Millionaire Interview 394

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 December.

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

Let’s get started…

OVERVIEW

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

My wife and I are both 49.

We have been married for 23 years.

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

We have three teenage children.

Our daughters are 17 and 15, and our son is 13.

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

We live in a quiet community, outside of a bustling town, in the suburbs of a major east coast city. It has great public schools, lots of quaint shops and restaurants in town, and farms and orchards within about a 10-minute drive.

Definitely a great place to raise our kids!

What is your current net worth?

Our current net worth is $3.75 million.

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?

• Retirement accounts: $1.45MM
• Taxable investment account: $410K
• Savings accounts: $30K
• Primary residence: $550K in equity ($800K – $250K loan)
• 1st Investment property: $210K in equity (no debt)
• 2nd Investment property: $670K in equity (no debt)
• 3rd Investment property: $164K in equity ($426K – $262 loan)
• 529 Plans: $275K

I know that some retirement police sirens might be sounding on the internet, but I am comfortable including our primary residence equity and 529 plans in our net worth. They are both assets we own and I view money as truly fungible.

If needed, we could sell the house and buy something much cheaper or move into one of our rentals, so it is clearly an asset we could tap. Similarly, we will be helping all of our kids pay for college, and this 529 plan money is what we have set aside to do so.

I don’t think we would deduct it from our net worth if we had simply kept it in the taxable account instead of putting it in 529 accounts, so why treat it differently just because we put it in 529 accounts?

EARN

What is your job?

I am a partner in a law firm.

My wife is a college professor.

What is your annual income?

Our combined gross income for 2022 was just over $500,000.

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 recently looked at my Social Security statement and it was a nice trip down memory lane. It reminded my of all of my summer and part time jobs from high school through college.

I graduated college in the mid-1990s with a degree in engineering and my first “grown-up” job paid $35,000 per year.

After a few years at that design firm I moved to a larger firm for a 33% raise.

I did the same thing a few years later and moved to another consulting firm for another 33% raise and a bit of a career shift.

That last engineering firm was involved with litigation support and I quickly realized that I liked the legal aspects of the job much more than the technical ones! I enjoyed the competition of mediations, arbitrations and trials, and also knew how much more the lawyers on those cases were making than I was.

So, after a couple of years (and nominal raises which got me up to about $70K per year) I took the plunge and went back to law school. We were married and homeowners by then, so it was not a decision we took lightly, but I knew that it would probably open a lot of doors for growing our income as compared to staying in engineering.

My first job out of law school paid $105K, and I have grown that slowly but steadily over time with the only big jumps coming when I made partner at the firm. The last 5 or 6 years have shown quicker growth from about $250K per year to a projected income of $450K for 2023.

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

I have a bit of a unique perspective since I jumped around at the start of my career, and went back to school part time to get an MBA during that period, then went back to law school full time, and have now stayed with one law firm since graduation.

Based on my experience, I don’t think that there is a one-size fits-all approach to growing career-related income. In fact, I think it is entirely person, industry, and employer-specific.

In engineering, I was never going to be able to negotiate big raises with my employers and there was very limited opportunities for advancement (economic or otherwise) at those firms. My wife also started out in engineering consulting and had the exact opposite experience. She stayed with the same employer until we had kids and was able to advance her position and income significantly in that time frame.

There is certainly the opportunity to chase income in the law by switching firms if you carry a big book of business. But I had a relatively clear path to advancement (and higher income) and decided to stay put, work hard enough to advance, and develop niche specialties that add value to my firm and to our clients.

What’s your work-life balance look like?

I’m sure this does not come as a surprise, but the law is not particularly conducive to striking a nice work-life balance.

However, having the ability to do so was a big driver in choosing my firm from the start and I have never regretted sacrificing a bit of income for the ability to be present for my family and pursue my interests outside of work.

The COVID pandemic was actually helpful in this regard since we updated all of our technology to allow seamless transition between working at home and working at the office. I now only go in to the office a couple of days a week and cannot imagine ever going back to the drudgery of commuting five days a week.

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?

We own several rental properties that have a total of 9 units or “doors.” They are all local and we (read: I, since my wife has no interest in this) manage and maintain them.

The gross rents from these units brings in about $120K per year. There are obviously plenty of expenses that go with those units but we will generally earn about $60K-70K in net income per year depending on whether we make any significant capital improvements or repairs that year.

