has a BIG impact on how wealthy you'll become.

Ha! I couldn't resist! :)

Ok, a few final comments (for real):

• Personally, I think $1 million in net worth is a good accomplishment. No, you're not going to retire in a castle with that amount, but there are those who could live quite nicely overseas or less nicely here in the U.S. on $1 million. It's not an insignificant amount!!!
• I remember when my net worth passed $1 million several years ago. I felt very good about that!
• The first $1 million is the hardest to earn. The second is much easier. The third even easier (or at least it appears it will be). One day I'll detail my specific facts for you to show the results. Anyone else able to testify to the same?

If there are any millionaires out there who haven't done a Millionaire Interview, I'd love to include you. Just drop me an email to get started.

So what are your thoughts on $1 million? Not much? A fortune? Or somewhere in between?

What We've Learned from Millionaires

I've completed 22 interviews with millionaires (here's the millionaire category in case you want to read them) and after the third one there were already patterns in their answers. So with all the responses we have now, I thought I would summarize what we've learned from this group with very high net worths.

Here are some common denominators:

Millionaires have high incomes. As a sample, here are the annual incomes of the last five millionaires I've interviewed (the ones who have shared a clear income number): $258k, $260k, $215k, $180k, and $230k. Yes, it's easier to have a high net worth when you have a high income. Haven't I been saying that since day 1 here at FMF? Millionaires know that their career is their greatest financial asset and they treat it as such, taking steps to grow and develop it much more than others.

Millionaires spend a fraction of their incomes. Here are the annual spending numbers for the five millionaires above (these numbers include giving, but not savings): $150k, $85k, $146k, $70k, and $85k. Notice anything? Yep, their spending is SIGNIFICANTLY below what they earn. It's no wonder they are wealthy, they are saving a TON of money every year! Also note that they are still spending a good amount each year, so they have a decent lifestyle. The lowest spender still spends $70k a year, which is a pretty decent standard of living.

Most have well over $1 million. While the cutoff to be interviewed by me is $1 million in net worth, many have $2 million or more. It's kind of what you'd expect given the income/spending numbers above.

They don't have exciting portfolios. Most invest in stocks/mutual funds and some have real estate. For the most part they are "boring" investors. This is likely what makes them successful -- they save a ton, put it away, and simply let it grow.

They have little to no debt. If they do have debt, it's a mortgage, but many don't have a dollar of debt. They save/earn money, they don't pay interest.

They are professionals. Business people, engineers, software developers, lawyers, and the like. Not many doctors though. Perhaps doctors don't read FMF. :)

They are self-made. None of them inherited a gazillion dollars. They simply grew their careers, spent a fraction of it, saved/invested the rest, and became wealthy. Again, it's the sort of thing I've been talking about here since this blog started.

Did I miss anything? Does anyone have anything else to add?

Thoughts on Being a Millionaire and Retirement

Here's an interesting piece from the NY Times that takes several views on being a millionaire:

They begin with the "a million dollars isn't what it used to be" argument:

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.

I'm not sure comparing something to an apartment cost in New York or what an NBA player makes for a good argument, but I get what they're saying. Imagine the difference today in having $1 million versus having $8.7 million. Big difference, right?

They go on to admit "while it's not the fortune it used to be, it's more than most people have":

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent.

The rest of the article notes how $1 million isn't the huge amount it may seem to be when it comes to retirement saving. The summary of their thoughts:

Consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds wants to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

A few thoughts here:

• I think the 4% rule has been de-bunked enough that it's not really reasonable even as a guideline, so I wouldn't put much weight on it. If anything, I think you need to plan to take LESS than 4% out.
• It would be nice to invest in muni-bonds and live off interest during retirement, but you need a whole lot of money to do that. That's why I think most retirees will need to invest in equities (at least to some degree) well into retirement.
• $40k could be supplemented with Social Security and working part-time and get a retiree up to an average income, so it's not the disaster the piece makes it out to be.

The article goes on a bit more, but here's a quote I found especially compelling:

“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

Yikes!

Scary, but true!!!

A couple final thoughts:

• Those who don't save enough will likely have a very poor retirement.
• The best retirement strategy IMO is one where you amass enough assets and then distribute them so that you can live off your savings alone and not spend and principal. This is the retirement plan I'm working on.

Comments?

Millionaire Interviews 22

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 58 and my wife is 56. We have been married 14 years, a second marriage for both of us.

Do you have kids/family (if so, how old are they)?

I have two grown children from my previous marriage ages 35 and 33.

What area of the country do you live in (and urban or rural)?

My wife and I live in the Northeast in a suburban area of a mid-size city.

What is your current net worth?

$2.25 million

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

• Savings & Investments-52%
• Tax Deferred Retirement Accounts-38%
• Personal Property-10%

We live in a region where housing is very affordable (but not property taxes). We own a modest 1860 square foot home built in 1928 with a market value of $175,000 (regional average market value is $115,000) with a low interest rate mortgage balance of $26,000. We also have a 1/3rd partial equity interest in a 2nd generation family cottage valued at $100,000 and clear of debt. We own 2 vehicles valued at $20,000 each that are also clear of debt. The modest outstanding mortgage is our only debt.

What is your job (type of work and level)?

I am a healthcare executive and my wife is a public sector attorney

What is your annual income?

My income is $172,000/yr and my wife is $86,000/yr

How did you grow your income so high?

With only a BA degree in accounting, I used my leadership and financial skills to rapidly advance up the management ladder in a medium size healthcare organization. I made a key decision at age 33 to work towards achieving a healthcare administrator license, which I received at age 35. From there I advanced into administration and eventually president/CEO of the organization at the age of 45.

What is your main source of income? What is your annual spending?

Our employment compensation is the only real source of household income other than investment income, which we allow to accumulate within our investment funds and currently don’t use as a source of household income. Against a 2013 household income of $258,000, our annual expenses for 2013 were $150,000 allowing us to add to our investments approximately $100,000, which computes to about a 40% household surplus margin.

Our 2013 expense category spending breakdown was as follows: 49% payroll taxes, 7.5% general merchandise, 7% charitable donations, 6% groceries, 4% gas & auto, 4% property taxes, 4% ATM cash withdrawals, 4% utilities & services, 3% vacations, 3% major household purchases or improvements, 2.5% dining out, 2% mortgage interest & insurance, 1% medical & health insurance, 3% misc. & other

What have you learned in the process of becoming wealthy that others can learn from?

For me it was a process of 4 steps.

First, “Work the Income”. Obviously, the more you earn, the more opportunities to save. In the early stages of net worth growth, the primary source of equity will be your income. So work long and hard to maximize your household income.

Second, “Manage the Margin”. A household with $80,000 of income and $50,000 of expenses is no further behind a household with $250,000 of income and $220,000 of expenses. Live well within your means by managing your expenses in a way that results in a healthy net surplus margin.

Third, “Save the Surplus”. Don’t be tempted to spend more because you have more. Make regular direct deposits to your retirement and other investment accounts in addition to periodic transfers from any additional household surplus.

Fourth, “Ride the Market”. As your investments grow from your household surplus, establish an investment portfolio using low cost, index mutual funds consistent with your personal risk & reward comfort level. It takes money to make money, so while your portfolio growth from income will start out slow, in the later years you’ll be amazed at how rapidly it will grow.

At the risk of sounding like every other financial pundit, my biggest regret is that I didn’t start earlier. When I re-married at the age of 44, our combined net worth was less than $200,000 with personal property representing about half of that amount. I shared that fact with my daughter recently to give her encouragement as her own household struggles with the financial challenges faced by a young, growing family.

Another mistake I made was thinking that I could self-invest my way to wealth. I started buying individual stocks in the early 2000s after everyone had run the market up making easy money, but learned pretty quickly it wasn’t that easy. I lost ground early before I figured out that I should leave the investing to professionals and invest in low cost, diverse index funds with excellent long-term performance results.

What are you currently doing to maintain/grow your net worth?

I’m sticking to my 4-step game plan. I try to keep it very simple and turn-key. As we approach early retirement, our compensation has leveled off but we continue to manage our margin rather easily. Don’t get me wrong, I don’t like to live within a budget or want for anything anymore than I like to diet or exercise. However, I’m a naturally frugal guy who likes to eat healthy and live an active lifestyle. So for me, working the margin, saving the surplus and riding the market come naturally and never feel like dieting or exercise. I’m well into my wealth accumulation journey so now I am reaping the benefits of making money off my money. Just last year on the wave of a very bull stock market, our net worth increased $600,000 with $100,000 coming from our margin surplus and $500,000 coming from investment growth.

Do you have a target net worth you are trying to attain?

I’m a fanatic planner and my wife and I are approaching what I call the first stage of retirement (semi-retirement). My target investment goal from several years back was 2 million dollars, but now that I have reached that goal the sky is the limit. That is the benefit of disciplined financial planning I guess. We have many options open to us and we can decide which we desire without worry or financial constraints.

What are your plans for the future regarding lifestyle?

Semi-retirement at age 60-62. Do something different from a career perspective. For my wife that might be running for town judge. For myself that might be consulting or part-time work in a line-staff position where I can sit around and complain about management for a change. We are also looking to purchase a waterfront retirement home in a warmer climate region where we can enjoy visitations with our 5 grandsons and family.

Is there any advice you have for FMF readers regarding wealth accumulation?

Follow the 4-step process, keep your investments simple and stay disciplined.

From 2000 to 2005, our net worth grew from $187,000 to $600,000 with 80% of that growth funded by our margin surplus (33% average) and 20% investment earnings.

From 2005 to 2010, our net worth grew from $600,000 to 1.325 million with 67% of that growth funded by our margin surplus (40% average) and 33% investment earnings.

From 2010 to 2013, our net worth has grown to 2.25 million with 33% of that growth funded by margin surplus (41% average) and 67% investment earnings. 

I would also say that I am a believer in the equity market over the long run and invest 100% in a diverse array of equity mutual funds. I ride the market (ups and downs) but over my 15 year plus time horizon that strategy has worked out fine. I would also suggest that a household’s wealth accumulation plan is only as strong as the weakest household member. My spouse and I share similar financial and spending philosophies (to an extent) and that is key. I once gave my wife a written quiz on our finances. To this day I’m not sure which is more remarkable to me; the fact that she aced it or the fact that she actually agreed to take it.

Millionaire Interviews 21

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

34, my wife is 26.  We’ve been married 5 years.  My wife is not working.

Do you have kids/family (if so, how old are they)?

No kids yet but one on the way

What area of the country do you live in (and urban or rural)?

I currently live in South East Asia in a major city

What is your current net worth?

Just under 1.2 million

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

My net worth distribution is probably a bit different than most.  I grew up overseas and have also worked overseas my entire career so I don’t have a specific ‘home’ anywhere in the US.  As a result, I’ve never owned a home or taken a mortgage, and while working I’ve been on an expatriate package so my housing has been paid for by my company.

Currently my net worth is broken down the following way:

• 401k : 140,000
• Various Rollover IRA’s from previous jobs : 180,000
• Roth IRA : 70,000
• Individual Stocks : 120,000
• Mutual Funds : 550,000
• Bonds : 30,000
• Cash Savings : 90,000
• Zero debt

What is your job (type of work and level)?

I’m an engineer at in an oil and gas service company.  I informally manage a small team but only have 2 formal direct reports.  Our base handles work from the Middle East, Russia and Australia as well as Asia itself. 

What is your annual income?

• 160k base salary
• 50k overseas bonus
• 50k annual bonus

How did you grow your income so high?

The number one thing I’ve found is to understand your value to the company.  When even a cheap oil well can cost 5-10 million dollars the extra salary to bring in the best people is insignificant.  If you are good at what you do the Oil and Gas industry will pay because the cost of failure is so high, and the best way to become good is to understand the technical and application aspects of the industry, and the best place to do that is on the oil rig itself.  Education is of less importance, there is less emphasis on higher level degrees (although that is changing a bit), so getting an MBA or a PhD or similar usually makes no difference to your salary. 

I have an engineering degree but instead of getting an office job when I graduated I went to work on the rigs, which meant that while my friends were partying their 20’s away I was stuck in the Sahara desert or Siberia or other tourist hotspots working.  That said, its paid off in spades as I have significantly more hands on experience with the business end of the oil industry (the rigs) than most other engineers my age and therefore I can command a significantly larger salary.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

100% is from my salary.  My investments are all set to automatically re-invest any dividends.

What is your annual spending?

Again, this is a bit different for me.  I don’t need a car where I live (I walk to work) and even if I did get one my company would give me an allowance.  They also pay for my house and utilities so my only real expenses are food, drink, vacation, or other personal items.  That said, we are paying for university for a relative.

With that out of the way, our annual spend is between 80-90 thousand a year, of which 20 thousand is for tuition.  Our biggest expense is probably vacations, I work and travel all the time (200,000 miles a year for the past 4 years) so when we do get a break and go on vacation I don’t worry about the cost.

How did you accumulate your net worth? Also, please share any mistakes you've made along the way that others can learn from.

My starting salary was 37,000 a year.  Even back then I maxed out my 401k contribution and started an IRA and maxed it out plus put away 600 a month into other savings.  I lived very frugally, which was helped by the fact that on an oil rig all your food and accommodation are covered.  When I wasn’t working I shared a flat with 4 other guys which also cut down on costs. 

Another large factor was that I didn’t want to be on the rigs forever, and I didn’t want to finish working the rigs and have nothing to show for it, so every penny I could was saved.  Many of my work colleagues have nice BMW’s or Ferraris or other expensive toys and will most likely be working the rigs forever, which is fine, but not for me. 

If you are going to take a job that demands a lot more socially (time away from home, total lack of social life, working all the time, etc) then you should have a plan for how long you want to do it and what you want to achieve from it and then stick to it.  My plan was to do it work the rigs for 6 years and save 50% or better of my salary during that time.  I ended up working for 5 years on the rigs but did hit the 50% mark every year.

As for investments, I quickly found I have no business picking stocks.  My classic mistake was buying Apple at $15 a share and selling at $35 cause I thought I had done well.  Had I just waited 8 years I could have sold at $600 and probably be in semi-retirement by now.  Currently just about all my savings go into various mutual funds, about 50% US, 20% Canadian and 30% for the rest of the world.

Its easy to think you will do a good job picking a stock or finding a winner, but regardless of what your gut feeling or Facebook tells you you won’t.  If most experts, people who’e entire job it is is to pick winners can not do it consistently then how is any part timer going to manage?  Vanguard and Fidelity get most of my money but there are obviously others that are equally good.  Find some general US stock fund and an international one, and call it good.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

Salary is king.  I have a chart of my net worth and since I changed into my most recent job (5 years ago) I’ve doubled my net worth.  However, if your spending goes up as your salary you are really just treading water and are going nowhere, so my wife and I (she is better at it than me) have been very careful to keep our spending at no more than 40% of my salary so we can save the rest.

What are you currently doing to maintain/grow your net worth?

Saving 60% of my salary and constantly looking for ways to increase it

Do you have a target net worth you are trying to attain?

No.  I suspect once our child arrives my financial situation will change a bit as our expenses will increase and my travel (and therefor my bonuses) will decrease.  This will change the growth rate of our net worth but I have no idea how much.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

I’ve always had it in my head I’d retire from full time work at 40 and go consulting, but I’m pretty sure that won’t happen then, but maybe at 50. 

Other than my plan to save as much as I can I’ve never been much of a planner, I don’t know how much I’d need to retire at 40, or 50.  I’m interested in making my net worth grow but I don’t really have specific goals in mind or targets.

Is there any advice you have for FMF readers regarding wealth accumulation?

Move overseas.  If you are in an industry that has overseas opportunities I would take them and then bank every penny you can.  Many people come to North Africa or Saudi Arabia and spend 5 years there, bank everything, and pay off their mortgage and then come home.  Any many find they like overseas life and never go back to the US. 

After that I’d say the next main advice would be to find specific skills or talents that you bring to the table at work and make sure you are the best at them there by allowing you to ask for larger salary increases.  I’ve never been an expert any anything at work, but I’m pretty good at everything so if a company can only send one guy to do the work, I’m that guy and I get paid appropriately.  You need to find your ‘edge’, whatever it is that will give you a leg up over the other guy.  Be it extra certifications, typing skills, or in my case rig experience, something that will make you stand out and allow you to ask for and receive a larger pay check.

Millionaire Interviews 20

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I’m 49 and my wife is 42.  We’ve been married for 10 years.

Do you have kids/family (if so, how old are they)?

No

What area of the country do you live in (and urban or rural)?

Fairly high-cost Midwestern suburban area

What is your current net worth?

$1.9M

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Retirement Accounts: $1.33M
Non-retirement Accounts: $221K
Home: $300K (fully paid)
Cash: $77K
Debt: $0

My investment portfolio is a mixture of no-load and low fee mutual funds and ETFs and is:

• US Large Cap: 40%
• US Mid Cap: 24%
• US Small Cap: 8%
• Intl Equity: 9%
• US Bond: 18%
• Cash: 1%

What is your job (type of work and level)?

I’m a software developer and my wife is a manager for a consulting company.

What is your annual income?

