If you do not read the comments here at ESI Money, you are missing a lot.
One mark of a great site (IMO) is the quality of people who read the site and leave comments.
I am thankful for so many great readers and that they leave comments that are just as valuable as the posts I write.
One such comment that I found very compelling was from reader Mike H who commented on my post titled What Financial Advice Would You Give New Graduates?
Here’s what he said:
I speak from experience. I graduated with a Masters in Mechanical & Aerospace Engineering in 1996 and started working making $43K a year, and saved more than 50% after tax, by switching from living alone the first year to living with roommates in an ultra-cheap place. Once you get to a few hundred thousand in savings you can start to put these into investments (CD’s at the time but blue chip stocks or index funds will be fine too) and you can see the investment income coming in on top of your salary. The model really works. The other beauty of the model is you need less to have saved up since you are already accustomed to living a low cost lifestyle and freedom from working in an unpleasant job is generally far sweeter than having more creature comforts and becoming ‘accustomed’ to a larger lifestyle which then ‘feels’ as normal and becomes very hard to cut amenities, especially once married with both partners accustomed to the lifestyle. It’s a seductive trap.
It’s been 20 years since I graduated and started working and since that time I’ve aggressively grew my career and now earn close to 10 times what I earned back then. In addition I have a portfolio of over $2M spitting out cash every month to the point where at 43 (turning 43 in a few days) our household is able to nearly fully cover all expenses just from the cash being returned from investments and all my income from work is going into savings for- you guessed it- more investments. We have a 3 year old daughter so I don’t plan to stop working although it’s nice to know that I could if it comes to that.
That’s what I mean by saying by building up a buffer by saving 50% of your income when you start working you put yourself on a path to an easier middle and late life. We are experiencing just that. About 3 years ago we really let up off the gas and bought a large penthouse in the city after our child was born and let our expenses climb significantly. Now when we travel we often stay in a $300 – 500 / night place, not every night mind you but fairly often, especially when traveling with our parents, and blow a lot of money on education and child entertainment related expenses. But we still keep this to less than our passive income coming in and if we want to trade up more we need to bring in more recurring sustainable passive income. If I can keep working at a high level job for another 10 years the compounding will really begin to go haywire and we should have a large margin of savings after expenses, from our passive income which will then be reinvested. It gets addictive once you see it play out, it’s like building a perpetual motion machine in real time.
I wish you all luck on your journey but having a well-paying job and a roadmap at an early age is the key to success. I stumbled upon this by intuition and luck but I’m happy to share it with others. Because it’s not necessarily easy I know that not many will do it but for those who do it there is a very high probability of success.
There is so much good advice here!
Here are some key quotes from the comment as well as my thoughts on them:
- “Saved more than 50% after tax, by switching from living alone the first year to living with roommates in an ultra-cheap place” — Great way to become wealthy: saving a large percentage of income by keeping living expenses low. As I’ve said, saving is just as important as earning and keeping your expenses low helps create great cash flow (which in turn builds wealth at a fast pace.)
- “Once you get to a few hundred thousand in savings you can start to put these into investments (CD’s at the time but blue chip stocks or index funds will be fine too) and you can see the investment income coming in on top of your salary.” — This is where things get really exciting for young people. I can remember when my money started earning money itself — I was THRILLED!! If new graduates can grasp and apply this advice early in their careers, they will benefit from it in a major way.
- “Freedom from working in an unpleasant job is generally far sweeter than having more creature comforts and becoming ‘accustomed’ to a larger lifestyle which then ‘feels’ as normal and becomes very hard to cut amenities” — True on both fronts: having freedom is worth more and once your lifestyle starts to creep up, it’s difficult to go back.
- “It’s been 20 years since I graduated and started working and since that time I’ve aggressively grew my career” — Very wise. You can’t over estimate the value of growing your career. This is why I focus on how much your career is worth and why/how you should grow it.
- “Now earn close to 10 times what I earned back then” — Couple this comment with “started working making $43K a year” and you’ll see this reader now earns close to $430k per year. I told you growing your career can make a HUGE difference!!
- “I have a portfolio of over $2M spitting out cash every month to the point where at 43 our household is able to nearly fully cover all expenses just from the cash being returned from investments” — This is true financial freedom! Congrats, Mike!! It’s also a reflection that 1) either he’s getting a great (10%+) return from his $2M or 2) his annual expenses are relatively low to his income (i.e. 4% of $2M is $80k). Or maybe it’s both — 6% of $2M is $120k.
- “I don’t plan to stop working although it’s nice to know that I could if it comes to that” — I can attest that this is a very nice thing to know.
