Do I have a couple million dollars in the bank earning enough interest (even at 3%) to live off of? No sorry again.
A great book that I recommend reading is The Millionaire Next Door (surprisingly they do not have a website). The authors define a millionaire as someone who has a net worth of $1,000,000 or more. Well I am the millionaire next door. My net worth as of this writing is $1,267,000 and in spite of high salaries over the past few years I was surprised to learn the source of that wealth was only partly due to income and now youíll find out that what you make is only part of the equation.
Also before I continue let me tell you that all this talk of being rich and getting more and more money seems a little selfish and greedy so if your goal is wealth just for wealthís sake fine but there is so much more you can achieve, so much more that wealth can be used for. I want to be known as a generous person, someone who cares about others and who can give back to friends, family and yes, even strangers.
Ok back to the task at hand.
My first full year of work in my chosen field after college was 1994 and I made a respectable (for the time I guess) $20,000. I had worked throughout college but whatever I saved was fairly negligible. One benefit I did have (if you consider this a benefit) is that I turned 21 with $13,000 in the bank from years of my mother saving my social security benefits. Why did I get social security benefits? Because when I was 6 my father died and this was known as survivor benefits.
In July of 1994 I changed jobs and got a huge raise (on a percentage basis) now making about $30k (50% increase). But 1996 was a break out year and I made a little over $48k. Of course by then I had already saved enough and had enough discipline to buy my first home, a townhouse. This event is the first significant example of luck. It turned out to be a great time to buy a house but no one knew it at the time. No one knew that the real estate market would begin a huge run up that, I think, has now gotten way out of hand.
I think you can see where this is going and Iíll spare you the year by year accounting of my salary. The important thing is that it increased year after year. Sure there were some rough spots but the trend was up. Then there was my wife.
When my brother introduced me to his co-worker it was with the intention that maybe we would make a good couple. The one question he asked was if I could handle the fact that she made more money than me. Handle it? It was a dream come true.
In 2000 we were married and our individual incomes combined to become one, leading to a significant increase in earnings. You see we believe that in spite of the fact that one us earns more than the other, we share equally in all financial aspects. That year our combined salary was $185,864 and it has increased every year since.
WAIT! Before you leave you have to understand that all of this is relative. In other words yes, we made a lot of money, but with that comes increased costs. Whatís important is how we put that money to work. Over the years since I began keeping records our income from salaries has been $1,306,465. But thatís the gross amount. You have to subtract things like taxes (at least 25% or $326,616) and the normal expenses we all have such as utilities ($20,618), property taxes and homeownerís insurance ($74,947), various other insurances (life, health and auto $42,274), dining out ($23,433), cash ($75,471). You get the point, this continues on and on but I just wanted to make it clear that a high salary isnít necessarily enough. Itís not so easy to say hey, I made over a million since I started working so of course Iím a millionaire.
When you subtract all of my expenses from my salary you come up with a negative figure Ė I, we, spent more than we made from our jobs so how can we possibly be millionaires? Well there are other forms of income other than salary. If you add all of that other income in and subtract all of the expenses then weíre left with a figure of $485,500. So, again, how come Iím worth $781,499 more than that? Our income from all sources, only accounts for 37% of our wealth. So whereís the other 63% come from? Well ultimately it comes from that $485,500 because that money didnít just sit in a box doing nothing all these years. We put it to work (as if money can work) by investing it. But thereís something else too. We worked hard.
The accounting can get complicated but to bring it to a more manageable level, you can say that of all the money we made we saved $485,500 or 20.86%. How many people out there save that much money? One reason we saved so much is that we made it a priority and lived as if the savings werenít there. Some of that was very easy. We maxed out our 401k contributions taking advantage of the company match giving us over $25,000 in free money.
What did we do with the money we saved? Well one thing we did was buy a rental property that generates income. We work hard at it, doing all of the extensive renovations ourselves as well as managing the property. From that rental business, a small side business was created that also generated some income. We work hard and that is something most people simply arenít willing to do.
Iím sure you might say youíre willing to work hard but explain why those get rich quick schemes you see advertised on TV do so well then? If you think most people are willing to work hard to become rich then explain why books that donít actually say anything, that donít offer any practical advice do so well? People want the easy way out but there isnít really an easy way.
Ok back to how I got rich. In addition to our salaries weíve also had income from the two other businesses I mentioned above. I mentioned luck earlier when I spoke of buying my first home. Well no matter how much I want to take all the credit luck certainly plays a role. I bought my townhouse in 1995 and sold it five years later for a $20,000 profit. There was no skill involved I just happened to buy and sell at the right time. The man I bought the house from took a loss from the price he paid for it.
