Outside of marriage or inheritance, there are only 3 tried and true vehicles that will get you to your first million in net worth.
Here are the 3 ways ranked by the least amount of risk.
- Cash flowing real estate
- A lean and mean business
You cannot get rich slow. You must leverage your time, money and resources as soon as possible to harness the power of compounding.
You can leverage stocks via tax savings by maximizing retirement contributions or working and receiving stock in a successful business. If you are in a combined 30% tax bracket, every dollar you earmark towards a tax deductible 401k or IRA costs you 70 cents.
This is a guaranteed 30% return on your money.
Take a second to ponder that last statement. Instead of speculating on a risky investment, you simply choose yourself by investing in your retirement. In other words, you leverage the tax code.
You can leverage real estate by putting as little 5% to 25% down and letting other people pay off your mortgage via income properties.
This is my preferred method since it allows me to leverage banks, renters, tradesman and technology to achieve the maximum results in the least amount of time.
It took me less than ten years to hit my first million in real estate with a modest amount down by simply buying one property a year. Granted, it was not easy. As I look back at my portfolio of income properties, I’m amazed how well it worked out despite the obstacles of juggling a full time advisory business.
You can leverage a business by finding a unique and profitable niche while employing a team of contractors to help you scale. To mitigate the risk of owning a business, you can redeploy the profits into passive vehicles like stocks or income properties. This is how I managed to scale my real estate portfolio.
Of the three ways to reach your first million, starting a business is by far the riskiest, followed by real estate and then investing in stocks.
I chose real estate since my financial business can be quite fickle thanks to Mr. Market and clients who let their amygdala hijack their prefrontal cortex whenever Mr. Market goes on a bender like October 2007 to March 2009. Thanks to real estate, I was able to keep my financial advisory business afloat as my revenue plunged 50%.
This is why I’m a big fan of having a side hustle. As we used to say in the Army Rangers, two is one. One is zero.
I can’t offer guidance on building a successful business outside of real estate. For a good resource, grab a copy of “The Million Dollar One Person Business.” Written by Elaine Pofeldt.
The book profiles solo entrepreneurs who hit one million or more in sales. If you can hit one million in revenue as a small business, you are in an elite club.
Fair disclosure: I was profiled in Chapter 3.
Here are some examples of some of the more successful small business owners I have had the pleasure to work with over the last two decades. Each one fits the definition of a million dollar business. Some had more than one employee, but all of them had less than 10 employees.
The key was they all started as a solo venture and scaled up after hitting a 1 million in revenue. I’ve changed their names to protect their privacy.
Fred, a wealthy almond farmer in Chico, CA. He specialized in harvesting almonds and employed a team of 1099 contractors during the harvest season. Once the harvest was over, he tended to his equipment on his ranch. His wise counsel guided me into house hacking my first triplex long before the term “house-hacking” was in vogue.
Leroy, a crusty heavy equipment operator who specialized in septic tank installations. He was the epitome of the solo million dollar business. All of his equipment was paid for in cash. This is a big deal since he owned a front end loader that can easily run over a hundred thousand. He hired 1099 contractors and worked his tail off from early spring to late fall. Thereafter, he invested his profits into the stock market via his retirement and taxable accounts. He also bought and sold used heavy equipment as a side hustle.
Suzie, a print broker who is crushing it. This young entrepreneur worked as a print salesperson and eventually decided to go solo after a falling out with her company.
I will never forget our conversations before she left the safety net of her employer. She was so worried about cutting the cord even though I kept telling her she could do better on her own. Being that she was a top producer, I knew she would crush it.
In less than 3 years, she hit over 2 million in sales and now employs a lean and mean team brokering print runs on books, calendars, journals, etc. She is also diversifying into real estate now.
Hmmm…I wonder who kept telling her to diversify into real estate?
Don’t want to start a business or deal with tenants and toilets?
I get it. Not everyone dreams of running a business or investing in rentals. Being an entrepreneur is risky and doesn’t always work out. According to Forbes, 80% of solo entrepreneurs never break past $50,000 in sales.
Worse, if your business is earning $50,000 or less, you may be penalized due to the new tax law’s flat 21% corporate tax rate along with the exclusion of service based business for the 20% pass thru deduction.
Here 5 tips to help you hit the double comma club.
