Millionaire Interview 259

Here’s our latest interview with a millionaire as we seek to learn from those who have grown their wealth to high heights.

If you’d like to be considered for an interview, drop me a note and we can chat about specifics.

This interview took place in March.

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

Let’s get started…

OVERVIEW

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

I’m 36 and my wife is 32.

We recently celebrated our second year of marriage and have been together for 6 years

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

We have a 1 year old daughter.

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

We live in a “suburb” of a small city in the Midwest, falling somewhere between urban and rural.

What is your current net worth?

Approximately $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?

• $1,100,000 Stocks (401k, IRA, and trading accounts. Split 60/40 retirement/trading)
• $585,000 Rental property equity ($1,150,000 less $565,000 mortgages)
• $255,000 Cash/equivalent (too high, but looking for a multi-family investment property)
• $75,000 Other (P2P lending, small business investments, LLC ownership)
• $50,000 Land
• $50,000 Pension account (lump sum)

These numbers don’t include $110,000 home equity, $80k in non-vested stock grants, vehicles, etc.

EARN

What is your job?

Me – Commercial Manager at a large multi-national.

My Wife – Manager in HR for the same employer.

What is your annual income?

Combined W2 – $300,000+ this year (includes salary, bonus).

Rental/management/etc – $75,000 after tax + equity gains.

Tell us about your income performance over time. What was the starting salary of your first job, how did it grow from there (and what you did to make it grow), and where are you now?

I grew up on a farm, so I started working in the family business at an early age.

My first paid employment started in college ($6.25/hr working for the university, then construction making $10/hr while finishing my studies. Between hourly jobs and scholarships I was able to graduate with almost no debt.

Immediately after college (2007) I began working for my current employer. Starting out I moved half-way across the country for a $44,000 salary working in commodities.

Through a series of annual reviews, position changes, a location changes and an MBA, I was lucky to weather the rough economic environment and double my salary in the first 6 years. Over the past 7 years I’ve been able to grow my base salary to $135,000 +bonus, while investing both time and capital in additional income streams.

My wife had opportunities to make money babysitting in high school and was also employed during college to help defray her expenses and avoid the debt burden many in our generation face(d). After a short stint with her first post-college employer, she had the opportunity to start her HR career. Long hours and a great understanding of her area of focus grew her responsibilities rapidly, resulting significant raises and a $140,000 +bonus compensation.

What tips do you have for others who want to grow their career-related income?

Each situation is different, so your strategy needs to be adjusted accordingly.

My wife has benefitted from pursuing a fairly specific area of focus and honing the necessary skills to support and advance that focus.

Conversely, I have chosen roles that allow me to gain insight from my employer’s broad network and leverage those capabilities to provide value.

Both routes have been great stepping stones to career advancement. Proving your value and leveraging that value at opportune times will put you in a better position to advance your compensation at a quicker pace.

What’s your work-life balance look like?

Both of us work an approximate 7:30-5 schedule, so it feels like we need to tip the scale a bit toward life to enjoy a better balance.

Add into that schedule the time necessary to manage several rental properties and it becomes even more work heavy.

Do you have any sources of income besides your career? If so, can you list them, give us a feel for how much you earn with each, and offer some insight into how you developed them?

Our primary non-W2 income is generated from 15 single family rental homes. Since the stock market has felt top heavy for much of the past decade, it seemed wise to diversify investing to include segments outside the stock market.

I had been interested in rental properties for a few years and finally bought my first property in 2012. This home needed some significant updating and has had a couple mid-sized remodeling projects since. I purchased the property in another state, but have ties to the area and am very happy with the market appreciation in that city. It is the only property currently managed by a property manager, but continues to provide great returns and has nearly doubled in value over the past few years. The value increase allowed me to refinance and put equity toward additional properties.

The remaining properties are all located within roughly ten miles of our current home which makes it easier to manage the portfolio. In general, single family homes can be purchased quite reasonably here, and rental rates are disproportionately high.

Using conservative figures for occupancy and repairs, finding the right deal will result in well over 20% cash on cash returns with traditional financing. These properties are split between finding homes that need some updating and foreclosures. The area is well suited to young families or people looking for a nice quiet neighborhood with room to spread out.