Combined base: $190K
Combined bonus: ~25K

How did you grow your income so high?

Each of us has only cracked the six figure mark in the last couple years.  In my case, it’s largely due to being in a good field for a long time allowing me to acquire marketable skills.  In my wife’s case, she just works much harder than anyone else on her team and consequently delivers a lot of value to her company.  If I worked as hard as my wife I probably could make quite a bit more money, but the trade-offs don’t work for me.  I’d have to spend a lot more time away from her, and we decided long ago that that’s not how we’d like to live.  I’m pretty sure that I’d be a bit more disagreeable to be around too.  Work/life balance is very high on our priority list.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Jobs.  Any investment income that we receive is reinvested.

What is your annual spending?

Expenses: 54% (nearly half of this is taxes, ugh!)
Savings: 32%
Charitable Contributions: 14%

How did you accumulate your net worth? Also, please share any mistakes you've made along the way that others can learn from.

I followed the tortoise methodology.  I steadily saved as much as I could for a long time and diligently invested practically from the first day of my career.  We have never really inherited any significant amount of money.  We have never really had a formal budget.  My salary was quite modest when I started my career but was still large enough for me to save some.  For the first decade or so, every time that I got a pay increase I would add it to my savings instead of increasing my lifestyle.  I was very fortunate that the equity markets performed extremely well early in my career (late 80s and through the 90s).  I’ve managed our investments; we’ve never hired anyone to manage our money.

My parents were quite conservative with their money because they needed to be.  Neither of them ever had a very high income, but they were very hard workers and excellent savers.  Fortunately for them, and for me, they learned how to invest while they still had some earning years left.  They are not wealthy but are very comfortably retired.  I learned from my parents to live simply, save aggressively and invest wisely.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

Don’t be afraid to do without. There are so many material trappings in our culture that don’t really add much value to your life when you look at the big picture.  You really need to decide how important it is to have the latest gadget or clothes now versus having financial security now AND for your future retirement.  I’d advise developing a thick skin early in life because this is one of those things that’s simple but not easy.  There have been lots of people throughout my life who’ve viewed me as overly frugal or downright cheap, but I’ve realized that I can’t completely control their opinions.  I’m not suggesting that you squeeze every two pennies until they’re a nickel; I’m just saying that you should be intentional about your spending so that you get real value.

Stay invested.  It’s an extremely rare person who is disciplined enough and smart enough to time the market.  Of course I took a beating in the bear market leading up to early 2009, but since then the broad market is up over 150% and presently at all-time highs.  You probably would’ve lost out on a good portion of that 150+% had you tried to time the market.

Actively manage your financial health.  Obviously having a positive cash flow is important; stay employable in order to keep your income at a nice level.  Also, it’s very powerful to have enough cash on hand to pay cash or not have to worry when your credit card payment is due.  This may allow you to ask a vendor for a discount for paying cash.  Keep tabs on your credit reports too.  I have my three free reports staggered every four months in order to make sure that all of my accounts are as they should be.  Businesses, especially financial institutions, tend to want your business quite a bit more when you have a good credit rating and generally good financial health.

Gain an understanding about how businesses and the markets work.  I was in an investment club for several years and was really surprised at how much I learned about how our markets work.  It just gave me so much more of an appreciation about what businesses need to do in order to be profitable and get investors and analysts to like them.  I never really dedicated much effort to investing directly in stocks in my own portfolio, but I got a much better understanding why companies do the things they do.  One of the consequences of this is how I interact with them as a customer.  I no longer think that businesses and business owners are always sitting on huge piles of cash and are looking to stick it to you to get more.  I now understand that most businesses are trying to manage risk and reward and income and expenses just as I am.  You don’t have to join an investment club, but you should have a basic understanding of quarterly and annual reports that public companies are required to produce.

What are you currently doing to maintain/grow your net worth?

We’re starting to take a serious look at estate planning, which we’ve never done before.  We’d really like to make sure that we can keep our money while we’re alive and that our heirs receive it quickly after we pass on.

Do you have a target net worth you are trying to attain?

Honestly and embarrassingly, no.  I’ve thought about some of the factors involved in calculating this number but haven’t seriously done the math.  We’d like to be able to live off of the interest and little or no principal.  My SWAG would be $3-4M.  We’d almost certainly move to different area that had a much lower cost of living.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

We really would like to retire early from our corporate jobs and use our skills working for non-profits.  Our hope is that we could work for an organization that is really personally meaningful to us and that our skills would help them thrive.  We’d like to move towards this sort of situation long before age 65 and continue as long as we’re able.

Is there any advice you have for FMF readers regarding wealth accumulation?

Be joyful.  One of my favorite radio talk show hosts has a regular segment on happiness, but I think that joy is a little different and quite a bit richer.  For example, it’s not possible to be both happy and sad at the same time, but you can be joyful and sad simultaneously.  This is because joy isn’t just about your present circumstances but about a hope in something greater than yourself and even greater than anything you can imagine.  Perhaps it’s an arguable point that this will increase your wealth, but it surely will increase your quality of life.

Millionaire Interviews 19

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 49 and my wife is 50.

Do you have kids/family (if so, how old are they)?

Two girls, 18 and 16 years old.

What area of the country do you live in (and urban or rural)?

North East USA. Suburban outskirts of a major city.

What is your current net worth?

$2.6MM- including  residence

$2.1MM- excluding residence

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

• $980K real estate (2 rental condos and a residence)
• $1.2MM  Portfolio  (Retirement accounts -- 401k, Ira’s, and Pension account)
• $450K- (taxable investment accounts)
• No Debt (all paid off in the last 12 months).

What is your job (type of work and level)?

• Attorney.
• 22 years with the same company.
• In house/ corporate.
• Started as assistant corporate counsel, moved up to corporate counsel, became a VP

What is your annual income?

My income has seen significant increases in income over the last 8 years.

• My base annual gross income is $180K per annum. I also receive a bonus with a target of 20% ( maybe -30%) of base.
• My base income was $155K in 2008 ( 5 years ago) with a smaller bonus.
• My base income was  $130K in 2005  ( 8 years ago)- with no bonus

I also have two rentals that provide $34000 per year GROSS. However—until very recently, when I paid them off, they basically paid for themselves but did not provide me with additional spendable income. Now that they are paid off I expect to receive about $22,000 per year NET (after property taxes and other expenses). I plan to pretend that $22,000 of income does not exist and just bank it. Until the rentals were paid off I was a “middle man”  and I justified the investment because “someone else” was paying the mortgage, taxes etc….. ( but I got the tax benefits)  and that “someday” I would be the beneficiary of those payments.

I will get an annual bonus in the range of $35K gross.

How did you grow your income so high?

Education is the main thing that got my career started on the right foot. 

After that, it is all about job performance. Being a team player and working harder than your boss works (making his/her life easier) usually fosters good performance reviews, raises and promotions. Getting into the bonus programs are a good thing.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

My job is my main source of income.

What is your annual spending?

We spend between $60K-- $80K/year. And save and invest the rest.

How did you accumulate your net worth?

My net worth was accumulated slowly over time. I did not receive any inheritance or other windfall.

It is simply the result of saving as much as possible, investing the savings in real estate and a moderate stock portfolio, and systematically paying down debt as fast as I could.

I was hired 22 years ago for $46K and my income has slowly grown with typical increases of 3%-7%  (early years were the higher percentages).

I was placed in a bonus program a few years ago starting at 10% of base. My bonus is now about 20-30% of base.

What have you learned in the process of becoming wealthy that others can learn from?

Unless you are lucky in some way—with an extraordinarily high income or a business that is booming, gaining wealth is a slow, diligent process that involves spending significantly less than you make, and investing it so that it can grow.

There is some luck involved (stock market cooperating, interest rates) but there is also a lot of perseverance needed.

It boils down to keeping what you earn.

Everyone is trying to take your money away from you. With every loan payment and every purchase you are giving away your income---someone else is making money and growing their nest egg.

What are you currently doing to maintain/grow your net worth?

• I try to avoid lifestyle inflation, while still maintaining a nice acceptable lifestyle.
• I try to ignore the neighbors displays of conspicuous consumption.
• I save as much as possible.
• I have maxed out my 401k from day one.
• I systematically save and invest money every single month.
• I educate myself on investing and personal finance.
• I avoid debt. And pay off debt as quickly as I can within reason.

Do you have a target net worth you are trying to attain?

Not really. But I would like to assure a smooth retirement. If interest rates rise—I need less—if they stay low, I would need more.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

I would love to retire a bit early. Nothing crazy -- maybe at 60?

It just depends what my situation looks like at the time I guess.

Is there any advice you have for FMF readers regarding wealth accumulation?

• Most of us, despite the claims of our parents, are “normal”. We grow up, get some education maybe, get a job. I suggest that you live within your means. Spend less than you make.
• We all do not “deserve” to drive a Lexus or live in a fancy new, large, home. Know the difference between a want & a need.
• If you can train yourself to be satisfied with your income—and live below it-- you will have the opportunity to grow your net worth.
• Most of us that have attained the “millionaire” status—do not think of ourselves as wealthy. I don’t. That may seem odd to some of you out there—but its true.
• Find a way to track your net worth and watch it grow. It will motivate you.
• Pay off your debt. It’s a great feeling.
• I always tried to refi to loans with less years remaining. Never refi and extend your loans maturity date.
• Read the “millionaire next door”.
• Educate yourself on investing and personal finance.
• Start investing and saving NOW. Open a Vanguard account.
• Time is a two edged sword. It  is your secret weapon if you start early. It is your enemy if you start late.
• Many of the clichés you hear are true -- always “pay yourself first”. Its worked for me.
• Compounding interest is  a wonderful thing--- if you do it right, at some point the interest/gains in your account will exceed your contributions.

Millionaire Interviews 18

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black. (FYI, I asked all the standard questions and, as you'll see, he answered some of them.)

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

Spouse is 55 years old.  I am 57 years old. We were/are high school sweat hearts and have been married for 33 years.

Do you have kids/family (if so, how old are they)?

We have 2 kids - one is 33  years old, married with 2 very precious babies.  The other is 23 years old - in law school (on a full ride scholarship in NY, but that scholarship does not cover living expenses).

What area of the country do you live in (and urban or rural)?

We were born and raised in Iowa, but currently live in Colorado.

What is your current net worth?

Our current net worth (not including bs like paid off cars, etc) is (conservatively) $1.1M.  Not much compared to most of your contributors - but let me tell you a little story about who we are and how we got here.
 
Spouse was born into a family with 10 kids - she was # 8.  Her mom was a stay at home mom, her dad was a lawyer.  They grew up very frugally. Nonetheless, she and her siblings all went to private schools from kindergarten thru college (and some thru higher education - also private schools).  Me, I was one of 6 kids.  I was the second born.  My parents divorced when I was a junior in high school and there wasn't a dime saved for me (or my siblings) to attend college.  So here's what we did - sure hope it helps someone out there.
 
My wife's parents paid for her college.  Me - I took out loans, went to school for a semester, dropped out, worked really crappy construction jobs long enough to earn (barely) enough to pay for one more semester.  Rinse and repeat and repeat and repeat and frickin repeat.  We both finally graduated.

We had a little, blessed, precious one.  My wife stayed home to take care of her. I worked more crap jobs and we were starving.  My wife decides she wants to go to law school - so she did and she graduated with honors, which, to this day amazes me seeing as we were living below the poverty level with a little one and never took one dime of welfare (totally against our beliefs).
 
She finally graduates, takes and passes the bar, gets a job and for the first time we could actually really eat - thank God!  Then we had another little, precious angel - ha!  Well, you know, when you're in love all things are possible.
 
It took us YEARS to pay off my undergrad loans and her law school loans and while we were doing that, we lived really cheaply, but always managed to have a lot of fun and take some pretty cool vacations with the kids too.
 
We paid off our last school loans 9 months before our youngest started college.  We cash flowed that, then we paid for her wedding, helped her and her husband with a down payment on their house, helped them out with all those expenses that come along with a newborn - just in time to cash flow our son's college.
 
In addition to going to college, he also wanted to get his personal pilot's license (which we paid for - altho he was working part time, getting 3 majors with great grades) and then he wanted to study/travel abroad (think Russia and Eastern Europe - ugh!) - so we helped him with that too.
 
He graduates speaking 3 languages (and pretty fluent in a 4th) and for the first time in his life he says he wants to go to law school - ugh!  We did our damndest to talk him out of it, he was undeterred so wife told him we were NOT paying for his law school so he had damn well better ace that lsat and get a full ride to law school - which he did - ha!  Yeah, the kid who couldn't even clean his bedroom actually rocked a full ride to law school.  However, that does not cover his living expenses and his rent alone is $1400/month so we're helping him out with that.
 
Don't mean to be too windy about all this but I did want to give your readers some real life experiences about real people who do NOT make $100K plus/year.  My wife has and does - but just barely 'cause with the grandkids here, she's working 4 days a week, not 5 and I only make $55k - and that's the highest income I've ever had.

Biggest mistake we made was not paying off those school loans just as fast as we could.  We just worked those monthly payments into our budget as if we were required to take the full amount of time to pay them off.  That was really, really stupid, but we didn't figure that out until after the fact.  Ditto for any car payments.  Buy used and use cash or do without.

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Our assets are primarily our retirement savings, cash, and equity in our home.  All of that came from our incomes.  We were never given any $ nor did we inherit anything.  We invested in primarily mutual funds and always put in as much as it took to get the full company match. 

What is your annual spending?

If you don't count what we spend helping our kids out and the extra we're throwing at our mortgage, we live on about $2400/month.

What are you currently doing to maintain/grow your net worth?

What we are currently doing to raise our net worth is get our kids the hell off our payrolls - ha!  We're getting there, slowly, but surely.  (Who knew it would ever take this long)!

Is there any advice you have for FMF readers regarding wealth accumulation?
 
My best advice is to have some fun along the way, in fact, have TONS of free fun along the way, save, don't stress too much over things, trust yourself, your spouse and your loved ones. (Really this is financial advice).

Count your blessings every day and cherish the time of life you're in right now.  You don't want to be looking back at it saying, "wasn't life fun when".  You want to be looking at it presently and back on it saying, "I'm glad I can fully appreciate what I have right now and I'm really glad I appreciated everything I had even when things were challenging".
 
And, lastly, don't get cocky.  We lost our asses in the stock market HUGELY twice and are gearing up for a 3rd one.  Don't think for one minute that you're "special" 'cause you made it to the $1M mark or more.  Shit - oops - life happens.  You can be flying high one day only to learn that a loved one has just been diagnosed with cancer - and that can bankrupt you in a heart beat.
 
These are some miscellaneous comments that don't fit nicely into the questions I asked, so they are lumped here together. :)
 
I'm sure there will be readers who will criticize us for helping our adult children out financially, but our daughter has a child with serious medical needs and we're trying to keep our son's law school expenses down as much as possible.  If both of them were not more than pulling their weight, we'd be singing a different tune, but they both have great work ethics so we're not going to begrudge them money they really need and are putting to good use right now.  We'd much prefer to help them while they really need it than leave them an inheritance that they probably won't need when we're gone.
 
What I really wish I had learned many decades ago was Dave Ramsey's baby steps.  So simple and yet so effective.  We live frugally, but we could have done so much better had we actually had a game plan.
 
My wife kind of has an "early" retirement in that she is now only working 4 days a week and has been doing so since she was 49 years old.  That may not sound like semi-retirement to a lot of people, but for a trial attorney, it's a constant vacation (only with some decent income).  We don't intend to downsize our home anytime soon.  We built it and we want to live in it as long as we can with no mortgage (which we're not quite there - but will be soon).
 
We always figured we'd need a good $2M to retire on (with market fluctuations, health care costs, etc), but lately we're thinking we may not need that much just because we like our frugal life style and still think we can travel the way we prefer with something short of $2M and have lots of fun along the way.

Millionaire Interviews 17

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

My wife and I are in our late 30's and have been married for 8 years.

Do you have kids/family (if so, how old are they)?

We have 2 preschool-aged boys.

What area of the country do you live in (and urban or rural)?

We live in an urban area in Southern California with a very high cost-of-living.

What is your current net worth?

$1.2 million.

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Our main assets are in stocks ($200k), retirement accounts ($500k in mutual funds, index funds where possible) and cash ($400k).  We also have $100k in home equity. Our only debt is a 30-year fixed rate home mortgage with a balance of $380K, recently refinanced from 5.75% to 3.75%.

What is your job (type of work and level)?

I am a software developer.  My wife is an insurance broker.  We are both senior level in our occupations.

What is your annual income?

$230K gross income, split almost equally between my wife's salary and my salary.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Our only source of income is from our jobs.  Our investment income is negligible and I know I have to work on this.

You have been successful growing your career/income. What is your advice for others who want to do the same?

Given how much I hate my job, I don't consider myself having a successful career and don't think anyone should follow my career path. I have a high income but hate going into work every single day. I may have attained financial success, but not personal success.

What is your annual spending?

