How to Get Started Investing

   For many people interested in investing the first step of getting started is the biggest hurdle they face.  According to www.sec.gov only 30% of Americans have investments in taxable brokerage accounts outside of their retirement plane.  I know many people that have savings in traditional banks with traditional bank products such as savings accounts or CDs.  These folks are a little nervous about investing in the stock market or bonds because they fear the unknown.  They don't understand the investment options or they don't know how to begin.  

   Investing in stocks and bonds has been a critical piece of my journey toward becoming a millionaire.  If you wish to reach similar financial goals it will most likely need to be a part of your journey.  

  So, where does one start?  The first piece of advise I would give is don't invest in any product you don't understand.  Before I began investing in mutual funds I purchased Mutual Funds for Dummies.  This book helped me get a basic understanding of stocks, bonds, and mutual funds.  Of course you don't need to read and entire book to get an understanding, but you get the point.

   The next step is to select what you would like to invest in.  This is the part that overwhelms most beginners.  There are so many investment products.  I recommend a balanced mutual fund to beginner investors.  A balanced fund is great because the fund invests in the stock of many companies and also owns bonds.  This provides stability with modest growth.  When you are starting out, you don't want to ride a roller coaster of ups and downs.  You want an investment product that you can put money into routinely and you will see a benefit from investing your money.  Most if not all mutual fund companies offer balanced funds.  I own several Vanguard mutual funds and Fidelity mutual fund products.

  I never recommend investing in individual stocks unless you are a professional or are willing to put 5-8 hours in per day researching companies.  I work for a large corporation and my company's stock price first went down 40% this year only to go up 60% from there.  Talk about a roller coaster.  If you are just starting out riding the investment ride, you don't want to get on the biggest and sometimes most dangerous roller coaster in the park.  

  Now that you understand the investment and have selected a product you want to invest in, the final step is easy.  Simply open an online account with the company who's investment product you selected.  For example, if you liked one of Vanguard's mutual funds you would go to www.vanguard.com and create an account.  Once you have an account, you would select the mutual fund for which you want to purchase shares.  Most Vanguard funds require a $3,000 minimum to invest in the fund.  However, there are some that only require $1,000.  Then use the website to execute the purchase of your mutual fund shares.

  Congratulations!! You are now an investor in a taxable mutual fund!  In the future you will become more familiar and more comfortable with growth oriented and higher risk mutual funds.  Branch out at your own comfort level.       

The Overlooked Small Business Everyone Has Access To

   What if I told you that you have access to a small business opportunity that will bring in extra income and you don't have to do much work at all?  Many of us would say, "Sign me up!"  Others would say, "Give me a break!"  Most seasoned people believe that an opportunity like this does not exist.  However, I believe that one does if we change our mindset a little.  A change in mindset in many areas of our lives is what is required on the journey toward becoming a millionaire.

   I started investing routinely in mutual funds back in 2013.  These mutual funds are in a taxable account outside of a 401K or IRA.  Each quarter the funds I invest in return a divided.  At the end of every year the funds distribute capital gains.  Both dividends and capital gains distributions are based upon the number of shares you own in a particular fund.  One of my favorite funds is Vanguard's Wellington Fund.  It distributes quarterly dividends around $0.50 per share.  My very first year investing in this fund I received $163 in dividends and $611 of capital gains distributions.  I know, nothing to get excited about right.  

   Over the next year, I put money each month into the Wellington fund.  After the second year investing in the fund, my dividends totaled $1,631.  If you add in my capital gains distribution, my shares in the fund had generated $4,685.  

   I began to feel that I was making some progress.  Dave Ramsey says something to the effect of, "Traction yields satisfaction."  I began to calculate how much money my investments were generating on a monthly basis.  I also understood that the more shares I had, the higher my dividends and capital gains distributions would be.  I know this should not be very hard to understand.  However, when you see your income tied to the number of shares of a fund you own, you get motivated to save more so that you can purchase more shares of that fund.  It became a rewarding game to play.  As I calculated the monthly income from my investments in these funds, something clicked with me and I began to feel that I had a small business that I was building.  This small business opportunity is available to all of us.  To start investing in mutual funds you don't need much money to get started.  Some Vanguard funds only require $1,000 to open an account and you can do it all online.  Most Vanguard funds require $3,000 to start, but once you make the initial investment future investments can be very small.  I sometimes only purchase $100 of additional shares.  You can do this! You can get started in the process and get your small business of owning mutual funds going!