I manage these homes and an additional 8 properties for one of my friends. Generally I handle most of the maintenance, but have a great list of contacts for the bigger projects. It is getting a bit time consuming with the addition of 7 properties between us this past year, so I have started to lean on my contacts to free up family time.

In addition, we have invested in some other passive sources of income including P2P lending and some niche livestock production, dividend stocks, etc. for cash flow after moving away from W2 income in the future.

Through these investments and the additional income from the managed properties, we are adding roughly $100,000 annually to our net worth.

SAVE

What is your annual spending?

We have had several large changes recently, including maintaining two homes for a couple years, funding a wedding/honeymoon, birth of our daughter, and recent vehicle changes, so our historical averages have some large swings.

Barring these outliers, our spending is generally $75,000 annually.

What are the main categories (expenses) this spending breaks into?

• $28,000 – Home (Mortgage (15 year), property tax, insurance, utilities and upkeep)
• $15,500 – Transportation (low interest auto loans, insurance, repairs, fuel, etc)
• $19,000 – Food/entertainment (groceries, dining, household supplies, clothes etc)
• $10,000 – Other (Travel, gifts, health insurance, donations)

Do you have a budget? If so, how do you implement it?

No official budget, but we both carefully consider our larger spending decisions.

We have given in to some lifestyle creep as well as spending a bit more for convenience to allow us to spend more of our time on things we enjoy.

What percentage of your gross income do you save and how has that changed over time?

It looks like this year we are on track to save/invest in excess of 60% when including the non-W2 income.

We have been increasing this percentage year over year as income has increased and our irregular large expenses should be less frequent going forward, which will improve the ratio as well.

What is your favorite thing to spend money on/your secret splurge?

Travel (when not dealing with a global pandemic and getting accustomed to being new parents).

I caught the relatively harmless travel bug my last year of college and passed it along to my wife. Since we have been together, we have tried to find new adventures both domestically and overseas each year.

Our daughter and Covid kept us from making any large scale trips this year, and I’m sure our travel planning will change for the future, but we are hoping to dive back in again soon.

In general, we have found a good balance of searching for deals and using rewards points for hotels and flights, while splurging on some of the available activities.

INVEST

What is your investment philosophy/plan?

From the stock market side of things, my wife and I have always made use of our employer match for our 401k and have maxed out our contributions for several years. Additionally began making use of the backdoor Roth IRA option about 5 years ago to invest another 5-6k annually for retirement. These investments are mostly in ETFs focused on large cap and international segments.

We also maintain a trading account split between several single stock holdings, a couple ETFs and an increasing holding in dividend stocks to test their income potential for an eventual move away from W2 income.

While continuing to invest in the stock market, it does feel like there is a growing bubble that will be important to monitor. Since we are still relying on W2 income and will have a few sources of cash flow, we are less concerned about short-term fluctuations in the market, but look for opportunities to increase our investing during market “corrections”.

All of the stock/fund purchases are made on a buy and hold type basis, since I don’t have the time or skill to day trade.

Additionally, given the luck we have had in the rental market, we are also looking for more opportunities to grow and diversify that portfolio.

What has been your best investment?

Rental property – and specifically the first one.

It took a bit of work to get it off the ground and I had a bit of an initial learning curve, but since then it has been a solid return. Current estimates would put the value at roughly double what I paid for the property including subsequent repairs/improvements.

The math gets a bit gray with the cash out refi, theoretically there is none of the original capital still invested in an asset that continues to pay out roughly 10k in pre-tax income. The extra equity also provided roughly the down payment for 2 additional properties which return another 10k pre-tax as well.

For sure, this has been a ton of time and effort as well, but in terms of return on cash, I had roughly 40k into the first property, and it now generates roughly 20k in income and has grown to over 150k in equity as well.

I also consider time invested in learning about finance, following financial publications/blogs, and building relationships with a similar focus to have had great returns as well.

What has been your worst investment?

One of my first stock purchases was a mining and oil exploration company that was riding the wave of $140/barrel crude, and didn’t fare well. Invested $600 which decreased quickly.

I left it in my account for years as a reminder to do more research before purchasing…finally got rid of it this last year and was basically left with enough to get a drive through lunch.

I guess I should maybe include this as my most valuable investment; $600 turned out to be a cheap lesson that has encouraged deep dives into due diligence and kept me from making similar mistakes since.

What’s been your overall return?

