Through the years, I have interviewed hundreds of millionaires with the goal of learning from their experiences and knowledge.
I’ve published these as Millionaire Interviews, featuring my specific questions and their responses.
After a few hundred interviews, I realized that there was phenomenal wisdom in several of the questions I asked, especially when the responses from different interviewees are read one after another.
I’ve decided to publish these here on ESI Money in my Millionaire Wisdom series.
Note, not every millionaire answered every question and I did change around questions from time to time, that’s why every millionaire isn’t listed below.
Today we continue the series (see part 1 here to start the series) with millionaires addressing the following question:
How did you accumulate your net worth?
Here are their responses…
This has also been a journey and with steady work or employment with no breaks from 10 to 65. I outlined those details previously. By steady employment I never had to dip into savings (except for some divorce settlements). I started at a relativity high salary and probably always out earned my peers. I always spent much less than I earned. I invested most of the windfalls (bonuses, tax refunds) and regularly invested surpluses.
My investments started with individual stocks with a broker picking. That did not work well as there were more losers than winners, and he had me on margins, and a crash forced some sales for a loss. That was early and learned from that experience but could use the losses to offset some future capital gains. I then switched to low-cost market funds and for the most part I invested and held and reinvested all the dividends.
I maxed out IRA and Roth accounts each year I was eligible. I started with 10% going into my 401(k) and eventually moved up to 14%. My company offered 6% matching and significant contributions to a pension fund that I annuitized at retirement. By having available cash, I always had the opportunity to spend or buy something without having to budget and could take advantage of opportunities as they can up (example: bought a house 9 months after I graduated, 2 years later bought a duplex rental property when market was down, went to Hawaii for 2 weeks on the cheap at high end resorts several months after 9/11, negotiated and paid cash for cars for the past 40 years).
“Continuity of Purpose”, by each day doing something to maintain what you have, do something to improve what you have or yourself, and to do something financial to support my purpose or goals.
Had a few side income jobs early on. Consulting with a college professor and working as a seasonal tax preparer. The tax prep work started out as an opportunity to learn about taxes by taking an H&R Block course. I did very well and they offered a job for the season. Worked weekends and a few evenings and learned a lot and realized I was in so much better position than most people. I excelled in that and eventual worked in an H&R Executive Service office where I worked with higher end clients and more complicated taxes, and many had multiple states due to working in NYC and living in Connecticut, or a corporate relocation.
Learned about finances (taxes, investments, real estate, etc.) and become an amateur Wealth Planner Note the H&R Block course and each season had to do more and advanced course work, took courses in real estate investing and real estate appraisal before investing in the income property, read financial books and magazines.
I had to move several times due to my job which forced me to sell homes. In each case I had considerable gains and equity and I always took out as much as possible and put only 20% down and invested the difference. Bought for $33K, sold for $54K, bought for $80K, sold for $125K (a story later on this), bought for $280K, sold for $345K, bought for $594K, sold for $697K (after 2 years), bought for $700K (and twice the sq. ft. as the prior house), and is my current dream home. This strategy by using low cost mortgages provided cheap capital to invest and no tax consequences. On one of the sales I had to pay the realtor fees, as my employer didn’t cover those expenses.
Track Net Worth and set achievable goals each year. I have tracked my net worth since I was 25. I was 50 and had my first $1M, $2M at 58, $3M at 64 and nearly $4M at 67. [Editor’s note: Again proving the first million is the hardest.]
Do a monthly budget and follow it. Challenge every line item as to need or is that the best/lowest cost.
Learned how to minimize expenses by doing things I enjoy – lawn maintenance, house maintenance, simple car maintenance. I have done a lot of painting (in fact recently finished painting 66 windows in my home). I have done electrical work, plumbing, dry wall, irrigation repairs, installed outdoor home lighting, replacing a $1 part on a headlight on a Corvette that the dealer wanted $700 each. Took me 8 hours and I did both headlights, but I learned a lot and saved a lot and the satisfaction of accomplishment. Repaired a wood floor when a bleach bottle leaked. The company investigated the bottle and found a pinhole in the bottle and claimed responsibility. Sent them pictures of the damage and they sent a check for $600 to repair it. It cost me nothing as I had the supplies, the tools and knowledge. I spent 2 hours over 4 days and the repair is like new. Replaced many windows when problems with blown seals.
Using knowledge, I learned from working on the farm to life experiences to You Tube, one can learn how to do almost anything. My dad the farmer was also versed in metal working, welding, machining, woodworking, auto mechanics, electrical, plumbing, etc. He could tear apart a tractor engine and rework pistons and rings. He built a pontoon boat, hay conveyors, doubled the size of a lake cabin (I spent several vacation weeks helping him) and many other things. He even built a working miniature steam engine and a miniature steam locomotive. He did much of the foundry work and made tools to make the parts. The steam engines ended up sold to a museum. My dad was an inspiration to do as much as you can rather than pay for something that one can do.