About $85K roughly broken down as follows:

• Mortgage        21120
• Preschool/daycare       15000
• Property tax    6600
• Gas     5500
• Charity 4000
• Cell phones     3000
• Utilities       3000
• Dining Out      3000
• Travel  3000
• Entertainment   2400
• Life insurance  2350
• Groceries       1800
• Auto insurance  1500
• House cleaning service  1300
• Home insurance  700
• Broadband internet      360
• Gardener        360
• Miscellaneous   3600
• Cash    5000

The "cash" category is for things that I pay for in cash that I don't track by category.  I also pay for the cell phone plans and some utilities for both my parents and parents-in-law and the above includes these.

How did you accumulate your net worth?

We are fortunate to have high incomes and my wife and I are both naturally frugal (as were our parents), so we have always lived beneath our means and avoided debt other than our home mortgage.  We pay off our credit cards every month, buy cars with cash and don't have cable (we just watch broadcast tv the few times that we do watch tv).  Our savings rate is about 45%. 

Until a couple of years ago, we were living on only my salary and my wife's salary went straight to savings/investments giving a savings rate of over 50%.  Once our kids started preschool/daycare 2 years ago, however, our expenses went up and we had to dip into my wife's salary.  I actually didn't realize this had happened until I put together these numbers for this interview.  My original response sent to FMF claimed we were still living on one salary but then I noticed the numbers didn't add up.  After some investigation, I found that our expenses had crept up the past 2 years (mainly for our kids' preschool, but other areas went up too) and we are no longer living on one salary.  This has really been the only method we used to accumulate our net worth: high incomes and high savings rate.

I think I have made 2 mistakes that have hurt my net worth.

1) My stock investments are currently a mess because I never followed a plan.  In years past, I have speculated, chased the strategy of the month, tried to time the market and ignored my investments for years at times.  Overall, I have probably lost 50K playing the stock market.

I am starting to clean up my investment accounts and implement a lazy portfolio of index funds that I will re-balance every year.  As much as I want to make millions trading the market and retire early, it is not happening. I did leave my 401K's and IRA's alone for the most part so they have done well and are more proof that I should just stick with index funds.

2) I wish we had waited a few years before buying a house.  I bought pretty much at the peak of the housing market in 2005.  Had I waited 2-3 years, I wouldn't have lost so much equity and would have gotten more for my money to boot.  I have probably lost $150-200K in home equity.

One other thing that could be considered a mistake is never having had a budget.  With a budget, a few more percentage points of savings could probably be had.  And with a budget, I probably would have discovered earlier that one salary no longer covered all our expenses. I probably still won't take the time to create and maintain a budget, but will definitely keep a closer eye on our expenses every month now.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

I don't know anything earth-shattering or special.  Just don't spend money you don't have and save as much as possible, though it helps enormously to have a good income.  The only exception I have to taking on debt is buying a house since they are so expensive where I live. But if you can pay cash for a house, do it!  I can only imagine that being completely debt free would be very liberating.  I would move to a lower cost-of-living area where housing costs are so much lower, but family ties are keeping me here for now.

What are you currently doing to maintain/grow your net worth?

We will continue to keep up our high savings rate.  I will probably analyze our expenses to see if things could be cut so we could live on one salary again and completely save the other; it would take about 20-25K in reductions to achieve this.

I am also looking to invest more wisely (see above mistake) and buy rental properties with my cash in the near future (which is why I have been very interested in your recent posts on your rental property experiences).

Do you have a target net worth you are trying to attain?

I am targeting $2 million in the next 6-8 years, then I plan to cut back on my job hours and ramp up on my own business aspirations (writing/selling my own software and/or do software consulting).  I despise my current job with its pressures and stress, but my wife enjoys hers (or at least tolerates it better) so we will still have her income until she decides she wants a change.  As for a longer term target net worth, I want to have at least $3.5 million net worth by the traditional retirement age of 65.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

I believe I can and will downsize my job around the age of 45, if not sooner.  Right now, I don't think I will ever fully retire, though I may change my mind later.  I want to stop working ASAP in a stressful corporate job, but I plan to write software in some capacity on my own for income as well as manage my own rental income properties.

Is there any advice you have for FMF readers regarding wealth accumulation?

I already said it above: don't spend money you don't have and save as much as possible.  Also, learn to invest in your vehicle(s) of choice.

I don't think there is one best way to invest. It just depends on your own personal interests, skills and tolerances.  Given the difference in returns between my stock accounts and my retirement accounts, index funds are what I need to stick with.

Wealth accumulation does start out slow, but then accelerates.  My wife and I have both been working for about 18 years.  We combined finances when we got got married at the 10 year mark and collectively reached 500K net worth at the 14 year mark.  We then reached 1M in the last 4 years, due to stock market appreciation and healthy raises at work.  I hope this snowball effect continues!

Millionaire Interviews 16

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 43, my wife is 41.  We have been married 13 years. 

Do you have kids/family (if so, how old are they)?

We have two daughters, 8 & 6

What area of the country do you live in (and urban or rural)?

Southwest, Urban

What is your current net worth?

$1,008,499. We are obviously just north of one million, and a swoon in the market might knock us back under that number temporarily.  But we are here now, and plan to keep going. 

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Assets

• cash on hand, plus retirement & college savings (pre and post tax): $650,084
• home value: $360,000
• auto values: $42,377
• total assets: $1,052,461

Liabilities

• mortgage: $34,166
• auto loans: $9,796
• total liabilities: $43,962

Net Worth: $1,008,499

What is your job (type of work and level)?

Sales, executive level for small firm

What is your annual income?

$115,000 him, $40,000 her working part time

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Jobs

What have you done to grow your career/earnings?

(1) Always beat the expectations you establish.  If you tell someone you will have a project completed in a week, deliver it in five days.

(2) Smile - even when talking on the phone.  People can tell.

(3) Listen

(4) Feel free to negotiate salary and/or annual performance reviews - once you have proven success.

(5) Every once in a while, dump the email and pick up the phone and/or write a letter.  Who doesn't like getting a letter in the mail? 

(6) Don't use another job offer to force an employer to retain you or increase your salary.  Either decline the offer, or accept it.  Be dignified.

What is your annual spending?

We have been able to save approximately 35% of net income, so spending is approx. 65% of net income.

How did you accumulate your net worth?

We both entered into our relationship with very little debt and began participating in company 401k plans immediately.  This allowed us to start saving and establishing goals early on.  I feel for individuals and/or couples just starting out that are already carrying massive student loan debt. That's a serious disadvantage, and a pretty significant barrier to financial independence.  

We purchased a starter home around the time we got married that appreciated wildly and we sold out at the peak of the market for a six-figure gain.  We used the entire profit to pay over 30% down on a larger home as we began growing our family.  We pushed ourselves to go with a 15-year mortgage, plus have paid additional against the principle every month.  Now, almost seven years in, we are on track to pay off the mortgage in 2014.  Our mortgage balance is currently less than what many people pay for a new, large, family SUV.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

1. I don't feel wealthy, but do feel secure and content. 

2. Find a spouse that is on the same page financially.  That is by far the best advice I can give. 

3. Control your fixed costs.  My wife and I are in the "no debt" camp.  I understand others may not agree with our strategy to pay off our mortgage so aggressively.  My reply to that is twofold: a. I have never heard any person who has paid off their mortgage express regret, and  b. I consider paying off the mortgage a hedge against my retirement investments.  Two thirds of my net worth is somehow invested in the market (401k, 529 plan, taxable brokerage, etc..).  One third of my net worth is invested in my home.  Just looking at the past 5 years of my own 401k plan, I see returns of +18.7%, -5.7%, +18.9%, +43.3%, and -44.6%.

At the same time, I see my home value has modestly increased 8-10% (my area of the country did not see the wild swings in the housing market some areas experienced) and the balance of my mortgage has steadily decreased.  This gives me quite a bit of financial security, regardless what occurs in the market (personally, I'm hoping for another significant market correction in the next few years). 

What are you currently doing to maintain/grow your net worth?

Steady diet of saving every month and reducing liabilities every month.  As we are still in the midst of careers, we have not spent too much time determining on how to grow net worth further.  When we pay off our mortgage in 2014, we have some interest in investing freed up funds into local, rental properties.  I have enjoyed reading the details of FMF's rental property strategies. 

For us, the 2008 meltdown in the market was a blessing.  So long as you didn't (1) remove money from your 401k, (2) stop contributing or reduce your contribution, or (3) retire around that time - then you should have made out great (assumes you have a well-diversified 401k plan).  I think the lesson is to press forward and contribute as much as possible to 401k and/or Roth plans and don't concern yourself with the overall year to year returns until you are nearing retirement.  Also, don't ever borrow money from your retirement plan.

Do you have a target net worth you are trying to attain?

About three million adjusted for inflation is our goal to have a retirement where we don't need to work to fund our activities, travel and health care costs. 

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

We are just keeping our heads down and feel we are on track for a retirement in our early sixties.  We are open to exploring other ways to expedite retirement and move that target date up five years or so. 

Is there any advice you have for FMF readers regarding wealth accumulation?

Determine what's important to you and your spouse.  Spend and enjoy money on those things (for us, it's family travel and gym membership).  Ruthlessly save and slash on items not as important (for us: cars, jewelry, expensive clothes, decorating the house)

Six Figure Interviews 9

Here's the latest in my series of six figure interviews, discussions with everyday people who have grown their incomes to at least $100,000 annually.

My questions are in bold italics and their responses follow in black.

Let's get started...

Tell us a bit about yourself (age, marital status, kids, where you live, etc.)

I am 30 years old, male, married, and without kids. My wife and I recently moved to a Midwestern suburb due to a job opportunity I had.

What do you do for a living?

I work as a software architect in a large corporation. Since we are not an IT company, my role is to design, plan, and implement software solutions for internal projects.

How much do you earn annually?
 
My base salary is $165K.

How does this amount break down (salary, bonuses, etc.)?

I am eligible for a 10% bonus. I have only been with my company a short time (about 6 months), so I have not received a bonus yet.

Do you receive any additional compensation/benefits from your employer (401k match, stock options, etc)?
 
I received a relocation package when I made the move; I also get 3.5% 401K match and discounted company stock. The 401K match vests after a year of employment, and I am required to hold all company stock for at least a year.

How long have you been working?
 
I graduated from college in 2005, and have been working full-time since then. So 8 years thus far.

How long have you earned at least six figures?
 
Since 2010, so for the past 3 years. I started out of college relatively underpaid at a $35K salary.

What have been the key steps you have taken that have allowed you to earn this level of income?  

My salary grew significantly as I took on additional responsibility and worked in a technical leadership role. Unlike many of my software developer peers, I focused on understanding the business needs rather than getting caught up with bleeding edge technology or “elegant” code. This led me to more customer facing roles, and eventually to an architect position.

In addition, I am told I have good communications skills, especially for a “techie” person. I think I am good at putting things in perspective and tackling problems accordingly, rather than letting knee-jerk reactions dictate the course of action. And, of course, I’m generally a hard worker and put in the extra hours when necessary.

Which of the following career advancing strategies did you employ (if any) and which were most effective: a. Doing well within your current company and being promoted. b. Jumping around from company to company always seeking a higher salary & responsibility. c. Entirely changing your career path from a lower earning field to a higher earning field (going back to school, etc).
 
B. Jumping around. There were certainly several positions that I expected to stay in longer, but things didn’t quite pan out that way.
 
Company 1 (3.2 years):

• Jun 2005: 35K
• Dec 2005: 36K + 1K bonus
• Apr 2006: 46K
• Jan 2007: 51K + 1K bonus
• Jan 2008: 56K + 1K bonus

Company 2 (1.2 years):

• Sep 2008: 70K
• Feb 2009: 87K

Company 3 (2.1 years):

• Nov 2009: 98K
• Sep 2010: 130K
• Apr 2011: 135K + 6K bonus

Company 4 (1.3 years):

• Dec 2011: 150K
• Jan 2013: 154K + 8K bonus

Company 5 (current):

• Mar 2013: 165K

A few notes:

• I was laid off from Company 1; the remaining job changes were all voluntary moves. That lay off was a huge blessing in disguise as I quickly discovered the kind of salary I could make.
• I almost went down the project management route during my time in Company 2. I am definitely glad that it didn’t pan out, since my technical skills are in much higher demand (and are stronger) than my PM skills would have been.
• I almost left Company 2 in Feb 2009, but decided to take a counteroffer. As I have learned, the counter wasn’t really worth it since I only lasted another 9 months.
• Company 3 started as a contract-to-hire role where I was making quite a bit less than the hourly rate that the company paid (I found out how much the contracting company was charging). I threw out the 130K requirement with little expectation of them agreeing to it, but apparently they wanted me as an employee more than I had anticipated. I had wholly expected to stay at this company longer, but changes in the organization had me looking elsewhere.
• Company 4 was easy work, well paying, but had nearly 0 growth potential.

What are you doing now to keep your income growing?
 
My latest role is quite a jump up in responsibility as I now have direct reports and have migrated from a position that was 80% writing code to one that is now 10-20% writing code. I hope to continue to build on this, and see where I can go within this company.

What are your future career plans?
 
In the 10-year horizon, I have multiple paths that I might go down. I want to stay on the technical side, since that’s where my strengths are. I’m hoping that can lead to a CTO role at some point for a small section of the business (not expecting to be a corporate-level CTO).

There’s another side of me that sees a form of early retirement and/or second career in my 40s. I enjoy what I do, but I would be okay with something that is less stressful and allows for more free time. I’m quite competitive though, so I’m not sure that if I built up my career further in the next 10 years, my ego would let me walk away from it.

Have you been able to turn your income into a decent net worth?
 
My current net worth is ~$500K. The vast majority of that is in several taxable accounts, since I have made many financial mistakes, one of which was not putting enough away in tax-sheltered retirement accounts. I will have to put together a Reader Profile at some point and get into more detail about that.

Why or why not?
 
I have always been a saver. However, I only recently became a bit more intelligent with the investment side of personal finance. I am still sorting through things and trying to line up all aspects of my portfolio at this time.

What advice do you have for people wanting to grow their incomes?
 
First, I will mention that I’m very fortunate to have a job that I enjoy and that pays well. I would highly recommend that the latter part is met, and that income is not the only focus. Even with early retirement options, most of us are stuck working for a good chunk of our lives so it’s far more tolerable if you enjoy that time.

My personal experience has been that it is beneficial to have an open mind and keep the big picture in focus. All companies suffer from short-sightedness, and it’s beneficial to have a vision at all levels of the corporate hierarchy. In my case, it was on the technology front to make sure that what we implement today isn’t shooting ourselves in the foot in the future. To go along with that though, make sure you know when to compromise as well. You will add little business value if it is ALWAYS your way or the highway.

Millionaire Interviews 15

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?
 
I’m 60; husband is 75.  We’ve been married 10 years.  This was the second marriage for me, 3rd for him.

Do you have kids/family (if so, how old are they)?
 
One son from my first marriage, age 28; on his own and about to make me a Grandmother.  Woo-hoo!  My husband’s 2 kids are older and don’t stay in touch.

What area of the country do you live in (and urban or rural)?
 
Midwest, suburb of medium-sized city.
 
What is your current net worth?
 
About $2.5 million.
 
What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Nearly all stocks and mutual funds.  Equity in the house is less than 10% of our net worth.  About 40% of the investments are in retirement accounts.  Value of car inconsequential.  No debt other than mortgage.

What is your job (type of work and level)?
 
I’m an actuary, VP level.  Husband is semi-retired from advertising with SS and some small freelance income.
 
What is your annual income?
 
Mine is about $200K from my job; husband gets about $20,000 from Social Security (before taxes) and about $5K per year from freelance work.  Our investment income is about $100K/year (including unrealized gains) but we don’t touch that.

How did you grow your income so high (if over $100k per year)? 

Invested a significant of blood, sweat and tears into passing actuarial exams early in my career. 

Took only 6 weeks out of the workforce after the birth of my son. 

What is your annual spending?
 
About $70K per year.
 
How did you accumulate your net worth?

In general, living on less than I made, being interested in investing very early (and making mistakes early in my career with small amounts of money), making the savings accounts pretty much a one-way street (money goes in, it does not come out), having some distinct areas where I splurged but not trying to keep with with the Joneses in everything.  I’ve probably paid a total of $200 in credit card interest my entire life and have bought modest cars and driven them till they fell apart.  I’ve been extremely wary of “easy monthly payments” my whole life.  They add up.  My business wardrobe is classic, well-made and expensive but I wear things till they fall apart (which can take a couple of decades).  I save a ton by not wearing makeup and perfume- just don’t like either.

Bad break: marrying a spendthrift first husband who was unemployed the last 5 years of our marriage and was trying to keep up with his multimillionaire sister.  He was a disaster and we divorced in 1997.

Good breaks:  From that marriage I got $100K out of the equity in the marital home, sank it into a $350K house, and sold that house for $575K 6 years later.  At the same time, I remarried; my husband had very little savings but sold his house, which had $100K in equity.  We moved to a LCOL area and bought a new home for $242K with a mortgage.  99% of the money we didn’t need for a down payment went into the savings.  We’re on the same page financially.  That’s huge.  I mow the lawn, brown-bag lunch and cut his hair; he maintains the pool.  We have one care, bought used.  We love our home and rarely go out to eat.  We laugh at how no one would look at us and guess how much we have.  We like it that way.  Our big splurge is travel.  Every year we go someplace major (aided by hotel and airline points) and we’ve been to over a dozen countries together.  We have wonderful stories and shared memories. 