We have been very intentional in our acquisitions and capital improvements, and they have all always cash flowed positive.

We acquired these units in various ways: one was my first home before we got married that we have held onto and continued to rent and the other two are small multi-unit buildings that we bought as investments. They are all local (see above re: managing them ourselves!) which also means that the multi-unit buildings were easy to evaluate in terms of cash flow, rentability, and projected appreciation.

Both of the multi-unit buildings had some cosmetic warts and deferred maintenance. As a result, they had been on the market for a while and we were able to negotiate the price down to a point that would let the building (barely) cash flow positive with 20% down. They all had below-market rents, so we knew that we could renovate the units as they turned over and create significantly better cash flows which would also allow us to make capital improvements without doing it out of pocket.

As an example, we’ve had two units turn over in the building that we bought last year, put about $3K into each of them, and raised those two rents by over 50% each. The increased rent will recover the $3K invested and the couple of month vacancy in 6 to 9 months. Our tenants tend to stay for 5+ years, so everything after that initial payback is added income.

SAVE

What is your annual spending?

For 2020, 2021, and 2022, our total cash outflows (not including estimated tax payments) were approximately $275K each year, but that includes all of the debt payments (regular and extra) on our primary residence and the one rental property along with the 529 plan contributions.

If you back those items out, our “core” spending is about $175K per year.

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

At a high level, that $175K breaks down into the following:

• 3.9% for insurance
• 6.6% for real estate taxes on our primary residence
• 3.2% for home utilities (electricity, gas, sewer, and TV/phones)
• 14.9% for debt on our primary residence
• 10.8% on our kids various activities
• 0.6% on miscellaneous Venmo payments to our cleaner and other home services

As noted below, we tend to run all of the spending we can through our travel rewards cards, so the remaining 60% (or $105K) goes to pay those cards off in full each month. I reviewed our year-to-date credit card statements to break down that $105K, and here goes:

• 31% goes to merchandise (we have a bit of an Amazon habit, and most of the buys are things for the kids, including lots of shoes/clothing)
• 16% goes to kids activities and organizations (we have very active kids!)
• 10% goes to vehicles (fuel, repairs, etc.)
• 10% goes to restaurants (we order out once a week, go out as a family once a month, and eat breakfast or lunch at work a couple of times a week; this also includes all of the food on vacations)
• 9% goes to lodging (mostly on vacations)
• 8% goes to groceries
• 7% goes to healthcare/ personal care (copays, pharmacies, gym membership, haircuts, etc.)
• 7% goes to entertainment (mostly plays, theme parks, swim club, etc., for the kids)
• 2% for travel (tolls, uber, and airline fees when using miles)

The credit card companies aren’t perfect in categorizing each purchase, and Citi and Capital One use slightly different categorization, but you get the gist, and we definitely spend a lot of money on the kids!

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

We do not use a formal budget.

When we were first starting out after college we sat down periodically to figure out whether we could afford a trip, project, or investment and how to pay for that.

Now, we live off of our monthly paychecks and tend to cash flow everything except real estate purchases.

The extra distributions that I get every couple of months from my firm are typically split between our taxable account and accelerated repayment of investment property debt.

It helps that we haven’t bought a brand new car since 2006 and have been able to simply cash flow the purchases of the several used cars we have bought since.

We take a few vacations a year that typically include a long weekend of skiing, a week or two at the beach, and another trip somewhere in the U.S. The ski trip is often the most expensive of those (the beach trips are with extended family and very cheap), so we usually spend about $10-15K on vacations and they are spread out through the year.

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

In 2020, we saved a little over 40% of our combined gross income. I count our extra payments to debt principal in our savings totals (again, do I hear sirens sounding in the background?)

For 2021 it was over 60% (we sold our former primary residence, kept the same mortgage amount, and invested the equity that we had cashed out).

For 2022 it was 35%. For 2023, it will be about 40%, using the projected income from my firm.

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

Pay yourself first.

Use automatic deferrals and deposits to send income straight into your retirement plans and other investment accounts.

If you never see the money in your checking account you learn to just live off of what is in that checking account.