  The graph below shows the level of income investing in mutual funds has generated for me on a yearly basis.  I sold a ton of shares in 2019 to buy a lake house, that's why 2019 was such a down year.  I have rebuilt the number of shares I have in my mutual funds since 2019, but the reduction in interest rates has hurt 2020's dividends.  2020 numbers are also just 3 dividend payouts and does not include a capital gains distribution.  I expect that it will be around $15,000 by the end of the year.  Keep in my, I hardly lift a finger to make this income, just a couple clicks of the mouse to buy more shares!!

                   

How Your Vehicle Purchases May Be Costing You $450,000!!

   In an earlier post I discussed a plan for paying for vehicles with cash.  The plan advocated paying the average new car payment ($554 per month according to Experion) into a savings fund for 5 years.  The built up savings, around $35,000 (assumes a 2% APR), is then used to purchase a near new vehicle a couple of model years old.  Then in the following 5 years the $554 dollars per month is diverted into an investment such as a mutual fund.  After the first 10 years, the process would start over.  The vehicle purchase timing with the level of savings is shown in the graph below.

Now, you may be wondering about the diverted investment into a mutual fund.  The graph below shows how that investment will grow over time.  You can see that if you divert your monthly vehicle savings to a mutual fund using this approach that the fund would have a value of $225,000 assuming a modest 6% return on investment.  Over 30 years most mutual funds will have a better return than 6%, I’m just being conservative here.

 

    Now, assume you are more like the average American family with 2 new vehicle payments totaling $1,108 per month.  Assume you followed this same approach, but instead saved $1,108 per month.  Not only would you have roughly $70,000 every 10 years to pay cash for vehicles, but as you can see in the graph below your mutual fund would be roughly $450,000 after 30 years!  If instead you purchase a new car every 5 years, you would miss out on $450,000.  It is plain to see the benefits of funding vehicles in this manner.  Who wouldn’t want an extra $450,000 at retirement!  I hope this illustrates how your attitudes and actions toward vehicle purchases can impact your ability to build wealth.  

The Real Millionaire

 I am a 39-year-old man with an amazing wife and 4 awesome kids.  I am also considered a net-worth millionaire.  Achieving this goal has always been a dream of mine.  I have carefully planned and plotted a course to this goal starting at the age of 24.  Over the last 15 years we have had a good income, but certainly not an extremely high income.  So, it doesn’t take an extremely high income to achieve millionaire status.  

  I am passionate about sharing our wealth building journey with others so that they can strive to achieve their financial goals.  I created this blog to show you the journey we have been on and to invite you to join us on this path.  I will warn you becoming a millionaire does take determination, grit, and self-discipline, but the goal is achievable for the average American.  Read on to see my journey to becoming a real millionaire.  

Vehicle Savings

 

As discussed in a previous post, a reliable paid off vehicle helps you minimize your vehicle expenses and should help increase your monthly savings rate.  According to Experion, the average American’s new car payment is $554 per month.   If you happen to have 2 new car payments, you may be spending more than $1,110 per month on vehicles.  In the graph below you can see the effect of not having a monthly vehicle expense on my personal saving rate.

  

  A portion of my monthly savings shown in the graph above are used to save money to pay cash for a future car.  Following this practice will enable you to have zero monthly car payments for the rest of your life and will fuel your wealth building.  You may be thinking, “How does this help you build wealth if instead of paying a car payment you are putting that money into a car fund?”  Well, take a look at when I paid off both of my cars.  I paid off both vehicles in 2013 and I didn’t start contributing to a car fund until 2018.  So, I had 5 years where the money went to investing instead of saving for a car purchase.  Once I replace my two older vehicles with new vehicles, I will have another 5-7 years without saving for a new car.  The money I would have put into vehicle savings will instead go into investments.

  The graph below is where my future car savings stand as of October 2020.  If you are wondering where and how I invest the money, I’ll share that with you now.  Since May of 2018 I have $500 automatically drafted from my checking account into a short-term bond index fund through Vanguard.  In the graph there are 2 data points per month, one is my contribution and the other is the interest earned.  I chose to auto-draft so that the savings happen each month on the same day automatically.  I am a big fan of auto-drafting toward any financial goal.  Just set it and forget it.  Make the automatic contribution part of your monthly budget and don’t make adjustments to it.  Auto-drafting will make you a much more successful saver.  I can’t endorse this practice more.  I chose a short-term bond fund because the interest rate was higher than Vanguard’s money market funds.  I am currently getting 1.1% APR on the fund vs. a money market of 0.07% APR.  I know there is more risk with the short term bond fund and you can’t discount risk, but personally I hate saving money and getting no return on my savings.

