Millionaire Interview 377, Part 2

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 August.

It’s a long one so I am breaking it into two posts. If you missed part 1, you can find it at Millionaire Interview 377.

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

Let’s get started…

SAVE

What is your annual spending?

Annual spending is about $130K. (Based on recent 12 month period from my Mint account.)

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

Main categories are as follows:

• Insurance: $33K. Mostly annual purchase of whole life policy ($30K)
• Taxes: $33K. Federal and State Income Taxes
• Home: $22K. Mortgage on primary house ($15.7K) and property taxes ($6K)
• Auto: $16K. Gas, Insurance, Repairs, Parking, Car Payments ($3600)
• Food and Dining. $18K. Restaurants ($12,841), Groceries, etc. ($5256)
• 401(k): $7K
• Utilities: $5.5K. Electric/Gas, Cell Phones ($3K), Internet, Streaming Services ($138/yr)
• Shopping: $5K. Amazon, Household items, Electronics, Books
• Travel: $4K. Couple of trips a year, timeshare in Las Vegas ($600/yr)
• Health Insurance: $2.7K. Medical, Dental, Vision (through employer)

Insurance mainly goes into cash value that is invested, so I don’t count $20K of that as “spending,” and similarly with the 401(k).

Restaurants are definitely my weak spot, but it is also what I enjoy. $3,300 or so of the Restaurant category was wedding dinners for my daughter’s wedding, so that is a special one-time event.

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

I do not have a budget.

I could probably save more if I used a budget, but right now I buy what I want to buy.

I had a budget for a long time when there always seemed more month left after the paycheck was gone, so I don’t worry about the details at this point because there is more than enough left over at the end of the month.

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

For monthly savings, I currently put the minimum needed to get the full match from my employer in my 401(k), which is 5%. I also put $200 per month into a 529 for my granddaughter and $400 per month into a brokerage account in dividend stocks.

I used to save at least 10% to my 401(k) accounts and over time I increased the amount every year when I got a raise until it was up to 15%.

A couple of years ago I was shooting for the maximum in my 401(k) with catchup contributions, but I redirected those amounts to my life insurance policy, so that is another $20K per year in savings.

I also re-invest any earnings from investments as soon as I can to keep my investments returns compounding, growing, and working for me.

What’s your best tip for saving (accumulating) money?

Make saving automatic and don’t stop or withdraw from your savings unless it is a real emergency or an investment opportunity. If you have money taken out of every paycheck, you don’t notice it. I know it is cliché, but it is true. Always look for opportunities to make your savings work harder for you.

I think it is difficult to save your way to wealth, unless you have a relatively high paying job and can manage to keep expenses extremely low. Obviously people have done it, but I think it runs counter to most people’s tendencies.

Savings becoming assets is the key to growing wealth. My “savings” in my mortgage and house allowed me to tap the equity to purchase rental homes when they were available. I got the HELOC set up before the Great Recession and it was available when the investment opportunity presented itself.

There is more than one kind of savings. Dollars don’t do anything on their own, but they are a necessary tool to get to investments and to build wealth.

What’s your best tip for spending less money?

Spending less is a skill like any other. Learning how to look for and ask for lower prices, waiting for sales, doing things like buying in bulk, moving to a cheaper place to live, comparison shopping, and repairing instead of replacing things all are learned skills.

Most things in life are a tradeoff between time and money. Do you have the time to figure out what to do or do you have the money to spend and need or want it done more quickly? Sometimes things take longer than they otherwise would because you don’t have the money. Once you have the money you can concentrate on making more time available.

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

I spend on going out to restaurants, bars, pubs, etc. with family and friends as evidenced by my spending categories. I love meeting up for a meal out or getting carry out.

I also enjoy college football games and tailgating before the games. There are only 5 or 6 games a year I can attend locally, so I definitely make a day of it and try to make the most of those few days a year.

INVEST

What is your investment philosophy/plan?

Buy cash flowing assets, primarily single family rentals.

