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I recently read a book called The Wealthy Barber and I found it amazing how compund interest works. My goal is to still invest in Real Estate some day on top of investing in Mutual Funds and so on but I'm wondering if anyone out there has a personal finance plan that has been a major success. I'm 29, and recently just maxed out my Roth IRA for 2007 and plan on maxing it out every year. On top of that, I put 10% of my net income in Mutual Funds and put 6% in my 401k since my company will match 50% up to 6% once I'm completely vested. I'm curious to see how other people invest. My goal is to be worth at least $10 million by the time I'm 60. Anyone have a recipe for success that could make this possible?
I'd suggest maxing out your 401K. It's great that you're putting in full match amount, but tax-free growth is tax-free growth, so if you can afford to, up the 401K so that you are maxing it out fully.
I think a class on basic finance like this should be taught to every HS senior. Keep credit card debt to ZERO. If you can't pay it off in full, you shouldn't be getting it. Car payment as close to zero as possible. Have adequate health insurance and disability insurance (those could completely derail your financial security. People undervalue disability ins.--until they need it. You need to plan for many possibilities--not just the one that says you'll be healthy and working til 65). Also life ins. if you have dependents. Pay yourself first: money goes into the 401K, the IRA, any addt'l savings areas (like brokerage accounts), etc. Only what is left over is there to play with. You can have a financial plan done (I am not a financial planner to anyone who thinks I'm trying to sell something here!) which can project how retirement will look with what you're currently doing and how it will look if you make certain changes (adding savings/investments here or there, etc).
You're right....time value of money is phenomenal. It's a shame so many people don't consider saving for their future until they are married with kids. They've lost a LOT of compounding interest by then!
I think if you stick with your plan you'll do very well. Most Americans save next to nothing--it's crazy.
Thanks for the feedback. As much as I would love to put more in my 401k I may hold off for a while for a couple of reasons. First off, I have $17,000 in credit card debt that I'll be paying off for a while and I have a pretty hefty car payment for another 2.5 years. I'm doing what I can but unfortunately I have a lot of credit card debt. Another reason I don't want to max out my 401k is because I would like to save up money to start buying real estate investments within the next few years. It has always been a dream of mine.
We did it (although never reached 10M). Saved up to 1/2 our income. Invested in a diversified portfolio. Used debt carefully and paid it off. Balanced our savings and debt payment each year. Used extra money to usually pay off debt.
Once out of debt for car and house, never went into debt again. Lived simply. Still we did a lot of foreign travel but usually carefully thought out. Got free tickets on Pan Am so we went to India. Used an adventure travel group for Egypt, etc.
Marry a frugal person and stay married. Dont try to live up to the advertisements in fact ignore them.
Learn how to fix and maintain what you have. Buy used when possible. We have never bought a new lawn mower.
Read The Millionaire Next Door, The Tightwad Gazette, and other simple living books. My favorite is Your Money or Your Life.
Ignore everyone else and their 'things' - look at them with pity if you must (to bolster your own resistance). You may have to be considered 'strange' to reach your goal. Revel in that..
If you can max out the 401K, get a 15-year mortgage, don't keep credit card debt, pay cash for a car and keep it forever, etc..you will not have too many other decisions to make. You won't really have to budget -- whatever is left can be your 'fun money'
Agree with all the above - never go into debt (except for that reasonable amount on a reasonable home - note "reasonable"). Pay cash for everything. Spend less than you make. Do NOT keep up with the Jones' (this will be a big temptation). Be frugal. Get with a good financial advisor if you do not have investing skills and invest for the long-term. Do not give into temptation to spend to keep up with the neighbors/family/friend.
Live below your means. A good basic reinforcement is the book The Millionaire Next Door. Here is a great summary from the book.
Quote:
PORTRAIT Of A MILLIONAIRE
Who is the prototypical American millionaire? What would he tell you about himself?
I am a fifty-seven-year-old male, married with three children. About 70 percent of us earn 80 percent or more of our household's income.
About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.
Many of the types of businesses we are in could be classified as dullnormal. We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.
About half of our wives do not work outside the home. The number-one occupation for those wives who do work is teacher.
Our household's total annual realized (taxable) income is $131,000 (median, or 50th percentile), while our average income is $247,000. Note that those of us who have incomes in the $500,000 to $999,999 category (8 percent) and the $1 million or more category (5 percent) skew the average upward.
We have an average household net worth of $3.7 million. Of course, some of our cohorts have accumulated much more. Nearly 6 percent have a net worth of over $10 million. Again, these people skew our average upward. The typical (median, or 50th percentile) millionaire household has a net worth of $1.6 million.
On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth.
Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.
Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.
We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.
Most of our wives are planners and meticulous budgeters. In fact, only 18 percent of us disagreed with the statement "Charity begins at home." Most of us will tell you that our wives are a lot more conservative with money than we are.
We have a "go-to-hell fund." In other words, we have accumulated enough wealth to live without working for ten or more years. Thus, those of us with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, we could live longer than that, since we save at least 15 percent of our earned income.
We have more than six and one-half times the level of wealth of our nonmillionaire neighbors, but, in our neighborhood, these nonmillionaires outnumber us better than three to one. Could it be that they have chosen to trade wealth for acquiring high-status material possessions?
As a group, we are fairly well educated. Only about one in five are not college graduates. Many of us hold advanced degrees. Eighteen percent have master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.
Only 17 percent of us or our spouses ever attended a private elementary or private high school. But 55 percent of our children are currently attending or have attended private schools.
As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.
About two-thirds of us work between forty-five and fifty-five hours per week.
We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of us have at least one account with a brokerage company. But we make our own investment decisions.