What have you learned in the process of becoming wealthy that others can learn from?

Marry someone with the same financial values you have- or stay single.  Save early, save often, take a long-range view of the market.  Educate yourself on investing.  Even if you trust your advisor (I do), you have to live with the results.  Choose your splurges carefully.  Shopping does not buy happiness.  You don’t have to have the best of everything- only the best of what’s most important to you.  Keep your fixed costs as low as possible (hard to do in a HCOL area, I know- I lived in Northern NJ for 25 years). 

What are you currently doing to maintain/grow your net worth?
 
I’m still working!  We save about $100K per year (that includes employer 401(k) contributions) so I plan to work to 65.  We continue to be cheap where it doesn’t matter to us, but have a $6K cruise ot Alaska planned next year and will probably go to Italy (in Business Class) in 2015.

Do you have a target net worth you are trying to attain? 

Projected value under some pretty reasonable assumptions is $3.6 million; the house will also be paid off by then.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?  

Retire in 5 years and move to a smaller house, preferably on a lake so I can get a kayak.  My husband will be 80 by then but if he’s around and up for it, we’re going to Australia and New Zealand.  If I’m on my own, I intend to travel, do volunteer work and take college classes in interesting but unmarketable areas such as History and foreign languages.

Is there any advice you have for FMF readers regarding wealth accumulation?

To repeat a little of what’s above: save early, save often.  Don’t try to keep up with everyone in every area.  Marry someone with the same financial priorities.  Educate yourself on investing.  Enjoy some of your money along the way.

Millionaire Interviews 14

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

66, retired at 55. Female. Life-time single.

Do you have kids/family (if so, how old are they)?

No kids, no dependents.

What area of the country do you live in (and urban or rural)?

I live in the mountains of North Carolina  in a small city that is in a very rural county.

What is your current net worth?

$1,623,527

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

All my assets are in mostly index funds at Vanguard. I am 62% in bonds funds, 35% in equities funds, 3% in Money market.   I have no debts.  I sold my last owner-occupied real estate 5 years ago and very cheerfully rent.  My rent is pleasantly small and I like having someone else reliable to call when the dwelling has a problem.

What is your annual income?

Currently I live on Social Security and a defined pension which add up to $35,000 per year.  Just before I retired 11 years ago I was making $85,000 per year.  My IRA required minimum deductions will begin in 4 1/2 years.

What is your annual spending?

My annual spending is 29,000 dollars per year, because I save 6,000 each year from current income.  From the 29,000 I give 6,000 /year to charity.  So I spend for my personal purchases---23,000.   And the low cost of living leaves this feeling fine.

How did you accumulate your net worth?

My parents were young adults in the Great Depression, and though my father was a physician, we ALWAYS  lived below our means as a family. I chafed at this as a teen, but then heard a 74 y/o woman give a presentation to my classmates about how her only income was as secretary, due to a sudden divorce in her 60's.   She told us all women meed an income and savings of their own.   I swore to myself I would not  be poor in old age.

I graduated from college and then masters degree with no debt, then got a Ph.D with very little debt thanks to my father's insistence that my parents help me with the expenses, so I could stay in school full time.

In my first job post grad  education, I saved like a fiend---first 15%of pre-tax salary, later, as my income grew, but my expenses didn't, I saved 25-30% of pre-tax income.

I invested in stock and bond funds, not California real estate, which went through deep recessions while I worked there.  I also move my investments from a full service broker to, first Schwab, then Vanguard for the lower fees.

I bought compact cars new, then drove them until they died, then bought another one paying cash.

I was never, and still am not interested in spending big for toys.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

I got burned once on a commodity contract my parents gave me, I got stuck owing a $10,000 federal income tax bill.  I promptly sold them, paid the taxes out of savings, and have never again bought or accepted an investment I did not FULLY understand!!!  That was a big  OUCH lesson!!

A happier lesson was seeing how good I felt when my investments began earning more per year than I was earning!!!   That is reinforcing...

What are you currently doing to maintain/grow your net worth?

I save 16%  of my pre-tax income, because I think it is good habit to keep up.  I am  a buy/hold/rebalance as needed investor at Vanguard and talk periodically there with my financial planner.   I stay put in all investments in the 08-09 crash---though it was very hard no to get spooked.  I cook and bake from scratch a mostly plant food diet---way less expensive, and very healthy way to eat and weight manage.

I am not touching my current investments to beef up my lifestyle---though I will when I move to the continuing care community.

Do you have a target net worth you are trying to attain?

I would enjoy seeing my net worth grow to $2,000,000, because it is such a pretty number to look at, but I don't need it for the continuing care community.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)? 

In 10 years I plan to enter a continuing care community that is an excellent one, but more pricey than my current lifestyle.   So I am leaving investment alone to grow and still save a bit to add to them.

Do you have any advice for FMF readers?

I think Your Money or Your Life and the Millionaire Next Door and Total Money Makeover have EXCELLENT tools for spending less and saving more. In fact, I still track my spending each month. It is helpful.  

Millionaire Interviews 13

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 43 years old.  My wife...well, a gentleman never reveals the age of a lady.  :-)

Do you have kids/family (if so, how old are they)?

We have one daughter who is a teenager.

What area of the country do you live in (and urban or rural)?

We live in an large city in the south

What is your current net worth?

$2.2MM in investments. We don't include our home equity, pension accounts, cars, other similar assets in that number but they would push our net worth up to $2.5MM or so.

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Stocks, municipal bonds, ETFs and a few mutual funds.  We have a mortgage for our house which we haven't paid off since we are planning on moving in the next few years.  We also have a low interest loan on a car that we haven't paid off since we can get a higher yield on our investments than the interest rate on the loan.

Asset allocation: We are 5% cash, 67% US stocks, 10 % foreign stocks, 16% bonds. Stock style is 44% large value, 34.8% large cap growth, 16.5% mid/small value and 4.5% mid/small growth.

What is your annual income?

$250,000 after raises this year. We have been greatly blessed in our lives.

How did you grow your income so high?

Initially, we switched companies often which resulted in a large raise each move.  Recently, we've settled down and worked hard and made ourselves indespensible at work. As a result of the hard work, I've had 2 promotions in 3 years and my wife has been well rewarded through bonuses and stock even though she has remained in the same job. We both have had top ratings the last 2 or 3 years in our job reviews. 

There is a benefit in my company for staying put.  My company matches 50% up to 6% on my 401K but they also put in an additional amount to take the place of a pension.  This year I got 7% additional and in 2 years I will get 10%.  In seven years it will increase to 15%.  My wife's company has a pension in addition to matching 100% up to 7% for 401K. 

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Jobs

What is your annual spending?

Initially we tracked every dime, but now we have a pretty good feel about our spending and don't have to track the details anymore.  Our approximate breakdown is roughly 25% taxes, 50% investments/saving and 25% for living expenses, charity, etc.  

How did you accumulate your net worth?

Although we didn't make a large amount of money initially, we always saved and paid our bills on time.  My wife and I have always been frugal.  We don't do without, but we don't go overboard.  About 18 years ago we began investing with a small amount of savings.  Of course we didn't know what we were doing and trusted our "advisors".  We didn't know what style of investing we wanted to do so we followed the crowd and invested in the latest and greatest.  In the dot com bubble, we lost about 50% of our portfolio and learned that we were horrible stock pickers, most advice we received was rubbish and our "advisors" were just as bad.  
 
After three or four advisors for three different firms we finally found an advisor that was honest and put us on a  more conservative path.  Dividend payers and conservative mutual funds.  I began to realize that this was my kind of investing.  It was much less stressful for us than trying to guess when the stock was at it's peak.  Now our portfolio consists of dividend achievers, MLPs, REITS, and the like.  During down turns, we try to cut spending a little and invest more.  In my mind, if I buy more shares, I can get more dividends, which buy more shares, which means more dividends...well you get the point that it snowballs.  We continue to max out our 401Ks, and invest the rest in taxable accounts since we make too much to invest in a Roth.  We do have pensions, but we consider them gravy and don't plan our retirement on them being present since that is the most conservative route.  We also do not count on social security since I would not be surprised if we are means tested out of it. 

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

Quite a few things actually.  Early in our investing "career" we learned not to be greedy and chase the latest, greatest, and fastest movers.  In our case, the turtle beats the hare any day.  There is no get-rich-quick scheme.
 
The second thing we learned is that most financial advisors are just sales people that push their firm's recommendations.  Typically by the time they recommend getting out of a stock it is too late.  Out of the 6 or 7 advisors we have used only one has acted in our best interest. I now handle our investments. 
 
A third thing we learned is to ignore the "experts" on TV and on financial websites.  It seems to me that at any given time 50% say to sell when 50% say to buy.  Fifty percent say the economy is improving while 50% say it is getting worse.  Both sides can't be right at the same time.  If the experts knew everything, they would rule the world since they would be worth trillions.
 
We also learned to be an investor and not a speculator.  Speculators look at the short term and try to make a guess when the market is in their favor.  Investors are in it for the long run.  In the short term, emotion rules the day and leads to huge ups and downs in the market.  Investors can ignore most of the noise and make rational decisions on their next move.
 
Time is your friend and you MUST invest early. The earlier the better.  We've all read the stories how someone who invests a given amount for 10 years in their 20s will have more than someone who invests the same amount for 20 years or more if they start later in life.   If you get a raise or a bonus, invest it instead of spending it.  
 
Your career is very important for making enough income and is your best asset.  Work hard and make it grow.  If you go to college, make sure your investment in college will provide a return.  Don't spend $100,000 on a degree than pays $20,000 per year.
 
Before you start investing in individual stocks, make sure you have a good base of diversified index funds.  Make sure you have decided on the style of investing that makes you comfortable since that will dictate your investment selections
 
Life is not fair and things will go wrong sometimes.  Deal with it.  You will make mistakes, learn from them and move on.  You will lose money on your investments at times, learn from it and move on.  Quit whining and figure out how to make the best out of the situation you are in.
 
The last major thing we learned is self-control.  You must control your spending, control your desire to keep up with the Joneses and focus on your family.  You must control your fear about downturns in the market or mistakes you have made and act rationally.  Control the fear and don't let it control you.  Downturns happen and they are actually a good opportunity for you.  Every time there is a downturn, we keep investing and the slope of the line that is the value of our portfolio is steeper every time the market comes back.  People who panic tend to buy high when everyone is talking about the investment and then sell low after the decline has happened.
 
What are you currently doing to maintain/grow your net worth?

We target a minimum of 50% of our income to be saved.  All dividends and interest are reinvested or used to buy more securities. This allows for purchase of more shares when the market is down which pays more income which then can be used for more shares.  Can you tell yet that we like income?  :-)

Do you have a target net worth you are trying to attain?

Our plan is to live off the dividends and interest our investments provide.  Right now, our portfolio's yield is around 3.5%.  If necessary we will sell shares in retirement, but that isn't our desire.  As a backup, we do have a target of a little under $4MM to be on the safe side.  To arrive at this number, we assumed that we desired $90,000 in today's dollars and assumed a 4% inflation rate.  Yeah, I know that is high but it makes us feel comfortable.  We tentatively plan on retiring in 12 years when I am 55 and at that time, the $90,000 will be around $155,000 in future dollars.  If you multiply this by 25 (ie the 4% rule) this equates to a little less than $4MM.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)? 

Retirement won't mean that we quit working, it just means we can do something else that doesn't pay as well as our current jobs.  This year we hit the point that if our investments grow at 4% we will be at our goal of nearly $4MM by retirement without any further investment.  Of course, we will keep investing until we retire and maybe even in retirement if we are working.  In the near future, we want to travel some but nothing too extravagent.  At some point, we want to buy some land and build a small house on it.

Millionaire Interviews 12

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 57, my spouse is 50. We have been married for 31 years.

Do you have kids/family (if so, how old are they)?

We have two kids. A girl and a boy, 29 and 27 years old.

What area of the country do you live in (and urban or rural)?

We took early retirement this year from our first job(s) where I worked for 27 years and my wife for 12 years. We currently live and work overseas.

What is your current net worth?

Our current net worth is approximately $7M - I estimate.

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

• Our home in the US is paid for. It is worth $2M
• Our combined Retirement Accounts is $1M
• Our combined savings is $1M
• Pension: $3M (Net Present Value)

What is your job (type of work and level)?

I am an Engineer and my spouse is in administrator.

What is your annual income?

Our combined annual income is $400K+.

How did you grow your income so high?

Ours is an immigrant's story. I came to the US with $8 in my pocket as a graduate student. Worked minimum wage jobs to augment my student assistantships and ate eggs for breakfast, ramen noodles for lunch and dinner. My wife did baby sitting and other odd jobs. Life was wonderful.

My first salary after my PhD was $28K/yr in late 80's. My wife was a homemaker and went back to school and finished her undergraduate degree after the kids got into high school and took up her career a dozen years ago.

After two years at $28K, I was hired on as a "permanent staff" at $45K. In career, as in investment, compounding works! Every three years or so, I had the opportunity to play it safe or get out of my comfort zone and take on a responsibility where there was the real risk of failure. Each time, I challenged myself to grow into the new role and it paid off. It was John Paul Jones that said, "It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win." The trick is to take considered risk.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Our jobs.

What is your annual spending?

There was a time when we used to watch every penny. These days, we do not watch what we spend. We do not have extravagant expenses. I cannot tell you exactly how much we spend. Outside of taxes etc. we probably spend $50K/yr, mostly for our food, entertainment, and other personal expenses.

How did you accumulate your net worth? Also, please share any mistakes you've made along the way that others can learn from.

We accumulated our net worth by focusing on education and our career. For us, higher education paid off in ways that we had never dreamt. This was the big positive thing that we did. Second, we stretched and invested in our house. We wanted our house to be our safety net. Most of the value in the house is not in the structure, but the suburban farm on which the house sits.

We took the first job that I got. We got lucky, it was a job with defined benefits and when we retired early this year, we retired with a pension with a net present value of $3M.

We have made and continue to make mistakes. I think it is part of life.

1) We did not enroll in a company sponsored retirement plan right away. Retirement seemed so far away, and the immediate needs seemed more pressing.

2) We withdrew all the money that we contributed to the 401K to help parents pay off debt, about 15 years ago. It was the right thing to do, but perhaps there was a more financially smart way to do it without incurring the penalty for early withdrawal.

3) Like many people, we did not manage our 401K very efficiently. Been busy with my career.

4) We have not made prudent financial investments and moneymarket does not return much of anything. We must find a good investment broker. Trying to decide whether to go with the major brokerage house or a smaller more personalized service.

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

Investing in higher education and in a career that you enjoy is extremely important. It gives you unparalleled options. Saving for retirement is very important and one should start early. If we had, we would have been wealthier. However putting one's life on hold to live after retirement does not make sense either. Life is about living and creating memories. The more memories you create, the more fulfilling your life.

What are you currently doing to maintain/grow your net worth?

We are at a point in our career where our income far exceeds our expenditure and we save most of our income.

Do you have a target net worth you are trying to attain?

Not really. We moved overseas so that we can be professionally engaged and yet do the things that we are interested in such as traveling, arts, entertainment. Moving overseas has made it much easier for us take vacation and visit places and do things that we want to do.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

We are not sure retiring early and staying home is what we want to do. Right now, we are both enjoying our work and leisure activities. When work becomes a chore, we might hang it up.

Is there any advice you have for FMF readers regarding wealth accumulation?

Education and sensible lifestyle! Behavioral economists will tell you that it is not the intensity of experience, rather the frequency of experience that contributes to happiness. In other words, the inexpensive camping trips is likely to give you just as much happiness as an overseas trip. You can afford more camping trips. Research shows that happiness increases with income up to a point beyond which no amount of money brings you more happiness. In the US, this number is $60K/year for a family of four. We did not accumulate wealth because we set out to accumulate wealth. We got lucky....our parents stressed education, we got good jobs, and the rest took care of itself.

Millionaire Interviews 11

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I’m 56 and divorced.
 
Do you have kids/family (if so, how old are they)?

One child, 16 year old.

Attends a top, public high school about 30 minutes from our home. We chose this high school as it affords her an excellent education without a private school price tag.  And, is in a culturally diverse, community-oriented area with a large university and many ‘.com’ and entrepreneurial firms.
 
What area of the country do you live in (and urban or rural)?

Urban
 
What is your current net worth?

Between $1.9M and $2.0M
 
What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

• $550,000 home
• 401k - $850,000
• IRA/ROTH - $240,000
• CD/MM/Cash - $100,000
• Taxable stocks, mutual funds - $250,000

Daughter:

• She has two ROTH IRAs (Vanguard Index 500/Global Index funds) – both funded with about $5,000 each from money earned in her small business.
• She also has a savings account into which she deposits her money until she has approximately $1,000 and then she will invest a portion of that money into her annual ROTH.