That 20k sounds like a pretty good deal but Iím not perfect and I sort of ripped myself off. Selling without using a realtor, I saved the commission but didnít price the house properly and jumped at the first offer I got, less than 24 hours after placing an ad in the paper. In addition to that mistake I could have rented it for a couple of years and made a huge profit. If I held onto it and sold today, Iíd have a profit of about $100,000. So I guess Iím not that smart after all.
Donít kick yourself for the stupid things you do. Learn from them and move on. And take risks, well planned and well researched risks, but risks just the same.
The year 2000 was a big year for us. I sold my townhouse, my wife started a new job, we bought a timeshare, we bought our rental property and we were married. Any one of these things would have been a challenge but all at once? Well I just donít know what we were thinking.
The biggest risk of them all, though, was the rental property. We really werenít sure if we could afford it and, as yet another example of how difficult it is to predict the market, we thought we were buying at the height of the real estate market. There was no way these prices could go any higher, we thought, and even considered waiting it out to get a better deal.
Sparing you the gory details, it turned out to be a wise investment but a lot of the credit has to go to luck once again. Oh and hard work. We have certainly put a lot of work into the house so donít let anyone tell you real estate is easy money. You might find a free lunch but easy money is a myth.
Ok so where else does our wealth come from? Well the appreciation in the homes we own is certainly one area. If we sold the rental property we would double our money and if we sold the home where we live weíd have another nice increase (of course weíd have to live somewhere so itís not all ours to keep). In spite of the internet bubble bursting weíve done well investing in the stock market. Add all of it up and you get a net worth worthy of the title millionaire next door.
There is also the very important aspect of our lifestyle. As youíve seen above our combined salary puts us quite high up on the economic latter and that again was the benefit of hard work, working to gain well paying jobs. But weíve also done something that has become a catch-phrase of sorts for the aspiring millionaires next door. We lived below our means.
With an income like ours we could have easily afforded much fancier cars but chose instead to keep our modest vehicles for a decade or more. When the time came to buy new cars we did not simply buy what we could afford but asked what do we need. How many people do you know who drive BMWs or other luxury cars but have trouble paying their credit cards or rent? Well weíve never had that problem because we bought less car then we could afford Ė thatís living below your means.
Weíve done the same thing with our home. I always wanted to move back to the area I grew up in. I loved the ample properties, the abundance of nature and the small town feeling. While we could afford a house there, it would stretch us to a point we donít feel comfortable going. So many people figure out the absolute maximum they can afford for a house and use every trick and technique to make it affordable but thatís the wrong approach. We donít need the large houses on equally large properties like the area I grew up. Similarly we wonít live in a bad neighborhood simply because itís cheap and we could save a lot of money. We found a middle ground where we enjoy living but that doesnít break the bank.
Weíve also turned tragedy into triumph. You can either let bad things keep you down or you can find opportunities where none seem apparent. We did this and while it worked out it is yet another example of us also not doing as well as we could have but thatís the nature of risk.
When my wife and I started dating she owned her own home and I owned my townhouse. Not long after we met, her house was destroyed by fire. It was a devastating loss as she basically lost everything she owned. Once the settlement with the insurance company was finalized she was given two separate checks. The first was to rebuild the house and was kept in escrow by the mortgage company who would issue payment to the contractor as work progressed.
The other check was for the contents in the house and was hers to do with as she pleased. Well since the house wasnít rebuilt yet, and we couldnít therefore begin replacing things like the furniture and appliances, she decided to invest the money. She wanted to invest all $100,000 in her companyís stock. This was before the collapse of Enron but I still knew it was a bad idea to rely so heavily on one stock. The compromise (which she didnít have to agree to since it wasnít my money at all) was that she would only invest half of it.
That $50,000 investment doubled and while we would have done much better if she had actually invested the whole amount, it was a risk I wasnít willing to take. Remember that you shouldnít beat yourself up for making decisions that turn out not to be so good. If you thought it was right at the time then accept it, learn from it, yes, but accept it and move on.
In this story I think youíve seen that Iím not a genius. I worked hard, chose a career that pays well, made some smart investments (Iíve made dumb ones too), saved agressively and gotten lucky. Thatís the key to success. Do it all until you find something that works. Donít be dumb about it. Educate yourself, surround yourself with like minded people and find what works for you. Good luck.