How to make a million bucks by 40

I’ve never thought of myself as someone who knows much about personal finance or  investing.  Yet I keep reading scary statistics about how the average American has less than $1000 in savings, the typical family has $90,000 in debt, and most cannot pay for a $500 emergency.

Furthermore, the lack of good money habits cut across all income levels.  I have friends who make far more money than me, but recently complained that they could not take advantage of Amazon Prime Day discounts because pay day was too far away.   Friends who amass huge bank accounts, where their money slowly rots from inflation, or gets invested into CD’s, or useless and expensive mutual funds.    Friends who panicked when the market crashed, and converted their securities to cash at the worst possible time.

Americans, you can do better!  You can save and be a successful investor without becoming an expert or hiring one.   By my estimate, a majority of American households would be worth a million dollars by their 40’s if they start early and make a concerted effort.  There are three parts to maximizing your net worth: (1) maximize your earnings (2) minimize your cost of living and (3) maximize the return from your investments.

I will share my financial story so you can see that that I learned these lessons the hard way.

First, I invested my student loans in the stock market – in the early 2000’s

I purchased my first mutual fund at 15, with the first $500 that I earned.   That was a smart start, but I followed up with a common setback:  I wasted 5 years of my life getting three useless university degrees.   A university degree may be necessary for many careers, but in my case, I learned virtually nothing that I used in my career as a software developer.   I made university as cheap as possible by going to a state school and applying for tons of scholarships.  I saved money by not having a car until I was 24, worked as a student worker, and had summer jobs.  Because I lived so cheaply and worked while at school, I was able to invest my student loans in the stock market, which as you may recall did not do very well in the early 2000’s.  I sold my stocks and paid off 100% of my student loans when the interest-free period elapsed, and decided to go with a professional advisor from then on.

Then, my broker bet everything on sub-prime mortgages

From 2005 to 2007, I lived cheaply and I sent a significant portion of my income to a broker.  Whatever he was doing seemed to be working.  What I did not consider is that the market itself did very well – I failed to compare his returns with overall market performance.  When the recession hit in  2007, I lost over 60% of my original investment.   Only later did I learn that he invested in subprime mortgage REITs that gave him kickbacks in the form of commissions.   His incentive was to sell me funds with the highest commission – not those that controlled risk or maximized my return.

So I fired the professionals and make a killing investing on my own

After watching my life savings dwindle away for all of 2008, I created a forum thread with a investment strategy based on Peter Schiff’s Crash Proof in January 2009.   I transferred everything to E*Trade and invested almost every penny I had in the markets.  My return for 2009 from my investment fund was 58% – I made back everything I lost in 2008.  That was a good start, but it was only a start.  I invested very little additional capital over the next several years because I started spending most of my money on a nice car, restaurants, a fancy wedding, and an apartment that was soon overflowing with stuff I barely used.

2009 investment returns
My first year investing on my own. Green is my investment account, blue is S&P 500

Then I got rid of all my possessions, moved to China, and adopted a minimalist lifestyle

In 2010, I was making a good income working for an big-name ad agency in midtown Manhattan.  I was making great money, but I was not very happy.  I worked crazy hours and never saw my wife.  The cost of life and taxes for a NYC resident are crazy high, and my friends and relative rarely had time for a vacation.  I wanted to see more of the world while my wife and I were still young.

So, I found a job in Shanghai, China.  It paid a fraction of what I was earning, but my wife and I decided that life is short, and if we did not see the world while we could, we would always regret it.  We only brought with us what we could fit into the two suitcases allowed by the airline.  Once we got to China, we knew we would have the same limitation when moved on, so we decided not to buy anything we could not carry when we moved to our next destination.  Over the next five years, we lived in a series of tiny apartments in central Shanghai (one of the most expensive cities in the world).  Yet because we had so few possessions, we felt liberated, not constrained.    We found that we did not miss the vast majority of our stuff,  and we could move anywhere in the world with just our baggage.

