Jun 222020
 

This is the third and final post in this series where I discuss the most influential events of my personal finance journey. I like to save the best for last so today I’m discussing a book called, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy,” by Thomas Stanley and William Danko. 🙂

The Millionaire Next Door

A hundred years ago everyone owned a horse but only the rich had cars. Today the middle class drive cars and only the rich have horses. Oh how the stables have turned. 😎 The advantage of building wealth today is you don’t have to be smart, highly educated, inventive, or take precarious risks. There’s actually a rulebook – a set of specific guidelines that you can follow to reach millionaire status. It all comes down to practicing some simple habits. 🙂

saving like a millionaire next door

I read the Millionaire Next Door when I was 20 years old because I wanted to know how rich people live so that I can be like them one day. Or better yet – for the rest of my life. 😉 What I discovered from the book blew my mind. For some reason I had the misconception that most millionaires inherited their money, and enjoy spending it on lavish goods and luxuries. But instead, the book revealed that 80% of millionaires are self made. And most of them live a very low key lifestyle – known as stealth wealth. Your next door neighbor could be a millionaire, but you probably can’t tell just by looking. The book is essentially a compilation of behaviors and habits of rich people through academic surveys.

I decided to follow in the footsteps of the millionaires in the book. Since 4 out of 5 millionaires are first-generation affluent it gave me more confidence that I don’t need any financial help from my parents to reach a 7 figure net worth.

My plan was straightforward. I would simply behave like a millionaire until I became one. 😀 That’s literally all I did. Everything I needed to know to act like a millionaire was right there in the book. And believe it or not this actually worked! 13 years later I became a millionaire. 🙂 So let’s take a look at the behaviors I began to adopt back in 2007.

 

The Characteristics of a Millionaire

Here are 10 habits that I picked up from the book. Some of these behaviors I followed to a T in order to improve my chances of success.

  1. Millionaires spend twice as many hours per month planning their investments as other people.
    At first I didn’t know how this would actually help make me a millionaire. But I did it anyway. And it was pretty easy. I started to watch the performance of my investments more closely. To my surprise, what I paid attention to grew the fastest. For example, by focusing on my retirement plan, my RRSP has now grown to $150,000.
  2. Wealth accumulators don’t drink much, and spend less than $10 on average for a bottle of wine.
    Alcohol is often taxed more than other goods. An evening spent drinking can cost $50 or more, especially if you order the good stuff. But rich people usually don’t drink. And when they do it’s often something affordable. 🙂 I have followed this rule myself and have saved lots of money. There are tons of other activities in life to enjoy. Drinking alcohol doesn’t have to be one of them.
  3. The millionaire next door probably doesn’t smoke.
    The financial cost of smoking can be expensive. And it’s not good for your healthy either. Although I’ve heard it is good for curing salmon. 😎
  4. Most wealthy people own cars instead of leasing them. The millionaire’s car make of choice: Toyota.
    I bought a used Toyota in 2010. I’ve been driving it for the past 10 years. Amazingly it still works like new. 🙂 I could probably get another 10 years out of it. It’s fuel efficient, cheap to maintain, and easy to insure. I can see why millionaires like to drive these.
  5. Millionaires avoid buying status objects. They tend to reject status symbols whenever possible.
    You can either look wealthy or be wealthy. But it’s nearly impossible to do both. That’s why I don’t own luxury brands. This alone has saved me thousands of dollars over the years. I don’t even have any Apple products since there are always cheaper alternatives.
  6. Millionaires like to track their spending. Two-thirds of millionaires can answer “yes” to this question: “Do you know how much your family spends each year for food, clothing, and shelter?” In contrast, only one-third of high-income non-millionaires answered yes to this question.
    I started to track my spending when I learned about this habit. It doesn’t take too much time with a spreadsheet. It really makes me feel in control of my budget and personal finances. 🙂
  7. Most millionaires work between 45 to 55 hours a week.
    I adopted a 50 hour work week in my twenties by taking up a part time job. It has worked out really well as the skills I’ve learned from the side job has given me the tools to advance my full time job. 🙂 The U.S. Bureau of Labor Statistics reports that the average person who works 13% longer earns 44% more pay. So there’s a nonlinear return on overtime.
  8. About 80% of millionaires have brokerage accounts. But they make their own investment decisions.
    I used to have a financial advisor in college. But after reading this book I took out all the money and started to invest it all myself. Best decisions I’ve ever made. Saved myself over $50,000 in management fees.
  9. The vast majority, (97%) of millionaire are homeowners. Most of them have lived in the same home for over 10 years. Thus, they have likely enjoyed significant increases in the value of their properties.
    This is why I’m a staunch proponent of real estate investing and saved up a downpayment ASAP when I was starting out. There’s a huge correlation between being rich and being a property owner. I’ve lived in my home for nearly 12 years now. The market value has easily doubled. 🙂
  10. On average, the wealthy invests nearly 20% of their realized income each year.
    My salary today is around $70K, the highest it’s ever been. But no matter how much I earn I always invest at least 20% of my income every year. Consistency is key. Making six-figures would be great, but it’s not required to become a millionaire.

