Sunday, March 26, 2017

How I became a millionaire & things I learned along the way

My net worth from 2002 through 2017
Something remarkable happened to me on January 24, 2017. When I looked at my assets, like my bank balance, my condo, my investments, and subtracted my liabilities, like my student loans and mortgage, my net worth came out to $1,000,378.46. I was officially a millionaire at 33 years old.

I first started tracking my net worth in 2002 during my freshman year at the University of Michigan. At the time, my net worth was only $5,279.59! I was very proud of having close to $6K to my name. Little did I know that 15 years later this number would be 200 times greater. With $6K, I could buy just about anything I needed (I wasn’t even thinking about a car or a house at the time!). I kept the money in a checking account that was paying a stingy 1.5% or so. Sadly, this rate wasn’t even enough to cover inflation!

Making it to this milestone has been a long journey and I’ve learned many things along the way. Perhaps the most important first-step I took was graduating from college. For example, according to the National Center for Education Statistics, in 2014 the median earnings of young adults with a bachelor's degree ($49,900) were 66% higher than the median earnings of young adult high school completers ($30,000). 

Sure, there are many examples of highly successfully people who never graduate from college, like Bill Gates or Mark Zuckerberg, and go on to earn tremendous amounts of money. However, these are outliers rather than the norm.

Although I received an excellent education at the University of Michigan and I received a scholarship, attending Michigan was very expensive as an out-of-state student. At the time, tuition cost close to $30K/year. With inflation, tuition costs closer to $40K/year now. My wife on the other hand, attended the University of Washington as an in-state student. With her scholarships, she earned money attending college. Talk about a good deal!

At the end of high school and throughout college, I ran a web hosting company called At its peak, the business boasted 120 customers located around the globe with three hosting resellers representing hundreds more. Although I was a young college student taking on substantial debt, my web hosting business covered some of these expenses, allowing my net worth to grow somewhat.

Once I reached my junior year in 2005, my net worth crossed $22K, representing a 43% annualized gain since I started tracking in 2002. Of course, achieving an impressive annualized gain with such a small base to start with is quite easy. Throughout Warren Buffett’s investing career, he achieved a 20% annual return with much larger sums.

In my junior year, I enrolled in the business school at Michigan. One of the most impactful classes was Introduction to Finance. I remember reading about financial markets and learning all about historical market returns. I learned that large cap stocks had historically returned about 10% a year and that small cap companies on average had earned close to 12% a year over the past 80 years. My 1.5% return for my checking account wasn’t looking so good anymore.

When I returned home during the summer, I researched different index fund companies and I ended up opening an account with Fidelity. They offered a collection of attractive index funds and some of my family members had accounts with Fidelity already.

I put my money into two different index funds, one that tracks the S&P 500 and another that tracks small company stocks with the goal of replicating the 10% and 12% returns that I learned about in my finance textbook. If you’re deciding where to invest, the following post has excellent tips (of course they’re excellent, they’re on Unlimited Net Worth!). Both charged minimal fees and by opening an account, I was well on my way to accelerating my net worth growth.

My investments are still mostly the same, with the addition of some Microsoft stock, international index funds, and a few other individual stocks, like Berkshire Hathaway.

Stock investment allocation
Between my junior and senior years in college, I interned at Microsoft in Redmond, Washington. This helped propel my net worth. Microsoft luckily pays interns, unlike some other companies out there. My net worth climbed to $47K by the time I graduated from college in 2006. At this point, I had achieved a whopping 55% annual gain since I started tracking in 2002.

My internship at Microsoft went well and I decided to return full-time after graduation in 2006. Microsoft offered me a starting salary of about $66K per year or about $80K in today’s dollars (2017). New employees starting today at Microsoft make much more than that. Either way, this served as a good anchor to kick off my career.

Once I started working, I had much less time but my net worth grew rapidly. By 2007, I was up to $82K, or a 58% annualized gain since I started tracking in 2002. Everything was going well, until 2008 hit.

In 2008, things took a turn for the worst. The financial bubble burst and my net worth took a huge hit. Adding to my woes, I purchased a condominium in Seattle and it immediately started losing value. I now know what it feels like to catch a falling knife.

My investments were plunging and my condominium was bleeding value. From 2007 to 2008, my net worth declined 1% for the year, despite plowing more money into investments.