After five years, we decided to move back to the USA.  We were able to fit all the possessions for three people in standard airline baggage, plus five medium boxes than we shipped via China Post.

I let a robot manage my life savings and worry about the details

When I returned to the USA, I reviewed what my ETrade account had been doing while I was in Asia.  I saw that it had grown badly unbalanced – investments that had been successful dominated my portfolio, and moved me away from my intended strategy.  To stay true my plan, I would have to re-balance my portfolio multiple times per years, buying and selling many stocks and driving up my costs.  That’s when I decided to switch to a robo-advisor, which would implement my strategy automatically, while minimizing taxes by investing funds in the right tax-category and performing tax loss harvesting.  After some research, I decided to go with Personal Capital, although there are several cheaper options if you don’t care about having access to a personal advisor when you want it.


Summary: how to make a million bucks by age 40

Here is a summary what I’ve learned over the last 10 years:

  1. Take responsibility for your own career
  2. Develop money-saving habits
  3. Don’t let your possessions control you: adopt a minimal lifestyle
  4. Get rich slowly: select your trading strategy, then automate it

1: Take responsibility for developing your career path

Remember that your career is an enterprise.  If you want to increase your compensation, you must increase your value to your employer.  Do what employer asks, but also discover what builds value for your employer and focus on that.  Keep in mind that making the value you create visible within your company is your responsibility.   Stay on the market and explore new opportunities even if you are happy where you are – this will help you understand your value.

If you get in a rut, be entrepreneurial: there were several times in my career when I felt stuck in a job or a position that either didn’t have the career path that I wanted or did not pay what I was worth.  I took on several freelance projects that boosted my income or helped me leverage into a career shift.  It’s not hard to find these opportunities if you’re always looking for them.

2: Develop money-saving habitswidgets

The money you able to invest each month is a simple difference of your earnings minus your expenses.  Every small change can make a small difference over many years.  Eliminating a $4 coffee every day over 30 years will add $142,000 to your retirement.  That’s why I bring my lunch to work, and commute to the office by bike.

To visualize my financial status, I use mint.com and personalcapital.com to track all my expenses and investments. (Mint.com is better at tracking personal expenses and keeping a budget, while Personal Capital is better at more complex situations and investments.)  I can quickly identify if a spending category is out of normal range, and I don’t forget about recurring expenses and subscriptions.  Mint.com also gives me a nice graph of my net worth from 2008 to today, which helps keep me motivated.

3: Practice minimalism

our minimal living room
our minimal living room

The real savings in my lifestyle come a minimalism.  Here is Joshua Millburn’s take on it:

I understand that my possessions can be replaced. Someone recently asked me what I would grab if my apartment caught fire. “Nothing,” I responded. “Everything I own is replaceable.”

Minimalism is not a radical lifestyle. Minimalism is a tool I use to get rid of unnecessary stuff and live a meaningful life—a life filled with happiness, freedom, and conscious awareness. Because I strip away life’s excess, I’m able to focus on the important parts of life: health, relationships, passions, growth, and contribution.

Here are some ways that a minimalist lifestyle saves us money:

  • By biking to work, we are able to eliminate the need for a second car.   This saves  us $10K/year.
  • By keeping possessions to a minimum and owning only what we use, we avoid the need to use a garage or spare room for storage.  We can easily fit everything we need to live in a small apartment
  • If we really need something we don’t have, we borrow it.
  • We buy very little prepared food.  We (well, mostly my wife) can make just about anything from a small set of ingredients.   Raw food is cheaper and the result is healthier.
  • We visit our library to borrow books, e-books, and movies, as well as passes to local parks & zoos
  • We work out at home using body-weight exercises and swim at the apartment’s pool – no gym memberships needed.
  • We buy our daughter’s clothes from resale shops and sell them back when she grows out of them.
  • We have a capsule wardrobe.  Everything hanging in my closet right now is for use during this summer.  Clothes for other seasons are in storage.   I don’t own anything I won’t wear over the course of a year.
  • When we moved to China, I digitized all my books by sending them to 1DollarScan.
  • I can fix shoes, furniture, and most electronics.   (It’s not hard to learn.)  I buy nice shoes and resole them many times before I wear out the upper.   I know how to replace a fuse in a microwave, change the air filter in my car, and I own a glue for every material in the house.  I know how to Google repairs — and I know when to let the experts handle them!