Buy quality. My mother always told me that only “rich people can afford to buy ‘cheap things’ “. Meaning it is better to buy based on quality rather than cost. It really is a value decision. Buy good quality food, clothes, tools, cars, etc. My parents gave me a new suit and $100 when I left for college. I was on my own since then. My father, my last parent passed away at 92 late in 2016. I did the eulogy and was the executor of his estate and received $4,000 inheritance but a priceless experience for all he taught me.
Start planning your retirement early. I have always had it in mind and made a spreadsheet for expenses, income and key dates to do something (everything from natural gas fixed pricing expires, to passports expiring, to when to take RMD’s, etc.). This helped me to remember to be proactive on key financial events. Think about: Where to live. What to do. How much money will I need? Sources of income. How to save for retirement. I used a detailed retirement calculator and updated it yearly with the latest assets, liabilities, and retirement income projections and printed it out. I felt safe when it said I had 100% chance of never running out of money. I worked hard to maximize Social Security contributions and was aware of the limits and the number of years to qualify for maximum benefits. When I retired, and started Medicare, I was assessed a high premium for Part B due to my high income. I twice went to SS office in the last two years to say I was no longer employed and had lower projected income. Used Form SSA-44 and SS then adjusted my withholdings and provided back payments we and saved several thousand $ each of the last 2 years.
Think about the impact of the sequence of market performance when retiring. One would like to have market growth in the first few years in retirement and not major losses. My plan was to reduce my withdrawals if that were to happen. In the last two years the markets were positive, and I still withdraw nothing in my first partial year of retirement (lived off retirement income and bonuses), and withdrew 1.45% last year and so far, plan 1.1% this year. I really need to withdraw more and spend more of my net worth.
Any recommendations to better move out of the accumulation phase and into the spending phase? [Editor’s note: Uh, take me and my wife with you on your trips? 😉 ]
So now, I’ll answer the spending question the way we think about it, because it is so closely tied to our goal of accumulating net worth.
We are comfortable in our lifestyle so see little need to spend more on ourselves. But we have some common financial goals, like ‘pay my taxes’ and ‘save for the best retirement possible (both length and quality)’. So, we account for our spending in this order:
1) By default, we pay taxes first, whatever my obligations are. I’ve worked very hard to learn to minimize taxes.
2) $86K Savings is next, we automate EVERYTHING to come out of my paycheck that I can, in this order:
- His 401K at the max ($24K), Hers at the max for her age ($18K), company matches that add up to $13K.
- HSAs, both maxed out ($7K)
- Backdoor Roth IRAs: His $6500, Hers $5500 after taxes (also age based)
- Another $12K after-tax goes into a strategy called “Mega Backdoor Roth 401K”, most people would put this surplus into a brokerage account and pay taxes on the future gains. I will not have to pay taxes on these gains. Search on the term Mega Backdoor Roth to learn more.
3) All regular bills are paid electronically/automatically, as soon as our remaining salary hits our checking account – Mortgage, Car Payments, Student Loan, Utilities. This ensures we are covered for main bills. We use cashback Visa to save 2% on everything we spend.
4) 2% Cashback Visas are used for dining out, and all the manual spending we do. MONTHLY BONUS for WISE SPENDING: As a relatively new couple, both who were recently independent, I felt it was important to maintain the ability to have some separate money. We needed a way to jointly manage spending, but leave some for our secondary or minor goals. We set a cashflow minimum goal for our checking account ($5K). If we are good and don’t overspend, anything that remains above that at the end of each month gets divided between us to spend or save anyway we want. No questions asked (for extravagances the other might not support). We also put an equal third portion into a household slush fund for common goals, like vacations and remodeling goals.
If we are NOT good, there’s nothing leftover to fund our ‘fun money’. We are “good” almost every month.
My net worth has been driven by a good income, particularly in the last 4 years of my career, stock market investments and a wife who has done very well for us in real estate – both our homes and our property investments.
And good fortune.
We never made a lot of money. 10 years ago when we were first married, our combined salaries were just over $80K per year. When we got married, I had over $100K saved. My wife came into our marriage with the house and had a good portion of it paid for. We doubled our salaries over the past decade.
We have always saved at least 40% of our combined salaries and now save well over 50%.
For the last 10 years we had an asset allocation of 75% in stocks and 25% in bonds. All of our investments are in low cost index funds. We just dollar cost averaged into our savings every pay. We now have a 65% stock and 35% bond allocation.