#1 Live on 75% or less of your take home pay and invest the difference in a diversified portfolio of stock index funds.
If you want to retire early, lower this to 50%.
For a detailed analysis of how much you should save plus some nifty calculators, head over to DQYDJ.com.
Here is the article that explains the math of savings for retirement or FIRE (financial independence retire early).
You do not need to make six figures to get to seven figures in net worth. I have clients that made more than $100,000 per year and others that made only $50,000 per year who became millionaires by investing right-100% in a sensible stock strategy.
Obviously, it is more difficult if you earn less.
On the other hand, I have worked with people who made more than $500,000 a year and never hit a million in net worth. I tried to save them, but we both decided to part ways.
You can lead a horse to water, but but you can’t make them drink the irrefutable math of retirement.
#2 Choose your spouse wisely.
The ideal partner is smarter and more frugal than you. Getting married is 100 times cheaper than getting divorced. Unfortunately, I messed this one up by choosing the wrong partner in the beginning of my ten to million journey.
#3 Buy gently used vehicles with warranties.
I just bought a 2014 Chevy Tahoe to replace my 2003 Suburban. The mileage on the slightly used Tahoe was less than 50,000 and it cost me around $30,000 with the 6 year warranty and tax. Sure beats dropping over $60,000 for a new one.
#4 Don’t spoil your children or fall into the trap that all your children need a college education.
Some kids are better off without a college diploma. Yes, we all believe our children are special little snowflakes. Yet, there are numerous opportunities available for your children to become successful without one. Technical schools offer a better earnings path than most colleges.
I have a tenant that went to a local technical school to become a nurse. She will start at $45,000 per year. She saved over $60,000 in tuition by not going to the expensive private school in our town that offers the exact same program.
I have a client in sales who never bothered with College. He makes over $350,000 a year, married an amazing college educated woman who is much smarter and frugal than him and they live way below their means. He is definitely following these 5 principals.
#5 Buy the home you need not the one you can afford.
Keep in mind that mobility is more important than a mortgage. It is far better to rent than to own if you are on a fast tracking career. Therefore, don’t buy the house your loan officer or realtor tells you that you can afford. By the one that suits your needs and invest the difference.
If you decide to own a home, recognize that it’s an expense; not an investment.
Here are some ways to recoup the expense of home ownership.
Buy with the minimum down payment and and a big fat 30-year fixed mortgage. This allows you to invest the difference between a payment on a 15-year mortgage and a 30-year mortgage into your early retirement.
Whatever you do, don’t pay off your mortgage early and don’t trade up every 5 years. If invested properly, you will earn more in the stock market than retiring your mortgage early.
Consider a reverse mortgage in retirement as soon as your eligible to cash out your equity. Some retirees are even using reverse mortgages to purchase a four plex.This is the ultimate retirement house hack.
Consider a home equity loan for a down payment on an income producing property. Most people use home equity loans to remodel their kitchen or go on vacation. I’ve seen some people use home equity to pay off credit cards and then run up the credit card balances again.
The worst strategy I’ve ever seen is letting a life insurance agent sell you on the benefits of tapping the equity in your home to buy an expensive insurance policy. If you get this pitch, grab your shot gun and kick ’em out of your house.
Best bet, buy 10 solid cash flowing rentals. You will thank me in 10 years or so.
How to invest in the stock market for maximum results by tilting the odds in your favor
Never buy individual stocks or mutual funds that rely on a manager to outsmart the market. Would you rather be the house (casino) or the player? Vegas makes a fortune off of gamblers. This is why they comp you a free hotel room if you are a regular.
If you are extremely lucky, ignore this advice. I have a client that turned $1,000 into $150,000 with some Apple stock she bought on a whim back when Steve Jobs came back to run the company. She bought Apple because she liked her Mac computer. She road it all the way up, all the way down, and all the way up,again. She never sold even when they were flirting with bankruptcy.
Ditto for Amazon, Google and Netflix.
If you are extremely unlucky, you worked or invested in…
- General Motors
- MCI Worldcom
- Health South
- Bear Stearns
- Lehman Brothers
- Washington Mutual
- Thornburg Mortgage
- Delta Airlines
- Pacific Gas & Electric
- General Electric
- Bitcoin at $19,000
All of your 401k was invested in your company stock because all of your co-workers said your company always does better than the stock market. All of these were storied companies with a rich history of rewarding shareholders over various market cycles.