“Snowball,” a biography of Warren Buffett, is an excellent read for value investing. A lot of Buffett’s early career was spent finding companies that were worth more than their stock prices reflected. The same goes for our rentals: a 900 sq ft home cannot be built for less than $150K-$200K. If we can buy them for less than that, in the long term they are going to go to that value. And in the meantime, if they are providing cash flow, that money can be reinvested and multiplied.

What has been your best investment?

Definitely my rental business.

The purchase price of the individual homes (with some initial renovation costs added in) has been $1.83 million, and the properties are now worth $3.6 million. In addition, most of those properties were purchased using the cash flow and equity in the initially purchased properties.

At this time, I have basically gotten back more than I have put into the business and yet it is still an asset that continues to appreciate and provide monthly income.

What has been your worst investment?

From an investment return standpoint, my current home.

I purchased it for $266K in 2001 and it is worth around $400K now, 22 years later. Overall, that is less than a 2% annual return and for a time the return was negative.

However, it has provided a place to live, a store of value, and through a home equity line of credit (HELOC), a source of financing to allow the opportunity for investments.

What’s been your overall return?

This is hard to estimate since I started over after my divorce and the growth in my net worth was slow for the first 6 or so years of investing. Looking back at personal finance statements starting in 2014, the estimate is about 23% per year from that time until now. 2014 was when we really started using financing and getting aggressive about purchasing properties. We also benefitted from the more recent increase in property values.

My previous investing in mutual funds through my 401(k) was not good. I was not good at managing emotions from markets swings. I am much better at real estate. I would guess my return versus the S&P 500 was probably about 50% of the market gain overall. Know your strengths and maximize them!

How often do you monitor/review your portfolio?

I work on the rentals daily.

On the mutual funds I purchase through my 401(k), I never look at them. That is simply an investment that I won’t have access to until I retire, and I don’t even look at it. It’s a purchase of stocks and then let them do what they are going to do. I’m trying to be a better buy and hold securities investor.

NET WORTH

How did you accumulate your net worth?

First, I worked on increasing my salary and putting money into my 401(k). By budgeting and being frugal, I eventually reached a point where there was some additional cash left over, and at that point I started increasing my 401(k) contributions further. Those funds ended up being my self directed IRA.

I also consistently increased the value of my home by moving up with each purchase.

My first house I bought for $25K and sold 5 years later for $25K. Although it didn’t appreciate (location IS everything), it was cheap rent ($242/month) for 5 years while I was in college. My second house was $60K, sold for $79K. My third house was purchased for $99K, I added a dormer (2 bedrooms and a full bath) upstairs for about $25K, and then sold for $172K. My current house I purchased for $266K.

The value of my current house rose significantly after it was purchased, which allowed the HELOC to be set up and used to invest in rental houses. My home was my first “buy, borrow, die” asset, where I bought the house and then used borrowing to pull out the value to use for other investments while retaining the asset. Hopefully one day it will pass tax free to my heirs.

With the HELOC funding source, I purchased cash flowing assets, reinvested the proceeds, and then used leverage of loans to increase our ability to purchase additional properties and increase the returns of the funds we had invested. The key to this with single family rentals is good tenants and learning to be a good property manager. Over time, quality renovations and repairs and quality tenants will result in strong returns and allow those investments to snowball if you re-invest.

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?

Investing is my greatest strength.

Earning and Saving were important to get me to Investing, but Investing needs time or management (or both) to grow. I believe Earnings and Saving can get you to wealth with a longer time period, but E & S really set you up to invest.

Investing is where you get your money to work for you. Reading “Rich Dad Poor Dad” was the key for me to shift my mindset about investing and assets. It is much more effective to move from Employee (earning and saving) to Investor to move the needle and generate wealth.

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

My divorce was the biggest setback I had.

Combined with the Great Recession and the loss of value of my home (my biggest part of the divorce settlement) below what I owed on it at the time, I likely had a very low or negative net worth in the 2009-2010 time frame. I was very fortunate I kept my job through that time and also fortunate I had the HELOC available so I had the “savings” to invest in rentals.

