Trying To Learn From Millionaires In The Making

CNN Money has recently put up a new profile in their series on Millionaires in the Making. This one about the caught my eye because of they share similarities to us. They are married and under 30, with no kids. A relatively high combined income. Lives in an area with a high cost of living. Saves half of their income. But they have a net worth of over $500,000 already? Maybe I could learn a few things.

Jobs. He is a software engineer. She used to process mortgage loans. But now she bought a retail store selling fancy soaps. Combined income is $174k, but they don’t break it down. Their balance sheet lists the store being worth $125,000 with a $72,000 business loan. It is also unknown what this store value is based on – a multiple of net annual earnings?

From what I know about such shops, they are really hard to make successful, but can be very lucrative if you are. With the current economic downturn, I don’t know if I’d be selling $10 soap. All in all, too risky for me.

Housing. They rent a house from his parents for $650. I know for a fact this is at least 50% below market rent, probably much more. Smart move for them, but hard to replicate for the average person.

Real Estate Invesments. They made $110,000 from buying and selling a condo during the boom years. I cannot necessarily attribute this to skill, and I certainly can’t duplicate it. They then went out and bought three rental properties in Arizona and Texas, which have current negative cashflow of $750/month. Their balance sheet says they have $40k in home equity, but you have to wonder how realistic those values are. Previously, one rental sat empty for 9 months. Not mentioned is their mortgage situation; are these adjustable-rate or fixed?

Overall, I’d say they have only broke even in this department. I wouldn’t want those properties.

Stock Investments. $88,000 (37% of portfolio) is in Microsoft stock. Even if purchased at a discount as a fringe benefit, many ESPP participants sell as soon as possible to grab the profit. Rest of portfolio is 99% stocks, though not much other detail. Lots of risk here, much of which is connected with his job as well. MSFT performance has not been impressive. Hmm, not much learned here either.

Spending and Priorities. According to the graphic, their non-housing expenses are about $17,500 per year. This is right at about our spending levels, which is $18,000 per year.

The article then goes into how they never travel and rarely eat out (and split meals when they do). However, she also wears a $20,000 engagement ring, and they own 4 cars including a $30,000 Subaru WRX. Although not what I would do, who cares if that’s what truly makes them happiest. I wouldn’t call them misers. They tithe to their church and still control spending, which is respectable.

Recap

This couple is doing the “big stuff” very well. They make a lot of money, and only spend about half of it. Multiply this by many years and you get a fat net worth. But other than that, I can’t really say I want to emulate them. They have a lot of risk in a boutique shop, cashflow-negative rental properties, single-stock investments. None of these created their high net worth, in fact they might have even detracted from it.

But we do share the same goals of early retirement, so I wish them luck. They might need it!

Comments

  1. Who would brag to CNN about how smart you are with money while you mooch off your family?

    They owe half a million dollars on houses they don’t live in, and I guess their soap shop is making incredible profit (despite her lack of experience) for their numbers to work.

    These people decided owning cash-negative property in other states is more important than eating out, traveling, or buying furniture. I seriously hope you aren’t like these people. I can imagine these kind of people showing up to the game empty-handed and only drinking your nice beer. They would then brag about how CNN ran a story on how smart they are, while effectively living with their parents.

  2. I read about these folks in Money magazine and thought everything was on track but the real estate. In fact, I wasn’t sure why they were so leveraged to begin with–particularly in out-of-state properties. If I were them I’d sell all but one (the closest one) and pay it off with the proceeds from the other two.

  3. High risk gives you the opportunity for high reward.

  4. They then went out and bought three rental properties in Arizona and Texas, which have current negative cashflow of $750/month.

    This really worries me because people don’t typically include maintenance liabilities in their “cashflow” discussions. If this is the case, it’s likely that they’re not only losing money, their real estate is depreciating because they’re not putting in any maintenance dollars.

    All things considered, they definitely sound “a little lucky”. Renting for super cheap, above-average jobs, stock options, timing of the house sale… Then again, a little luck seems like par for the course if you’re going to be a millionaire before you’re 30. Most people just don’t earn that much money from age 22 to age 30. I personally like Derek Foster’s story. He’s Canadian, so the tax laws are a little different, but he generally has a plan in line with the way you (Jonathan) think.

    Slight aside (did anyone see IOUSA last night?)

  5. "Mo" Money says:

    Risk is good in your portfolio, but they need to diversify. Having 37% in one stock is not smart!

  6. Mark Nelson says:

    They must have a reason to invest in properties out of state. I do for the reason of cash flow. Of course there is a property manager involved but some areas you can cash flow and the appreciation is much better.

  7. “never travel and rarely eat out.”

    though a part of me agrees with this philosophy to save more for retirement; the carpe diem part of me makes me feel this is not completely worth the money I save; if I died tomorrow and never traveled or ate out, I don’t know how happy I would have been only having more money in my bank account to show for it.