  Using this slow monthly automatic savings approach toward funding a new car purchase will have an added benefit.  It will help change your mentality towards your current vehicle.  I see my current vehicles as shields against a huge future expense.  These “shields” buy me time to build my vehicle fund.  Each additional day I own my current vehicles, I appreciate them more.  I personally love my 13-year-old Civic and will be very sad when the cost to keep it functional outweighs the benefits of keeping it.  Additionally, the longer the fund has a higher level of money in it, the more interest the fund will pay you.        

   

 

Vehicle Expenses

 

The second largest expense for most people is the expense of a vehicle.  This area is where most people have the biggest opportunity to make progress on building wealth, but they squander it.  This year my hot water heater died after 10 years of service.  When the plumber asked me if I had a preference for a replacement hot water heater, I told him “I’d like a reliable low cost hot water that gets the job done.”  This same logic should be applied to vehicle purchases.  However, so many different emotions get rolled into a car purchase because other people will see us driving it.  We link our vehicle to our self worth.  We want cars that tell people that we are a success.  We don’t want a used cheap vehicle because we think it shows others that we aren’t successful or don’t make a lot of money.  You must get past this mentality.  This mentality keeps you making large monthly payments on vehicles that hurt your opportunity to build wealth.  Vehicles go down in value over time and therefore are very rarely an investment.  They are not a  wealth building tool and you should divert as much of your income away from vehicles as possible.  I drive a 2007 Honda Civic (13 years old) and my wife drives a 2009 Toyota Sienna (11 years old).  We bought both of these vehicles new and planned to keep them as long as they run.  These vehicles have been amazing for us and have helped us keep our monthly vehicle payments low (see the graph below).  

Our highest monthly vehicle payment year was 2009 when we still had payments on my Civic and we bought the Sienna.  Notice in the graph above that 2009 was our second lowest year for savings.  Once we paid off both vehicles in 2013 our monthly savings began to take off.  Some of our monthly savings has been diverted to a vehicle fund as we plan for the purchase of our next vehicle with cash, but I’ll discuss that in a future post. 

  To sum up lessons related to the vehicles you own and how they influence your ability to become a millionaire.

1.       Treat the purchase and ownership of a vehicle the way you would a hot water heater.  This removes the negative emotional elements of vehicle ownership.

2.       Purchase a reliable make and model and plan to keep the vehicle a minimum of 10 years.

3.       Try to pay cash for your vehicle.  I didn’t in my first 2 vehicle purchases, but I plan to for all future vehicle purchases.

4.       If you have all your vehicles paid off, try to keep it that way and put the money you would have spent on a car to work by investing or saving it.

Housing Expenses

As I mentioned in my last post, I wanted to start sharing strategies to help you keep your expenses in check.  When attempting to build wealth, your gap between income and expenses is going to be the engine that drives your wealth building progression.  Remember that it doesn't matter how much money you make; it matters how much money you keep.  Generally, the largest expense you will have is housing, so let's start there.  When my wife and I first started out in 2005 we kept our housing expenses super cheap by living in a small 1-bedroom apartment.  Our rent in our first year of our wealth building journey was $325 a month.  The low rent helped us keep our overall monthly expenses to a minimum and we were able to save $36,000 in our first year.  In the graph below, you can see our total housing costs from 2005 to present.  The total housing cost value I show here is the total of rent or mortgage plus the property tax and homeowner’s insurance.  I didn’t include home maintenance cost or remodeling, but any of you homeowner’s know that those costs can be significant at various points in your homeowning experience. 

  In 2005 I didn’t think we could reduce our housing costs much more.  However, in 2006 an opportunity came along for us to purchase a small 2-bedroom 1 bath 800 square foot fixer upper.  The price was $65,000.  At this point, we’d saved enough money to purchase the small house with cash, so we did.  The house was so cheap that the property taxes and insurance were very low.  The first full year we lived there (2007) represented the lowest housing cost to date.  That year our average monthly spend on housing was $173.  Now how did housing cost impact our ability to save you ask?  The graph below tells the story.