Similarly, we have always made extra monthly payments to our real estate debt. Instead of taking out 10-, 15-, or 20-year loans, we have always taken out debt with a 30-year term but paid it down like it was a 15- or 20-year amortization. While the interest rate is a bit higher, we’ve liked having the piece of mind that we could throttle back the extra payments if we needed to for cash flow purposes.

What’s your best tip for spending less money?

Don’t be impulsive.

The amount of deliberation that I put into purchases drives my wife insane at times. I will spend 20 minutes on Amazon looking for a comparable item at a better price to save $10 or $15. Once I’ve decided what I want, I then often wait weeks and sometimes months to see if I still really want it.

It’s as if I’m allergic to spending money, but it works for me and certainly results in less spending!

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

Vacations.

While we don’t spend a lot on our trips, it is about the only thing that I enjoy spending money on. I view it as creating lifetime memories for our family, and it is hands-down the times of the year when our kids get along the best and we are all engaged and enjoying each other’s company the most.

We do our homework to try to line up cost-effective places to stay when booking vacations. We also run most of our spending through our Aadvantage and Venture X cards so that we can book travel with rewards points to keep the costs down as well.

INVEST

What is your investment philosophy/plan?

I am a buy-and-hold investor, and I am now almost entirely in index funds.

The only trading I do in our investment accounts is putting new deposits to work, rebalancing as needed (and do that no more than once or twice a year), and tax loss harvesting when possible and practical.

We currently invest 60% in S&P500 and total US stock index funds, 25% in international stock index funds, and 15% in bond funds.

I have been seriously considering eliminating the bond funds given our real estate holdings, but I have not dug into the correlation in risk/ returns for those assets to make a final decision.

What has been your best investment?

I would have to say our real estate investments.

The three investment properties are worth over $1.25MM, collectively, and the only debt on them is a $250K mortgage on the one that we purchased last year. The debt on the other two have been paid off almost entirely using the excess cash flow from our rental income. Those two were bought 20 and 10 years ago, for about $40K and $380K, and are now worth $210K and $670K, respectively, while continuing to spin off cash and appreciate in value.

We have also done well with our primary residence moves. We bought our first home for $165K in 2000 and sold it for $365K in 2006 after a ton of sweat equity renovation. We bought our second home for $365K in 2006 and sold it for $535K in 2020. Our current home was bought in 2020 for $535K and is now worth $800K.

All of those moves were made after watching the market for a good opportunity in the “right” neighborhood (i.e., each time we traded up to a house of the same value but in a neighborhood with better appreciation potential). Each time, we also bought a house that had sat on the market long enough that we could negotiate the purchase price and seller concessions aggressively.

What has been your worst investment?

I was invested in some internet darlings that plummeted to penny stocks (remember Safeguard Scientific?) around the time of the dot com bust. It was a painful lesson but not a large investment in hindsight.

I was already trending towards index investing, and this experience put the nail in the coffin of my days of trying to pick winners. How could I possibly compete as an individual investor against the teams of investment analysts at Wall Street firms?

What’s been your overall return?

Unfortunately, I honestly have no idea.

In addition to our investment accounts, we would have to look at the rental income streams, maintenance costs, debt service, and building appreciation over time. It feels like I would need to hire a forensic accountant to figure that out!

I have been using Personal Capital (now Empower) for about 10 years now, and my “You Index” has always been within a percentage point or two of the S&P 500 return at the end of each year.

This year, my You Index is lagging the S&P return by 4-5% (which is part of why I’ve started questioning our bond positions), but we will see what the last few weeks of the year brings.

How often do you monitor/review your portfolio?

I look at Empower every weekend. I also review our market investment allocation quarterly to make sure we are still in line with our targeted allocation.

I am a bit of a real estate junky, so I also review the local real estate listings for a few target markets daily to see if any good investment opportunities have come on the market.

NET WORTH

How did you accumulate your net worth?

We have accumulated our net worth slowly and steadily and with a lot of hard work.

Our market investments have been in broad index funds for about 20 years, so we have largely tracked the S&P 500 return there.

We kept my first home when we moved in together and have rented that out ever since. We have also added two more rental properties, have renovated them as needed, have found and kept good tenants in both (we rarely have vacancies and they never last more than a couple of months), and have gotten all of the units up to market rents.