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

I am growing my net worth by setting up multiple streams of income.

I am constantly looking for new investments that will produce income over time and also provide strong returns. This is why I have started to invest in apartment syndications outside my SDIRA and started funding mobile home notes.

We have a plan to start creating more assets within the rental business to provide additional streams of income and help to offset costs of borrowing. My goal is for the rentals to buy assets that produce income and the entire rental business snowballs into additional income producing assets.

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

My target is $10 million. I am not sure I can get there, but I think you set your targets high so you have something to strive to achieve.

My target used to be $2 million and then $5 million. I’ll keep moving the carrot a little further out if I feel I’m getting too close to meeting my goal.

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

First million was in early 2019 and I was 52 years old. I didn’t change a thing as it was more on paper at that time than anything coming in on a week by week or month by month basis.

I did leave my previous job at that time, so maybe reaching that milestone gave me some confidence to move on to a job that didn’t pay as much but had a better work life balance. I guess that is really what we all want in achieving wealth, to have a better life.

What personal habits and/or traits have you developed that have made you successful at growing your net worth?

The personal habits I have that have made me successful at growing my net worth are discipline, re-investing, and learning.

Discipline is needed to stay focused on maximizing every dollar, re-investing every dollar you can, and constantly learning about what you are doing.

I have read dozens of book, probably thousands of articles, listened to hundreds of podcasts, and tried to simply learn from every person I met and take a lesson every mistake.

You need discipline to get processes in place that can be repeated and will give you the results you need. You also need to re-invest constantly. For the first 3 or 4 years we didn’t take anything out of the business except to repay our personal loans. It is slow at first, but over time reinvesting the profits builds more assets and eventually the business is making more than you can contribute.

That is the goal, for your money to make more than you can earn individually. And to do that you need to constantly learn about how you are investing. I try to get one thing out of each podcast or article I can apply to our business and tweak slightly what we do.

There are a lot of false starts. For new contractors we find a handful of them, give them small jobs to do and see how they do, and we keep the best. Do the same thing with your investments and you’ll find some good ones that will help in the long run.

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

If I were to do something differently, I would have used leverage sooner.

We have never had an extremely high amount of debt with respect to the value of our rental properties. Had we started with financing sooner, we could have grown faster. I don’t mean 90% financing, but 50% financing lets you turn a good return to a great return.

Leverage is a tremendous tool I wish I had learned to use sooner.

Also, I think many people have said this, I wish I would have started investing sooner. You only live once!

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

Read books about any kind of finance and investing, blogs, and magazines, listen to podcasts, talk to people, and do whatever you have to do to find out about investments.

Only invest in what you understand.

The biggest hurdle is to get to $1 million net worth (without your primary home), but once you do you can be considered accredited and an incredible array of investment options opens up.

You have to do your due diligence, so you are back to reading and listening and talking to people. If you’re really lucky and can find a good mentor, I think you can really cut down on potential pitfalls.

FUTURE

What are your plans for the future regarding lifestyle?

Right now I am planning to work at least another 3-6 years. I might retire from my job at 59, but I might wait a little longer as long as the job is still going well.

It also will depend on how the syndications turn out and how many other streams of income I can develop.

What are your retirement plans?

Right now I am unsure what I would do if I retired from my day job, so until I figure out what that will be, I probably will keep working.

I do plan to travel more as I like cruising and Las Vegas. I’d also like to travel to see college football games in other locations.

I tried out pickleball and enjoyed it, but I need more time to dedicate to it as playing it infrequently is just frustrating me because I am competitive and want to get better.

I am active in my local government and want to continue to be active in my community.

I’d also like to figure out a way to be more involved with my grandchildren’s lives.

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

My primarily concern in early retirement is health care. It is one of the reasons why I may wait until 62, so there are fewer years I have to self-fund. I may even see if I can go to a reduced schedule at work as a “semi-retirement” and allow my health case to continue to be partially covered.

I plan to either make sure my budget can handle the expense or I will continue working. Health care may actually be what gets me to do a budget again!