Continue reading »

Feb 242020
 

Overcoming Challenges

Millennials have been dealt a rough hand. We face an unstable job security, a sluggish economy, crippling student debt, high housing prices, and record low bond yields. This all makes it tough to retire rich without taking on at least some form of risk. The good news is that we don’t need to make a ton of money to retire with a big nest egg. We just have to make saving money a priority. 🙂

American author Tony Robbins says you can either look at things negatively or positively. It’s up to you. He uses the example of a former UPS employee named Theodore Johnson who never made more than $14,000 a year. But a friend suggested early on that he should save and invest 20% of his income. At first Theodore complained that he couldn’t save that much. But he gave it a shot anyway and soon got used to a more frugal lifestyle. And after five decades, he finally retired and wound up with over $70 million in his investment account.

 stock market

But Theodore was a bit of a special case. He made other smart investments besides the stock market. And although his final salary was $14,000 before he retired, that was in 1951. So it would have been worth about $130,000 in today’s dollars. But the point still stands. Consistently putting away money early on can pay huge dividends down the line.

The Components of Wealth

Creating wealth can be broken down into three components: Savings + Investment Returns + Time.

It’s difficult to predict investment returns. We obviously want the best performance. And there are things we can do to mitigate risk and improve the odds of achieving higher investment returns. But market performance is largely out of our control. Fortunately we still have efficacy over the other two variables – Savings, and Time.

Improving our savings rate is a matter of increasing the difference between what we make and what we spend. We can either act rich or become rich. But very few of us can do both in one lifetime. Understanding this idea can help motivate us to spend less on frivolous items, and value long term savings.

Lastly, time is probably the most important factor of all. It’s comparatively more powerful than investment returns when it comes to building wealth. For example, a 10% annual return over 20 years will generate more money than a 20% return over 10 years.

Over the next few months I will write detailed posts on how to save more money, earn higher investment returns, and maximize one’s investment time horizon. 🙂

 

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Random Useless Fact:

In 2020 there are over 6 million articles written on the English Wikipedia site.

Oct 212019
 

Investing is a lot like dating. Low confidence can keep you out of the market. A good way to gain confidence is to learn from those with experience. 🙂

When you do an internet search for “famous investors” you might see a list of highly experienced individuals. Some are dead. Most are alive. But despite being from different backgrounds, all the investors from the search result appear to have one thing in common.

None of them are wearing hats. A piece of headwear can tell a lot about someone’s personality. However, there is one famous investor that didn’t come up in my search results but does like to wear hats: and that’s Hetty Green. There aren’t a lot of photos of her because she died in 1916, but she had an incredible investment career. Here are five lessons we can learn from Hetty.

 

1. Start early

Wearing hats wasn’t the only trait that differentiated Hetty from other world class investors. With her grandfather’s encouragement Hetty had learned to manage her family’s financial accounts when she was just 13 years old. Born into the Quaker family (yes, the cereal name) Hetty was raised with conservative financial principles that would stay with her for life. The world was much simpler back in the days before Instagram and electric scooters. But while other kids were playing hopscotch outside, Hetty was busy reading financial papers and stock reports. 🙂

2. Practice delayed gratification

When her father bought her brand new clothes, Ms. Green sold her new wardrobe and purchased government bonds with the money instead. She eventually turned an inherited sum of $6 million into $100 million by 1916, which is the equivalent of $2.3 billion in today’s climate thanks to inflation.