Hey, does this sound familiar right now?
I wonder where the next Enron is lurking.
Contrary to what CNBC blasts, beating the market is hard. Earning a market return is easy. Since the vast majority of stocks and mutual funds underperform the market, you are guaranteed to earn less than the stock market if you engage in stock picking or hiring money managers that juice up their fees in the pursuit of beating the market.
When you buy the market you are guaranteed to earn the market return less the cost of the mutual fund management fee. Anyone can do this and it’s way easier that researching stocks or mutual funds.
Better yet, when you buy the market you will outperform anywhere from 70 to 90 percent of PROFESSIONAL money managers over the long run.
Still think you can do better than an army of Ivy School MBA’s trying to beat the market?
Consider the following mutual fund math.
The average (asset based weighted fees are less) active mutual fund costs 1.5% per year. Add in the average financial advisor fee at 1.5% and you pay 3% a year in expenses to underperform the market.
If the market earns 10%, you pocket 7% assuming your financial advisor and the funds he/she picks matches the market return. A far fetched assumption since most advisors use active funds and/or tactical allocation to justify their fees.
On a side note, I just picked up an account with this exact same problem. Unfortunately, my client’s advisor has been bearish on the market ever since the last crash and his IRA earned basically nothing over the last ten years. His average expense ratio was over 1.8% due to the active funds the advisor employed. The advisor told him he was getting a deal since he charged him 1% on his IRA to manage the managers. 2.8% in fees not a deal folks.
On the other hand, If you buy the market via low cost index or asset class funds and hire a fee friendly advisor who does not time the market, you can potentially cut this cost in half.
You can do all of this yourself with Vanguard as long as you are emotionally wired to look at a 50% drop in your 401k and get excited.
I’m ecstatic when the market drops 50%.
I’m depressed when the market hits new highs like it has been over the last 8 years.
How about you?
A good advisor keeps you fully invested in the market during the inevitable crash. They will show you how to save thousands in taxes and nudge you to get your act together and purchase the right insurance while implementing an estate plan.
For all of this work, you are charged an advisory fee of 1% or less ( if you have lots of money the fee drops) while only investing in index or asset class funds that charge .40% or less.
This is a bargain in my opinion.
Invest in a globally diversified portfolio of stocks.
If you can stomach massive short term swings and wish to achieve the highest potential portfolio value, stick to stocks.
Warren Buffet made his first billion via stocks, not bonds. He also instructed his estate to put 90% of his portfolio in stocks and 10% in short term government bonds. If it works for a billionaire stock picker, it works for me.
Warren recognizes that he is a freak of nature and this is why he stresses that people should own index funds versus hiring stock pickers or hedge fund managers.
He even put one million dollars on the line via a bet with a prominent hedge fund manger that the SP500 index would beat his hedge fund picks over the ensuing ten years.
Tilt your portfolio towards these 5 risk factors to optimize and diversify your potential returns. This includes both domestic and international stocks.
- Value companies
- Large companies
- Small companies
This is the strategy recommended by 3 different Nobel Prize winners in Finance and Economics.
Might as well listen to these bright fellows.
If you must own bonds, limit your holdings to short to intermediate term domestic and international government bonds. Notice how Warren Buffet instructed his estate to own government bonds. Get it? These bonds are one of the best places to hide out when the bear market hits.
Forget high yield/junk or corporate bonds. You are better off tilting your risk bucket towards stocks, not bonds. To see how these other bonds fare in a market crash, check out the returns of government bonds versus junk or corporate bonds during the last financial crisis.
It was ugly.
Learn from Kurt Vonnegut and know when enough is enough.
Once you achieve your wealth, you need to keep your wealth. This means not reaching for yield or high returns. There is a huge difference between building wealth and keeping your wealth. Take some risk off the table and invest no more than 75% in stocks once you hit your goal
If you have no idea what I’m writing about in regards to your investments, hire a fee friendly financial advisor who is legally obligated to invest with your best interests.
Will follow these tips
Walks the talk with real estate and investments.
Far better to pay slightly more for a competent advisor than pay next to nothing an incompetent advisor. You just don’t realize this till after a bear market hits.
There you have it.
3 ways to build a million dollar net worth.
What do you think?