I invested when I was young, and compound interest did its magic.
The majority of my net worth comes from the beginning of my career. A lot of expatriate workers use the low cost of overseas living plus the tax savings to have a good time. A lot spend their money on exotic travel, and some drink their salary away. But not everyone does that. I lived with extreme frugality, and plowed money into low-fee mutual funds. Even when my salary wasn’t very high, I saved up to 70% of my gross income.
In the first fifteen years of my career, I saved an average of USD 40,000 per year. That average varied a lot from year to year: one year was zero, for example. The average was USD 40,000 per year. After I got married my salary continued to go up, but my savings rate tapered off. In the last 10 years I’ve averaged USD 15,000 per year.
All of my savings went into mutual funds. My return on income (ROI) has averaged 9% per year. That’s not as spectacular as ESI’s return, but it’s roughly the same as the S&P500 over the same period, so I’m happy. That brings me to today’s total of USD 3.4m.
In short, good career planning and risk-taking to position ourselves for promotions and higher paying jobs which allowed us to save 25%-30% of our combined incomes for nearly 25 years and moderately invest that money. Our investments are mostly passive index funds but we have diversified to include some actively managed funds. Diversification has been key as we have tried to invest in mutual funds and ETFs for Growth and Value as well as Large, Medium and Small Company Funds, both domestic and international. We have stayed nearly 100% invested and about 97% funded in equities through the years which has served us fairly well.
Over the last few years, we added some PE funds and some of our Angel investments. Home Equity is pretty robust as we have a desirable home in a good neighborhood and high growth area of the country. As mentioned, we refinanced our 30-year mortgage to a 15-year mortgage about 8 years ago. Originally, we put in a 25% down payment, made some healthy extra payments toward principal and now make bi-weekly payments. Realizing some appreciation and accelerating payments to reduce principal and save interest on a very expensive home has created a nice chunk of home equity.
We have been of the “buy and hold” mentality and have closed our eyes and ridden out the tough years (i.e. 2008) and have tried to dollar cost average our investments over time. I was able to take advantage of some executive deferred compensation programs at my former Fortune 100 Company which added considerably to our tax-advantaged nest egg, along with 2 stock splits, one 2:1 and one 3:1 over a seven year period. Our home is our big extravagance and quite the money pit, but we have kept some of the other luxuries to a minimum.
Our daughter attended decent public schools, my wife has a company car, and I drive a 9-year-old BMW after passing down my 18-year-old Jeep to my daughter when she turned 16. We do eat out quite a bit due to the nature of our jobs and busy lives but we don’t entertain or socialize an abnormal amount. We have the usual complement of social technology entrapments, (cell phones, computers, digital programming, cable, etc.) which tends to entertain us at home rather than a lot of discretionary spending outside the home. We will generally take one big family vacation a year and then a few long weekends throughout the year.
A big factor has been starting young. While we didn’t make much out of college (my opening salary was less than $40K), we had the ESI principles in place right away which helped us get the snowball rolling. I like to call it The Green Swan way of life.
But besides that, the biggest factor has been our earnings. We’ve worked hard to advance our career, sometimes a little too hard.
Getting our incomes up there over the years while keeping spending under control has meant we can tuck away a whole lot into investments. Top that off with a nice bull market (although we did take our lumps during The Great Recession), we’ve experienced a nice net worth explosion.
We’ve certainly made some mistakes along the way, but we’ve been fairly diligent. We’ve always tried to do our research while avoiding paralysis by over-analysis. And most importantly, we try to learn from mistakes. Not only our own, but other folks’ mistakes as well.
As mentioned above, I started at internet startup company in 95. It went public a few years later during the dot com boom. While I didn’t have that many shares, they did split a few times. That got me started in investing in other companies and stock market, also got me to max out 401ks each year.
I also make sure my wife maxes out her 401k each year, and then I contribute $13k in IRA’s for both of us each year.
During my working years, we began having family and moving up in house sizes:
- First house in San Jose was purchased @ 1989 for $167k and sold in 1992 for $235k.
- Purchased our next home in 1992 (central valley) for $280k and was under water for years before selling it @1998 for $315k.
- We then purchased a nice ranch home on 1.5 acres in 1998 for $450k as the housing market began to really take off. We sold that house in 2002 for @ $820k and purchased some acreage and built a custom house.
- In 2015, we sold the custom home and acreage for $1.5m+. We are now renting back this home for $2500 per month for as long as we want. The buyer was interested in the acreage mostly. So we are free to move whenever we wish.
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Lots of good stuff, huh?
To read more on this series, check out part 4 here.
Millionaire 22,
Hopefully you have someone you trust to bargain your funeral and centenary plot. Wow