3. Have an independent mindset and don’t follow the crowd

Hetty followed a contrarian investing strategy where she bought stocks and bonds when the market was full of pessimistic sentiment. She also had a knack for snapping up cheap real estate deals and trading railroad companies. In her own words she told the New York Times in 1905, “I believe in getting in at the bottom and out at the top. I like to buy railroad stocks or mortgage bonds. When I see a good thing going cheap because nobody wants it, I buy a lot of it and tuck it away. I keep them until they go up and people are anxious to buy. That is, I believe, the secret of all successful business.” She showed off this strategy a couple years later in 1907. After deciding that the market was overvalued, Hetty called in all her loans. Then, when the market crashed, she swooped in and bought them again at the lows. This line of thinking is very similar to Warren Buffett’s investment advice about being “fearful when others are greedy and greedy when others are fearful.”

Continue reading »

Mar 302018
 

Peter Munk 1927 – 2018

The founder of the world’s largest gold mining company passed away a couple of days ago at the age of 90. Peter Munk came from humble beginnings. He fled his home country of Hungry during WWII when it was invaded by Nazi Germany. Soon after he boarded a boat from England and came to Canada when he was 20 years old.

With no skills, money, or influence Peter and his family had to start from nothing in a foreign country. But that didn’t stop him from wanting to achieve great success. After graduating from the University of Toronto in 1952 Peter thrived in the business world. He helped to build multiple companies, including resorts, an electronic manufacturer, and mining companies. His biggest career move began in 1981 when he formed Barrick Investments, which would eventually become Barrick Gold (stock symbol ABX) the largest gold miner in the world. The company currently produces about 5 million ounces of gold per year across its many operations around the world.

Among other things, the billionaire entrepreneur is also known for being one of canada’s most significant philanthropists giving hundreds of millions of dollars to charity such as hospitals. He also established the Munk School of Global Affairs, the Munk Debates, amd was named a Companion of the Order of Canada, the country’s highest civilian honor.

Last year he was included in the New York Stock Exchange Wall of Innovators, alongside Warren Buffett, Jamie Dimon and Jack Ma. In a remark that captured the two leading pursuits of his life—business and philanthropy—Peter Munk said. “You can create wealth. You are entitled to the joy of this creation. But ultimately society makes it possible, and this wealth should flow back to society.”

Being independently wealthy is nice and all. But doing something meaningful with that money is more important. Having money doesn’t make our problems go away. It merely replaces one problem with another. For example Elvis Presley’s daughter inherited $100 million from her father’s estate in 1993. But that’s when the problems began. Through years of spending and mismanagement the funds have nearly dried out. This year only $14,000 remains of the initial $100 million fortune. Ouch. 🙁  Having a lot of money also created many problems for Jeane Napoles and her family. Peter Munk has 5 children and 13 grandchildren. I hope they can make their inheritance last longer. Financial management education is important for everyone, but especially so for children who come from wealthy families.

The idea that rich people don’t have money problems is a myth. Everyone has money problems from the single parent living on social assistance to the CEO of a large company. The difference is the CEO just has better money problems. Or maybe worse, depending on your perspective. 🙂

 

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Random Useless Fact

 

Feb 162017
 

A survey done a few years ago found that 34% of people rely on winning the lottery as a legitimate retirement plan. 😐 #smh. I’m no financial expert, but when it comes to aggressively planning for one’s retirement, playing the lottery more frequently probably isn’t the best strategy.

But of course some people can get very lucky, like Jane Park, who lives in the U.K. When she was 17 years old she bought her first lottery ticket and won the jackpot of £1 million. That’s roughly CAD $1.6 million, or USD $1.2 million. What did she do with her new found wealth? First, she spent £4,500 on a boob job. 😄 Then she purchased some properties, a Louis Vuitton handbag, and a chihuahua, because why not? 🙄

But it appears her lucky situation had unintentional consequences. At 21 years old today, Jane explains that winning the lottery has actually made her sick. That is to say, “sick of shopping for designer goodies.” She is also “struggling to find a genuine boyfriend who isn’t after her money.” Jane says that despite her wealth people don’t seem to understand her stress of being a millionaire. She says despite her material possessions her life feels “empty and without purpose.” Damn. Poor girl.

“I thought it would make it ten times better but it’s made it ten times worse. I wish I had no money most days. I say to myself, ‘My life would be so much easier if I hadn’t won.’” ~ Jane Park

But don’t feel too sorry for her just yet. Jane is currently thinking about suing the lottery company for giving her the money and ruining her life. She claims that the company should not be selling lottery tickets to 17 year olds because someone at that age can’t handle so much money. Again, I’m no expert. But if money caused her to feel empty and without purpose in the first place, then I’m not sure suing for more money is going to help her situation. 😄

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Random Useless Fact:

There was record snowfall this year in parts of Canada

This is what Vancouver looked like a week ago.