We have also done a couple of other real estate deals over the years by acquiring foreclosed properties, renovating them, and selling them at market value. We made anywhere from $50K to $150K on each of those deals, and a couple of them provided the seed money for acquiring our rental properties. While that is a side hustle that continues to interest me, it takes a lot of sweat equity to maximize profit, there is a lot of risk in acquiring these properties since many went into foreclosure for structural or other issues, and the real estate market run up has made deals nearly impossible to find in our target markets (we have only done these in good neighborhoods in reputable school districts).

Neither my wife nor I have received any inheritances, and our only leg up (albeit a big one), was that my parents paid for my undergraduate degree. We have gotten scholarships, employer contributions, and have otherwise paid out-of-pocket for our degrees (my wife’s undergraduate, masters and PhD, and my MBA and JD).

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?

I would have to say it is earning, but it is a really close call since I think that we are pretty balanced across all three.

Our earning power has allowed us to save and invest a much larger portion of our income in the past 5 or so years, but I think we have done a pretty good job at that saving and investing.

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

We have been incredibly fortunate and really haven’t faced any significant bumps or headwinds. The only ones we’ve really dealt with have been intentionally self-inflicted.

For example, our decision for me to go back to law school (and give up three years of income) and our decision for my wife to stay home and then transition back to part-time and then full-time work, and to then go back for a PhD (and give up four years of income), as our kids have grown.

Those decisions caused meaningful dips in our income, but I would not redo it any differently.

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

We are keep on keeping on.

As noted below, we haven’t made any changes to our behavior as our wealth has grown. We continue to both work, continue to save as much as we can, and continue to invest in the same ways that have been successful for us in the past.

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

I’m looking forward to seeing a net worth that starts with a “4”, but I’ve really got my eyes on one that starts with a “5.”

There’s no magic reason for wanting to see $5MM, it’s just a nice round number and candidly beyond anything we would have imagined when we were first starting out.

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

We cracked the $1MM mark in 2016 at the age of 41, the $2MM mark in 2020 at age 45, and the $3MM mark in 2022 at age 47.

Our net worth went mostly sideways for over a year but we are now closing in on the $4MM mark.

We did not have any significant behavior shifts when we hit any of these milestones, and we aren’t planning to make any in the future.

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

I would say the willingness to take calculated risks is a trait that I have developed and that has helped on that front.

By nature, I am a risk-averse person. But I realized early in adulthood that I would need to take some risks to get ahead and earn the income that I wanted to earn. So, I was willing to go back to law school, I was willing to take on debt to invest in real estate, I was willing to buy-renovate-flip houses, and I was willing to put all of the money that I could into the stock market instead of building up any kind of emergency fund.

All of these were calculated risks that involved really digging into the costs, benefits, and potential outcomes as part of the decision-making process.

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

Given the job changes that both my wife and I have had, we both have rather significant rollover IRAs that have precluded us from making backdoor Roth IRA contributions. I know that we could have moved the money in those rollover IRAs into our new employers retirement plans to make ourselves eligible for backdoor contributions, but I was just never thrilled enough with the offerings in those plans (and did not want the added fees embedded in 401(k) plans) to do it.

In hindsight, I probably should have bit the bullet and done the conversions. As I worked through a potential drawdown strategy for our savings, I have realized the value of using Roth money to manage our tax brackets. It’s a definitional first-world problem to have, but is an issue that I would have addressed differently if I could.

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

At the risk of stating the obvious, I view wealth accumulation as a simple formula: spend less than you earn.

It’s essentially the same principle as dieting, if you want to lose weight, burn more calories than you eat, just applied in reverse. If you keep your spending under control from the outset (and below your take-home pay), you will accumulate wealth.

If you are able to avoid significant lifestyle creep, and grow that spending more slowly than you grow your income, you will accelerate that growth.

I fully recognize that this strategy is much easier to follow when you have a good income from the start, but for us, that formula has worked wonders.

We live in a nice house in a nice neighborhood, but it is not the nicest house in the neighborhood. We drive 10+ year old cars. They are nice enough, but many of our friends and neighbors drive expensive new imports, and we bought ours used and with cash. We have significantly grown our income over the past 15 years, but we have not increased our spending at the same rate, and that spending should go way down once the kids leave home. Not overspending on cars, homes, furnishings, or clothes has let us put a lot more of our money to work in investments.

