Today we continue the ESI Scale Interview series where people answer questions about their success at working the ESI Scale.
In short, the series focuses on what the interviewee is doing in the areas of earning, saving, and investing. They also get an opportunity to ask ESI Money readers for suggestions if they choose to do so.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
With that said, let’s get started.
Today’s interview is with Adam who writes at Minafi.
My questions are in bold italics and his responses follow in black.
OVERVIEW
Please tell us a bit about yourself.
Hi there! I’m a 35 years old, with a wife a year younger. We both work full-time, with no notable income outside of those day-jobs.
We live in a moderately large city in the western United States. The cost of living here is very reasonable, with many 2-3 bedroom houses available under $300k.
My wife and I have been together over 10 years and have decided not to have kids. We have a dog, we love to travel and one of our biggest vices is spending entirely too much money on delicious food.
What is your current net worth?
Our net worth right now is just under $1.3 million. This is entirely in investments. The full breakdown would look like this:
- $1.27 million – Investments.
- $20k – In our emergency fund (which is just our checking fund we pay all bills from).
- $10k – Our one paid off car.
The investments area has been wild lately. It was just last May that these investments hit $1 million, and since then they’ve continued to climb.
How did you accumulate your net worth?
I’ve worked hard since college, but I’ve also been extremely fortunate and very lucky.
I went to a state college with a 75% scholarship, so tuition was only $300 a semester. All that to say that I graduated college and was immediately able to start saving money.
I started investing immediately after college, starting a 401k the same month I graduated.
For that $1.3 million, here’s a rough breakdown of where it came from:
- $100k – Inheritance from a family member
- $400k – Proceeds from the sale of a business
- $400k – Investment gains
- $400k – Investments from my normal salary
I just ran these numbers now, and was surprised at how these were about equal!
I’ve been fortunate to benefit from an inheritance in my 20s and a business sale in my 30s, that was immediately followed by a run up in the stock market. I have a feeling without the inheritance or the business sale, my net worth today would be closer to $500k. Perhaps even less, as I learned a bunch due to those life events that helped. It’s a silver lining that sometimes the worst times in life can lead to the greatest growth.
EARN
Tell us a bit about your career.
I went to college with a Computer Science focus and started working part-time as a programmer while still in college at a the high high rate of $12/hr.
Throughout college, I picked up odd programing jobs whenever friends, family or anyone else I talked to mentioned them. Usually this included agreeing to do things I had no idea how to do, then figuring out as I went.
Programming was both a hobby and a career, which allowed me to increase my skills in the field faster than I might have otherwise. I didn’t focus on the deep technical math problems, but instead on providing immediate value to people.
For my first job out of college as a Web Developer, I made $37k/yr. I started my 401k there and continued rising in the ranks to where I was a Tech Lead for a developer team making $52k. When I see devs leaving college and working at Google making $120k+ today, my developer salary in 2004 seems quaint, but it was competitive at the time for my location and experience.
I continued working at various programming jobs throughout my 20s and 30s, eventually leading up to a salary of over $100k a year in a Technical Director role (something similar to a CTO). That has been while still in a moderate cost of living location. When I run the numbers, the comparative cost of living in San Francisco would be $302k a year (!), which is just crazy to me.
Like most engineers, I considered moving out to Silicon Valley and working at high profile companies. When I actually ran the numbers, it was always much more attractive to work in emerging tech hubs rather than being in a tech epicenter and not being able to save money.
Do you have a side hustle?
I don’t! Or at least not one that’s cash flow positive. I have tremendous respect for people who do, but I’ve never had something that’s worked. I have a website I’m currently working on that might make money someday, but for now, my day-job is my only source of income.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
I’d give myself about a 7 on the earnings side.
By investing a ton of time in learning to program in my 20s, and focusing on how to provide the most value to clients, that was a huge help in driving my career forward at every performance review and salary negotiation.
If anything, I likely didn’t ask for enough in these talks. I could have moved to an area with higher earnings potential and lived cheaper, but that would have been at a tradeoff of working/commuting longer hours. The negotiations and the side hustle areas would be two areas that I believe I could improve on that would have a direct impact in increasing my earnings.
What are your future plans regarding growing your income?
I’d love to increase income from my website right now. I think there’s a huge potential to increase this significantly this year – with a reasonable goal of a few hundred a month this year, and more next.
I also have a not-insignificant stock share in my current pre-IPO company. I’m not including that potential money in my plans or my current investments, but it’ll be awesome if it ends up leading to something someday.
SAVE
What percent of your gross income do you save?