    IMHO, I think the value of strategically planning one’s travel during low season at least once a year and aggresively finding good deals is much higher than completely not traveling to save a little bit more;

    Life’s short, live it…….just do it !

  8. Never travel or eat out. Seems like their philosophy is to deprive themselves of “enjoying Life” (term subjective to ones desires and what makes one happY) now while they are young and in their prime, in order to enjoy “comfort” returement.

    Which would you rather enjoy, good meals and travel while young or good eats and travel while your old?

    Being 30 and taking a hiking trip in South America and doing some cliff diving in brazil. Eatting at fine restuarants and drinking the night away.

    or

    A trip to boca Raton to wake up early and drink coffee and walk the boardwalk. Followed by a long dinner at a restuarant and drinks to return to your hotel room for an early night sleep.

    -Keep a balance between living and enjoying now and still saving for retirement.

    -This couple sounds like a bore!

  9. I agree with the other comments about this couple’s real estate portfolio. With a negative cash flow, their short and long term ROI and ROE is likely terrible. As frugal as they have been, their net worth could be a lot higher and a lot more liquid.

  10. NY GUY hit the spot and I agree with him.

    Rather than have to choose between not enjoying either one’s youth or one’s geriatric years, I would rather have a moderate level of enjoyment throughout all my years and save for a comfortable but not necessarily luxurious retirement. But that’s just me….to each their own.

  11. See you’re looking at the soap shop with the wrong perspective… it may be risky, but if that was her dream in life, then even if it isn’t making tons of cashflow, she is probably one of the happiest individuals in this economy, because she is doing what she loves.

  12. Yeah, not the way i am doing it.

    My wife and I both have great jobs, we save max to 401k, Roth, plus more for a down payment to a house. Life within our means. But still vacation and go out.

  13. Nice analysis of the CNN money series and pointing out what cannot be emulated or what is suspect.
    If I was them I’d be concerned with stocks, real estate values and retail are all cratering.

  14. I would like to be their Church .. And couple of more believers like that and I’ll be set for life

  15. This couple was absolutely uninspiring. Nice analysis of all the holes in their story. I’d like to know the details of the Countrywide loans they took to buy all that “investment property.”
    With stock, real estate and retail cratering (especially in their part of California), they may be living at mom’s for awhile.

  16. Yeah, it has to be rough to mooch off your parents, invest poorly, buy property that isnt successful, and still be considered a success.

    And I agree – their way of saving money sounds like the $600 a month lady. It reminds me of people who put more work into cheating their way through school than what it would take to just learn the stuff and do it the legit way.

  17. Uncommonadvice says:

    Very interesting post. This may sound an absolutely crazy statement in the current climate but to me the easiest way to a million pounds would be to get on the property ladder at the earliest possible age – and resist “Lifestyle inflation”.

  18. Good catch, I forgot to add the question of what kind of mortgages they have. If adjustable-rate, can they handle the rate reset? Cashflow would implode.

    My initial thought was that a $20,000 engagement ring and a $30,000 car would have bought a decade of regular meals and beers with my friends, which I’d much rather have. But I thought that was too judgmental :)

  19. James Wilcox says:

    Your comment about their stocks being risky isn’t necessarily true. MSFT has performed fine if you consider they are holding their shares long term. Dividends alone will earn them almost $6k a year and if those dividends are reinvested into the stock, it’s a smart way to play.

    For example, I work for Wells Fargo and contribute 6% of my salary to my 401k with 40% of the allocation going to Wells stock. Why? Because they match dollar for dollar up to that 6% which means half of the stock I am getting for free. He may be in a similar situation, who knows.

  20. That might turn out to be a good deal, James, but Enron employees were doing much the same as you.

  21. James – The question is, can you sell that Wells stock? Most companies allow you to. If so, then you have to ask yourself if you would invest in WF shares if they were not “free”. If I gave you $100, what would you buy?

    I still say individual company stocks do have more risk in general. It might pay off handsomely, but they have a non-zero chance of going to well, zero. Enron, MCI Worldcom, etc. Look at Ford and GM stock, which were surefire “longterm” plays a few decades ago.

    Not only that, but if the company does poorly, you now risk your job income as well as your retirement funds. As the saying goes, avoid having too many eggs in one basket.

  22. The worst part of this story is how hard-headed this guy is when an expert thinks he should reconsider dumping some of the rental properties and diversify his stock holdings. Sure, the property may bounce back in a few years but that doesn’t mean that money may be better sitting in an account making 3% today.

    I’ve worked with a few people like this before. We all want to think we are smart but it never hurts to consider opinions of people who have been there before.

    And that he makes some immature comment that he doesn’t need 100 friends, even though he is lonely at time; because his beautiful wife is all he needs. Why do I think this guy is going to wake up tomorrow being 15 years older, and find the wife ready to leave him.