We hold nearly 20 percent of our household's wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments. We hold even more in our pension plans. On average, 21 percent of our household's wealth is in our private businesses.
As a group, we feel that our daughters are financially handicapped in comparison to our sons. Men seem to make much more money even within the same occupational categories. That is why most of us would not hesitate to share some of our wealth with our daughters. Our sons, and men in general, have the deck of economic cards stacked in their favor. They should not need subsidies from their parents.
What would be the ideal occupations for our sons and daughters? There are about 3.5 millionaire households like ours. Our numbers are growing much faster than the general population. Our kids should consider providing affluent people with some valuable service. Overall, our most trusted financial advisors are our accountants. Our attorneys are also very important. So we recommend accounting and law to our children. Tax advisors and estate-planning experts will be in big demand over the next fifteen years. I am a tightwad. That's one of the main reasons I completed a long questionnaire for a crispy $1 bill. Why else would I spend two or three hours being personally interviewed by these authors? They paid me $100, $200, or $250. Oh, they made me another offer--to donate in my name the money I earned for my interview to my favorite charity. But I told them, "I am my favorite charity."
I recently read a book called The Wealthy Barber and I found it amazing how compund interest works. My goal is to still invest in Real Estate some day on top of investing in Mutual Funds and so on but I'm wondering if anyone out there has a personal finance plan that has been a major success. I'm 29, and recently just maxed out my Roth IRA for 2007 and plan on maxing it out every year. On top of that, I put 10% of my net income in Mutual Funds and put 6% in my 401k since my company will match 50% up to 6% once I'm completely vested. I'm curious to see how other people invest. My goal is to be worth at least $10 million by the time I'm 60. Anyone have a recipe for success that could make this possible?
I applaud your determination. A couple of words of advice. If you want $10 million in 30 years, assuming a conservative 7% annual return, you'll have to save an average of $105,000 each year - starting right now.
To reach your goal, you'll have to use every available option to build wealth. Take for example the current tax code that enables a single person to live in a home for 2 out of the last 5 years and sell it, keeping up to $250,000 of the gain tax free. It's $500,000 for married couples. So, consider buying an older home in a good school district where prices are pretty high and have a good track record of increasing. In other words, find the best neighborhood you can and buy a 3-4 bedroom home with a good yard. Get a couple of roommates and charge them rent. They'll help pay for your house. Over time, fix the place up - don't let your roomies trash it or treat it like their frat house.
When it's time to get married, refinance the house, taking only the minimum amount of cash out to purchase a basic home for you and your wife that can be fixed up over time. Continue to rent your previous house. As you improve your new house, keep an eye on the market. When you notice homes around you selling for what you think are high prices, put your home on the market - and yes, sell it yourself. You can get a good closing attorney to help you with the documents. If you can't get a good profit, at current market rates, then stay for another year or so. When you do get a good profit, roll it into a better home in a better neighborhood without taking on much more debt. If you get to a price range where a few years appreciation will equate to $250k to $350k, you can move every few years and sock away a substantial amount of money tax free. When you finally decide to have kids and stop moving around so much, buy an affordable home in a good school district and pay cash. You should have a few dollars left over. Take the money you had been spending on a mortgage and buy another rental home. You will get wealthier investing in real estate that virtually any other investment vehicle. And you'll always have more tax laws in your favor, such as the 1031 exchange allowing you to "swap" properties and avoid the tax penalty.
For example, let's say you buy a $250,000 home and put 20% down. On a 30 year 6.5% mortgage, you'll pay about $1265 per month, excluding taxes and insurance. If you rent each bedroom for $500 per month, your cost will be only $265 per month, plus taxes and insurance. Who knows, you may be able to get more. Now, you only put down $50,000. But every year you are reducing the principal portion of your mortgage about $2000. And if the value increases, let's say 4% per year, that's another $10,000 per year. (That's another reason you'll have to take good care of the place!) Add those together and you've got about $12,000 per year return on your $50,000 investment, or a 24% annual return. And you're getting to write off the interest on the mortgage against your income while somebody else pays the majority of the debt for you.
Last edited by Buckhead_Broker; 04-07-2008 at 07:20 PM..
To reach that net worth, I think you'll have to think outside of stocks or bonds.
Stocks work, to a degree. Certainly in the last 20 years they've worked extremely well, but they don't go up perfectly 8 or 10% a year.
The next 10 years could be flat to slightly down (as the 80's and 90's excesses get worked off). Then 20 years at 8-10% + 10 years of 0%, I dont know what that is compounded.
The S&P in the last 9 years has been flat. I'd be cautious of listening to any planners that think stocks always go up. Or using historical data, stocks have never done this over 15 or 20 years. Or housing has never done this. You have to pay attention to whats going on.
And certainly theres alot of advantages with taxes, selling your home tax free for example in the above post.
Thanks for the feedback. As much as I would love to put more in my 401k I may hold off for a while for a couple of reasons. First off, I have $17,000 in credit card debt that I'll be paying off for a while and I have a pretty hefty car payment for another 2.5 years. I'm doing what I can but unfortunately I have a lot of credit card debt. Another reason I don't want to max out my 401k is because I would like to save up money to start buying real estate investments within the next few years. It has always been a dream of mine.
Wow, 17K in CC debt? Do you want the sugar coated version or the real truth?
No way you're going to acheive your goals w/that amount of cc debt.
Right now you're probably paying 15% a year just in interest.
My advice would be to pay off the debt IMMEDIATELY.
Also, why do you have a hefty car payment? If you want to have money for the future, sell that depreciating asset, buy something cheaper and put the difference to paying off the cc debt.
Its very simple. You just need to learn to truly sacrifice.
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