Wednesday, September 30, 2020

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 3rd 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.

 


Tuesday, September 29, 2020

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.

Monday, September 28, 2020

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”.                       

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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 alw...