No – this is not one of those asinine get-rich-quick scams where I’m going to ask you to pay me for my Big Secret. I’m sure that I’ll get a dozen “hits” from those assholes, but that is not what this is about. This is about my own personal experience and it is completely free-of-charge.
I recently had a conversation with a friend where we were talking about money – a subject that I suppose many people consider rather “personal”. I do not wish to get into too much personal detail here either, but suffice to say that I mentioned to my friend that according to available online statistics, our net-worth (total assets minus total debt and liabilities) ranks us well within the top 5% of American household wealth. One report suggested that we might even qualify for the top 4%.
There are several up-front observations and disclaimers to make about this statistical fact. For one, although we have always had a “comfortable” income (I am a typical “white-collar” technical professional), we have never had an exceptionally high income compared to many other people. By this I mean that even in our best year our combined annual income has always been well under $200k. I also have to say that I am surprised that we rank so high with what feels like a relatively “modest” dollar amount. I guess that this is because wealth increases exponentially as you move up the rankings and therefore we are still many, many light-years away from the Bill Gates and Warren Buffetts of the world and the much maligned “1%”.
Anyway, as I thought more about the conversation I imagined; what if my friend asked me “So, how did you achieve this”?
My 5 Rules for Attaining Wealth – in order of importance
1) Luck (and I’m not too proud to admit it)
I’m sorry if it is disappointing, but this has to be number-1. The fact that we are “well-off” financially has far more to do with luck than either personal skill or special insight. Part of the luck was that my family was not financially constrained when I was growing up, I was an only-child, and I did inherit up to about 20% of what we have today. We were also quite lucky with some stock-options during the “Dot-Com Bubble” of the 1990’s. In addition, we managed to sell off a piece of commercial property that we owned in the summer of 2007, closing on the very week that news of “The Real Estate Crisis” was first hitting the papers and about 6-months before The Great Recession hit the stock market – pure dumb luck.
2) Live-Below-Your-Means and Save-Save-Save
Once again, not a glamorous or sexy “secret formula”, but this is where the other 80% of our wealth came from. Simply put, the real reason why we have lots of money is because – we don’t spend it. Saving, especially for retirement, has always been a top priority. We have always been into IRA and 401(k) programs to the maximum level – no matter what. For about 20-years, during our peak earning period, I calculated that about 1/3 of our gross income went to taxes (including property and local taxes), about 1/3 of our gross income went into long-term savings and investments (both tax-deferred and taxable), and we actually lived on only about 1/3 of our gross income. This was true even after my wife quit her corporate job and started making less than a quarter of her former salary running her own business. We could easily have afforded a nicer home, fancier car, exotic vacations and lots of other things during all these years, but then we wouldn’t have the resources that we have now. It is a question of priorities and of having the discipline to take the long-view rather than wallowing in short-term instant-gratification. I knew for years that what I really wanted in life was an early-retirement, and that this would have to be self-funded through personal savings (“The Government” doesn’t owe anyone a comfy retirement). No one has a right to complain about not attaining a goal that they have never made any serious effort to reach.
3) No Children
We did not consciously choose money over children of course, and I am not advocating that, but before becoming a parent it is important to clearly recognize the financial impact that this will have. Unfortunately I think that this is something that a lot of parents do not discuss with their own children for fear of instilling a sense of “guilt” into them. The fact is though that raising children is enormously expensive and from a cold balance-sheet perspective it is not cost-effective. My wife and I decided not to have children because neither of us was interested in being a parent. A secondary effect of that choice however was that all of the money that would otherwise have been spent on maintaining and raising children could be redirected into savings and investments. For many people the emotional pull of “family” outweighs all other interests, but you should at least be cognizant that being a parent is not “necessary”. Conceiving a child should never be brainlessly automatic or incurred through anyone else’s expectations of you. You should also be aware of the trade-offs that you are accepting and what you are intentionally sacrificing when you decide to have those kids. It is a choice and no one has a right to complain over the predicable and inevitable outcome of a deliberate choice that they have freely made for themselves.