For 2015 my savings rate was 65%.
For 2016 it was 69%.
In 2017 it dropped to 37% due to a number of major life events. Making that choice to spend money when I was previously saving it was harder than I thought (which is a good thing!)
How did you get to this level?
In my first job, I had to file paperwork with HR to change my 401k contribution. I handed over a paper with an amount of 27% (which would’ve been saving $10k out of $37k salary at age 23). The HR person looked at me and asked “You know we only match up to 6% right?”
After I received the inheritance, I started reading more and asking questions on the Bogleheads forum about what I should do. The very useful advice I got from there was to max out my 401k, even if that meant dipping a little more into that inheritance. I dialed that up to the max and have kept it there as long as I’ve been in a job that offers a 401k.
Beyond that, I track my spending and automatically invest at the beginning of each month into a Vanguard account. That amount going into the Vanguard account has steadily risen with my income – starting at $50 a paycheck and peaking at more than $2,500.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
I’d say about a 6, but I’m OK with that. I’ve traveled a bunch, bought many electronic luxuries and let lifestyle inflation in to a limited degree.
Even though my SR was 37% in 2017, I’m hoping to be back in the 60s% in 2018.
My approach to savings has always been to save as much as feels natural, while also questioning all purchases (especially larger ones). I have a personal rule to wait (cost/$100) days before making any purchase over $100. This has helped avoid a number of purchases I would have regretted later.
What are your future plans regarding saving your money?
I’m trying to refocus on the basics – saving and investing a large amount automatically each month and seeing it grow.
I’ve recently become more content with using older technology, and not feeling like I need to upgrade my phone, computer or camera quite as much. I’m hoping to continue and improve this trend in order to spend less money.
INVEST
What are your main investments?
I’m a huge proponent of keeping things simple with diversified index funds.
I favor a Vanguard portfolio with these funds:
- 50% Vanguard Total Stock Market
- 25% Vanguard Total Intl Stock Index
- 20% Vanguard Total Bond Market
- 5% Vanguard REIT Fund
My actual makeup is a little different than this, but from a market sector side this is spot on for what I’m going for. Today, my “US Market” areas is made up of this investment plus a small amount in a US Small Cap fund. I want to sell the Small Cap Fund, but since I’d need to pay taxes on those gains it’s just easier to keep them around.
I’m also in a bit of a weird position now, where I invested in some cryptocurrencies last year to try it out, and now they make up 10% of my portfolio. I’m planning on selling them over time, then all of them once I’ve held them a year.
For new contributions, I figure out which sector is behind my target and invest all new money into that. Right now I’m underinvested in bonds, so my 401k and my after-tax Vanguard contributions all go right into that.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
About an 8 today. In the past, through an investment advisor, I invested in funds that had higher fees, ones that had purchase fees and ones that were actively managed (so they had super high fees) – with a 1% advisor fee on top of it all.
There is no doubt that those decisions cost me a lot of money. I was lucky to make all of those mistakes with my $100k inheritance money, so by the time I had a business sale later I was already invested in Vanguard and could do things in a much lower-cost way.
What are your future plans regarding investing?
Having a target asset allocation is important for me. That helps keep me honest and gives me something to shoot for.
I’m hoping to keep it simple – with these 4 funds making up the bulk of anything I invest in. If I see something else that seems interesting (ie, the next Bitcoin), I might invest as much as 5% in it, but no more than that. For the other 95% of my investments, I invest with the question: “Can I hold this investment for the rest of my life?” I only plan to invest in things that meet that condition.
WRAP-UP
What money mistakes have you made that others can learn from?
The biggest one was around using an investment advisor.
I falsely assumed that they would be able to “beat the market”. Now I think that’s a fool’s game, and it’s better to rely on diversified, low-cost index funds. There’s always going to be someone promising that they can outperform index funds, and there likely will be a handful of active investors who do. The number will be so small though, that there’s a 99% chance that you’ll make more money with Vanguard than with an active advisor.
Even an honest advisor is likely to cost more than just picking a few Vanguard funds. If I were starting today without any knowledge, I’d probably just choose Wealthfront or Betterment – they’re both worlds better than the choice I made.
Are there any questions you have for ESI Money readers regarding any parts of your finances?
I’d be curious from others – when you have funds that don’t meet your current “target portfolio allocation”, but have investment gains, what do you do?
How do you decide if you should sell (and accept the taxes) to bring your portfolio in line with your target versus when do you just hold and accept part of your allocation won’t match up?