MISCELLANEOUS

How did you learn about finances and at what age did it “click”?

I learned about finances fairly young.

I had a paper route when I was 11 and I bought 10 shares of my first stock about that time.

My father sold our house on a land contract (contract for deed) and explained amortization schedules to me.

My maternal grandmother had rental houses in Miami so, as my mom says, “I come by it honestly.”

My paternal grandmother had “roomers” or boarders in her home, like my great grandmother did in the Great Depression to help get by. I used to go room to room with my grandmother helping her make the boarders’ beds. She charged $35 a week (in the 1970s) to rent a room.

She religiously saved for all 10 of her grandchildren and when I was 18, she gave me $5000 that I used for the down payment for my first house.

In my spare time when I was in college I read every personal finance book I could find at the local library. My father was investing in mutual funds so we would talk about moving averages and charting and interest rates every weekend. At this time my father was building his trucking company and this gave me some insight into running a company and accounting.

I started reading about rentals around this time, too, but never found the right real estate to purchase, but I didn’t really have savings at that point. I kept trying to find the “side gig” (we just called it a second job back then) that would work. I prepared taxes for a couple of years at H&R Block and learned a lot about taxes and how they work. I had the classes I mentioned as part of the MBA I started that taught me about accounting and some basic business concepts.

I think it really clicked for me about the time I figured out if we got financing in place it would amplify the returns and ability to expand. It was all kind of floating around until then. At that point, it all fell into place and I feel things have been going well ever since.

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

First, my parents. I never saw my dad in the morning, he was always up before us and home at 5 pm or 6 pm, tired from the day. He started his own trucking company later and built it into 10 trucks. He always had something going, he never was idle. He also always had projects around the house where I learned a lot about basic construction. He was a tough guy to work for because he would never ask you to do anything he wouldn’t do, but there wasn’t anything he wasn’t willing to do if it needed doing.

My mom really pulled herself up by her bootstraps, bought her home, built a career, has many friends, and has managed to do some things I don’t think I could do. She is an inspiration to me.

My other hero when I was a kid was Pete Rose. I loved that he played harder than anyone else, that he’d do just about anything to win. He was driven and believed completely in himself.

During one of my son’s baseball games I pulled him aside and told him a story about Pete Rose to give him confidence. When Pete Rose was suspended from baseball for gambling it was a very sad day for me, the day my hero fell.

After that, I would say I admire Warren Buffett very much, but I don’t have heroes any more.

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” – This book changed my perspective on money, assets, and my career. I was on a cross country road trip with my daughter and we were reading the book aloud to each other, Somewhere driving through Montana I realized I needed to take the program manager job I had been offered at work. It helped me to put a simpler definition of assets and liabilities in my mind and it taught me to think of how I could generate income to afford what I wanted.
• “Landlording on Autopilot” – Great book to learn to manage properties. Very common sense approach, it is written by a former police officer who became a landlord.
• “Snowball” – A biography about Warren Buffett. It’s a terrific story about possibly the greatest business investor of our time. The stories and examples of his life teach you the basics of investing. Mr. Buffett has a great way of simplifying a concept and explaining it.

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

I only give sporadically. The last two years I have contributed to a local organization that helps to manage the watershed in our area.

At this point I am still mostly re-investing.

As I mentioned, I am active in my local government. Although not really a charity, it does take a great deal of time and, frankly, with the political climate today, it can be very stressful. It seems people have forgotten we can disagree with someone and that doesn’t make them a bad person. Hopefully we’ll get back to a common goal of bettering our communities and agreeing to disagree yet still finding a way to work together.

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?

I am doing estate planning right now. My initial plan is to distribute lumps sums when I die through a trust, but then maintain assets in the trust that will cause it to grow over time while paying income to my heirs.

I want to help my grandchildren with their skilled trades or college education and their first homes as my grandmother did for me.

I don’t want to distribute it all at once because, as I told my son, there are lots of broke ex-NFL players and lottery winners. People don’t do well with large lump sums.

I am hoping what I leave behind can be helpful to my heirs for a couple of generations.