I’ve considered this question since my first visit to the millionaire interviews. Fluctuation in the real estate market, properties bought with equity from other properties, stock market fluctuations…all make this number seem impossible to give an exact value.

My first 4 years in the work force included the impact of 2008-09 so I would say returns over that period were essentially 0.

The next 2-3 years had some small wins and did not include many contributions from investments outside the stock market and likely averaged 8-10% annually.

Stock market growth and the impact of rental investing over the past 6 years have resulted in returns in excess of 20%.

Up to half of the capital invested during that period was funded with cash flow from the rental investments, which would make the rate of return on the original capital much higher if viewed through the lens of compound growth vs portfolio growth.

How often do you monitor/review your portfolio?

Way too often…given the simplicity of tracking through Personal Capital. This year has been quite a ride with the market movement, and makes even daily changes notable.

Since the information is so accessible, I’ve had more opportunities to roll funds from top performing individual stocks into ETF’s and dividend offerings when it makes sense to do so.

NET WORTH

How did you accumulate your net worth?

It feels like we are at an intersection of factors at this moment.

We are currently benefitting from our highest earnings, seeing great investment returns, and continuing to save aggressively. My wife and I have been fortunate to have grown our W2 income to very healthy levels.

The additional income generated through the rental homes has continued to snowball, and I feel this falls somewhere in the middle of earn and invest since it is not a passive investment. Our savings level continues to increase both in total dollars as well as percent of income, even though we have moved a bit beyond our previously frugal spending.

We both did benefit from some inherited funds, but these have made a small impact on our overall portfolio. (for perspective – mine helped me to buy a used car when the auto market bottomed out in 2007)

Our compensation has primarily been driven by the work ethic our parents passed along to both of us, but has probably also included some measure of luck when it comes to avoiding some of the difficulties present in the job market in recent years.

The growth of our stock holdings has largely been reflective of the overall market, but we have been lucky with some timing on single stock purchases (Google, Amazon, Apple etc).

If there is an area where we are beating the average would be the rental investments. Our local market does offer a bit of an anomaly when it comes to purchase to rent values, which has helped immensely, but does benefit from a good understanding of the specific segment of the market we have targeted. Our homes appeal to a target audience with good incomes and generally stable families. While the initial purchase which has provided such great returns is not located here, the real value in that property came from timing and getting to buy a market dip.

What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?

Kind of explained above, but ESI have each played a large role to this point.

Depending on the source, our earnings would likely land us close to the top 5% of US households.

Saving 60-70% of that income is not putting us in the fully frugal category, but definitely helps to power our net worth growth.

Stock market growth over the past few years has been somewhat idiot proof, but steady investing combined with rental investing has generated returns largely outpacing the broader market.

What road bumps did you face along the way to becoming a millionaire and how did you handle them?

Fairly lucky in this category. We were able to start careers without student loan debt, grew careers, and seem likely to continue on the trajectory on our own terms.

Seeing the market take a hit in 2008 might have made me a bit gun shy, but also set rational expectations.

When the covid related dip hit in March of 2020, it did damage on paper, but afforded a great buying opportunity.

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

ESI – These three have worked together well so far, and at least for the next couple years we plan to continue business as usual.

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

Early on it seemed like $3-4M would be roughly enough to provide a comfortable lifestyle at fairly conservative rates of return. I think now given the potential for inflation and heavy market volatility; that number might be closer to $5M to feel like we could count on passive investing to meet our needs over an extended “retirement”.

The more “active” portion of our portfolio is now very close to meeting most of our cash flow goals. Once those targets are reached, we shouldn’t have to touch any of the stock market investments if we decide to retire, and they could be considered more of a safety net. If we maintain a somewhat similar blend of active and passive investments, $3M should be a good target to allow for continued investment of excess cash flows.

How old were you when you made your first million and have you had any significant behavior shifts since then?

With conservative guestimates for rental property values, I probably crossed the threshold either at the end of 33 or beginning of 34.

Roughly a year later my wife and I got married and our collective number got a bit closer to $1.5M.

There wasn’t any notable change in behavior, we have had some big events and some lifestyle creep which have involved a bit more spending, but crossing an imaginary line was not the trigger.

What money mistakes have you made along the way that others can learn from?

A very generic answer, but would love to have gotten a quicker start on investing. I bought my first house at 23, so at least that money was going toward equity, but didn’t benefit from some of the market growth I could have.