What is your job (type of work and level)?

Technology company- global program manager
 
What is your annual income?

$105,000, plus supplemental income from my daughter’s small company (approximately $22,000).
 
How did you grow your income so high?

Most employers (in the past 8-10 years) have not been generous with pay increases or bonuses.  To make both career, and income, it was warranted to move from firm to firm, spending several years in each firm to gain expertise and promotions.

In my case, I chose to find projects and teams where my expertise was highly sought after, as well as finding new/developing company technology areas, to enhance my career, expertise and to a small degree, my salary.

However, I will be looking for employment outside of my current company as the economy and job prospects have improved.

I wish to remain in my current location and continue to telecommute, or travel as needed, for any position.

And, given my desire to retire, once my child is in college, I plan on choosing only those positions which afford me the current schedule and travel which meet my personal needs for the next few years.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

My technology job and my daughter’s small business, which I manage while she’s in school.

I’m not currently withdrawing anything from my taxable, or non-taxable, investments.

I plan on applying for Social Security, on my ex-husband’s benefits, when I’m 66 and waiting until I’m 70 to claim my full benefits. 

Given my portfolio (low-expense mutual funds – domestic, global, REIT, etc.) I plan on withdrawing the minimum amount (4-5%) and not touching the principal.

Also, my daughter has asked that I continue her small business, while she’s in college.  This will provide a nice contribution, in addition to investments and SS.
 
What is your annual spending?

My annual spending is approximately as follows:

• $4,000 property tax
• $3,300 home/property/auto insurance
• $2,000 home maintenance, HOA
• $15,000 groceries, gas, utilities, school supplies/activities, car maintenance
• $1,000 clothing
• $5,000-10,000 travel, entertainment
• $2,000 miscellaneous
• Mortgage:  $0
• Car loans:  $0
• Other loans:  $0
• Credit card debt (none for 26 years): $0

2008 Honda – I’ll keep it until it doesn’t make financial sense to continue to maintain the vehicle.

I don’t plan on purchasing a car for my daughter as she carpools to/from school and will be entering college in the next year. Also, she is able to use my vehicle, or carpool, to any of the events and activities she chooses.

Depending on where I choose to live, after my daughter is in college, I will choose to purchase either a used car or utilize public transportation.

My daughter and I enjoy a very rich life culturally, educationally, and socially.

We are members of our local libraries, art/cultural museums, and attend as many free concerts, events, etc. as possible.

Plus, we are avid coupon, Groupon, loyalty card, and discount savers.  We don’t ‘clip to shop’, instead we clip or use a coupon only when there is something we need or have saved for. 

My daughter is a lovely young lady and dresses in the latest Fashions. However, she purchases only those items she needs to replace, or enhance the items in her wardrobe.  She isn’t a weekly mall shopper and prefers to shop at the upscale thrift and consignment shops.  She is also thrifty with her money, from her business, as she knows it’s her hard earned money she’s spending.

We have the latest cell phones, but purchased with 100% rebates and on low-cost plans.  We have electronics that are less than 2 years old, but which were purchased at Christmas sales with several incentives and rebates.

We aren’t members of Costco, Sam’s Club nor do we stockpile large quantities of goods, household goods or other items.  We visit libraries for books and DVD rentals.

And, we have high-speed wifi, canceled cable and switched to HDTV antenna to receive TV channels.  Between wifi (Netflix, Pandora, etc.), antenna, libraries and Redbox, most of our entertainment needs are met. We watch very little TV but have many options available for in-home entertainment.

We’ve estimated that, in 2012 alone, we saved over $5,000 by using coupons, loyalty cards, cash-back credit cards, thrift shops, and having a list before we shop.

We take at least two trips a year. One domestically or to Mexico, and one overseas for two to three weeks.  We have money set aside for these trips and many are made a month or two before we leave as we don’t know until that time what our work and school schedules will be.
 
How did you accumulate your net worth? Also, please share any mistakes you've made along the way that others can learn from.

I was surprised at how much I’ve accumulated (investments) when I did my taxes and reviewed my investments, a couple of years ago.  Before then I’d reviewed my investments but didn’t do a full tally of all that I owned. 

My parents were well-educated, but had little money as professors, and lived overseas for the majority of their lives. They, however, were naive regarding investments and the stock market.

When I attended college, then grad school for my MBA, and found my first job in the then infant technology industry, it became clear I needed to educate myself about money, investments and my future. At that time, the money magazines were mainly technical journals which made little sense to the neophyte investor.

I attended seminars which were offered by small mutual fund companies and started to invest in individual stocks (Apple, STK, AT&T, etc.).  Over the years, as the mutual fund industry started to grow and more consumer-friendly magazines were published, I moved from individual stock investments to mutual funds to simplify my investing.

The mistakes I made were to invest a majority of my pre-tax funds in the stock of companies in which I worked.  However, having worked for two firms which went out of business and after I was married and had my child, I found I had little time to spend on valuating individual stock purchases and moved to investing, via ACH and monthly, in low-expense mutual funds (Vanguard, Schwab, Fidelity, etc.). 

In my different company 401k’s I’ve invested across the fund spectrum (domestic small cap, domestic large cap, REIT, global, emerging markets, etc.) to diversify my portfolio. I’ve invested very little in the stock in the firms in which I work as the technology sector to hold that much of a company stock in my portfolio.

Also, I’ve always invested the maximum amount, in my 401k, to receive the company-match and to maximize pre-tax savings.  When I reached 50, I increased the 401k investment to the max allowed by the IRS. And, continued my after-tax ROTH and taxable investments.
 
What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

I find that I have more money than I really need and am surprised how well we can live on less than half of my income (after pre-tax and after-tax investments).

We’re not wanting and I feel comfortable in knowing that I have no financial debts that will derail my future.
 
What are you currently doing to maintain/grow your net worth?

Continuing to save at least 30%+ of my income and finding new ways to save.  I planning on investing in rental properties (in other markets) as I owned several rental properties, previously.

Invest 50% of my available cash in funds I can tap, if needed, vs the money losing value in a CD or MM.
 
Do you have a target net worth you are trying to attain?

$2.5M-$3M
 
What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

I hope to sell my home and move to a smaller residence, as when I retire I don’t want yard work or major home maintenance.  I’d also like to look at living, at least part of the time, overseas.
 
Is there any advice you have for FMF readers regarding wealth accumulation?

It’s amazing how even the smallest of decisions regarding spending can lead to a savings and investing plan that will benefit  enable you to not have to worry about college, retirement and your mortgage. 

If you’re in a relationship (living together, marriage, or even single or single with kids) and serious about getting out of debt and realizing  a life where you control your money and your debts don’t control you – sit down and itemize everything you own, you owe, and where you can and WILL cut and save.  When I was married, my husband said he wanted to save, but would go purchase the latest boat or other toy and wonder why he couldn’t pay the bills.

Before I divorced, I was very careful to itemize my investments, debts and where I could save additionally. Plus, how much I realistically needed to have to live on as a single parent.   After I itemized, I realized our lifestyle (my daughter’s and mine) wouldn’t change much and that we could find ways to save even more so college, and retirement, would be fully covered.

In closing, the reason so many individuals fail to realize their financial dreams is that they aren’t brutally honest about why they spend and to make a long-term commitment to get themselves out of debt and into a healthy emotional and financial state.

Millionaire Interviews 7

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

I am 36, and my wife is 37. We met shortly after we graduated from college. We have been together for 14 years, and have been married for 12 years.

Do you have kids/family (if so, how old are they)?

We've made a decision not to have children.

What area of the country do you live in (and urban or rural)?

We live in a suburban/semi-rural area in the Mid-West. We chose this region in part because of the quality of life and in part because of the very reasonable cost of living.

What is your current net worth?

Our current net worth is $3.1 million.

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Our net worth is broken down as follows:
 
Assets:

• Retirement Accounts: $900,000
• Deferred Compensation: $250,000
• After-tax savings: $1.1M
• Inheritance (in an after-tax account): $450,000
• Real Estate (primary residence): $450,000

Liabilities:

• Mortgage: -$50,000

Other:

• We also have approximately $400,000 in unvested stock options. I do not include these in net worth calculations, because they are not available to us today.
• I don't count our other assets (cars, furniture, etc..). That's way too complicated, and those items will never help us retire.

Comments:

• Our retirement accounts include our own 401k contributions, our employers' profit sharing contributions, and IRAs.
• We both qualify for deferred compensation programs through our employers. These programs allow us to take reduced salaries now, with the balance being put in a fund. This helps us to defer taxes on this deferred income until we leave our employers. We'll then pay tax on the deferred amount, presumably at a lower tax rate.
• You'll note the $450,000 inheritance. My wife's aunt passed away in 2007 and left her about $250,000. We put this in an after tax investment account and got lucky by investing it near the bottom of the stock market dip. Excluding this unexpected inheritance, our net worth would be about $2.7M.
• Our only real estate is our house. We have intentionally avoided "investing" in real estate through rentals. A core part of our savings/investing philosophy is to "keep it simple"; we can make far more money by applying ourselves in our careers than by spending time and mental energy worrying about rental units. We refinanced into a 5/1 ARM a few years back. We'll pay off the balance when the ARM comes due.

What is your job (type of work and level)?

I am an Electrical Engineer and my wife is a Chemical Engineer. I am a mid-upper level individual contributor while my wife moved into project management a few years back.

What is your annual income?

Our annual income varies based on the stock market performance and annual bonuses. The range for our combined income is approximately $500,000 to $600,000. That is generated from about $350,000 base salary, $150,000 in bonuses, and $0 - $100,000 from exercising stock awards.

How did you grow your income so high?

Both of us made a conscious decision to study engineering because we believed it would continue to be an area of high demand. We both took jobs at large companies directly out of school, and neither of us has changed employers since. We place a high value on stability. Our incomes have increased through regular yearly raises, commensurate with promotions. Neither of us has aggressively sought out pay increases, but we have always made it clear that we understand the value we offer our employers, and they have responded appropriately.

In some regions it is common to hear of people changing jobs every year or two. In the Mid-West employment tends to be far more stable. I have friends who work in the Bay Area who have had numerous employers. It is not clear that job hopping has paid off for them. While each job change results in a higher salary, they lose unvested stock options, unvested profit sharing contributions, and generally the first year at a new company they receive very modest salary increases.

What is your main source of income (be as specific as possible -- job, investments, inheritance, etc.)?

Our primary source of income, by far, is our salary. We are just now reaching the point where growth in our investments occasionally exceeds the amount that we save. Most of our investment gains are capital gains that will not be realized (and thus taxed) until we sell the investment. We plan not to realize these gains until we are in a lower tax bracket.

What is your annual spending?

An approximate breakdown based on a $500,000 year is as follows (I derived this from last year's numbers):

• Income: $500,000
• Taxes: $175,000 (state + federal)
• Savings: $250,000
• Charitable Giving: $20,000
• Entertainment: $20,000
• Housing + Utilities: $18,000
• Food: $10,000
• Insurance: $4,000
• Clothing: $2,000

I lump a lot in with "Entertainment"; that includes vacations, movies, sporting events, as well as gadgets. I suppose that could be classified "Miscellaneous". You'll note that I don't include car payments there. When we want/need a new car, we pay cash. Of course that impacts our savings rate for that year.

How did you accumulate your net worth? Also, please share any mistakes you've made along the way that others can learn from.

We have been fortunate to have a good income immediately after graduating from college. But our net worth accumulation came as a direct result of "extreme saving". We have saved nearly half of our gross income for most of our post-college years. We have always maxed our our pre-tax retirement savings

Early on we lived in a very inexpensive apartment and ate chicken and rice to keep costs low. When we bought a house, servicing the mortgage cost well under 10% of our gross (this was the period when many people were buying houses with NINJA loans). We're still in the same house and the mortgage is now about 2% of our gross income.

I can't think of any real "mistakes"; we have been careful and consistent in our saving and investment strategy. There have certainly been opportunities for improvement though. I've always been a gadget hound, and adding up the money I've wasted on phones and tablets over the years is a bit embarrassing. No doubt it runs well into 5 figures. Now when I buy something, I mentally calculate its cost 20 years from now (learn and use the rule of 72).

What are you currently doing to maintain/grow your net worth?

We are continuing to save at a considerable rate, though to be honest we regularly ask ourselves what is our "end game". Fortunately we both enjoy our jobs, so are not planning to retire in the immediate future.

We are considering ceasing contributing to our pre-tax retirement accounts. These are already generously funded, and it is difficult to access those funds before retirement age. We're considering moving those contributions into our deferred compensation instead, where it will be available without penalty earlier.

Currently our net worth is growing on its own at about the same rate that we're adding to it through savings. One might think that we could stop saving pretty soon. But it's a catch-22; if we save less then we are spending more. If we spend more, then our lifestyle is more expensive. If our lifestyle is more expensive, than we need more net worth to cover that. And since we're saving less, it takes even longer to reach that higher net worth. One can have all kinds of fun going over these scenarios with a spreadsheet.

Do you have a target net worth you are trying to attain?

Our target is to have enough accessible savings to hit our current spending rate with a 2% drawdown. Assuming we want $80,000 per year, that means we need $4M in accessible savings. We're less than halfway there (I don't count retirement savings as "accessible"), but our savings has ramped up with our income, so we should hit our target by age 40.

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?

This is the big question. We have no short-term plans to retire. We may move to 80% time at work, if our employers will allow it. However doing so virtually guarantees that our careers will stall. That's probably ok though. Having a 3-day weekend every week would be great!

Is there any advice you have for FMF readers regarding wealth accumulation?

Yes! The following should not be construed as advice. This is what my wife and I did, and it worked for us. I'm sorry that much of it sounds cliche. It probably is.

Read "The Millionaire Next Door". Then re-read it every year. Measure your success based on your savings, not your possessions. Strive to be a "Prodigious Accumulator of Wealth". View your net worth as your ticket to freedom.

Read The Dilbert Guide To Personal Finance. Open an account at Vanguard. Direct deposit your entire paycheck into the Prime Money Market fund. Set up two automatic monthly transfers out of this fund. One for $X into your checking account (where $X is enough to cover your budget), and one for $Y into a target retirement fund. Only trade individual stock with money you don't care about. Don't get cold feet when the stock market crashes. Your savings will grow slowly at first, and then more quickly. Before long it will be 5 figures, then 6.

Despite what many people will tell you, you can become quite successful with a corporate job. Make yourself a valuable employee, and you will be rewarded. Large employers usually offer stable employment. There are few things that can derail your plans faster than a prolonged period of unemployment (I know this from observing friends in this situation).

If you are successful, your biggest expense will be taxes. As a wage earner, your opportunities for avoiding them are very limited, but defer them if you can safely and legally do so.

When considering job moves, assess the entire compensation package, not just base salary. For white-collar jobs much of the compensation may require several years to vest. By changing jobs frequently you may miss out on considerable income.

Time and mental horsepower is limited. Avoid wasting yours on financial gimmicks like rebate credit cards and switching between high(er) yield checking accounts. The benefits from those are dubious at best, and trying to take advantage of them is mental clutter that you are better off without. Here's a secret: If you're not wealthy, you don't have enough money that an extra 0.5% yield on your savings will matter. If you are wealthy, you won't care about an extra 0.5%.

When you are starting out, the rate of return on your investments does not matter. You are far better off spending time figuring out how to save more money or increase your income than you are trying to figure out how to boost your investment returns by 1%.

Don't forget to factor in transaction costs. Every time you sell your house to buy a new one, you're throwing 10% of your home's value into a pit (there are more expenses than realtor's fees) That can easily exceed whatever capital gains you thought you were making on the sale.

Decreasing the cost of your lifestyle has outsized benefits. Not only do you have more money to save, but you don't need as much savings to recreate your income. Put another way, a penny saved is worth more than a penny earned.

There's a management principle that "If you can't measure it, you can't manage it". Measure (calculate) your net worth religiously every month. I've been tracking our net worth every month for the last 14 years in a spreadsheet (the first month it was $14,000!). It's hard to do this calculation when the market is down, but looking at how far you've come eases the pain.

Maximize your income and minimize your lifestyle. If you're still choosing a career, prefer a high demand field over a low demand field. This should be obvious, and yet far too many spend money on a degree that will never pay off.

Consider your priorities. Rapid wealth accumulation has benefits but comes with trade-offs. Only you know if those trade-offs are worth it.

Debt is insidious. Pay it off. All of it. Never borrow money to buy a depreciating asset.

Millionaire Interviews 5

Here's the latest in my series of millionaire interviews, discussions with everyday people who have practical tips and insights into growing and managing wealth.

My questions are in bold italics and their responses follow in black.

Let's get started...

How old are you (and spouse if applicable, plus how long you've been married)?

53

Do you have kids/family (if so, how old are they)?

No children/never married....steady girlfriend for 2+ years....

What area of the country do you live in (and urban or rural)?

Pitttsburgh, PA  ....urban...grew up in north WVa (small town)....

What is your current net worth?

$2.1M

What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?

Stock Mutual funds...rents...

What is your job (type of work and level)?

Civil servant/maintain residential properties (7)

What is your annual income?