- “We still keep this to less than our passive income coming in” — Eventually you can live the good life but you don’t need to go overboard. This is what Dave Ramsey refers to when he says, “If you will live like no one else, later you can live like no one else.”
- “If I can keep working at a high level job for another 10 years the compounding will really begin to go haywire and we should have a large margin of savings after expenses” — I always like to have a large margin of safety in my financial affairs as well. That said, my recent thoughts are to have less of a margin (still a decent one) and retire sooner.
- “Because it’s not necessarily easy I know that not many will do it but for those who do it there is a very high probability of success.” — The concepts needed to be successful with money are very easy to understand. They are much harder to implement because they require discipline, sacrifice, and several other qualities that most people are not fond of. But if a person can do it, they will end up growing their wealth significantly.
There you have it. An awesome comment with a lot of meat.
Thanks, Mike, and all the commenters, for your contributions here at ESI Money!
The Green Swan says
That is a great comment and I’d emphasize that it was doable for Mike given his high salary and a good reason why we all should be striving to make more. Good for you, Mike!
Mike H says
@Swan- the high salary really helps of course- but I was also saving a lot of money when I was earning much less. If you can control spending, earn more and eventually invest well then you will get results. Of course ESI figured this out long ago, 10 years back- it is a timeless recipe.
SavvyFinancialLatina says
The comment is very inspirational. Especially for us young folks. I’m 26 and sometimes it seems like the dream is so far away.
Mike H says
@Savvy- you have time on your side so with a steady approach of a high savings rate you will make progress quickly. The high savings rate is much more important, in the beginning, than worrying about the investment rate of return, which matters more once you have a few hundred thousand dollars already saved up. Enjoy your life but make it a habit to live on a fraction of your income and you will slowly but surely achieve great wealth.
-Mike
SavvyFinancialLatina says
Thanks Mike for replying. It’s always good to get advice from successful people who have been there. Also, interesting to see you support your inlaws. I know we will have to fully support my parents in about 10 years.
Jon @ Money Smart Guides says
There is a lot of great information in that comment. When you boil it down though, it all comes back to saving as much as you can while still being happy. I know my wife and I could save 80% of our income if we wanted to, but we would be miserable. So we settle for 40%. It allows us to reach our retirement goal of 55 and we still get to enjoy today in the process.
Mike H says
ESI,
I’m humbled and surprised to see my comment up on here as a stand-alone post. You picked through and gleaned a lot of key points there. And yes, you are right- this year my income from the day job should be around $400K and the income from our portfolio works out to be about $70K this year- so we are still living well below our means.
And even with that we are living a very luxurious life. Our daughter is in an expensive private school and we took several trips abroad this year (Dubai, Hong Kong, Bali and California including a very nice trip to Yosemite with the extended family and we footed the bill of a wonderful $600 per night place for a few nights).
Once we’ve reached a basic level of FI, I’m starting to see past the race to FI and thinking about the next stage of life. That means a business venture that has the potential to help a lot of people- you’ve seen this but I won’t explain all the details in this comment. These types of passion projects are what make life worth living and getting to a level of financial independence is what can make it happen. It’s great to be in this position in my young 40’s, even with supporting a family of 5 (my in laws plus my family) and it really takes the pressure off the uncertainties tied to having a high level job. I really have to thank my younger self here for setting things in motion.
My advice to younger people is to get to FI by saving and living well below your means and then use the remaining time to find passion projects that help you get out of bed every morning. Often these lead back to serving others and that is what makes for a satisfying life. Many people have done it faster than I did and the journey is as important as the destination.
-Mike
BH says
Very inspirational Mike H. I’m in a similar situation and the trouble is that our passive income is taxed at our highest marginal rate, which is over 40% (first world problem, no doubt)! Neither of us want to retire for at least another 5 years, so the passive income is now, in some ways, kind of a nuisance, because so much of it goes right back to the government. We’re trying to find other ways to grown our nest egg without giving so much of it up in taxes since we are in our highest earning (taxing) years. I wonder if you have the same concern with your passive income?
Mike H says
Thanks for the comment, BH. Taxes are uniquely personal to the circumstances of each specific individual. For your situation, I’d recommend looking into creating a municipal bond ladder as these are exempt from federal, state and local tax although you’ll have the pay the 3.8% net investment tax on any passive income earned if your totals are more than 250K per year as part of the ACA provisions in the law. The other thing you can look at is companies with a high growth rate but low current dividend yield like Nike or Disney which will result in lower income now but more later when you are ready to retire. Note that I’m not a tax adviser so take my comment as just that- an opinion and do your own research.