4) No Debt
I hate debt and we have zero-debt of any kind. To me debt is just like heroin and the debt-industry exactly like a drug-pusher. To quote an old song; “Goddamn the pusher-man”. This probably could qualify as a “secret” though, because I’m sure that a lot of people out there would claim that it is impossible to live without debt. Well, maybe technically, but it is quite do-able in a broad sense and in my opinion very important for personal financial security. The paying of “interest” to someone else is not a fundamental requirement of life; it is discretionary and in most cases just plain stupid. An interest payment is nothing but flushing money down the toilet. It is giving away hard-earned cash for nothing. The only time that we have ever paid interest to anyone for anything was on a home mortgage. All of our major purchases, including cars, have been for cash. We never carry a balance on a credit-card and we have never taken out any other form of loan – ever – even when we were just starting out and didn’t have much. There are many folks who will rationalize their debt behavior by saying that if the rate is low enough you can earn more by keeping your money invested than you pay in interest, but to me that is just a lame excuse (like claiming that if you snort heroin it isn’t as addictive as shooting it). If you can’t afford to pay cash for something, then you can’t afford it and you should buy a cheaper car, or stay home for your vacation, or wait a year for that remodeling or whatever. If people would just stop and add up the money that they flush away in interest payments over their lifetime they would realize that this probably represents a healthy chunk of a comfortable retirement – and all because you gotta-have-it now rather than a little later after you have saved up for it. A home-mortgage is maybe one valid debt to undertake, because no one wants to save for 30-years before owning a home and rent is just as bad as interest. We paid off our mortgage as soon as we could however, and that was one of the smartest financial moves we ever made (contrary to what the “pundits” say). I suppose that a student or business loan might be another valid form of debt but again, that should be undertaken with a specific cost-effective objective in mind and be retired as soon as possible. Debt and interest payments are wasteful and bad – period.
5) Investment Principles
Certainly the least important of all my advice involves “financial savvy” and investment expertise, neither of which I possess. I do not flail around in the stock-market or follow any “wizards” or “gurus” or retain expensive private advisers. I also do not harbor the hubris of thinking that I can “beat the market” with some clever scheme or magic formula. All such dreams are strictly for gamblers – meaning fools and losers. Much of my investing was done via regular monthly contributions to tax-deferred accounts – come rain or come shine – without worrying about short-term gyrations and (of course!!) not “borrowing” from the tax-deferred accounts. I am primarily invested in a diversified mix of market index funds and the only individual-stock that we have is IBM due to an old employee-purchase program from back in the days when we worked for IBM. The only investment principle really worth knowing is the one that everyone already knows: “Buy-Low and Sell-High”. The thing is however; a great many people don’t seem to understand what those words actually mean. The stock-market is not some independent alien life-form – it is just other people – and it reflects the basic irrationality, herd-mentality and over-reactions of any other human endeavor. The obvious truth is that the only way to “buy-low” is to put your money into the stock-market when everyone else is panicking and screaming about the end-of-the-world and selling; and the only way to “sell-high” is to get out of the market when everyone else is euphoric and dancing-in-the-streets and throwing their money at it with both fists. To use a financial term – this makes me a “Contrarian”. Now most of this involves buying, because I am also a strong believer in buy-and-hold (I might call it; buy-low and hold-high). Trying to time the market peaks and valleys precisely and pick individual winners and losers is a well-documented path to disaster. However, the occasion to stand back and build up cash-reserves in CD’s and Treasury Bills is when the market is high and over-bought (as in both 2007 and, perhaps, now) and the time to cash-out those CD’s and Treasury Bills and move the money into the market is when it is crashing and over-sold (like it was in 2008-2009). This is all founded on the basic belief that the whole USA isn’t going dry-up and blow-away in our lifetime, and that over the long-term (say, 20+ years) the market will go up. If you don’t believe that or can’t afford a 20-year investment horizon, then you should probably be keeping your savings in a mattress anyway. In addition to putting our 2007 real-estate proceeds into Treasury Bills that autumn when the Dow was over 14,000, it was 18-months later, when the Dow was around 7,000 that I cashed out those Treasuries’, increased my 401(k) (with additional “catch-up” contributions) and was scraping together every dollar that I could find to put into the market. Now all those 2009 dollars have more than doubled. Was that really the result of some kind of brilliant financial acumen on my part? Of course not; it was just “Buy-Low/Sell-High”.