When we had very low housing expense between 2005 and 2008, we were able to save a really nice chunk of change, despite our lower income.  However, in 2008 I started my first real job.  We relocated and sold the little paid for house and moved into a much bigger more expensive house.  In 2009-2012 we saved less money even though I made more money.  Remember, its not how much money you make, its how much money you keep.  It took me 5 years (2008 to 2013) of steady pay raises to get back to and exceed the level of savings that we had in the first 4 years of our wealth building journey.  In 2008, we moved up in house too quickly and it negatively impacted our ability to build wealth.  We still live in the same city but are now on our 3^rd house in our current location.  So, what lessons can we glean from my experience with housing expenses and strategies to keep them low.

1.      Try to start out with very low housing costs and save the money not spent on housing.

2.      Use your savings to try to buy a very small place with cash and live there for several years.

3.      Slow and steady.  Sell the small place when you outgrow it, but don’t make a big jump up in housing.  This didn’t stop us, but it did slow our wealth building.

4.      If you can pay cash or pay off your house, this greatly increases monthly savings, even if you don’t make a lot of money.

 

In the next post, I’ll discuss most people’s second largest expense… cars.  See you next time.

 

The Gap

 As mentioned in my previous post, the gap is the most important factor in building wealth.  What, you might ask, is the gap?  Well, the gap is simply your income minus your expenses.  The larger the gap, the easier and quicker it is to build wealth.  You can make progress with a small gap, but the progress will be slow and not very motivating.  You may have also guessed that if your gap is negative, you are heading in the wrong direction.  You are losing ground and your trajectory is unsustainable.  It is not enough to just consider the idea of this gap, you need to discover what your gap is and track it.  Keeping an eye on my gap over the years has helped me become a real millionaire.  Each month for the last 16 years I have tallied up my income and expenses.  Here is a chart with my average monthly expenses vs. income each year since I started keeping an eye on this.

   

  There are several important pieces of information I want you to see by looking at my income and expenses.  

• I have consistently lived below my means.  In 2005 my wife and I made a combined income of $5,000 per month.  However, we lived so frugally that we only spent $2,000 per month.  Now at the time, it was just the two of us, so this was easier to do.  We were basically 23 year old college kids, but we were able to save $36,000 in our first year of marriage.
• This has been a wealth building journey.  This process has played out for us over 16 years, this approach is not a get rich quick approach.  However, this approach is available to most people.
• We have allowed and enjoyed some lifestyle creep.  As our income has gone up, we have loosened the purse strings a little.  It is important to enjoy money.  We aren't as tight as we used to be.  However, we have always paid attention to maintaining or increasing the gap between our income and expenses.

Some of you may be thinking, "of course you can build wealth, you are bringing in $11,000 per month!"  I'd like to point out that in the first 6 years we averaged about half that income, but still managed to save a large chunk of that income.  You simply have to adjust your lifestyle to maintain a gap between income and expenses.  In the next several posts, I want to share some of the strategies that I've used to help keep my expenses in check, so stay tuned.

A Confession and an Apology

 

  I have a confession and an apology to make.  When you invited me over to look at your shiny new $70,000 SUV or to take a tour of your 5,000 square foot house, I was dishonest.  I oohed and awed and said a couple of “WOWs!”.  I pretended to be impressed or even excited for you.  In my mind though I was excited for myself.  You see, I was in competition with you.  You didn’t know that I’m was in competition with you.  It’s a secret little game I’ve been playing for years.  A game to see who can build more wealth.  Each time my acquaintances make bad financial choices that will slow their wealth building, I selfishly think “Well, I’ll have more money than they will in the future.”  I realize this is wrong and thus the apology.  I’m sorry I thought and acted in this way.

  I’ve decided to take a new approach.  Instead of enjoying watching you make poor decisions, I’d like to bring you along on my journey to building wealth.  I want to help you progress toward your financial goals.  I’ve been actively trying to build wealth for 16 years and those efforts have paid off.  I am a real millionaire and I’d like to show you how to become one too.  Now what do I mean by a real millionaire?  Well, I simply mean that the path I took is not a get rich quick scheme.  It also doesn’t mean that I inherited a large sum of money.  The path toward becoming a real millionaire is available to most people.  The path takes time, hard work and discipline.  I’ll show you the steps I’ve taken to move along the wealth building path.  I’ll start in the next post by discussing what I think is the most important factor in building wealth… it’s what I call “the gap”.