FUTURE

What are your plans for the future regarding lifestyle?

I am definitely planning to retire early while my wife loves her job and is happy to continue with it indefinitely.

Where our kids decide to attend college will likely have an impact on how soon I will retire, but our assets are to the point where we do not need all of our current income. I could certainly cut back on work, although making a significant reduction is probably not feasible given client’s expectations.

I may consider making another career change to something less demanding. I have always enjoyed buying, renovating, managing, and investing in real estate, so I might look to get more actively into real estate if the opportunities are there.

What are your retirement plans?

My wife and I both want to live abroad at some point, and probably in Europe.

I have lots of bucket list activities that involve physical activities (like cycling across the U.S. and hiking the Appalachian Trail), so I’d like to take a crack at some of them in my 50s or 60s.

I will likely spend more time doing renovation projects at our home and our rental properties since I find them fun and hugely fulfilling.

Financially, a lot will depend on when my wife decides to retire. Depending on where the kids go to college and how much we contribute, we are already basically at the point where we could live off of our current assets indefinitely, so all of our additional income and savings from here out are probably just gravy.

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

As long as my wife keeps working, healthcare coverage is not a concern. Depending on when she decides to retire, that is an issue that we might need to navigate.

Beyond that, my only concern is the mental transition from accumulation to draw down and potential boredom. I have already done spending models that make me comfortable with our ability to easily outlive our current assets, but I’m sure that it will be a big pill to swallow when our income takes a big dip with my retirement.

As for boredom, I enjoy working out and could easily spend a few hours exercising every day. I also enjoy golf, tennis, and other outdoor activities that could keep my busy. My concern is more with making sure I have enough mental stimulation to keep me satisfied.

MISCELLANEOUS

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

I became interested in real estate and the financial markets at a pretty young age. My parents owned rental units, so I had an early exposure to that world and quickly learned the power of appreciation and letting other people pay off your mortgage.

I remember being interested in the financial markets by middle school but did not open a brokerage account until I had my first real job out of college and had money to invest. I opened a brokerage account with a traditional broker in 1996.

By the time I finished my MBA several years later, I was confident in my ability to manage the account, online brokerages had become more mainstream, I saw the advantages in minimizing fees, and I was a converted buy-and-hold index investor who saw no need in having a traditional broker to ping for advice on individual stocks or trades.

I would say that finishing my MBA is the time when everything really “clicked” and I felt like I had a full grasp on finances and investing.

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

My father inspired me to excel in life and my grandfather has always been my hero.

My dad worked tirelessly when I was a kid and it was always to provide for our needs and to pay for our education. He always also found time to coach our sports team and attend all of our other events as well. We certainly had means and lived in nice houses in nice neighborhoods, but we had a relatively frugal upbringing. Lots of hand-me-down clothes from cousins and bargain store buys, and I never had the “in” clothes or sports gear. While frustrating as a kid, it definitely instilled a work ethic and frugality that has served me well.

My grandfather was WWII enlistee who became career military and rose through the ranks to the very cusp of the top. He was incredibly magnanimous and generous, had an indelible love of family, and simply lived a good life. He always made you feel like the most important person in the world, and many of my favorite memories from growing up are associated with trips to see, and vacations with, my grandparents.

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?

I read The Millionaire Next Door in college and it resonated with me (and made me realize how much my father had been practicing stealth wealth).

I read A Random Walk down Wall Street during my MBA studies and it entirely changed my investing style to favor passive index funds.

I can’t think of a third book that I liked enough to recommend, so I’ll stop there.

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

I volunteer a lot of time on community organizations and we also make charitable contributions each year.

My volunteering has changed over time as our kids have grown out of the sports that I used to coach, and most of my volunteer time is now spent on local boards.

We have been donating about $10,000-15,000 a year to a Donor Advised Fund that we established with Fidelity and to individual charities that we want to support.

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?

Our current estate plan would leave our assets in trust for our children until they reach they reach the age of 25. We will likely revisit that plan in the future, and will certainly do so once our children near that age of 25 (assuming we are still alive and kicking!).

Our children will hopefully be well into their own careers and stable by the time we go, so I hope to be able to leave money for our grandchildren (hopefully lots of them) so that they can get a start on their own journeys to financial independence and living their best lives.