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.
My questions are in bold italics and his responses follow in black.
OVERVIEW
Please tell us a bit about yourself.
Here’s the thing: most of the stories on this site are by people who started early and didn’t make huge mistakes along the way (“I began saving the day I was born, when I sold my pacifier to the kid in the next crib and invested the proceeds in index funds”).
I want to tell a different story – that you can make pretty much every mistake in the book, yet still get on track. Besides, life’s more interesting when you have some scars.
I’m 48, and my wife is 39. We’ve been married for five years. I have two teenage children from a previous marriage.
We are in the greater Cleveland area, which is a wonderful place to live – we have all of the advantages of a big city (world-class museums, pro sports, vibrant restaurant scene, great park systems) with a much more affordable cost of living. The cost of a starter home in Silicon Valley or D.C. will get you a castle with a moat here.
What is your current net worth?
We’re currently at $545,000.
The majority of that (~$330K) is in retirement funds. We have about $200K equity in our home (it’s worth about $300K, minus just under $100K on the mortgage), and the rest is in savings/checking.
We also own two cars (worth maybe $18-20K total), but I don’t like to include declining assets in our net worth.
How did you accumulate your net worth?
It’s been a combination of making a good income, investing some of that income, and using some more of that income to pay down our mortgage aggressively.
More generally, it’s been a matter of learning from mistakes and trying not to repeat them.
I was divorced in my late 30s. I sat down to do my finances not long after the split, and realized that after 15 years of my working life, I had a negative net worth to show for it. I had improved my finances somewhat by the time my wife and I started dating, a few years later. But both of us were still just sort of bumbling along.
The turning point came after we were engaged. We were discussing finances, and she brought up the name Dave Ramsey. I’d never heard of the guy. I read his books, and they made a lot of sense to me. Not because he was saying anything groundbreaking – he wasn’t (and would be the first to say that) – but he put it all together in a way that it clicked with me.
We decided to start following his plan. Fortunately, we did have some money saved, and not too much non-mortgage debt, so we had a good head start. But the main thing was that we started budgeting (really for the first time in either of our lives), and started living well below our means.
EARN
Tell us a bit about your career.
I’m a software development manager, and my wife is in the process of moving to a consulting position (she’s just finishing her current role with a large nonprofit).
We’ve been in the $190,000-$210,000 range the past couple of years; with her new position, that could go up significantly.
Do you have a side hustle?
I do not. I enjoy writing, and have toyed with blogging, but found that I’m not interested in developing and maintaining a site. (Ideally, I’d write for some other site!) My wife teaches yoga a few times a week, bringing in an extra $400 or so a month.
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?
Let’s call it a 6.
We make good money, and we’re very appreciative of the many opportunities we’ve had. I’m downgrading myself because I was stagnant in my career for many years, and settled for less than I probably could have made elsewhere, in the name of “stability.”
I moved to my current company three years ago, and have had much more opportunity (and corresponding salary growth) there.
Life lesson: Don’t stay in a job or career where you are stuck, simply because it is safe or comfortable. Comfort is seriously over-rated.
What are your future plans regarding growing your income?
Keep doing what we’ve been doing the past few years, because it is working.
I should be in line for a significant raise early next year, and have potential promotions in my future; and as mentioned, my wife has a really strong opportunity in front of her.
I would not be shocked to be north of $250K in a year or two.
SAVE
What percent of your gross income do you save?
It’s heresy to say this on a personal finance site, but I’m not sure. I’ve never thought in terms of savings rate. If I stop and think about it … between our retirement contributions and pre-paying our mortgage, we’re around 40% the past couple of years.
How did you get to this level?
The turning point was when we started budgeting in earnest and really asking ourselves “is that how we truly want to use our money?” on every purchase.
We started putting 15% of our income in retirement funds, and also started living well below our means. We’ve done that without being extreme – it’s not like we split two-ply toilet paper or rinse dental floss for future use.
And we’ve also had a fair amount of life along the way (my wife had a brief period of unemployment; I was sick and missed three months of work; we’ve had some significant medical expenses; and so on).
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’ll say 9.
Not because we have the highest savings rate – there are certainly people who put our rate to shame – but because we’ve found a level that strikes the balance we want between living life today and preparing for tomorrow.
We think we are well-positioned for tomorrow, while still living complete lives today.
What are your future plans regarding saving your money?
We’ll always live well below our means, I suspect.
Even when we get to that point where we have more money than we could ever spend, it would be too big of a shock to our system to actually spend everything we bring in.
INVEST
What are your main investments?
We own low-cost index funds. We’re fortunate that both of our retirement plans offer such funds, instead of a buffet of high-fee crap.
With my wife moving to self-employment, we will be starting a SEP-IRA for her, which should really allow us to boost those contributions.
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?
7.
I’ve made plenty of mistakes along the way, but I like where we are now. In the future, I would like to branch out into real estate, in order to develop a reliable stream of income.
What are your future plans regarding investing?
Continue making retirement contributions, continue piling up index funds, and eventually buy some income-producing real estate.
WRAP-UP
What money mistakes have you made that others can learn from?
Shit, how much time you got?
