Lazy Man and Money

How To Be a Millionaire in Ten Years

by 11 Comments

Every couple of months, I read an article about early retirement that knocks my socks off. This past week I read such an article and I’d like to share it with you. We have a similar story, so you might want to stick around after you read it.

Here is Root of Good’s recap of their million dollar journey in 10 years.

Before I get to our story, I’d like to shine a spotlight on what really worked for Justin. It feels weird analyzing someone else’s personal finances like this. However, I’ve detailed our estimated $200,000 in annual retirement income and have explained what’s working for me. Maybe this makes me qualified to give an opinion on someone else’s journey?

As my old math teacher used to say, “There’s more than one way to Main Street.”

Here are some of the most notable items I found in Root of Good’s journey:

Big Income Not Necessary

While they did have two incomes, neither made close to six figures. At their peak, they combined to make $138K.

That’s not to say that big income can’t work. It’s even easier. It’s just that big income is not a requirement.

Frugality Wins the Day

It might not come off in this particular article as much as other Root of Good articles, but Root of Good is very frugal. When I read their monthly spending reports, I think, “That simply can’t be.” Then I read the explanation that goes with them and say, “but it is!”

In this article, the frugality comes into play when they point out that they didn’t upgrade their starter home or their cars. These are typically the two largest expenses adding up to around 50% of spending. They all took vacations using bonus miles by signing up for credit cards.

Saving a Lot of Money

When you aren’t spending money, it becomes easy to save it. If that sounds too simple, perhaps it is because it really is that simple.

My absolute favorite tool for saving money is Digit. (I reviewed Digit it here.) Digit is a FREE tool that squirrels small amounts of money from your checking account to a Digit account. That automatically builds an emergency fund. You don’t have to think about it and you’ll never notice the small amount of money being moved. In 18 months, I’ve squirreled away over $8000, but I’m extremely aggressive with it. It’s always a happy surprise to see a big chunk of money in that account.

Digit is one of two tools that I think everyone should get.

Investing the Money in the Market

They poured the savings into the stock market and let it grow over ten years. Using a quick Rule of 70, if they even made 7% (which might be conservative), they’d have doubled their initial money. In two years, 2012-2013, savings and investment gains added over $500,000 to their net worth going from 697K to 1.24 million dollars.

Let that sink in for a minute. A couple whose combined income (before expenses of 3 kids) was $138K grew their net worth by $500K in two years! You simply can’t do that by saving alone.

They benefited by a very good stock market as the S&P 500 was up ~16% and ~32% in those years respectively.

You can call it luck if you want. I’d rather focus on how years of saving prepared them well to take advantage of that stock market.

They didn’t do any special stock picking or market timing. Sorry if you were looking for some fancy investment advice. Instead it was boring… slow and steady investing in index funds with low expense ratios. That’s what’s worked for me as well. I recommend Vanguard ETFs.

Tracking Financial Progress

As you can see from the charts, Justin tracks his net worth very regularly. I’ve done the same and I can’t express how much of a difference it has made.

When you are doing the right things, it is empowering to see your net worth number grow. Imagine what it feels like when your money makes makes more money than you did

Over the years, I’ve gathered so many financial accounts (banks, credit cards, brokerages, mortgages, Paypal, etc.). I used to track it all with a spreadsheet, but I’ve found a better tool for the job. Personal Capital pulls in all your financial information securely from all your financial institutions and puts it in one place.

You get great charts of your net worth, but it’s a lot more than that. You can see where your money is invested (large-caps vs. small-caps, international or domestic). You can also where you are spending your money via the categorization of credit cards. I couldn’t get this information my manual spreadsheet.

Best of all, like Digit, Personal Capital is free.

Making Very Smart Financial Choices

As you read through the article, you realize that Justin is extremely smart when it comes to personal finance details. Those small details add up over ten years.

Specifically these two moves stood out to me:

Plot Your Own Course for Success

The Root of Good plan to early retirement may not be for everyone. Not everyone wants to live as frugally as they do. If that sounds like you, you might want to look into making more money. Not everyone may have the ability to tax-defer so much of their income. There’s still a lot you can build on here.

And so what if takes you 12 years to only have a million net worth instead of their 1.2 million in 10 years. You can live with that right?

Personally, we’ve built a real estate component to our retirement plan. It was accidental, but the results have been very positive for our net worth.

We initially bought the real estate at the wrong time. We intended to live there, but “life” changed our plans. We were able to refinance the properties and rent them out. It not only dug them out of the hole, but also helped get us to a point where they have equity.

It is essentially the same idea as Root of Good investing in the stock market, but a different type of investment. It has more leverage and is more work. However, when the mortgages are paid off in a decade or so, we’ll have a sizable income stream.

If you need any more inspiration, check out these 20 inspiring quotes by influential people.

What Drives You for Better Personal Finance?

by 1 Comment

My Google News feed picked up this article a couple of weeks ago: Dave Says: You Need Something That Matters

It is a good article and one worth sharing. However, I had to think whether I was really wanted to write about Dave Ramsey again. When I last wrote about him it when he clearly seemed to support pyramid schemes. To be more specific, his explanation for Multi-level Marketing matches the FTC’s guidelines for when an MLM company is an illegal pyramid schemes, and he supported MLM as if it wasn’t a pyramid scheme.

Social media picked it up and he finally gave out a response that you’d expect from a politician, not from someone trying to help people with their finances:

Imagine watching a video where Ramsey explained that all rectangles are illegal. He follows it up by saying that squares are fine without explanation why. I explain to Ramsey that all squares are indeed rectangles (as they are) and thus illegal as he claims. His response ignores the topic of squares and reverts to “rectangles are illegal and I don’t support them.”

That’s essentially what he’s doing. It is so frustrating, because Dave Ramsey has a large audience.

Despite this, I have to recognize that Dave Ramsey does a lot of good. He’s got a wide audience and I think somewhere around 90% of his advice is sound. So I thought I’d give him another shot, because his answer in this article was quite interesting.

Isaac asks:

“My wife and I are in our twenties. We have no debt and $50,000 in the bank. Our income is $90,000 a year, and we’re cautious to live on less than we make. Still, we can’t seem to get motivated to make a budget. How can we get inspired to do this?”

Ramsey responds:

“Two of the biggest motivators we have are pain and pleasure. Financially, you guys don’t have any pain. You’re killing it! So, we’re going to have to figure out something associated with pleasure.
…
It sounds to me like you both realize money can’t be the goal. And that’s a good thing. You guys are obviously smart, gifted people. I’m sure you have ideas and goals, dreams and desires. Talk about them and write them down. By doing this, you’ll be taking the first steps toward making these things reality. When you have something specific that you want money to do, it gives you a reason to make it behave.”

I love the response. Money helps us avoid pain and it can enhance our pleasure.

It is inspiring to stop and think, “Money is great… but I should really do something with it.”

I only have one minor quibble. To some degree money CAN be the goal when you are in your twenties. For example they could set a goal to of financial freedom by 30, 35, or 40.

They’ve got a tremendous start, but $50,000 is not financial freedom. It isn’t even close. Using the rule 4% it would throw off an income of about $2000 a year. It’s hard to retire on that. However, if they invest that money at their young age that money can grow exponentially.

Also, let’s not forget that life has a way of creating expenses after your twenties. They may want to own or a home (or not). They will probably have to buy cars. They may have children which could require child care or a temporary loss of income while one stays at home.

Dreams and desires change over time. Ten years ago, I would not have imagined a dream where our family immerses ourselves in Spain or Italy for a month. I have that desire today. Because money was one of my goals ten years ago, it looks like a strong possibility in a few years, when the kids are a little older.

I wish I could answer Isaac directly. I’d tell him that he’s already using one of my Three Budget Systems. That’s simply to be cautious and live on less what you make. Training yourself to make smart buying decisions may be all you need.

If it isn’t broke, don’t fix it.

Financial freedom drives me to work for better personal finance. What drives you?

What’s Your Financial Freedom Plan?

by Leave a Comment

Last month I reviewed Martin of Studenomics’ book. Failure To Launch No More (read the review). My conclusion was that while the book will not win a Pulitzer, it is well worth the very small investment in your time and money to read it.)

Martin has another book out: Next Round’s On Me: How-to Achieve Financial Freedom in Your 20s. This time, he’s graciously provided a guest post, which will give you a flavor for the book and his writing style. I’ve got a few words to say about the book at the end, which will include an offer that you shouldn’t refuse.

“Financial freedom sounds like a scam.”

I totally get that. I would be skeptical as well because this initially sounds like something you would hear on a late night infomercial. Promoting financial freedom in your 20s isn’t easy in the era of online scams.

I don’t get offended when someone puts down financial freedom. I am however amused sometimes. It always surprises me how those who have no clue about money management, are in huge amounts of debt, or can’t get ahead are first to put down my ideas. On the other hand, my successful friends are always curious and open to a discussion.

Financial freedom is about being free and feeling free. I’m not promising you millions of dollars and beautiful girls as you sleep 12 hours a day.

What’s financial freedom all about?

There are different levels of financial freedom ranging from:

  • Paying off your student loans.
  • Getting rid of credit card debt.
  • Being able to eat out often (daily for me).
  • Paying back your parents for college.
  • Joining that expensive gym.
  • Quitting your job.
  • Going on a trip for the first time.
  • Saving up enough money to live comfortably.

Freedom depends on what you want out of life and where you want to be.

  • If you enjoy your job, then keep it.
  • If you don’t want to travel full-time, you don’t have to.
  • If you want to eat out religiously, then you can.
  • If you want to kill your debt, then it’s possible.
  • If you want to buy the next round of drinks for your buddies, you better invite me.

Freedom depends on where you are and where you want to be. You see, there’s a huge difference between where you are right now and where you want to be. I’m here to help you close that gap.

What’s your financial freedom plan?

Let’s create a plan together so that you don’t keep on keeping on forever.

Step #1: Decide on your goal.

What’s your goal? I’m not talking about dreams here. This has to be a goal with a tangible result and a deadline.

Do you want to pay off your student loans? Do you want to quit your job?

Only you know what you want. Your freedom will depend on this. Paying off your student loans will give you freedom because you no longer have to stress about owing money. You could now take some risks with your time and finances.

Step #2: Calculate the numbers.

What are the numbers like?

If you have debt, then you need to see how much you owe.

If you want to quit your job, you need to save up to cover your expenses.

If you want to work for yourself, you need to determine how much you could live off of and what you need to pay the bills.

For example, when my friend Bo wanted to quit his job, I had him write down his expenses. To quit his job he had to save up enough money to cover his expenses for 6 months. Why 6 months? This was the amount of time that he was willing to give himself before he went back to work as he grew his business.

What do your numbers look like? If you’re not happy with how high your expenses are, then it might be time to make some phone calls to cut some of these expenses. I did this last year when I cancelled a subscription and lowered the features on my cell phone.

The numbers don’t lie. It may be a bit intimidating at first when you see how much you owe or how much you need to quit a job. Don’t worry. You can get there if you break this figure down.

Step #3: Figure out how long it’s going to take you.

How long will it take you?

I hate it when a friend gives me a vague timeline. We all know that “next winter” just isn’t concrete enough.

The math here is simple. Add the numbers up to see what your number is.

Do you have $20k worth of student debt? $5k worth of debt? Do you need to save $6k before you can quit your job?

How long will these goals take to reach? With a financial target in mind and a clear timeline, there’s no stopping you.

Step #4: Give yourself some shortcuts.

You need to make things easy for yourself. This is why I believe in small wins and celebrating.

You save $100? Perfect, treat yourself to dessert.

You increase your income? Treat yourself with a drink of your choice.

Life gets tough. I don’t want you to be bored out of your mind as you work towards your financial freedom plan. You need to have some fun. Celebrate the small wins and enjoy the ride. Before you know it, that debt will be paid off or you’re going to be in Thailand.

Do you need a plan?

Yes.

You need a destination in mind. You can’t just have wild dreams in your mind that you never follow up on. When you have a plan you now have focus. You won’t let useless distractions get in the way because you know exactly where you want to be.

If you ever get lonely, bored, or confused, please refer to this quote.

“Lacking an external focus, the mind turns inward on itself and creates problems to solve, even if the problems are undefined or unimportant. If you find a focus, an ambitious goal that seems impossible and forces you to grow, these doubts disappear.” – Tim Ferriss

Good luck to you!

Editor’s Note: Martin also provided me with a copy of the book, Next Round’s On Me: How-to Achieve Financial Freedom in Your 20s. Once again it is well worth your time. Right now, the price of the book is “just a damn buck” (one of my favorite Martin quotes). I don’t know why he’s pricing it so cheaply, but I’d take this opportunity to spread the word. How can it not be one of the best dollars you’ve ever spent?

MoneyStepper on Escaping the Rat Race

by 3 Comments

[Editor’s Note: The following is a guest post from Graham Clark at MoneyStepper. It’s rare that I accept a guest post from outside North America as what works there, might not work here. However, I found his story inspiring and that’s relevant everywhere.]

The rat race. We all want to escape it. But, why? What is the rat race? Well, according to Wikipedia:

“The Rat Race is a 1960 American drama film directed by Robert Mulligan and starring Tony Curtis and Debbie Reynolds as struggling young entertainment professionals in New York City.”

However, I’m not sure that this is the rat race that most of us are trying to escape from. Let’s keep looking:

“A rat race is an endless, self-defeating, or pointless pursuit.”

That’s more like it.

After 7 years in a Big4 Accountancy Firm, I started to realise that I was in the rat race. I had no specific goal in mind. My pursuit was simply to earn a pay-check. But, what for?

Nothing. I wanted out.

What does it mean to escape the rat race?

Escaping the rat race can have different meanings to different people. My first step was to define exactly what “escaping the rat race” meant to me. In order of preference, I determined that my definitions were:

  1. Retirement, i.e. no longer needing to work.
  2. Becoming financially independent from an employer.
  3. Working from home.
  4. Moving to another different job that doesn’t involve working 9 to 5 and/or a long commute.
  5. Moving to a less intense role either at a different company.

    6. In mid-2012, I made this my mission, and I was going to get intense about achieving it. Over the course of the past 2 years, I have been able to get into a position whereby I was comfortable enough to leave my employer and put myself in position 2 above.

    How did I do this? Breaking it down methodically, I followed these steps:

    Step 1 – Perform a personal gap analysis

    My first, and biggest, change was to perform a personal gap analysis. If you have not heard of the phrase “gap analysis”, it is a term used in business whereby you define exactly where you are right now, where you need to be and what “the gap” is between these two scenarios. Once you understand the gap, you can devise a strategy to fill it.

    Once I had decided that I wanted to escape the rat race (and the sooner the better), I started tracking (penny for penny) my budget and my net worth. From a financial perspective, this told me exactly where I was.

    To determine where I wanted to be, I needed to work out what my financial needs were at each of the 5 definitions of “escape the rat race” above.

    1. Have truly passive income that exceeds my future needs
    2. Have income coming from sources that is not my employer and which exceeds my future needs
    3. Find an employer where my income exceeds my future needs, but allows me to work from home
    4. Find an employer where my income exceeds my future needs, but where I work less hours
    5. Find an employer where my income exceeds my future needs, but which is less stressful

    This allowed me to define my “gap” for each scenario.

    I then decided, due to the respective size of the gaps, that my goal over the following two years would be to stay in the rat race, all whilst doing everything I could to earn additional income elsewhere, in order to get myself all the way to step 2.

    Whilst I considered steps 3-5 as suitable alternatives, none of these hugely appealed to me in the long term and I decided I would rather sacrifice in the short term (2-3 years) in order to step up the ladder a little quicker.

    Step 2 – Work really hard and find additional income

    Therefore, I got to work. I worked really hard at my full time job, which ensured that I received good ratings and good annual bonuses. This would then help me narrow that gap.

    I started my site, MoneyStepper, in order to generate additional income. This would then help me narrow that gap.

    I created a sports quiz app, in order to generate another stream of income. This would then help me narrow that gap.

    I sold a lot of my material possessions that I didn’t need or use regularly. Golf clubs – sold. Second TV – sold. DVDs – sold. Clothes I didn’t wear very often – sold. Surfboard – sold. Xbox – sold. You get the idea. This would then help me narrow that gap.

    I monitored my spending very carefully through a monthly budget, which pushed my regular average savings rate over the past 2 years to over 66% of my net income. This would then help me narrow that gap.

    I invested my money that I had saved into a diversified portfolio of equities and real estate. This then generates passive income through capital growth, dividends and rental income. This would then help me narrow that gap.

    Step 3 – Make the leap

    Now, two years down the line, that gap has been narrowed. Therefore, in the past few months, I prepared myself to make the jump out of the rat race.

    My net worth and corresponding passive income is not currently sufficient to not work at all. Instead, I continue to focus on my aforementioned projects, putting me at step 2.

    Personally, this takes me out of the rat race and where I want to be. At 29, I don’t think I’m quite ready for step 1 and total retirement yet! Instead, I am focusing my efforts on things that I enjoy doing and from which I get a great sense of achievement and pride when people provide me feedback on what I do.