What advice do you have for ESI Money readers on how to become wealthy?

A great work ethic and time are the two biggest factors to building wealth.

Not every effort you put forth and not every time frame will give you positive results, but with persistence over the long-term the odds are in your favor.

There is something to be said for luck, whether it is luck related to where you were born, your family circumstances/connections; or the luck noted in a fairly well known quote “the harder people work, the luckier they seem to be”. “Luck” itself is nothing you can control, but you have to be ready to make the most of every situation.

FUTURE

What are your plans for the future regarding lifestyle?

Currently enjoying the income our full-time jobs provide, but also looking forward to a time when our schedule can be our own.

It seems like our financial position is nearly in place to make this possible, but would feel much more comfortable either with a larger safety net, or a few more years’ worth of data points. We are just over a couple years into our marriage, a year into parenthood, a year into covid, and have seen remarkable recent market growth, all of which are important factors to both short and long-term considerations.

Since I am generally very conservative in my estimates, “fat FIRE” is my preference and a default way to build in more cushion for a longer than average “retirement”.

At least one of us will likely step away from the W2 world in the near term in order to spend more time with our daughter and likely put a bit more effort behind our investing as well.

What are your retirement plans?

Our next phase will be financial independence, since the real estate portion of our portfolio is not completely passive and we both enjoy the mental aspect of generating income.

When we hit our financial independence goal, it will give us the freedom to focus on raising our daughter and flexibility to travel, while augmenting our income/portfolio as we desire.

This phase will likely continue until our completely passive income is more than sufficient to cover our needs, or longer if we find pursuits that continue to hold our interests and don’t get in the way of our family time.

“Retirement” will include more extended travel as well as maintaining a home base to host family and friends as well as provide a place to reset and pursue our hobbies.

Are there any issues in retirement that concern you? If so, how are you planning to address them?

Probably the same three factors that anyone planning an early departure from W2 employment: A good source for health insurance, finding compelling ways to use free time, and the uncertainty that comes along with attempting to forecast over an extended time horizon.

MISCELLANEOUS

How did you learn about finances and at what age did it ‘click’?

Hard work and conservative finances were something learned by default on the farm from a very young age.

My father stayed up to date on tax provisions, which made me aware of the benefits of ensuring you find the best ways to keep what you earn.

But, additional facets of finance have continued to “click” at various points along the way. Learning from my earliest rental investments, studying stock market growth, extracting valuable bits during my MBA studies, and having friends with similar interests have all continued to shape my understanding of finances.

Who inspired you to excel in life? Who are your heroes?

My father – he showed me the value of knowledge and pursuing a path that you enjoy.

Do you have any favorite money books you like/recommend? If so, can you share with us your top three and why you like them?

• Rich Dad Poor Dad – I initially read this book after investing in my first rental home and it solidified my resolve to succeed in my independent ventures. I love the simplicity of the concepts in this book, but I’m continually shocked by how few people grasp their importance.
• Millionaire Next Door – Another example of simple concepts that everyone should/could follow. Appearing wealthy is generally counterproductive, and applies to both people who are wealthy as well as those trying to attain wealth.
• Financial Samurai – Not a book, but another great resource for anyone looking for perspective in many areas of finance. For me it is interesting to compare/contrast Sam’s strategies in a high earning/cost of living setting to the conditions in our area and find ways to adapt that knowledge.

Do you give to charity? Why or why not? If you do, what percent of time/money do you give?

This one varies from year to year.

We generally make some donations through church and to various entities.

But, we also find ways in which we can help family, friends and people in our community on an individual basis. As we free up more time, we plan to volunteer in more capacities.

Do you plan to leave an inheritance for your heirs (how do you plan to distribute your wealth at your death)? What are your reasons behind this plan?

Yes, we plan to give our daughter (and any future siblings) a good start in life.

The primary things we want to pass along are a good work ethic, a love of learning, and a desire to apply both of those attributes.

We will plan to cover education costs not paid for by scholarships and will help along the way so she (they) can start life without a debt burden.

If there is interest in continuing the rental properties for the next generation, we will eventually transition their management to our child(ren).

While we do plan to continue growing this part of our portfolio and it may support more than one generation, it will also be important for our heir(s) to have experience in other areas of employment and the ability to make their own path.