The weird thing is, I “knew” a lot of good personal finance principles from an early age. I’ve never been a big spender. I saved in retirement funds, and invested in equities. I generally lived within my means.
But when push came to shove, I made a lot of bad decisions. Decisions that maybe made sense in the moment, but that I now realize were ten different kinds of stupid. Let’s list some of them, shall we?
- I got married to the wrong person. Twice. Once in my 20s, once in my 30s. Each time, it resulted in a divorce that was financially devastating (it’s redundant to say that, actually). While both of those divorces occurred for plenty of other reasons, it didn’t help that we had very different views on money. The advice here: if you’re going to get married (and it’s worked out very well for me this most recent time), choose wisely. Make sure that you talk about money with your prospective spouse, and that you have similar goals. Otherwise, you’re setting yourself up for lots of fighting and stress.
- As a result of each of those divorces, I cashed out retirement funds. (You’re welcome, Uncle Sam.)
- I invested in single stocks. Not that stocks are bad. But if you’re going to invest in a company, you need to know everything you can about it, and most of us don’t have the time or inclination to do that level of research.
- I put way too much of my investments in those single stocks. I should have limited it to a non-load-bearing amount of my portfolio.
- Oh, I also used margin to buy some of those stocks. Nothing like turbo-charging your stupid. If the market goes south suddenly, then you’re looking at margin calls. I should have just bought a hammer and used it to hit myself in the balls. It would have had about the same effect, and cost a lot less.
- I used debt way too much. I was a big believer in home equity loans, zero/low-interest teaser rates, and ___ days same-as-cash deals. All I was doing was robbing from my future self to pay for today … and removing my margin of safety.
- I bought new cars. Worse yet, I financed those new cars (“only 1.9% interest! What a deal!”). New cars drop like a stone in value. I wouldn’t invest $100 today if I knew that it was going to be worth $60 in two years, yet that’s exactly what I was doing when buying new cars.
I could go on. You get the idea.
So that’s the inspiration to take from this interview. You can do an awful lot of stupid things, and still end up on the right track.
We may not be able to retire at 50 (wouldn’t want to anyway; my job these days is too much fun), but we’re definitely on track to be financially independent for life.
Are there any questions you have for ESI Money readers regarding any parts of your finances?
With my wife moving to consulting, this is the first time either of us has been a 1099 contractor rather than a W-2 employee. Any advice is appreciated.
Beyond that … no specific questions, but I’m always interested in how other people see our situation, moves they might make that we haven’t considered, and so forth. So if you have any thoughts, let’s hear them!
Thanks for sharing, it was an interesting read.
I’m always surprised by how many people fall into the trap of buying a new car – sadly, the King of Net Worth destroyers!
Best of luck with the future though. The important bit is to learn from these mistakes.
This is something that comes up a lot in the millionaire interviews. However I think it comes down to each individual situation. I don’t look at a car as an investment anymore than a primary home.
However we all have our indulgences to some extent. One could also easily argue that vacations are a waste… but most would agree in the experiential value of time away with friends and/or family. So buying that new car is not always a bad idea IMO.
The key is to live within your means always- to stay ahead.
Thank you!
As Dave says below – it’s not like buying a new car is a certain wealth destroyer; and we all have our things we choose to spend money on. For example, vacations make zero financial sense — you’re spending money and will have nothing tangible to show for it — yet I think most of us are in favor of them (I certainly am).
It’s all a matter of what you choose as your indulgences … and that you aren’t overly indulgent compared to your finances. Personally, new car smell isn’t that important to me (our two hounds will have it smelling like dog in no time anyway).
Sounds like you are making good money and on track now. Dont beat yourself up too much about the past. I think we’ve all lacked guidance and made some bad choices early on. If you are enjoying your jobs and making good money, I’d stay with it as long as it makes sense.
Thanks, Arrgo! I’ve gotten past the “beat myself up” phase and look at it as tuition in Life University. Mistakes are a problem only if you don’t learn from them.
If you are becoming self-employed, I find a really good CPA who is very proactive, not reactive to tax implications, then you or the CPA would set up an LLC for each of you (your businesses are separate, correct?), then elect S-Corp status for the LLCs. You would need to do payroll withholding for the LLCs through business checking accounts.
You can then claim a MUCH lower level income for paying Social Security and FICA on; we saved $13,000 in taxes the first year we found our awesome CPA and followed his (valid and legal) advice.
I can’t emphasize enough the importance of finding a good Certified Public Accountant!
Good luck to you both in your endeavors!
Feisty – thanks! We did set up an LLC and elected S-Corp status — however, we still have a few details to iron out.
I have a few questions I’d like to ask you off-line, if you’re amenable. If so, shoot me a message to brunswicksolutions (gmail.com). Thanks!
Sure thing!!
“I should have just bought a hammer and used it to hit myself in the balls.”
^^^I was reading this while drinking my coffee at my desk, and literally spit it out after reading hahaha
We all make dumb money mistakes, but the successful one’s (like yourself) know how to rebound from them and not make them again.
Great interview!
What can I say, I like to go for vivid images …
(And yes, the hammer would have been much cheaper!)
Thanks!
I agree with FiestyFrugals advice as I have my business set up like that.
In addition you can look into a solo 401k for the 1099 spouse. That allows you to put away more than the 18,500 employee contribution. I am also really, really interested in the new Section 199A deduction as well.
Chris – thanks! Yeah, we’re definitely looking to take advantage of that for my wife (as you say, it allows contributing much more than 18,500).
Some good advice has already been provided such as thinking about setting up an LLC or S corp if your wife is going to be doing work that could put your assets at risk. I’m not sure the cost of doing so in Ohio, but it’s likely minimal and it keeps your personal wealth from being put as risk.
I’m a self-employed consultant and my clients required I be an LLC, which may be the same case for your wife. You should also work with an accountant to determine which options (LLC vs. S corp) will result in the best tax strategy.
The other things are to setup a separate checking account to run her business, and to also make sure to pay your quarterly tax estimates. Your accountant can help you with these estimates or you can use the IRS worksheet they have available online to determine what your tax payments should be. Also make sure to do the same for your state taxes.
One of the best advantages of being self-employed is the retirement options available to you (i.e. SEP, solo 401(k)). Take advantage of those options to max out your savings once you have the house paid off.
You can have an LLC with S-Corp status under the IRS code. I never knew this until years of paying too many SS/FICA taxes. Huge advantage and totally within the IRS guidelines, per my awesome accountant!
IRS Form 2553.
https://www.irs.gov/forms-pubs/form-2553-election-by-a-small-business-corporation
You have to file it in order to take advantage, but the savings are real, and exactly as documented above. Best tax advice I ever got as an entrepreneur!
Thanks for posting the link, Tom!
Thanks for the advice. I think we’re doing it right — we did set up an LLC for my wife’s consulting, and elected S-Corp status. We’ve set up/are using a business checking account. We’re probably being overly conservative as to what her “reasonable” income is.
And yeah, we got the quarterly tax payments in. Great way to spend part of a Saturday! But it’s done for now.
Thanks again!
Thanks for sharing your history and your potential future. You need to look at your past as a learning experience. You and your wife are motivated for the future. Learning from others whether books, podcasts, TV, blogs etc is helpful since you pick up what makes sense to you. Best of luck.
Thanks, CB. It’s all a learning experience; the only question is whether we’ll choose to learn from it.
Thanks for sharing, it was a great interview. I have read many of these, and it seems very common to have stock picking in our past. I moved from there to mutual funds, and then to index funds after much research and being in the financial advice industry for a while. You just can’t consistently beat the market.
Chuck, if I had just known that 20 years ago, I would be so much further ahead. It’s intoxicating (yes, in an addictive sense) when your picks go up … but when things head south, hoo boy. Thanks for your comment!
Great post. I truly appreciate the honesty in this.
Mistakes can be made. And we can still make it. That’s an important message to get out there.
TPP
TPP, that’s exactly the message I wanted to convey; glad it looks like I did. I think it’s easy to read sites like these and think “I’m age ____ and am way behind these people, so why bother?” You can make wrong moves (a lot of wrong moves!) and still make it.
This was a very ‘readable’ post. You have an interesting story and you told it well.
Congrats on the good third marriage! My cousin is another one who picked the right person on the third attempt. 🙂
Frog – thanks! It took three times, but I finally outkicked the coverage!
Loved this! I really appreciated your honesty and humor. Thanks for sharing. It sounds like you guys are off to the races now with your finances. Best wishes for continued success!
Thanks, Cody! Just looking to get there with the rest of you.
You’ve had some challenges but good on you for not letting them keep you down. Your story is a good one because it shows perseverance and tenacity can overcome adversity if you set the right goals, work a solid plan and don’t give up.
Just for giggles, I plugged your numbers into a financial calculator that I like and made some guesses to see what your current situation may grow to in 15 years. You would be 63 and your wife would be 54 at that point in time. I pulled your home equity out of the equation and assumed your starting point is the $330K you have currently in your retirement accounts but I did tax it as if it was not deferred just to give you an after-tax outcome. I assumed 2.9% inflation, 25% Federal Tax rate and 6% state tax rate. I kept income constant at 250K per year and assume you can invest 20% of your income quarterly or $12.5K per quarter.
With this in mind, your current 330K of investments + 20% of income going to new investments each year would put you right at $2M in 15 years after taxes and inflation. Again, you would also have your home equity in addition to these numbers. If you could double your investing rate to 40% of your income or 25K per quarter, the number in 15 years would be ~$3.2M.
Keys: Keep your incomes and savings rate up over the next 12-15 years and you should be just fine and still young enough to really enjoy it!
Oops, I forgot to mention one other key metric in the calculations. These numbers assume you can average an annual 6% return on your investments over 15 years which I think is very reasonable.
Paper Tiger, is that financial calculator a web site you could share?
Tiger – thanks! It’s encouraging to see numbers like that, even with a late start. Thanks for running the numbers using our example.
So encouraging and informative! I feel hopeful.
Lisa – thanks! No matter how many mistakes we’ve made, we can all improve our situation. It’s not like you have to start by the time you’re 21 (or whatever) or else all hope is lost.