Before I begin this blog post, I wanted to apologize for not posting for awhile. I’ve been extremely busy with personal matters, work, and school. I definitely do not plan on quitting this blog. I genuinely enjoy reading and writing about personal finance. The next few years will be really busy for me, so bear with me. I will continue to provide you with hopefully, relatable advice. Stay tuned.
Obviously, I’m not a millionaire, so I’m not qualified to tell you the steps to becoming a millionaire. This blog is basically my diary to get there. I just want to be able to share my growing knowledge with you. Since I’m also relatively inexperienced, I think I can provide a great perspective for those of you who are just starting your career or want to take control of your finances. In this post, I’m going to go through my strategy to reach millionaire status. The beauty of it is that there is not just one right path to get there. There are countless methods that you could take on that would best fit your lifestyle and personal situation.
Before I talk about my plans as a Future Millionaire, I want to stress how important it is to truly know your why. Why do you want to be a millionaire? Is it that you can buy fancy clothes and cars? Is it because of the peace of mind that it comes with? Maybe you just want to be generous and give. Define what rich means to you. While $1 million dollars is just an arbitrary measurement of success, it provides us with a concrete, quantitative target that we can realistically work towards. Writing out your plan and tracking your progress is a great way to stay focused and committed.
As you may know, this blog is all about saving AND investing. It’s not either/or. I’ll write about both topics, but most of my articles will lean more toward educating you on investing. In the long run, that’s where the big bucks will come from. When it comes to investing, I want to make sure I have a diverse portfolio of assets.
The main asset classes I want to be in are stocks and real estate. However, if you want to invest in anything, you obviously need capital. Stating the obvious here, but you need an income to start saving and investing. For now, I have a day job and I invest my money passively. I’m not focused on getting rich quick. It’s important to understand that you’re going to start out slow. People tend to get discouraged early because they aren’t seeing results immediately. As the famous quote goes, “A journey of a thousand miles begins with a single step.”
MY DAY JOB
I’m young, so I’m focused on my job right now. I want to improve as a professional and soak in as much knowledge and experience as I can. Since I’m new to the workforce, there is a lot of room to grow and increase my income. This means I won’t really have time to be an active investor.
In the early stages, this is what’s going to be my main wealth building tool. I work in accounting right now, and I am currently working toward becoming a certified public accountant (CPA). This will open up a lot of doors for where I want to go with my career. This will lead to higher pay and higher responsibility.
These are the kind of things that are going to have a meaningful impact on building your wealth. You’ll see a lot of people saying that you need to give up your latte or your avocado toast. Focus on the big picture. Stop spending so much time wondering if the latte you’re drinking right now was a good financial decision. The key is building your income and then putting it to work. Improve your skills in your profession and become more financially literate. The places where you need to watch your spending are big purchases like a car. There is nothing that slows you down more than a brand new, $35,000 depreciating asset.
Understand that the time and effort you put into yourself in the beginning of your career will be your best investment. Just focus on working hard, perfecting your craft, and getting promoted to build your income. In the meantime, educate yourself on the basics of personal finance. Finally, and I can’t stress this enough, think long-term.
STOCK MARKET INVESTING
For the time being, I’m focused on passive investing. The stock market is the best place to do that. You do not need to be some sort of guru in order to make money in the stock market. Here’s what you do: open up a brokerage account, transfer some money in there, buy stocks or mutual funds. Now you’re done. Obviously, you need to do your research on which company or fund to put your money. You also NEED to understand the costs associated with buying stocks or mutual funds. Most brokerage accounts charge a trading commission, a fee you pay when you buy or sell a stock.
Personally, I hate paying high trading commissions. I have about a quarter of my wealth in Robinhood, where it is commission-free. I’m also at the beginning of my investing career, so I’m trading with small amounts. If you’re frequently making small trades, trading commissions can seriously eat into your profits or significantly contribute to net losses. I think it’s a great place for beginners, but don’t get carried away by constantly buying and selling.
I use Robinhood to pick individual stocks. However, I put in a lot of research in the company and analyze their financial statements to assess their overall health and future outlook. As someone who is in accounting, I enjoy doing that. I understand that not everyone else can say the same thing. If that’s the case, I would recommend investing in low-cost index funds or exchange traded funds (ETFs). I’ll write more in depth about these in the future. Put simply, you are investing in a basket of stocks that track a market index (S&P 500 is an example of an index) that is passively managed by professionals. Basically, you don’t have to pick your own stocks. You just choose a fund that invests in a bunch of stocks for you.
Understand that I’m not some sort of expert when it comes to picking stocks, so I invest in exchange traded funds as well. Another portion of my wealth is in Vanguard. This is the ultimate place to buy and hold. For the time being, I just have a Roth IRA account (HIGHLY recommend) on Vanguard. For those who are just getting started in investing, a Roth IRA is the first place you need to do that. You invest your after-tax dollars in the account, and it will grow tax free. When you can withdraw money from it, you will not pay any taxes. Nada. There is a $6,000 limit ($7,000 if you’re over 50) that you can contribute annually, however. You NEED to take advantage of this account as soon as you can.
I like Vanguard because they have a huge selection of commission–free exchange traded funds. You don’t have pay anything when you buy or sell them. The only cost to you is the expense ratio, but Vanguard also has a huge selection of ETFs with dirt cheap expense ratios. Expense ratios are just a percentage of your investment in an ETF that covers the operating expenses of that fund, such as paying the people who manage it. If you choose to buy stocks or funds that aren’t free, you will pay a hefty trade commission. This is to discourage any frequent buying and selling, and encourage buying and holding. Admittedly, Vanguard’s trading platform does seem a little outdated, but if you’re a long-term buy and hold investor, you’ll only be making a few trades a year. Who cares what the user interface is like? No need to get cute with it. This is why you may see sites that have low star ratings on them. Vanguard is focused on providing cheap, long-term, buy and hold investing and they’re the best option for that, in my opinion.
I also have some of my investments in a Roth 401(k). I’ve been in the workforce for less than a year, so I don’t have a whole lot in there yet. However, I strongly advise everyone to contribute AT LEAST what your employer will match. It is literally free money. It’s the easiest 100% return on investment you’ll ever have. You contribute $100. Your employer matches the same amount. Boom. 100% return.
Finally, the rest of my portfolio is in a robo-adviser, Wealthfront. Robo-advisers are exactly what they sound like. They are a class of financial advisors where there is little to no human intervention. All the financial advice is algorithmically based. I simply put my money in Wealthfront, and it invests my money based on my risk tolerance, which is determined by a questionnaire. Once it knows the type of risk that I am comfortable taking, it automatically invests your money accordingly. All I have to pay is a 0.25% management fee. For every $10,000 I invest, I pay a fee of $25.
This makes up my whole investment portfolio in my young career. As I said before, I’m interested in just passive investing right now, and the stock market is the best option for that. Next I’ll talk about where I want to go from here and other places I want to invest on my journey to a seven-figure net worth.
REAL ESTATE INVESTING
Real estate is definitely intriguing to me. My ultimate goal is to own residential and commercial properties that bring in enough passive income that I can comfortably choose to retire at my own discretion. I like real estate because it’s a tangible asset and it’s relatively stable. I mean, who doesn’t want to bring in stable and consistent cash flow for every month? Since I’ve only been working for less than a year, it may be tougher to qualify for a loan, but I’m in no rush. For now, I’m just spending lots of time researching the pros and cons of real estate investing.
First and foremost, I like the idea of having properties fully paid off and providing consistent cash flow that can fund my retirement lifestyle to my heart’s content. In the beginning, this is what attracted me to real estate. Having properties fully paid off sure sounds nice, but how do you get there? As I educated myself more and learning other’s strategies, I’ve realized that there’s more to real estate besides just cash flow.
In the beginning, having fully paid off homes is just not feasible. Instead, you take out loans and put in tenants to pay it off. So, you have to pay off the loan, property taxes, repairs and maintenance, insurance, etc. How are you possibly going to cash flow? For a short period, I began to lose interest when I came the realization of how hard it would be to cash flow any significant amount. I was a newbie, and only considered cash flow. As I’ve become more knowledgable on the subject, I’ve come to understand many of the other benefits that come with it.
Ideally, your tenant is able to cover all of your mortgage, your monthly expenses, with some left over cash flow. Your mortgage is made up of two things: principal paydown and interest. The principal paydown is equity that you gain in your house. In other words, it increases your ownership in the property. I understand it’s not a direct form of cash flow, but it increases your net worth, which is more important. The other portion of the mortgage is interest. If you’re borrowing money, then you’re going to pay interest. It’s the cost of borrowing money. As you make your payments over time, principal gradually becomes a larger portion of the mortgage and the interest becomes a smaller portion of the mortgage.
So, the tenant pays your mortgage; you gain equity in the property and keep whatever cash is left over after you pay all the expenses. How else can you build wealth in real estate? Well, you can write off any expenses related to operating and maintaining the property. The one I like the most is being able to write off depreciation expense. But what if my home is appreciating in value? Doesn’t matter. As a business, you have to depreciate your assets over time. What’s great is that it is a noncash expense. So, you can write off an expense that you’re not paying any cash for.
While deducting expenses from your income is nice, it’s not as great as everyone makes it out to be. You record gross income (your rent) and deduct any operating expenses. This is how any business works. I‘ve read countless articles about “tax savings” on real estate investing, but it’s not like you’re saving much in taxes that you’re paying from your active income. The only scenario this is possible is when your operating expenses exceed your rental income. Technically, you’re paying less tax, but you’re also paying more expenses out of your own pocket to maintain your rental property since the tenant’s payments aren’t covering everything. So, you’re not really saving any cash here.
This is where the depreciation expense shines. You can include this as an operating expense even though you’re not actually paying cash for it. This is a scenario where you could actually save on taxes from your active income and still cash flow from your rental property. For example, you could have an annual cash flow of $4,000, but maybe you also have $5,000 in depreciation. On paper, your expenses exceed your income by $1,000. In reality, you’re not paying cash for depreciation expense, so you are still cash flowing that $4,000 without paying any taxes on it and you can deduct that extra $1,000 from your active income.
Finally, there is also appreciation. There’s really not much to it. Over time, homes will generally appreciate in value. If you do your research, you can find areas where home values are going way up. This is where the “location, location, location” cliché applies. The increase in value can be a huge return on your investment. Remember, your original investment was your down payment. Say your down payment for a $200,000 property was $40,000 and the property appreciated by $5,000 (only 2.5%). You just gained $5,000 in equity, which is a 12.5% return on your original investment of $40,000. That’s not including any cash flow or principal paydown.
This was definitely a lot to soak in, but I think this was a good overview of the type of topics that I plan to cover for this blog. I wanted to briefly share my plans to building wealth for a couple reasons. One, this keeps me accountable; two, I want you to start thinking about how you plan to get there. I hope that, after reading this, you’ve envisioned your Future Millionaire journey. As mentioned before, there is no right way to do it. However, I think the plan I described is the most realistic for most people. Even if you want to take a different path, I think that much of what I provide will still be useful.