Don’t buy a home:

The New York Times has a great calculator for whether buying or renting makes sense, but if you’re working hard for that million, it generally does not.  Yes, buying will generally save you money over renting in the long term, but consider this:

Even if you could buy a new house with cash, chances are that your investments will appreciate far more than your home.  So you have to take out a mortgage.  Now you have to worry about the costs of buying the home, paying the mortgage, performing maintenance, and big hassle if you want to move somewhere else. It’s better for you to stay flexible, focus on your family and career and let someone else take care of all the maintenance.  (Another great perspective on this.)

4: Get rich slowly

After maximizing the spread between your income and your expenses, you need to leverage the magic of compound returns by investing it in the market.

There as many opinions investment strategies as there are investors, but unless investing in the market is your full time job, you will probably not beat the market.  You may get lucky, but chances are that if you try timing the market, you will be guided by your emotions, and buy high and sell low.  Even the best money managers in the world can’t beat the market.

So my suggestion is: just invest in the market.  The whole market, not just the S&P 500.  You can either invest in an index fund like VTI (USA) + VEU (not USA) or use a robo-trader which buys individual stocks (this can lower costs and save on taxes).  I use Personal Capital.  I can’t speak for other robo-traders, but Personal Capital re-balances my portfolio not only by asset class, but also by market sector, so I’m positioned to benefit from growth in any industry.

The only two questions you need to decide are: how to split domestic versus international stocks, and what to invest in alternative investments (such as gold, REITs, and Bitcoin).  If you have trouble with these questions, use the default from a robo-trader, or use my strategy:

My portfolio asset allocation:

allocation

Allocation by sector (industry):

portfolio US sectors

An aggressive portfolio can “beat the market” while controlling risk but that’s not the primary goal:

PersonalCapital holdings

Can I really make a million by 40?https://www.edwardjones.com/preparing-for-your-future/calculators-checklists/calculators/retirement-savings-calculator.html

The average historical market return is about 10.7%.*  A 10.7% return means your money will double every 6.5 years.   If you start investing at age 20, and invest $16,300 each year, you can expect just over a million dollars by 40.   Saving $1360 per month is not possible for a typical American, but becomes doable if you follow the career and lifestyle principles mentioned above.  (Delaying the start of your career with a college degree would push your million into your mid 40’s.)

* Before accounting for inflation, with dividend reinvestment, and an aggressive portfolio.  Read another perspective on $1M by 40, and 12 tips for retiring at 30.

It’s time to bring your lunch to work

One stark difference between my coworkers during the time I lived in Shanghai was that the majority of Chinese workers brought their lunch from home, whereas foreigners tended to go to restaurants to eat.  Going out in central Shanghai is not cheap, but like New York City or San Francisco, it has a fantastic selection of exotic dining options.   Chances are however, that if you live elsewhere in the world, you frequent your local Chick-Fil-A or Chipotle simply because it’s the most practical lunch option.  Two thirds of Americans go out for lunch, costing them over $2000 per year.

If you love going out for lunch to eat great food, that’s great.  However, consider that you can save a lot of money and time, as well as eat much better if you pack your own lunch.   I bring my own breakfast almost every day, and it’s not nearly as much effort as most people imagine.  Furthermore,  bringing my own lunch makes it much easier for me to stick to a paleo diet.

The photo below shows the three parts of my lunch box:

Breakfast

  • 3 eggs and bacon or sausage:   each Sunday, my wife prepares two dozen hard boiled eggs and a pan of bacon and sausage in the oven.  These go into individually-packages ziplock bags for the week.   Each morning we throw one bag into my lunchbox.

Lunch

  • My main course is usually leftovers.   There are ideas online for how to pack a lunch box, but keep in mind you don’t need to prepare food specifically for lunch:  if you go out for dinner, get some to take with you, and if you cook at home, just make enough for the next day.   When I don’t have any other ideas, I grab some single-serving canned salmon or potato salad.

Snacks

  • My snacks for the today: almonds, dark chocolate,  carrots and an orange.  Like my breakfast, snacks are prepared a week or more in advance in individual ziploc bags.

Seven tips for riding a bike to work

I ride a bike to work almost every morning.   Occasionally my wife or a coworker will give me a ride, but this is actually a hassle because then I don’t have my bike when I go home.  On two days a week, I ride across town to a class.  I’ve discovered that getting there by car takes 25-40 minutes depending on traffic, and I have to pay at least $6 for parking (in Atlanta, even shopping malls and doctors offices have paid parking).  It takes me 15-20 minutes by bike regardless of traffic, and the parking is free.  Not everyone can bike to work, but I think bicycles are under-appreciated in the USA as a means of transport.

There are tons of lists online for why you should bike, so I won’t try to rehash the reasons here.   Here are seven ways I make my bike commute easier:

  • Live near the office:  I know this is obvious, but I want to stress that a short commute can justify paying much higher rent.  I save about $800/month by not having a car just to drive to work, including the cost of the car, gas, insurance, repairs & parking pass.  Paying more for an apartment in an upscale area close to my office lets me live in a much better apartment.   Just as crucially, I can be a lot more productive by avoiding a long commute to and from work.   Furthermore, I enjoy my ride: some studies claim that avoiding a commute is equivalent a $40,000 raise!
  • Get a light bike: you can commute on any bike, but a lightweight road bike is a lot more efficient than a heavy mountain bike.   Decent road bikes start around $250- mine cost about $860 from a bike shop.
  • Don’t get stranded:  see the infographic below for the gear I keep on my bike.  You should either know how to change a flat tire, or have someone who can pick you up when you have mechanical trouble.
  • Know when to cheat:  I keep a poncho at the office so I can get home in the rain, but if there is heavy rain in the morning, I either wait or get a ride – it’s not worth biking in a downpour.   Also, mud guards are awesome.
  • Be safe in traffic:  I don’t wear a helmet on my very short commute to work.  I only mention so you realize that I’m serious about this: if you ride at night, you must get a solid front light and rear lights.
    • It is required by law in most cities, and you will get a ticket
    • Cars don’t expect cyclists at night, and a light will save your butt
    • I do wear a helmet if my ride will be more than 10 minutes
    • Know when to claim the lane.  In most cases, you want to ride in the middle of a lane – not on the sidewalk and not to the extreme right.
  • Adapt to hot weather:  Atlanta stays between 90 and 100 all summer, but it’s not unusual for me to wear a suit to the office.   A few suggestions:
    • I used an office shower at my last job, but I’ve had to make do with a desk fan this year.  It works pretty well.
    • Keep a change of clothes at the office.   I haven’t tried this so yet, but on extra hot days, I change shirts and I don’t put on my tie until I get to the office.
    • You can reduce how much you sweat during your ride by either optimizing your intensity or efficiency.  You can lower intensity by using your bike’s gears correctly, getting a more efficient bike, or a more gentle route. Keep in mind that the harder your ride, the faster your body will adapt!
  • Take the scenic route:  Do not simply follow the path that you would normally take in your car.
    • Use Google Maps to see bike paths and experiment with different ways to get from A to B.
    • Experiment with routes that have fewer (or more, if that’s your thing) hills in the summer.
    • Don’t forget to enjoy your ride!  When it’s not too hot, I take the Atlanta Beltline part of the way (a nice path down a forest is great to relax before work), then take another detour when I want to avoid a steep hill.  It took me over a dozen variations and several months to find the ideal route – one that combines a park, quiet neighborhood streets, bike trails for part of the way, minimal hills, and the fewest stoplights.

Here’s the gear I carry on my bike:

bike_infographic2