One lesson I learned is that buying a house is usually a poor investment decision. You need a roof over your head, but don’t expect to make fantastic returns. I bought my condo in 2008 for $327K and today it’s worth $423K. That’s almost a $100K return, which appears great on the surface, except when you look at the annual return. The annual return works out to right around 3%, or the rate of inflation. Remember that the long-term historical return of the market is around 10%. By investing in the market, I could have made an additional 7% per year beyond what I made investing in my condo, or an additional $278K.

From my finance classes, I knew that fluctuations in the market were commonplace and that over the long-run things would settle down. Luckily, the good times came roaring back. The market rebounded by 2012. Throughout this lull, I plowed more money into the market at greatly reduced rates. As Warren Buffett says, whether you’re buying socks or stocks, you want to buy quality merchandise when it’s marked down.

When things swung back up, my investments registered healthy returns. By 2012, my net worth reached $277K, returning 48% on an annualized basis since I started tracking in 2002. I was doing relatively well with $277K after 6 years in the work force.

At this point, I started reading several excellent books. These have influenced my investing strategies greatly.

In “Rich Dad, Poor Dad,” I learned the importance of investing in assets instead of spending on liabilities. For example, instead of buying the latest gadgets or buying a new car every few years, I would be better off buying ownership stakes in businesses by buying stock. I’d much rather have my money work for me than me work for my money.

In “The Snowball: Warren Buffett and the Business of Life,” I learned how you can make your money work for you. Once you have money, it becomes easier and easier to make more money, just like how a snowball grows when you roll it. As I’ve invested more money, my investment returns grow more and more each year. Last year alone, my net worth increased by $230K. In only 3 months in 2017, my net worth has already increased by $73K. Most of that increase came from investments.
Annual net worth $ gain, 2017 is through March
As my net worth grows, it becomes more and more difficult to maintain the high growth rates that I saw earlier in my career. With only a few thousand dollars, it’s easy to double your money. Once you have hundreds of thousands, doubling your money becomes much more difficult. Over time, I’ve seen my net worth growth percentage decline. In 2016, I achieved a 31% net worth gain, compared to over 100% in 2005 and 2006. Of course, making 31% on a much larger sum is better than a higher percentage on a very small sum.
Annual net worth % gain, 2017 is through March
When I was young, I frequently played computer games like “Sim City” and “Transport Tycoon.” These games taught me a valuable lesson. As you build out an empire, each piece of the empire makes money for you. In “Sim City”, as you build out the city, each additional resident, business, or industry brings in additional tax revenue. As the city becomes larger, raising funds becomes much easier. 

Similarly, in “Transport Tycoon,” you start out with a loan to build your first transport line. As it starts running, a very small amount of money starts trickling in to invest into additional lines. Existing lines continue earning revenue while each additional line adds even more revenue. Once I had 5 – 10 transport lines in place, it becomes much easier to build more lines as you have a solid base of revenue coming in.

Like with these games, investing is very similar. Each dollar invested earns money each year. Each subsequent dollar earned and invested earns even more. It becomes much more apparent how your money starts working for you once you have more invested. With over a million dollars now, my investments return about 10% a year or $100K. In a few short years, my investment returns will exceed my salary.

As a millionaire, I feel more financially secure, but my lifestyle won’t change. Over time I’ve learned the importance of spending on things that truly matter. A new car, a big house, new gadgets, etc. don’t carry importance for me. I’d rather spend money on experiences, such as a trip with my wife, or no longer needing to work at all, which I talk about in my perpetual money generator post.

Every time I make a purchase, one thing that I consider is the opportunity cost. For example, I could buy a Tesla for $70K. I would have a very nice car, but if I had invested that same amount in the market, I could earn about $7K/year and have it grow each year. I’d rather have a perpetual income stream than a car that loses value over time.

With a large net worth also comes responsibility. For now, I'm letting my net worth grow larger and larger through investing, but someday I’ll be confronted with what to do with it all. Bill Gates and Warren Buffett are two great examples showing how they’re using their wealth for the betterment of the world. Their actions are commendable and I’d like to one day contribute in a similar way.

I’ve also learned many other things along the way. You can read more about what I’ve learned below: