We covered a lot of ground in Part 1 of our two part Q&A. What I’ve come to realize is this 2-part Q&A is a great summary of my journey and plan. I’ve also realized that these are my answers and 10 other near-millionaires would likely provide 10 different answers to every question.
“Winning at money is 80 percent behavior and 20 percent head knowledge.”
Dave Ramsey
Personal finance is a personal journey. And the Dave Ramsey quote on building wealth is more than just knowledge of what stocks or mutual funds to buy. It’s taken all my experiences, the ups and horrible downs, to create a set of behaviors that allowed me to build some wealth.
The earlier someone builds those set of behaviors the easier and quicker they’ll build wealth. I want others to learn from my mistakes. Why take your lumps if you can learn from me and save yourself financial misery. Get your mind right (behaviors), create a plan, execute that plan, and stick to it.
What is your investment philosophy/plan?
Over the past 1 1/2 years, I’ve created several articles that are best served to describe my plan. Though I have no issue with mutual funds, I personally like to buy individual quality dividend stocks. That’s my thing and there is nothing wrong with buying some index ETF’s or mutual funds too.
And let’s face it, there are many ways to get the job done. I used to be an investor that just wanted 3-4 index mutual funds (think Boglehead) but my direction has changed. That doesn’t make me right and someone else wrong, it just means that’s what I’m doing. And I may have both individual stocks and mutual funds too.
So, here are some of my articles that would best describe my plan:
- Create a Stock List and Wait for Value
- Stocks that grow (and at least hold) their dividend
- Stocks (and dividends) that will survive
- 3 articles on what Not To Do!
- Don’t invest in junk
- Quality companies at value pricing
- Be patient and build a stock position over time
- Reinvest your dividends
- Choose your stock sectors wisely
- Some stock sector are better than others
- Build wealth with individual stocks
- Dividends are your best friend
If I have to summarize my philosophy then I’d say buy and hold quality companies that pay dividends. Be cognizant of their sectors, buy them when they are on sale (value investing), and build a position over time. Building a position over time means buying 100 shares of Coca-Cola every year or buying 15-25 shares of Johnson & Johnson when you have available cash and the price is good.
What road bumps did you face along the way to becoming a millionaire and how did you handle them?
As I’ve stated many times in this blog, my wife and I were basically broke from 35-45 years old with two small kids. My first industry wasn’t very kind to me and I found myself unemployed more than once. Staying employed is important to the wealth building process.
It wasn’t until I was in my current company that my financial picture eventually changed – the stability and career opportunity are great. But even then, we had bumps. My wife and I fell into an issue that plagues many couples … poor communication. Due to a lack of communication, we found ourselves in deep credit card debt, which was one of the big reasons our net worth was only $115,000 at 48 years old.
It took several years for us to climb out of debt and start the process of building our net worth. Since 2011, we’ve really be focused as a couple and that alignment has increased even more the last few years. For the past two years, my wife and I have been crystal clear on our goals and how to get there.
What are you currently doing to maintain/grow your net worth?
It will sound easy but it takes substantial will to execute, especially if you are starting late. And the closer you are to retirement (like me) the more aggressive you have to be in your plan. The closer to retirement, the more aggressive you need to attack debt and reduce expenses.
Increasing my savings rate and cutting debt is the name of my game. For 2018 and 2019, my savings rate averaged mid-30% but this year I’ve jumped in to the 40% range. In 2021, my focus is to become debt-free and that will likely lower my savings rate a little.
Starting in 2022, I fully expect my savings rate to be over 60%+ for the last few years of my career. And that is how I’m growing my net worth in the last few years before I retire. If you think about it, that’s how you do it whether you have 5 years until retirement or 25 years.
I’m loading up my taxable investment portfolio with dividend paying stocks and eventually some bonds. My 401(k) is staying low risk as I slide into retirement. For my entire investment portfolio, I’m currently only 25% stock but that is growing as I get closer to and into retirement.
By the time I hit retirement, I’ll probably be 40-50% stock and that will grow until I get nearly 10 years into retirement. The reason I’m gliding upwards into my stock percentage is sequence of returns risk. I won’t go into that now but Google the word and learn about it because it’s very important.
Do you have a target net worth you are trying to attain?
I don’t have a target but I do have a forecast. I’m 57 years old today and I’m forecasting a net worth at 62 of between $1.5M-$1.8M. About 75% of that net worth will be my investment portfolio and the other 25% is my residential home.
I’ve written several times about people being house rich but investment poor. House rich is not ideal. Personally, I’d rather my home value be a small percentage of my net worth. I’d say under 20% is preferred and the lower the better
What money mistakes have you made along the way that others can learn from?
Well, this blog is filled with them. From trading, to buying crappy stocks, to sitting on too much cash. And let’s not forget the debt or the poor savings rate. Nearly all mistakes can be defined by some article in this blog.
The greatest advice I can give is to let you know what I’ve been teaching my daughters. They’ve learned the value of money from an early age and know that happiness can’t be bought at the electronic’s store or a car dealership. The one thing they tire of me saying is “Don’t have the future you be pissed off at the current you.”
This phrase is code for increase your savings rate to at least 25% and live well below your means. Have short and long-term savings accounts so daily life doesn’t knock you out. Most people get knocked down financially (I did) and have a hard time getting back up (many never do).
Another important thing is to stay employed. Unemployment can really set a person back (I know from personal experience). And once employed, increase your skills to match your interests and the weaknesses in the company. Then ask for more responsibilities because more income will follow.
As for investments, stick to quality stocks or bonds. If you feel more comfortable with mutual funds that’s fine too but buy low-cost index funds. Think long-term, buy and hold because you don’t want to spend all your free time checking stock prices 20 times per day.
What advice do you have on how to become wealthy?
I still live pay check to pay check even though I make $250,000. That’s because we are paying down debt and saving everything we can. Lifestyle inflation is a real thing. For example, you get a bonus and you buy a boat or new car. You get a raise at work and now you can go out to eat more. Lifestyle inflation keeps your savings rate down and doesn’t help build wealth.
Life is about balance. If you get a bonus, then save some (or a lot), reduce debt, and spend a little. You do deserve to live some of life’s pleasure if you consider buying things pleasure. It’s important that you change your view on money and what it can be used for.
I get a paycheck every two weeks. If I don’t live below my means, reduce debt, and save then I’ll always have to work. The most important thing is to use the paycheck I earn to create income that doesn’t have to be earned. In other words, create some passive income. Without this formula you’ll be working for the rest of your life and that’s not something I want.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Warren Buffett
And by all means protect your capital. I’d be much closer to retirement by now if I had just followed Rule #1. That’s why I only buy the highest quality companies now. Once you get into retirement you can’t earn that money back. A loss in retirement is a significant blow.
What are your plans for the future regarding lifestyle?
First, my wife and I have to rethink how we will live without kids being top of mind. They are living their own life now (though still young) and don’t need mom and dad hovering.
We are focused on understanding what a comfortable life-style without kids will cost. So, we’ll be using these last 4 years of work to find the sweet spot of essential versus discretionary expenses. Our plan is to have my pension cover all essential expenses and to let the investment portfolio cover the rest (the fun stuff, live travel and hobbies).
We do plan on getting an RV before retirement and fixing up the house. We’ll figure out a way to work those expenses into our plan so that we aren’t impacted too much. Otherwise, we like hiking and just enjoying a simple life … we’re pretty easy to please.
What are your retirement plans?
For retirement, we plan to spend the summers out of town in places like Colorado, Idaho, or anywhere else that is cooler than the southwest part of the country. The kids will likely be living in some other state so we’ll probably be spending summers near them.
We’ll do some USA travel, both in our RV and picking different places each summer to live. My wife would like to do some out of the country travel with my daughters so we’ll see if that can be planned.
I’ll keep myself busy with a variety of activities. I’d really like to get involved in something that would help the neighborhood (especially kids) but I have no details on that yet.
Are there any issues in retirement that concern you? If so, how are you planning to address them?
My first concern is hoping that my pension plan continues to accrue. It’s continued accrual means our essential expenses will be met. If that occurs then that will be a major retirement concern lifted off my shoulders.
Though the pension was going to support us in retirement, I wanted to make sure we had some financial assets too. That’s why we started to get our financial affairs in order around 48 years old. That was the age where I actually had fear that I would be a burden to my family or society in old age.
If my pension continues to accrue these next 4-5 years and we can stay on the path we are on, all should be fine in retirement. Of course, I’ve got some concern about healthcare and maybe even social security but I think that’ll work out. But at least we’ll have the pension, no debt, and over $1,000,000 in our investment portfolio.
Ask me this question in 4-5 years when I’m actually going into retirement. If the plan works as designed then we should have no concerns. But plans don’t always work out so we try to mitigate as many issues as possible. Personally, I’m thinking we’ll be fine. The best you can do is execute your plan and run some scenarios (here’s another too) to sooth your fearful soul.
How did you learn about finances and at what age did it “click”?
It’s been an interest from an early age. My dad was involved in finance and he would talk to me about it. When I was in high school, his friend (a stockbroker) paid me $1 an hour (or some stupid amount) to spend time at the brokerage firm. He’s have me research companies and such. Later in life, I found out that my dad paid him to let me be there so that was cool.
My college major was Finance, I was in banking plus I spend a few years as an investment broker too. I knew how to do finance but it’s never easy when life has it’s own plan.
Like I’ve mentioned already, unemployment is very damaging to retirement planning. It’s a big reason I make sure my kids have a long-term emergency fund to cover things like unemployment or major medical bills. That’s something I lacked and it’s something I’d change if I had a do over … have more emergency cash to ride out the storms.
But the real “clicking” didn’t occur until I was 48 years old and only had $115,000 of net worth. That’s when my financial knowledge (and driven by my fear of a poor retirement) became an asset, I created a plan, and we’ve been executing on that plan ever since. The “clicking” only occurs when you are ready, willing, and able to change your financial picture.
Do you give to charity? Why or why not? If you do, what percent of time/money do you give?
Sure we’ve been giving to charity but mainly through work. It’s not been much usually $1,000-$2,000 per year. I’m a strong believer that charity starts at home. First, I need to be solid in my finances and I need to make sure my kids are solid citizens and don’t become a long-term societal burden.
Then there is extended family. We’ve been trying to help out my wife’s parents as much as possible. I wish we could do more but, again, we need to make sure our finances are solid first. If I’m good then I can help others be in a good place. Eventually, we’ll figure out a way to help those in our community but only when the time is right for us.
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?
We absolutely plan and hope to leave our two daughters an inheritance. But that said, I don’t want them waiting for me to die to receive a distribution of wealth. I’m working with them to be financially independent before I die (if all goes well). Anything we give them should be icing on the cake.
Additionally, we plan to help them as much as possible along the way. We hope to help them buy their first house (assuming good timing for us) and give them “hand me down” vehicles.
We’ve spent our kids entire lives preparing them to be strong independent women. There’s nothing that brings us more pleasure than watching them tackle the world and be on their own. We aren’t part of the Lifestyles of the Rich and Famous culture. But we do want to continue to help our kids get through this tough world even after death.
Conclusion – Part 2
I’ll conclude with what I’ve been telling my two daughters for the past year now. Whether you retire or not, be financially prepared to retire by 50 years old – that should be a younger person’s objective. Nearly 60% of people over 50 years old lose their jobs. And given that people are achieving peak earnings when over 50 it’s hard to replace that income. In fact, only 10% of those people achieve an income that was equal to their last job.
Once you are financially independent, I don’t care if you retire, work three jobs, or decide to go live alone in the forest. That’s why it’s called choice. Remember, this is America and you still have freedoms. But you don’t have that choice if you don’t do the things necessary to create financial independence.
I wish I had done things differently when I was younger. Being unemployed 2-3 times really set us back. Unemployment was the predominant reason we were broke in our mid-30’s. And it always felt like I was trying to catch-up so I kept trying to hit some investment home runs. What I really did was make some poor investment choices until I “woke-up” at 48 years old with a $115,000 net worth.
Now I’m 57 with a $925,000 net worth and feeling like I’m more in control of my financial future. Thank goodness I woke up when I did or my wife and I would be another horrible American retirement statistic.
Thanks for reading!
Mr. TLR