About $90k

What is your main source of income?
 
Salary from job
 
What is your annual spending?
 
Credit card averages $2.1k/month say $25k....

How did you accumulate your net worth?

Investing into mutual funds, saving.....First $20k was when I was when I was about 26 years old...always extending myself...working 2nd jobs...’moonlighting’ my dad would call it....”8 hours is just breaking even...”

What have you learned in the process of becoming wealthy that others can learn from (what can others apply to become wealthy themselves)?

MISTAKE:  Taking coworkers advice and putting $6k into commodities in Chicago brokerage firm.....Always reading motivation material “Think and Grow RIch”. “Millionaire Next Door”, Gene Simmons “Love, Sex & Kiss” (great for young men wanting to succeed)  etc. and listening to cassettes for over 25 years...now an occassional cd.....Use the local library for latest financial books...

KEY:  living below your means...gaging portfolio on a monthly basis (I have my monthly net worth since 1988)...never marry...

What are you currently doing to maintain/grow your net worth?

Still working regular job (been there 29 years; retiring in 2 years from that).

Do you have a target net worth you are trying to attain?

Hope to see $3M in the next few years...

What are your plans for the future regarding lifestyle (for instance, will your net worth allow you to retire early, downsize jobs, etc.)?
 
Maintain same lifestyle for first few years (maintaining real estate)...then spend more time along the beach...travel, etc. but always live within means and figure a market decline of 20-30% anytime.

Is there any advice you have for FMF readers regarding wealth accumulation?

Yes:

• Read, read, read
• ”All things in moderation”
• Save $
• Guard your time
• Watch the waistline
• Make income streams
• Play defense with your $
• Love your parents and spouse
• Follow these maxims:  “My life is what my thoughts make of it”..”we usually get what we want in the long run”...”we become what we think about”...

Millionaire Interviews

I am in the process of moving this series from Wealth Lion to FMF. So here's the post that got it all started...

This blog is about how to grow your net worth.

To this end, I have been (and will keep) sharing the tips I've learned along the way, but I want to offer a broader perspective for my readers' sakes. Yes, I think I have something to offer, of course, otherwise I wouldn't spend the time running this site. But I'm certainly not the end-all expert on how to grow and manage wealth.

There are many ways to become wealthy and probably even more ways to manage wealth once you have it. So I wondered what voices could I add to mine to offer additional thoughts and tips on becoming and staying wealthy.

Well, there is certainly no lack of so-called experts out there. You can find them all over TV shows, on the radio, in print, on the web and so forth. But while many of these people know how to speak, write, and talk about managing money, they know it only in theory, not in practice. Yes, they know what to say and report on what to do, but they don't know how it really works. Why? Because they are not wealthy themselves. They spit out facts, but there's no insight, no extra tips, no real-life application because they haven't lived it themselves. No, these people would not add anything useful to the conversation.

Then there are the wealthy who have "made it" in some form or fashion. They are generally famous to some degree and most times have greater wealth than the average person could ever hope to attain (I'm talking $10 million+, and generally much more). They have started multi-million dollar businesses, are very talented in some way (sports, music, etc.), been in the right place at the right time, and so forth, and now are very wealthy. Yes, they certainly have something to share and their stories would be interesting. But since much of their results are not something the rest of us can replicate, I don't think adding their voices here would be as beneficial as I'd like. 

I prefer the everyday person. The one who started from nothing (or close to it) and became wealthy over time. The person who knows the ins and outs of growing and managing wealth because she's lived it. The person who is just like the rest of us -- a "normal", "regular" person, who we can relate to. And best of all, a person who has practical tips and insights that work in the real world -- ones that we all can apply to grow our wealth.

That's why I'm starting my "Millionaire Interviews" series. It will be a category here at FMF where I interview everyday millionaires. Here's how it will work:

• The interviews will be with people who have a net worth of at least $1 million. The levels of their wealth will vary and will be shared on each post. Some will have several million dollars to their names..
• I will ask them a series of questions and they will respond. They also have the right to add their own questions to the interview if they think I left out something important.
• As you might imagine, I want to keep the identity of these people guarded (to the extent they want to be guarded.) So I won't even use their initials in the posts -- I'll simply give them a number, starting at "1" and counting up.
• As you read each post, you can not only learn from them but also ask them questions. If they feel comfortable doing so, they will respond. I am guessing that some will and some won't.

These posts will hit at random. We may have a couple in one week and then none for a month or two. There's no set schedule. It's dependent, as you might imagine, on me finding millionaires willing to be interviewed. To that end, if you have a net worth of at least $1 million and are willing to be interviewed for this series, please drop me a line. We would all appreciate hearing your story.

So stay tuned. Millionaire Interviews will be coming your way shortly...

Top Ten Assets Owned by Millionaires

Dr. Thomas Stanley lists the top ten assets owned by millionaires (with the percentage of total wealth in each asset class) as follows:

1. Investment real estate (17.7)
2. Closely held stocks (14.5)
3. Publicly traded stock (12.6)
4. Retirement assets (11.4)
5. Personal residence (9.2)
6. Insurance (7.2)
7. Cash assets (6.9)
8. Limited partnerships (4.1)
9. Tax-exempt bonds (3.9)
10. Farms (3.1)

Just to be clear, the data is from "IRS' estate returns computed during 2007-2009 for those decedents who were under 70, married at the time of their deaths and had a gross estate of $2M or more." Just so we're all on the same page.

Here's how my top assets break down:

1. Retirement assets -- work 401k + rollover IRAs invested in Vanguard index funds
2. Investment real estate -- Two places (10 units) at the moment and working on more
3. Publicly traded stock -- taxable accounts invested in Vanguard index funds
4. Cash assets -- higher than normal now because I'm looking for a property to buy
5. Personal residence

All my other assets are negligible in value.

How about you? How do your assets break down?

How Millionaires Became Wealthy

Time recently highlighted a survey of multi-millionaires asking them how they became wealthy. The results:

• 27% are entrepreneurs


• 15% are corporate executives


• 7% are managers


• 6% are investors


• 6% are doctors and dentists

A few other key notes:

• 75% of wealthy entrepreneurs and business owners attribute their success to prudent risk taking. This group is also most likely to cite serendipity, or “being in the right place at the right time.” Just 58% of professionals including doctors and lawyers attributed their success to risk taking.


• 96% of professionals attribute their success to education while 81% of entrepreneurs feel that way. Professionals are also most likely to credit frugality as a significant factor in building their wealth. Nearly all (99%) corporate executives, meanwhile, cite “hard work” as a significant wealth creation factor.


• 80% say smart investing is a great way to join the millionaire’s club.

Some comments from me:

• I have grown my net worth through a combination of factors. First I was a "manager", and then became an "executive." Along the way, I spent less than I earned and saved and invested the difference to grow my wealth.


• I attribute a lot of my success to my education and rate my graduate degree as the main reason for my financial success.


• Of course, frugality is important as well. Without at least a degree of it, it's very difficult to significantly grow your net worth (which is why I list over-spending as the worst money mistake anyone can make). Of course you have to live and enjoy life as well, so that's why I practice moderate and selective frugality.


• "Hard work" is almost a given in wealth creation, isn't it? Very few become wealthy without it IMO.


• It's interesting to see so many say that "investing" is a way to become wealthy. I would see investing as part of another method, but I think few become wealthy with investing alone. Warren Buffett is the exception to the rule.

How about you? What has been the main reason(s) for your financial success?

How Do You Stack Up Compared to Millionaires?

Dr. Thomas Stanley recently shared some average financial figures from Millionaires Next Door (he wrote the book) as follows:

• The typical millionaire next door is 57 years old.


• The market value of the home is less than 20% of net worth.


• Debt totals the equivalent of less than 5% of net worth.


• Annual income tax is the equivalent of about 2% of net worth.


• Total annual realized income is approximately 8.2% of net worth [median], or the equivalent of $8.20 of income for about every $100 of wealth.

Here's where I stand on these measures:

• I haven't reached my 50's yet.


• Our home makes up about 7% of our net worth. This is because 1) we bought a house we could easily afford, 2) the value of our home has declined since we bought it, and 3) our net worth has gone up since we purchased the house 13 years ago.


• We have been debt free for over 15 years now (other than credit cards which we pay off each month).


• I haven't calculated income tax as a percent of net worth, but I would guess it's in this range.


• We are just about average in our income to net worth relationship.

How about you? How do the millionaires (or striving-to-be-a-millionaire) out there stack up to these averages?

How to Reach $1 Million

CNN Money recently ran a series on how to get to $1 million in net worth. They featured several articles, each purporting to help you accumulate $1 million on their own. The ideas: investing, owning rental real estate, launching a business, saving money, and climbing the corporate ladder. Each option came with a few suggestions to make the most of each method to get to $1 million.

Overall the tips were pretty basic and fairly weak IMO -- as well as not being very realistic. Not very many people can get to $1 million in net worth with just one of the ideas above. But used in combination they can make you wealthy. However that's not as much of an attention-grabbing headline. :)

If someone asked me how they could get to $1 million in net worth, here's what I would tell them:

• Start by picking the right college and the correct major. The "right" college is the one that maximizes the trade-offs between costs and benefits (with the benefit being career-long earnings). The "correct" major is one that you like (not love) that can earn you a great living.


• Cash in your degree to get a great first job with a brand-name company. I've told why this is important previously, so I won't repeat myself, but if you want details, see Five Steps to Six Figures in Seven Years.


• Work to maximize your career. It's your #1 financial asset, so growing it can have HUGE benefits to your finances.


• Earn extra money. Add to your career earnings by making money on the side. There are many ways to do this. For some of the most popular (and easiest) ways to earn some extra cash, see 11 Great Ways to Earn More Money and 7 More Great Ways to Earn More Money.


• Keep your spending as low as possible (enjoying life, of course, but not spending everything you have.) The combination of an ever-growing income and low expenses will increase the gap between the two -- and your gap is what you need to fuel your net worth growth.


• Invest your gap as soon as you can and for as long as you can. My investments are in index funds (including stocks, bonds, international stocks and the like) and real estate. Yours may or may not be the same, but whatever you do, develop a plan to make sure your gap money grows as much as it can.


• Avoid major money mistakes. You can take all the steps above and still derail your finances by making one (or a few) of the worst money moves anyone can make. Avoid them like the plague because they can be the death of your net worth.

If you take these steps over the course of many years (and repeat them again and again), you will become a millionaire. And it's likely you'll become a multi-millionaire eventually.

Anyone have anything to add?

Manage Your Finances and Think Like a Millionaire

My favorite personal finance book of all time, The Millionaire Next Door: The Surprising Secrets of America's Wealthy, lists the following seven common denominators among those who successfully build wealth as follows:

1. They live well below their means.

2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

3. They believe that financial independence is more important than displaying high social status.

4. Their parents did not provide economic outpatient care.

5. Their adult children are economically self-sufficient.

6. They are proficient in targeting market opportunities.

7. They chose the right occupation.

Here are my thoughts on these:

• I know you know what I think of spending less than you earn. I've mentioned several times that it's the best piece of financial advice I could give anyone.


• Yes, you have to spend time to make and manage your money properly. But it's generally a lot less time than most people assume. All told I probably spend a couple hours a month managing my finances.


• Put succinctly: millionaires don't worry about keeping up with the Joneses.


• My parents certainly didn't provide economic outpatient care -- they didn't have anything to provide. It will be interesting to see what we'll do for our kids as they get older. Will we be able to resist helping them financially (more than appropriate) when/if they need it?


• I don't think I'm proficient in targeting market opportunities (for instance, to develop a business of my own), but I certainly did choose the right occupation. Specifically, getting an MBA has been a goldmine for me!

After The Millionaire Next Door, Dr. Stanley wrote The Millionaire Mind. This book went a step further into (as you might imagine) the mindsets of millionaires and attempted to determine the traits they felt had caused them to be wealthy. Dr. Stanley distilled there success to these five things:

• Integrity -- being honest with all people


• Discipline -- applying self-control


• Social skills -- getting along with people


• A supportive spouse


• Hard work -- more than most people

Notice how these are simple concepts to define and understand, but they are not easy to implement. They require effort and determination, something that's in short supply among most Americans when it comes to money. That's why, IMO, most Americans are not doing well financially.

It's hard for me to honestly evaluate myself on these five factors, but of the group, there are three that I think have been a major part of my success to date:

• Discipline -- I have always been a pretty disciplined person, whether it's in academics, business, or personal habits. I generally use lists and measurement tools to help me achieve many of my goals and keep myself accountable. Others would likely call me anally retentive. :)


• Spouse -- As I've noted, my wife plays GREAT defense. She is even more frugal than I am (I know, you probably find that hard to believe, but it's true.) She fits the mold that Dr. Stanley talked about in Stop Acting Rich -- she's not interested in displaying our economic success. This is an awesome characteristic to have in a spouse because without it, you can be sunk. It doesn't matter what one spouse earns, if the other spends that much and more, the family's finances are doomed.


• Hard work -- I have always succeeded by hard work, not raw ability. For example, my intelligence is (IMO) a bit above average at best (even though I always tested well and was at the top of my class.) But my "secret weapon", what set me apart academically, was the fact that I was willing to work harder than almost anyone. I was willing to spend three hours (or more) studying every night of college when most others weren't. Then in grad school I was willing to spend five hours (or more) studying every night when most others weren't. In my career I've been willing to put in the extra hours and work as hard as needed to do a good job. And all that effort has paid off quite nicely.

I realize this can sound like bragging, and I really don't mean it that way. Believe me, I have a whole laundry list of stuff I could do better in all areas of my life. But fortunately Dr. Stanley doesn't have that list for me to comment on. :) Anyway, I'm simply trying to reinforce the fact that much of what he's said in his book has held true in my life. I'm sure there are others of you out there that have had similar experiences.

So what's your take on this information? Does it fit with what you've seen in life yourself or is there something missing? Give us your thoughts in the comments below.

A Story from a Millionaire Next Door

You all know how I love the book The Millionaire Next Door.  Well, here's an email I received from a good friend of mine recently -- a real millionaire next door. He had been reading around FMF and wanted to share his own personal finance story:

Our finance story. Married at 21, bought house at 25, mortgage rate of 14%. Refinanced three years later at 12%. Bought upgraded home at age 31. Resisted urge to buy McMansion on prestige golf course. Low ball offer with no waiting was accepted, saving $10,000. In four weeks, put $10,000 into home, and got home re-appraised for $20,000 more. Got home equity loan to cover the $10,000 in upgrades. (Wife hired maintenance men from her company to do the work on the side.)

Despite losing my job to disability, paid off home in eight years (yes, young people need disability insurance).

For last 14 years, we have maxed wife's 401k. The previous six years, we maxed my 401k. Our 401k's are worth $650,000 at age 50, plus $130,000 for college education.
 
In 1992, bought land for a second home for $12,000 + $7,500 in improvements. Never built house, which would have devalued land and sucked money. Land now worth $125,000.
 
We have a paid off house to borrow against as needed. We keep $5,000 to $20,000 on hand for vacations and home repairs and upgrades. We pay off credit cards every month.
 
So, even with my income crippled, saving for college, splurging on water-skiing and the massive gas-sucking SUV to pull the boat, we have net worth of $1.2 million.

Let's review a few things here -- what this couple did right to get them to such a great position:

• They bought disability insurance. My friend has had health issues for many years now and has been unable to work. But because they had disability insurance, he still has an income. I always say that we hope we never have to use our insurance, but if you need to, like in this case, it can be a HUGE financial lifesaver.


• They spent less than they earned. Of course they did -- how else could they save such a large amount? And not only for retirement, but they also have a good amount set aside for college (for two kids).


• They bought a house they could afford. Almost to a "T", they followed my formula for buying a house. And don't think they are living in a two-bedroom shack either. I have been to their home several times and it is quite nice.


• They paid off debt. Back when they bought a home (14% interest!), paying off a house was a no-brainer. That said, many people still didn't pay off their mortgage. This couple did. Now they are debt free and on solid financial ground.


• They got lucky. Ok, so there was a bit of luck here -- on the value of the land they bought. It's done a good job of appreciating (especially the way the market has been lately). Then again, they made a smart move by not developing it. 


• They enjoyed life. At the end he talks about how they like to water ski. They do (as well as snow ski too.) And they have a boat. Don't think for a minute that this couple has simply saved every penny at the expense of having fun. Quite the opposite. They were able to both save and have fun/enjoy life. Why? Because their gap was large enough to allow them to do so.

Those of you who are still working on millionaire status can learn a lot by following the example set by this couple. Those of you who are already there (or beyond), I know you can identify with them. And if you're willing, I'd love to hear your personal story of how you became a millionaire next door.

The Wealth of Auctioneers

Dr. Thomas Stanley (author of The Millionaire Next Door) recently noted that auctioneers are 10 times more likely to be millionaires than the average American. Why is this? Two factors -- high income and low expenses. Here's how Dr. Stanley summarizes it:

The combination of a high income and the low cost of living in a small town is a powerful force underlying wealth accumulation.