  23. I read this article and thought they were both morons. IMO, they’re not enjoying life. I’d rather work 5 extra years for the man than scrimp every dollar.

    We’re aggressive on savings but never at the cost of actually enjoying living our lives RIGHT THIS SECOND.

    Life is way too short to argue over dinner bills.

  24. I also read this article a few days back and it was pretty interesting. Enjoy life now or save was the theme to me.

  25. I read this article last week, and found it to be unsettling at best. Tom’s comment above about how hard headed this guy seems to be is spot on. No one should have 37% of their portfolio in one stock – ask employees of Bear Stearns, Wachovia, etc, etc, etc. Also, I just can’t imagine spending $30,000 on a car and then not allowing your wife to get her own meal at a restaurant?!? And finally, like many other posts have said: you shouldn’t be bragging about your net worth when you are living in your Mama’s house! This guy comes off as a total jerk in the article. I bet you that his wife isn’t on board with his “strategy” and they will be divorced by 2010.

  26. Agreed. These guys should enjoy a bit more and then retire a few years later. I am not sure the financial advisors have taken into account cost rising when the family have kids. He has three houses now going in a downturn so net worth is decreasing day by day. Rent should cover mortgage which is not right now (as I understand).

  27. One more thing. How does the financial independence chart , the one from “Your money or your life” look for this couple ? :)

  28. sure hope no one at the state of california tax office reads your blog or cnn money. didn’t anyone else catch that he did not pay the required use tax when buying goods out of state? (the $20,000 ring)

    not sure why he felt it necessary to reveal this to the reporters…

  29. I recently re-read T. Harv Eker’s “Secrets of the Millionaire Mind” and always find that more inspiring and enlightening than what the general media preaches about building financial independence.

    It doesn’t sound like those guys are doing it right in the real estate department (aside from the luck of buying during the boom on their primary residence), but in the end, real estate has created a lot more millionaires than the stock market. Building assets that you control is really the only way to truly win your financial freedom.

    Great blog, keep it up :)

  30. so our blogging friend is worried about being judgement while the moron in the article has set himself up as an example of how to live off your parents’ money and avoid paying taxes.
    i think its ok to point out the obvious in this case.

  31. I agree – the story was not inspiring. And I am afraid that when they turn 40 and retire to their ranch and start their family – they will only wish they had started years earlier. I would not choose an early retirement over my little girl. Family has much more importance than that.

  32. I agree. Their story sounds borderline awful. I feel kind of sorry for them for not balancing saving and enjoying their lives. Only wear hand-me down clothes when your income is $170K+?! Good grief! Please don’t get me wrong. I’m as frugal as the next person and would not shrink from shopping at thrift stores and mostly shop on sales, but their spending habit sounded oppressive.

    When I was 27, I also co-owned a house with my brother so I had a house payment to deal with on a modest income. However, I managed to squeeze in weekly dining out/happy-hours with friends and took trips near and far when opportunities arose. If there are any regret it would be that I didn’t travel more instead of less.

    I hope they would relax a little and experience their lives before it’s too late.

  33. Yes, sorry I also agree the story was not inspiring! I think its ok to point out the obvious in this case.

  34. Heard a story a few months back about how lipstick and perfume boutiques are doing very well in this economy. Turns out that if women are in tight times, they are willing to splurge on $20 lipstick to compensate for not buying the $200 [insert stupid material purchase here].

    Soap probably goes the same way?

  35. I read the CNN article. How do they take account of taxes in these articles? Or are taxes just not a consideration?

  36. Interesting article.

    They are doing pretty well I think. Some of it is luck but without taking risks you won’t get rewards. But they also are very frugal and spend much less than they earn, and with that they are sure to accumulate wealth long term.

    Personally I would not be quite as tight with the spending. But if they are happy with their spending habits then each to their own.

    Their cheap rent subsidy is helping but thats not saving them more than $10-20k a year and they save much more than that annually.

    I do think they’ve been relatively lucky with the real estate. San Antonio market has not really lost value so that has helped. Plus they cashed in big on the condo.

    I’d definitely sell the Microsoft stock. He’s too heavily invested in one company. Plus MS hasn’t performed well as a stock in the past 5 years.

    I’d be inclined to dump the rentals too. They are losing too much money on them and they are out of state. While the rent – mortgage for the rentals is about a $9000 deficit they will also get a fair amount of money back out of the rentals though tax deductions. With about $500k in property they could be deducting around 15k a year in depreciation and at their marginal rate that could save them $6k or so a year.

    Jim

  37. Wow, I see you really analized this. Good job.

    I will say they are doing better than average. A boutique shop- hey you gotta take risks! Maybe the shop is her passion.

    The key to wealth pay attention to income producing assets, avoid consumer debt

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