    However, I wasn’t fully confident relying only on these sources of income this early in my life. Therefore, before making the leap, I identified a number of potential consulting contracts that I could perform with clients that I have previously worked with. This puts me entirely in control of my work schedule, but allows me to earn some semi-fixed income if required. This is my safety net.

    I’ve now been out of the rat race for 3 weeks. I’m about to start a consulting contract next week with a larger company, but limited to a week as determined by myself. I’m working hard on my other projects. But, all of this work comes without the stress that I had in the rat race. It comes without the demands of the rat race. And, most importantly for me, it comes with the freedom which I did not enjoy when I was caught up in the rat race.

    Oh, and finally, wish me luck!

What Do You Want to Do With Your Life?

by 6 Comments

Recently, I’ve been bombarded with this question by several different sources. I’m not the type to believe in signs, but I’m starting to wonder if someone is trying to tell me something. Each time the question has come about in the context of what do you want your career to be? It’s not about morals, family values, charity, hobbies or any of the other things that make up our lives, but what do you want to do to earn a living. Here’s the context in which the questions have come up:

  • Interview with Career Brazenist, Penelope Trunk (Warning: Adult Language) – I’m going to break one of my rules here and link to something that isn’t exactly family-friendly. The blogger at Ending the Grind was interviewing Penelope Trunk who is a famous and successful writer – at least in the online world. She mostly writes articles about attaining career goals. At around the 11 minute mark the interview takes a weird twist where she asks the blogger what he wants his life to be like. She berates him about his lack of goals and his unwillingness to open up to his audience. It’s almost like Judge Judy when she knows someone is guilty. It’s extremely entertaining, but also educational. I don’t agree with everything Penelope Trunk says, but in general she makes some good points. One of the best went something like this, “I don’t know anyone who works less than 8 hours a day and provides for their family. So what do you want to do with your 8 hours?” Straight to the point and hard-hitting. (Tip of the hat to Brip Blap for pointing that out.)
  • The Millionaire Fastlane – This was a book included in the swag bag at the personal finance conference I went to a couple of months ago. I almost tossed it aside, but Jeremy from Generation X Finance said it would be worth a read. I’m still in the very beginning of the book, but so far it is very much in the Rich Dad, Poor Dad mold of providing motivation and getting someone to not think about a 9-5 job. I think it’s going to be just as controversial as the author doesn’t recommend the Get Rich Slowly method of growing wealth.
  • Multi-level Marketing (MLM) Zealots – This isn’t really a recent thing, but since I have some very popular articles about MLM, I get a lot of comments from these people pushing it as a way to get out of the 9-5 grind. Of course, they do this because they are trying to recruit other people into the program like your basic pyramid scheme.

Did you catch the common thread on all three? It’s “I want out of my 9-5 job.” I don’t blame people for having those feelings. I’ve had them myself. That’s why I started this blog. I’m at the point now, after 5 years, where I am replacing about half of my income from when I had a full-time job. However, I’m there… I am out of the 9-5 job.

I’ve replaced it with a 24-7 job.

It’s not like I work all the time, but I have difficulty stepping away from it. Getting out of the 9-5 job isn’t necessarily the fix that you might expect. There are pluses like not having to deal with that manager you hate or waking up to that alarm clock. There are downsides too. I’m always wondering if a big ad deal is in my inbox or worried about what kind of nonsense those MLM distributors are spreading in the comments of my posts. My interaction with other people consists of “Do I slide my card now and press the green button?” a few times a week.

It’s hard to ignore these signs and not reflect on Penelope Trunk’s line of “What do you want to do with your 8 hours?” Currently far too many of them are spent debating those MLM distributors. While I love to debate, I’ve found that for the most part those commenting fall into one of three categories, “not the sharpest knives in the drawer”, “brainwashed into supporting the company despite what evidence exists against it”, and/or “those trying to rip people off because it puts another dollar in their pocket.” There’s a need for someone to educate others about these MLM scams, but I’m fairly sure that’s not what I want to do with my life. Debating with all three types of people is pretty much a losing battle.

The more I think about what I want to do with my life, the more I realize that I’m looking for an answer that isn’t there. I’ve found that if I do anything long enough it’ll get boring.

Anyone else out there feel the same way? Sound off in the comments.