So they maximize their incomes and live in a low cost-of-living area, huh? Wow, wish I had thought of that. ;-)

He also adds an interesting insight into why auctioneers are careful with their money:

They are quite frugal in part because they see how little previously owned consumer products sell at an auction. Many auctioneers are also experts at appraising the value of certain assets.  They often leverage this knowledge when they invest. 

It makes sense. If you see items being sold day after day for a fraction of their "new" value, you probably wonder why anyone would buy these things new. Or, if you can get 40% off a few major purchases simply because you're in the right place at the right time, then that can save you a bundle -- especially over a 40-year career.

Three shows come to mind when I think of this situation: Pawn Stars, Storage Wars, and Auction Kings (yes, we watch them all.) They all have to do with:

1) knowing the value of items that have no official price tag associated with them (thus getting a good buy on them)

2) selling items for (hopefully) more than they are worth.

If you can do these things over and over again, you're bound to become wealthy. And auctioneers take advantage of both of these. They buy for themselves when they see a great deal (or can use their knowledge to save on purchases) and they make money (a commission) the more they sell an item for. Quite a good formula for wealth accumulation.

7 Life Lessons from the Very Wealthy

The Washington Post lists seven life lessons from the very wealthy as follows:

1. Having money is better than not having money. Money may not buy you happiness, but it buys many other important things. Like financial security, excellent health care, education, travel and a comfortable retirement. In a word: freedom.

2. Don’t become “cash rich” and “time poor.”

3. Memories are better than material objects.

4. Watch your “lifestyle leverage,” especially early in your career.

5. Having goals is incredibly important.

6. You must live in the here and now.

7. It helps to be incredibly lucky.

My thoughts on these:

• Of course having money is better than not having it. If it wasn't, who would read financial blogs? ;-)


• I have had times in my life where I was making a great salary but had no time for anything other than work. I was miserable. Thank goodness that I eventually (after a decade or so) found a job with a much better work/life balance. It has made a world of difference.


• We've previously discussed that experiences are generally rated higher than having "things". As a family, we're counting on adding to our experiences in the next few months by traveling to the Caribbean.


• IMO, you need to watch "lifestyle leverage" (and leverage of any kind), "spending creep", or whatever you want to call it -- throughout your career. Otherwise, you'll end up spending most or all that you make and go nowhere financially.


• You need to have at least basic, general goals. Specific, written goals are even better. After all, if you don't know where you're going, how will you get where you want to be?


• Living in the here and now is difficult for me, but something I'm working on. We can't spend out whole lives sacrificing only to find ourselves old, rich, and no physical ability to do anything -- what a waste. But it's often difficult in the daily grind of activity to stop and smell the roses.


• There's very little written about the impact of luck on personal finances -- probably because it's something that can't be controlled and planned for. But I know I have been incredibly lucky over the years, especially in the development of my career. Those of us who are spiritual often give God the credit for this "luck", but whether or not you believe good fortune is bestowed by a higher being, I think we all can agree that there are certain events in life that give some of us an extra break/boost.

That's my take. What are your thoughts on these?

Examples of How to Become Wealthy

My post titled Details on Millionaires generated a couple of comments from readers who I know are doing well financially. I thought I'd share their comments with you all since they were full of great advice.

Here's the first one:

At age 38 in approx 1998, I hit $1M~, then a divorce took $400K+ in 2000 and the '01 and '03 markets took some more. I worked HARD again, kept investing when others said "the times are bad" (dollar cost averaged in bad years) and saving too (those early '00 decade I bonds are priceless!) and retired in 2007~ w/ $2.85M.

Paid taxes, spent some and (I only count my house at tax valuation, not market plus CASH/investments, no STUFF in my net worth), still have 2.2~ to $2.4M. My income from pensions (about $40K~ since I have no mortgage and a VERY tax efficient portfolio) covers my living needs. $4k a month (!) more in guaranteed annuity at age 60 (minimum, could be more) means I better SPEND!

Early Retirement and financial freedom allows me to make up for some lost years of my 30's and 40's but, I'm doing well at it! It's discipline; I started a plan at age 22 and stuck to it. Only debt EVER in my life was a 48 mo car loan for $7K I paid off in 19 months and a trailer loan as a young AF officer that at $350~ a month (26 months) I recovered when I sold it. NEVER any other debt! THAT is the secret, ALWAYS live BELOW (well below) your means. Forget saving 10%, 15% minimum to up to 50% (after taxes) when you make the big ($500K+) income makes it happen!

Let's see: live below your means, don't go into debt, grow your career so you make a great income, and save a ton. Hmmm, sounds like I've heard those tips before. ;-)

Seriously, take it from this reader if you don't from me -- this stuff works!!!! And here's living proof that it does!!!!

Here's the next comment from another millionaire reader:

I can attest to the logic of Dr. Stanley.

You need to really focus on minimizing your expenses, especially when young to become a PAW... like most of the millionaires next door.

I remember when I was 23 and took my first job as an Engineer making $42k a year. $3500 a month gross paycheck, after taxes and 401k contributions take home was around $2600 / month. Besides giving my first paycheck to my parents to thank them for paying for college for me, I was paying $780 per month rent for a 1 BR apt, plus food, phone bills, and car insurance. Roughly saving $1000 -$1200 a month out of my income or 30 - 35% of gross salary.

Instead of spending more I actually found ways to cut my rent by living with 2 other guys in a very basic small house (2 BR, 1 BA, the 3rd guy slept in the basement!). This was in Northern Indiana. My share of the 'rent' (covering mortgage only) was $120 per month! It was great to live so cheaply, my friends from NYC were blown away at how cheap this was, and I got a chance to live with people who were very blue collar but interesting people. It took me out of my comfort zone, and I enjoyed that. No doubt it is much easier for a man to do this than a woman but I was watchful not to get into a dicey living situation.

My savings rate jumped by $660 / month or 20% of my salary, and I started to invest a bit with the extra savings.

I kept up that same attitude throughout my career and that is why my wife and I are living in a 2BR / 2BA condo that is worth less than $300k...even though peers of mine are living in very large houses with 5 bathrooms, swimming pools, etc.

I can personally vouch for the research done at MND, it has been very close to my own experience.

It's not what you earn, but what you keep.

Again: earning a good income, keeping expenses low to make your gap as large as possible, and saving a ton. It's a simple formula, and if you follow it over many years, you WILL become wealthy.

BTW, I have to echo the comments made by this last reader. I also read The Millionaire Next Door early in my post-college life. I started to apply its principles soon thereafter and the rest, as they say, is history. That book has made/saved me hundreds of thousands of dollars and that's why it's at the top of my best personal finance books of all time list.

How Millionaires Become Millionaires

After sharing Millionaire Facts, I ran into this piece from Yahoo Finance titled Wealth Is What You Save, Not What You Spend that talks about how millionaires became millionaires. How could I not post on something with this title? ;-)

Some of the quotes from the piece I just have to share (with my thoughts added in):

Most of those folks with a net worth of $1 million or more have earned it themselves.

Many people mistakenly think that most millionaires have their wealth handed to them from either their relatives or some stroke of luck (like winning the lottery, being gifted with amazing abilities/talent, etc.) This is completely false. Most people with over seven-figure wealth got it the old-fashioned way, they earned it.

Most of those with big bucks live well under their means and they put their money instead toward investments that help them stockpile more wealth.

This is why spending less than you earn is my best piece of financial advice. It's also the reason that over-spending is the worst money mistake anyone can make.

"It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes," the authors wrote. "Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline."

Some related FMF posts that you might like to read that support these claims:

• The Wealth of Farmers
• Intelligence Still Linked to Income, Not Wealth
• How Most Millionaires Become Wealthy

Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.

Simple math tells us all that it's easier to become wealthy with higher incomes (that's why I recommend growing your career and offer other money making suggestions as well.) But those who make more often spend more -- either treading water or even going backwards financially.

Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.

We paid for our last car with cash (and several before that), our last home with cash (from the sale of our previous home), and we don't want/need/have a boat. Of course I prefer to pay for anything by credit card, get the cash back, and pay it off immediately. ;-)

And they're patient, willing to invest in the long term and wait it out. "They stick with their investments and are more likely to have a financial plan," said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments. Many take the long-term approach to investing because they're working at being financial independent.

They "just so happen" to take advantage of the #1 way to grow their investments: time.

When it comes down to it, becoming wealthy is pretty simple: make your gap as big as possible and invest it for a long, long time.

Anyone working on this plan? I know you're out there. ;-)

Millionaire Facts

CNN Money has a piece that lists facts about millionaires. I thought I'd list some of their findings (in red) and my thoughts on them. Here goes:

About 7% of households have seven figures.

Whenever I write a piece about trying to become a millionaire, someone always makes a comment similar to, "Having $1 million is no big deal these days." Oh yeah? Well having $1 million puts you in the top 7% of net worths in the U.S. That sounds like a big deal to me.

14% of millionaires say their parents were wealthy.

In other words, the vast majority of millionaires didn't inherit their wealth.

My family was lower-middle-class for much of my young life (just me and my mom on a minimum wage salary), then middle class once my mom get remarried. But we were never, and they aren't now, "wealthy".

42% say they don't feel wealthy themselves.

I wonder what it takes to feel wealthy. I'm guessing a few million more than whatever you have. ;-)

How they got rich:

• 95% Hard work
• 83% Smart investing
• 81% Frugality
• 67% Risk taking
• 41% Luck

If I was listing these for my own life I would say:

• Hard work/education (see How I Made Millions Off a $5,000 Investment) which led to a great career  
• Saving early and saving often (see Time, Time, Time)
• Frugality/spending less than I earned (which really leads back to saving)
• Luck (mainly not having any major sickness and being "in the right place at the right time" a few times in my career)

90% college grads and yet only 5% law degrees and 3% medical degrees.

Think the MBA is bigger than the other post-grad degrees? I'm thinking so.

Median price of car: $31,400

Almost the exact price of the last car I purchased.

$39,300 -- the amount they save or invest annually.

This seems a bit low to me, though perhaps it's still a good percentage of their income. I save a good amount more than this each year.

61% say they "still have a great deal to learn" about investing.

I've condensed investing down to this: save as much as I can as soon as I can for as long as I can. Get decent returns on these savings by using index funds. So, is there a lot I don't know about investing? Sure. Do I really need to know anything more about it to be successful? Nope.

$13,000 average annual amount millionaires with up to $5 million give to charity.

Seems really, really low to me. Even someone with "just" $1 million should give more than this, shouldn't they? Then again, many of them likely pay high taxes and would say they "give" that way (though I don't buy that argument.)

How to Become a Millionaire in Three Easy Steps

CNN Money tells how to be a millionaire in three easy steps. It's a three-page post (or at least they've expanded it to that) that really boils down to making the most of these three factors:

• The time you have to save/invest
• How much you save/invest
• The return rate on your savings/investments

They go on to say that the longer you have to invest, the more money you invest, and the more aggressive (within reason) you invest, the faster you'll become a millionaire.

Wow, these guys are geniuses. ;-)

Yeah, pretty basic stuff. But they do make one point that I wanted to share with you all on a serious note -- this one about the impact of time on your investments:

When you think about getting rich, what jumps to mind? Saving more money? Getting that money to work harder for you? Sure, those are critical elements. But they're not nearly as important as time: How long you allow dictates how you pull the other two levers -- which is why you want to estimate your schedule before going on to the next sections.

I brought up the importance of time in investing in The Best Way to Maximize Your Investment Return, where I noted it was the one factor of the three that made the most difference in how your wealth would grow. BTW, #2 is how much you save. This makes return rate, the step most people spend the most time on, the least important of the group. So if people simply started saving more and doing it over a longer period of time (two factors they can influence much more than they can return rate), they would be much better off. Couple those with using index funds as your preferred investment vehicles (delivering you a good rate of return), and you've got a winning strategy.

CNN Money says (roughly) the same thing with this quote:

The single most important thing you need to know about building wealth: You're far better off being a dogged saver who's a mediocre investor than being a below-average saver who can knock the socks off the S&P 500.

Of course, if you can do everything well, then you're almost guaranteed to become quite wealthy.

The post does have an interesting chart that gives the odds of hitting $1 million in 20 years if you start with $250k and invest 60% in stocks and 40% in bonds given various annual savings rates. The results:

• Annual savings: $5,000; Chance of hitting $1 million in 20 years: 31%
• Annual savings: $10,000; Chance of hitting $1 million in 20 years: 43%
• Annual savings: $15,000; Chance of hitting $1 million in 20 years: 55%
• Annual savings: $20,000; Chance of hitting $1 million in 20 years: 67%
• Annual savings: $25,000; Chance of hitting $1 million in 20 years: 79%
• Annual savings: $30,000; Chance of hitting $1 million in 20 years: 91%
• Annual savings: $40,000; Chance of hitting $1 million in 20 years: 100%

With all this talk of saving $1 million, I know someone is going to say something like, "$1 million is not what it used to be" or "$1 million is not enough to retire on." So let me address these issues quickly:

• No, $1 million is not what it used to be. Nothing is what it used to be thanks to inflation. But $1 million still places an individual in the top few percentage points of all net worths in the US.
• Yes, $1 million is enough to retire on. Not a lavish retirement, mind you, but many people are retiring with far less than $1 million in the bank and are doing "ok."

Anyway, the key point here boils down to this:

If you want to become wealthy, invest as much as you can as soon as you can for as long as you can.

Yes, it's as simple as that!

Details on Millionaires

Get Rich Slowly has a great interview with Thomas Stanley, Co-Author of “The Millionaire Next Door” (one of the best personal finance books ever IMO) that has some really great quotes. I thought I'd share a few of them with you (in red) and give my comments on them. Here we go:

Income only explains about 30% of the variation in wealth. So they are doing something other than just making money and accumulating wealth via investments.

So again we see that having a high income is only partially responsible for making people wealthy (we've discussed this in Wealth Doesn't Require a High Income and The Wealth of Farmers.) In fact, income is less than a third of the reason that millionaires are wealthy. What accounts for the majority of their success? The fact that they spend less than they earn (regardless of their income.)

Every time I post on the fact that you can become wealthy by spending less than you earn, someone says something like, "Yeah, but you also have to have a high income." No, you don't. You need a "decent" income, of course (someone making $10k per year isn't going to become wealthy no matter how much they cut spending.) But you don't need to be making six figures to become wealthy.

And yes, I realize that people with higher incomes have a better opportunity of becoming wealthy. But as the statements above imply, many people don't seize this opportunity -- their spending simply rises as their income does. Unfortunately, this is more likely to happen (that even high income people spend all -- or even more -- than they make) than not happen in America today.

If you look at the statistics on happiness in life overall, those people who live below their means are happier than people who don’t.

Why is this? Is it because they've controlled their desires and are thus not always left wanting "more"? Or is it because they end up becoming wealthier and this leads to happy feelings? Thoughts?

The happiest people are the people who have substantially more money than most of the people that live in their neighborhood.

As we've discussed, relative income is a better predictor of happiness than absolute income.

The price of the house is a very high correlative of everything else that you spend money on.

In other words, if you spend a boatload on a home, it's also likely that you'll spend a boatload on all sorts of other expenses. People who want to grow their wealth understand this. And that's why in the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more. For specifics, see Why Many Homeowners are Having a Tough Time.

Most people should not be in their own business.

Eliminates the myth that you have to have your own business to become wealthy.

There are a whole lot of folks out there in this country who are millionaires [but not self-employed].

Let me say from experience that you can certainly earn a great income without being self-employed.

Most millionaires are disciplined not only in terms of money, but also in consumption of food. We found in the correlations that weight is related inversely to health. Most wealthy people are not overweight. They are healthier than most people.

Let's face it, the reason many of these people is wealthy is because they are disciplined -- they control various portions of their lives (and can resist temptations) and thus become wealthy. This discipline carries over into other areas of their lives (like health/weight issues) in many cases.

Overall, it's great, great stuff from an author who I really admire. The Millionaire Next Door was one book I read and applied early in my post-college life. The results have been tremendous and for this I owe Dr. Stanley a great big THANK YOU!!!!

Wealth-Building Lessons from The Millionaire Next Door

Long-time readers know that one of my favorite personal finance books is The Millionaire Next Door. I read it several years ago when it first came out and have applied many of the principles it discussed. As a result, my net worth has climbed steadily throughout the years.

As a result, when Get Rich Slowly recently posted nine wealth-building lessons from The Millionaire Next Door, I knew I had to share their thoughts with you. Here are their nine lessons and my thoughts on each:

Lesson #1: Income Does Not Equal Wealth

So true. Yes, people with higher incomes have a better opportunity to become wealthy, but many waste it by spending all (or more than) they earn. Example: After 40 years, someone making $1 million a year but spending $1.1 million a year will be worse off (assuming the spending is on consumables) than someone making $75,000 a year but only spending $50,000 a year.

Lesson #2: Work That Budget

Most millionaires have budgets. Those that don't have developed the ability to spend below what they earn throughout the years.

We had a budget for the first 10 or so years of our marriage. But after that time, we were able to control our spending so much that we haven't needed/used one for years now. That said, I do check out actual spending versus past years in Quicken to make sure we keep ourselves under control.