My own tax situation on passive income is pretty fortunate under the current tax laws. Because I live in a foreign country with a higher tax rate that what the US Federal rates are (and overseas residents get an exemption on the first $100K of income earned abroad plus the dual tax agreement credit of taxes paid to a foreign government) I end up with a foreign tax credit each year so I am able to bring in dividend income and offset this credit with the federal tax liability on this income. I do still have to pay the net investment income tax so that the tax rate on this passive income ends up being 3.8%.
-Mike
Mike H says
You can also use a 401k or self directed IRA to avoid paying taxes on dividends and gains but you will have to wait until you are old enough to withdraw this without penalties.
Another strategy to defer taxes when earning more is what ESI did- buy properly valued real estate and let depreciation reduce your current taxes and when the properties are producing more taxable income you should be retired / earning less and therefore in a lower tax bracket.
-Mike
Jen says
Re-allocating your passive income-generating assets to stocks (all US companies as well as companies organized in many foreign countries) should reduce the tax rate by close to half. You’ll get qualified dividend treatment on dividends and the beneficial capital gains rate (20% plus 3.8% net investment income tax, plus any state and local taxes). Of course, you have to balance that against the actual economics of the assets – if your 40% tax-rate assets are generating much higher growth than a stock portfolio, you may still be better off in the higher tax rate assets.
Coopersmith says
If I had finacial knowledge and reinforcement that this blog and it contributors in comments 10 years earlier I know my finacial picture would have been totally different. I started with ESI’s other blog about 6 to 8 years ago and it greately impoved my networth. It reinforced some of my thoughts in money management and if I had started sooner I would be in a better position. I wish I had started 20 years ago with what I am doing now.
Keep up the good work everyone and educate the niave.
Mike H says
ESI- I’d like to say thanks for all you do here. You’ve provided some wonderful free advice.
Hats off to ESI!
ESI says
Thanks, Mike!!
I’m so glad we’ve been together all these years!! 😉
PatientWealth says
These comments and this post illustrate the beauty of the personal finance community. You can have your own blog, write posts on other people’s blogs, ask questions, and be open about where you are personally. Love it.
Sam says
Great stuff Mike H.
I am into workforce since 5 years after I did my PhD in Bioengineering and make just above 95k per year. Only one earning and have wife working part-time (may not count much). So far in rented house; no children.
I feel like I might be missing out on increasing my net worth although we live below our means. I max out my 401K and HSA accts every year. Invested 20% of HSA in Vanguard. Few grand in savings. Other than that, life has been normal. I still feel I should be making more at my age (34 yrs) as some of them have achieved 50% of FI already. It’s subjective to say how PhD for 7 years can slow down FI in certain fields. Any ideas?
Mike H says
@ Sam- what is your savings rate in addition to maxing out the 401k and HSA each year? Minimizing costs, starting with your big three largest expenses (housing, transportation and food) will be the best place to start. On the income side, you should look into where your career path will lead (top level scientist / researcher or manager of other scientists, CTO) and see how to get there as fast as you can.
Certainly doing a PhD for many years without a focus on financial independence will slow down the journey. Honestly it’s just a race with yourself so the end date doesn’t matter as much as the process. If you are able to save a large percentage of your income now and continue growing your salary it’s a foregone conclusion that in 20 years you will be on or close to your target. And you will still be you at that time with many more healthy and productive years left if you are anything like the average person.
You asked a general question so I responded with a somewhat general comment. If you are looking for any more specific advice, please feel free to ask.
-Mike
Sam says
@Mike –
I too save more than 50% after tax. Household income is 102k. As of now, I have 50k cash in savings. No student debts etc. We are living in a rented place for 5 years. We don’t eat out a lot. Our groceries are modest $25 per week. We do indulge in traveling though, but the expenses are reasonable and are for short stays.
401k invested in target fund. No investments in stocks etc. Saving cash if we plan to buy a townhome (<200k) in future and may start family.
My issue is – is this good enough to sustain? My company doesn't have an bonus etc. each year. And the raise is not palatable. When I discuss this with my seniors with 30 yrs exp in the company, they throw back at me by saying, "thank god I have a job". I should probably look elsewhere to grow, but deciding on a house and a family will slow things down again. Thoughts?
Mike H says
That is a great savings rate, and if you do nothing but steadily invest in conservative investments you will do very well in 10-20 years.
You are correct that you probably need to make a move to seal a strong income raise. I’d quietly look around until you have a compelling offer which hopefully has identified you as a key candidate, then you can negotiate for larger comp. You are so right, it’s much tougher once you have a family and a house. I guess I was lucky to do most of those changes when I was still single.
Good luck to you. You are coming from a position of strength so can afford to wait until you are in a good position.
-Mike