Really good read. I liked your rule: “I have a personal rule to wait (cost/$100) days before making any purchase over $100. This has helped avoid a number of purchases I would have regretted later.”
I personally use a “one month rule” for big purchases to make sure it is something I really do think is worth the money spent.
Your investment philosophy seems spot on. You are young and have the opportunity to let passive index fund investing do the lion’s share of the work in terms of your investing.
I, personally, think cryptocurrency is pure speculation. It seems if 10% of your portfolio (assuming ~100,000) is in that, I would personally take the tax hit. If you have the opportunity to hang on til one year to get the long-terms capital gains tax, then great. If that point is 10 months away, then I’d have to weigh the cost of taxes at my current tax rate.
Who knows what cryptocurrenices will be worth in thirty years? But it seems that you get the “boglehead’s way” and I probably don’t need to convince you of why that is more likely to be a bad idea than not.
> I, personally, think cryptocurrency is pure speculation.
I definitely agree. When this interview was taken, these were up to 10% of my portfolio, but then promptly dropped to 4%. The buy-and-hold investor in me in worries about taxes and long-term thinking, which caused my not to recognize a good deal and just sell when I had a chance. It’s one more good reason why I limit myself to 5% of my portfolio invested in these.
What I didn’t have at the time was a good plan on what to do if things actually grow! I’ve recently come up with a plan for that:
“If my 5% speculative assets rise to 7.5% or greater at any time, sell the excess to bring my holdings down to 5% – even if that means paying short-term capital gains tax.”
Having this rule sooner would’ve helped, but it’s better to have it now than later. I do plan to sell all 5% before too long as well – perhaps after holding 1 year for better tax treatment on the gains I do have. I’m with you in the question of where these will be in 30 years. I’d rather hold something I’m more confident in for that time period.
This drunk, that’s a millionaire interview! :p
What kind of a HR person hinders against contributing? 6% is plenty!
$100/day wait sounds brilliant. I am going to adopt that. Everyone says to wait and I’m like how long??
I know! (re: 6%). What’s even more odd was this was at a banking company. You’d think they’d know better, or at least encourage people to save more.
Thanks for sharing Adam. For the funds with gains I think it depends on why you want to sell it. If you don’t believe it’s a quality investment (such as high fees), I’d look to sell and pay the gains. If it’s still quality but just not in your current three find plan, I’d hang on to it until you can sell without capital gains.
Do you have a post about selling your prior business. If so, can you share a link? I’d love to read it.
Good thoughts on the long-term vs short-term quality aspect. I think anything that I’m speculating in (in that 5% of my portfolio) would be in the non-quality investments – or at least not purchased for the long term. It’s when I convince myself this short-term investment WILL go up long term I get in trouble.
I don’t have any posts about the sale of that business, but that’d a good idea to write about! In this case I was fortunate enough to work at a startup that was acquired, and would likely be a fun story to write.
Adam,
I had a fund($30K) for 10 years that I didn’t want anymore. I held on to it all that time because if I sold it, I would pay taxes. I pulled the trigger three years ago and sold it, paid my taxes and moved it to a Vanguard index fund. I am happy with the move. I look back and wish I pulled the trigger years ago. The growth of the index fund is better than my old fund, plus in line with my plan.
You have to think long term. What you knew way back then and now is different. Why keep the mistakes of past active? Pay the taxes while you are working and get your allocation in line for the future. Isn’t that the purpose of FI, less worries? Ha ha.
Very good point on the idea of minimizing worry. The conceptual overhead of having those investments is a thing on my mind that would be eased with a sale of them. Thanks for your thoughts on This aspect – and it helps you went through something similar!
Just out of curiosity how has that cryptocurrency portfolio worked for you? I have a very, very small amount in crypto, but got in at about its height and it has lost 1/2 of its value. I plan on holding for a year and seeing what happens. And because it is such as small part of my net worth (less than .3%) I am not that worried, but was wondering how you were doing with it and when you bought in. Congrats on two comma club status.
It’s been an interesting ride, that’s for sure. It makes me appreciate not relying on day trading or speculating at my intended form of wealth building – I wouldn’t be able to handle those swings!
Right now, my investments are up about 40% of what I bought them for, so I was lucky enough to have a good starting point (as of today at least – we’ll see about tomorrow). I’ve set a boundary that I’ll sell all gains if they reach 50% up, or (probably) sell in 1 yr with whatever is left. I might also just go down to 3% at that time, but we’ll see.
Great Job, Adam. You are doing exceptionally well. You reached a high net worth at a young age. Thanks for sharing your success with us.
Thanks Dave!