Lesson #3: Know Where Your Dough Doth Go

Basically, millionaires know where their money is going. To me, this is really a restatement of lesson #2.

Lesson #4: Know Where You Want Your Dough to Go

Do you let your money go where it wants to go or do you tell it where to go (savings, investments, etc.)? If you do the latter, you're much more likely to be (or become) a millionaire.

Lesson #5: Time Is Money

How much time do you spend on your finances? Millionaires spend a "lot" relative to those who are not millionaires. That said, you don't have to spend 30 hours a week obsessing over your finances to become wealthy. If I don't count this blog, I spend maybe two hours a week managing my finances.

Lesson #6: Love the Home You’re With

As we've discussed, millionaires are much more likely to have an affordable home than a multi-million dollar one. And when they buy a house, they apply my formula for purchasing a home.  

Lesson #7: Love the Spouse You’re With

Two points here: 1. Divorce is expensive. 2. Spouses must work together to make a wealthy couple. In particular, if one is a spendthrift, it can sink their finances quickly.

Lesson #8: Don’t Drive Away Your Wealth

Lots of car stats here for millionaires:

• The majority of millionaires own their cars, rather than lease.
• Approximately a quarter have a current-year model.
• Another quarter drives a car that is four years old or older.
• More than a third tend to buy used vehicles.
• Toyota is the most popular car maker among millionaires.

Here's what I do:

1. I do buy new cars -- but drive them for several years. My last car was seven years old when I got rid of it. My wife's car is seven years old now.

2. I recently bought a new car -- a Toyota. My wife has a Toyota too. ;-)

Lesson #9: The Rich Are Different — They’re Happier

The key quote IMO: “Financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Yes, having financial security does bring a certain sense of "happiness."

The actual book doesn't have nine lessons -- it has seven factors. The ones that stand out to me the most (and some posts I've written on them) are:

1. They live well below their means. See: My Best Financial Advice: Spend Less than You Earn

3. They believe that financial independence is more important than displaying high social status. See: Why Do We Try to Keep Up with the Joneses?  

7. They chose the right occupation. See: Making the Most of Your Most Valuable Financial Asset and Five Steps to Six Figures in Seven Years  

And for those of you who like lists of "how to become wealthy", you might also want to check out Revisiting the Richest Man in Babylon. It summarizes another one of my all-time favorite personal finance books.

How Rich People Stay Rich

The book Smart Is the New Rich: If You Cant Afford It, Put It Down says that "rich people and wealthy university endowments stay rich and wealthy by following the following three rules":

1. Have the right asset allocation. That means the right mix of stocks, bonds, commodities, and cash.

2. Keep the fees to a minimum.

3. Rebalance the portfolio regularly to make sure that they have the appropriate asset allocation at all times.

The book goes on to say:

Fees are key. By Tuchman's math, if you are filling an IRA with mutual funds, you could be losing in the neighborhood of $1 million in fees over the course of a 41-year investment horizon.

My thoughts on these:

1. Yes, asset allocation is very important. For details, see The Basics of Asset Allocation and Asset Allocation Made Ridiculously Easy.  

2. I've been talking about the impact of costs for years. For specifics on how I keep fees low, see The Beauty of Index Funds.  

3. As I've noted, portfolio rebalancing boosts returns.  

These may be the ways people stay rich, but here is how they get rich: by spending less than they earn and investing the difference for a long period of time while avoiding the money mistakes that can kill your finances.

Key to Wealth: Tenacity

Here's a post from Dr. Thomas Stanley that says tenacity is common among self-made millionaires. The details:

Most self made millionaires rank high on the tenacity scale.  They report that this characteristic was developed in part during their secondary school and college experiences.  The majority (76%) of the millionaires I surveyed report that tenacity and hard work account for why they consistently achieve at a high level.  Plus, as I said in The Millionaire Mind:

. . .  people who are determined to succeed view all reversals as temporary and just as a required step to eventual success. 

At one time or another, most economically successful people have been labeled by some authority figure or some standardized test result as being "average" or "inferior."  But as the results of my research point out, such evaluations make these people all the more tenacious.  Some thrive upon such judgments, as they have made very clear to me. 

I think we've all had something or someone tell us "you can't do that." The difference between those who "make it" and those who don't is that the statements drive some people on to succeed (to prove the others wrong) while the statements push down others (because they believe them.)

A few more thoughts:

• Look at my piece titled The Difference Between the Wealthy and Everyone Else. One trait of the wealthy is that "they are competitive." Telling them that they can't do something just gets those competitive juices flowing.
• Next see What Makes Wealthy People Wealthy. On the list: "drive" and "confidence." Both are closely related to tenacity.
• Most people will have to be tenacious to become wealthy because the formula for wealth requires it. You have to spend less than you earn and invest consistently OVER TIME. This requires you to stick to the plan for at least a couple decades. If you do not, it's very likely you won't become wealthy.
• One of my biggest assets personally is that I'm determined/tenacious. I wasn't the smartest kid in the class, but I was determined to do well, so I spent more time studying. I wasn't the best employee from the get-go, so I worked harder. I wasn't the best this or that, but I compensated for it by wanting to be much better than I was, so I devoted time and effort to it. And so far, it's worked out well for me.

How about you? What's your take on tenacity? Do you have it or not? Is it a benefit or not?

Interesting Facts on Cars and Wealth

My recent posts titled My Recent New Car Purchase and Why I Buy New Cars spurred a lot of good discussion/comments. A few days after posting them I read some interesting stats on millionaires and car ownership from Dr. Thomas Stanley, the guy who wrote The Millionaire Next Door and Stop Acting Rich and I thought you all would be interested in hearing them.

Here's the first -- from his post titled Frugal Millionaire with a Mercedes? I (in red) along with my comments following each:

Of the four types of buyers, one stands out as the most frugal and most productive in transforming dollars of income into dollars of wealth.  On average their latest motor vehicle purchase represented less than 0.7% of their net worth. This group is referred to as the "used vehicle-prone shoppers."  Its members buy only used cars and/or are aggressive shoppers of vehicles offered by individuals as well as a variety of dealers, leasing companies, financial institutions, consignment companies, auction companies and agents, Internet listing sites such as Craigslist, etc.

I almost always match (or beat) what Dr. Stanley suggests when it comes to frugality, but on this one, as you know, I veer from my usual path. I like to buy new cars (see the link above if you want to know why) and keep them for a long time. I'm not saying that I recommend this for everyone (or even most people), but it's something I prefer to do and I'm financially able to do, so I do it.

Footnote: in Stop Acting Rich, millionaires (those with investments of $1M or more) paid the equivalent of only 1.4% of their investments for the motor vehicle they most recently purchased.

I was a bit higher than the 1.4% he notes here -- but not by much. I paid 1.75% of my net worth for my latest vehicle. So I don't feel too bad about that. ;-)

And here's a thought from his follow-up post titled Frugal Millionaire with a Mercedes? II:

Too many Americans may believe that by driving a new car they are emulating economically successful people.  But only 8.6% of those driving this year's model motor vehicle are millionaires [those with $1M in investments].  Don't ever feel degraded if you are riding around in a used motor vehicle.  

I don't believe that by driving a new car that I'm emulating economically successful people. In fact I pay very little attention to what other people drive (or do for that matter.) I pay more attention to what I like to do -- which is buy a new car and keep it for awhile. So I guess I'm among the minority 8.6% again, huh? But I'll only be for the next year. After that, I won't be driving "this year's model motor vehicle" any longer, of course.

How about you? What percent of your net worth did you pay for your last car? And are you driving this year's model? (I think I know the answer to that last question for most of you, but I had to ask anyway.) ;-)

8 Drawbacks of Being a Millionaire

MSN Money lists eight drawbacks of being a millionaire as follows:

1. Meet Mr. Tax Man. As a millionaire, you're going to be on the hook for doing a greater amount of (financial) good for your country.

2. It's like taking a second job. Possessions take time to maintain.

3. Meet the Joneses. Once you have the means to buy a bigger house, purchase a nicer car and join that nearby golf club, you're most likely going to meet a whole new group of people -- wealthier people.

4. 'But you shouldn't have!' Friends, family members, co-workers and employees begin to expect bigger, nicer and, well, more expensive gifts. 

5. They will come out of the woodwork. Having money will attract people who need or want money.

6. It's a roller coaster. As your portfolio value increases so, most likely, will your anxiety over market fluctuations that could quickly erode your net worth.

7. Whom can you trust? You will likely receive a steady flow of e-mail, snail mail and voice-mail offers from lawyers, investment advisers and tax attorneys all eager for your money -- or, that is, your "business."

8. You'll suddenly be less secure. As a millionaire, you are now a target for an unwelcome group of people: criminals.

A few thoughts on these:

• It goes without saying (though I'm going to say it anyway) that most people would prefer to have these "problems" over the (usually) much worse problems associated with not having enough money/financial resources. So it's really a "good problem to have."
• Yes, as you make more, you pay more in taxes. Welcome to America. If you like, you can choose to pay less -- just decide to earn less. ;-) Taxes are my #1 expense and I wouldn't mind paying them if I thought government officials were spending them wisely. But "government spending" and "wisely" rarely go together IMO.
• Yes, money takes time to manage. Hey, but what else would you do if you didn't read FMF for tips on growing and managing your net worth? ;-)
• Here's key #1 to many of these issues: keep your spending in check as your income increases. By doing this, your net worth will grow tremendously and you'll be able to avoid many of the money suckers (like an expensive home) that keep you from becoming wealthy.
• Here's key #2 to many of these issues: don't tell anyone how much money you have. If you do, people will expect nice gifts, want some handouts, try to rob you, etc. Just keep the fact that you're doing so well to yourself!
• Avoid following the stock market on a daily basis. I know what the market is doing IN GENERAL (up or down) every day, but I don't watch it closely.) I load my fund values in Quicken once a month (at the end of the month when I update my net worth) and that's the only time I look at specific valuations. If I followed the ups and downs of the market as closely as some of my friends, I'd probably have several ulcers by now.

How about advice from you millionaires out there? Any tips you'd add that will help people better manage a large amount of money?

How Most Millionaires Become Wealthy

Want to know how most millionaires become wealthy? Here's the key according to Smart Spending:

If you're like him (a millionaire), you'll accumulate your wealth gradually by diligently saving your money over multiple decades.

Said another way, I recently heard a radio host use this phrase about how to become wealthy:

Steady plodding brings prosperity.

Both statements are very true. If you want to become wealthy, the most tried and true way is to "save your money over multiple decades." Of course you can always speed up the process by earning more and/or saving more. But the key to becoming rich is pretty basic -- spend less than you earn over a long period of time.

For those of you who don't have the time and/or patience to become wealthy over 40 years or so, here are my suggestions for cutting "multiple decades" down to "two decades" (though technically, two decades are still "multiple" decades):

• Grow your career

• Control your spending

• Save/invest the difference (and the bigger the gap, the better)

Or you could simply plan on winning the lottery. But I hear that method is much less reliable. ;-)

America's Got Talent: When $1 Million Isn't As Much As It Seems

Some of you may think I'm a dunce (not that you don't already) for watching America's Got Talent (AGT). For three years now it has been my family's guilty summertime entertainment choice. We enjoy following the contestants through the process, seeing how America votes, and watcing Piers Morgan blast many of the particimants. Yes, now's the time when you can call me a dunce. ;-)

For those of you who have better things to do with your lives, you may not know that last night was the season finale of AGT. The final came down to soulful singer Michael Grimm beating opera sensation Jackie Evancho (who's 10-years-old, BTW). For those of you interested, here's Michael's last performance:

And here's Jackie performing with Sarah Brightman last night:

For the record, I think Jackie out-performed Sarah and should have won it all, but Michael is a great talent as well (just not as unique.)

Anyway, Micheal wins the $1 million -- which seems like a lot of money. So much so that he's planning on using it to buy his grandparents a new home. But wait a minute, he doesn't get $1 million all at once. Check this out:

The prize, which totals $1,000,000, is payable in a financial annuity over forty years, or the contestant may choose to receive the present cash value of such annuity.

In other words, the prize is like many lotteries: take a smaller amount of cash now, which over time will earn enough interest to make it worth the big amount, or wait for the full amount to trickle in over time as inflation makes each payment less and less valuable.

If we assume the annuity pays a fixed 5 percent interest rate, that would make the one-time payment worth $450,426. That, of course, would be subject to income taxes, so maybe the prize is worth $375,000, about a third of the advertised $1 million.

So that $1 million isn't really going to make him instantly wealthy and he's certainly not going to be paying cash for any home (unless he takes the lump sum -- but even then a home would suck up most of it.) Of course he'll likely go on to fame and fortune and make a boatload more off his music, he just isn't a millionaire today.

Nope, $1 million isn't always what it seems to be...

Cars Driven by Millionaires (And Me)

Here are some thoughts from the author of the Millionaire Next Door on car-buying habits of millionaires:

86% of those who drive prestige makes of motor vehicles are not millionaires [having an investment portfolio of $1M or more]. Also, I mention the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41,997].  It is understandable why so many people relate wealth with the price tag of a motor vehicle.  In a study of more than 2,000 respondents, The Wall Street Journal  found that 35% believed that in order to qualify as being rich a person must drive a car that costs $75,000 or more.  If I applied this $75,000 threshold to the millionaires whom I surveyed, more than 90% would fail to qualify.

A few thoughts on this issue as I start looking for a new car in the next month or so:

1. Leaves you with a different conclusion when you now see people driving a Lexus, Mercedes, or BMW, huh? ;-)

2. $31k is still a good amount to spend on a vehicle. I'm looking at all-wheel drive SUVs (to handle the Michigan winters and have room for our growing kids and friends) and I'm not sure I'm going to get that high. So people buying $40k vehicles would still be getting something "prestige" in my book.

3. I thought people reading the Wall Street Journal were smarter than that. $75k? Yikes!!!

4. I know that many of you are "buy quality used cars" buyers. Personally, I like a new car every seven years or so (100k miles) and I can afford it, so consider it one of the ways that I choose to spend/enjoy my hard-earned money. ;-)

And just to throw fuel on the flame of this issue, how about this as a debate question: should I buy, a Honda Pilot, Toyota Highlander, or something else? ;-)

Doctors Should be Wealthy

Remember our discussion of how the average farmer is more likely to accumulate wealth than the average doctor? That conversation had a few comments from people giving reasons why doctors weren't able to accumulate wealth like people in other professions. Yeah, right.

Check out this piece from Yahoo that lists the worst paying jobs for doctors as follows:

1. Family Practice - Average salary, 2009-2010: $175,000

2. Pediatrics - Average salary, 2009-2010: $180,000

3. Internal Medicine - Average salary, 2009-2010: $191,000

4. Family Practice with Obstetrics - Average salary, 2009-2010: $200,000

5. Hospitalist - Average salary, 2009-2010: $208,000

The piece also lists $140,000 as the amount of loans the average medical student owes at graduation. Consider all these numbers, I'd like to make the following comments:

1. These are the WORST paying jobs for doctors. That means that there are many, many other jobs for doctors that make these amounts at a minimum. Not bad. Here's a sampling from the article:

The typical orthopedic surgeon, who makes $519,000, or a urologist, who earns $400,000, according to the Merritt Hawkins data.

2. Even though $175k is the WORST an average doctor makes, it's still $175k!!! That's not a bad salary at all. Yes, I understand that, being averages, many doctors start out at salaries lower than these. But still, they're going to be making great salaries no matter how you look at it.

3. Couple the $175k salary with $140,000 in loans. It's not a great ratio, but it's not devastating either. It's equivalent to someone earning $25k having $20k in loans or someone making $50k having $40k in loans. These are certainly serviceable. It's far from the horror stories we often hear today where someone racks up $100k in debt for a job that pays $20,000 a year. In addition, there's a lot more discretionary income (more with which to pay off the loans at a quicker pace) when you're making $175k than when you're making $25k or $50k.

4. These are what the AVERAGES are. Is anyone striving to be average? How about working so that your income is above (or well above) the average while you college debt is well below the average. The piece tells the story of one guy who went to medical school courtesy of the Army. No debts for him other than having to serve four years once he graduated. One option: some small towns are paying off college loans to get doctors to come to their communities. And the government offers incentives as well.

5. Yes, there are exceptions. So please do not comment below that you know someone who has $140,000 in medical school debt and then went to work serving the poor for $25,000 a year. Those situations happen, but they are not close to being the norm. Furthermore, they violate a foundational principle -- borrowing too much for your anticipated salary. It's a noble cause to provide health care to the poor. But the person who wants to do this needs to figure out a way to do it without racking up so much college debt.

Yes, doctors have some extra expenses -- insurance in particular. But other than that, they shouldn't have costs that are that much more substantial than what the rest of us pay. As the original post claimed, I still believe that the main issue is that farmers are better controllers of their spending while doctors, on average, are not. As such, farmers accumulate more wealth over a lifetime.

It's pretty simple:

• Make $40,000 a year and spend $30,000, you're making financial progress each year.
• Make $175,000 a year and spend $185,000, you're going backwards financially each year.

No matter how you look at it, it comes back to following the basics. Implement them and you'll become wealthy. Violate them and you won't.