How to Squash Debt and Build Wealth

This is a fairly basic look at my thoughts on getting out of debt, saving, and investing. Good to read if you are getting started with investing. If you are an advanced investor, you may find it basic.

Among acquaintances, friends, and co-workers, my thoughts on money seem extreme. I don’t have many among those groups to share and discuss with.

I’ve been devouring books about money my whole life. I was soooo happy when I found the world of FI, real estate, and investing blogs. I feel like there is a community of people out there that understands me.

I love the blogs where the average person shares their struggles with real estate, investing, and life in general.

When I was in college, I got a job at Fidelity Investments as a stockbroker. It was a 3rd job, a side hustle to pay back my student loans. It was a great introduction to the world of finance. It made sense for someone like me to get a job like this. I’ve always had an interest in the stock market.

If I have to summarize what I learned from being at Fidelity for a short year before I joined the military, it would have to do with what I noticed about the accounts of wealthy people vs. the rest. I got a chance to peer into accounts of all sizes during the time I took trades over the phone.

What the wealthy do that’s different than the rest of us is simple.

Wealthy people don’t do anything tricky, and they don’t have secret investments that are reserved for the super-rich.

Here is the big secret:

Typically, they invested in a mix of 10 to 20 well-known stocks or a few mutual funds, and rarely trade. They hold for the long term. What they did do often was add money into the investments they already had.

That’s all.

(Big letdown)

Wait, that’s not sexy enough!

It is not how they invested their money, but how much they invested. How much they saved. Saving is the point, how to invest will come later.

Rich on Money

Something that happened to me a lot in my job at Fidelity was people assumed I had some type of inside knowledge of the market. People that knew me wanted statements about where the market was headed. Friends and acquaintances always wanted me to share the best investments tips with them.

            If I want to make money, what should I buy?

It’s the wrong question.

It doesn’t matter so much what you buy. It matters what you save.   Figuring out what to buy is easy.

Most people’s problem is they want to invest, but they are deep in debt, and they don’t save. You don’t have to worry much about an investment strategy until you get out of debt.   Even when you are debt-free, the right investment strategy should be simple and not require paying someone fees.

From my time working at Fidelity, I can also tell you what unsuccessful people did in their accounts.

They called me everyday and asked what I thought of different stocks. I wasn’t allowed to answer this, and they knew that, but boy did they try!! They would make me check lots of stock prices for them (before it was simple to do on the internet or smartphones).

They traded often based on hot tips, newsletters, Wall Street Times articles, gut feelings, panic, and over-confidence. It the long run, they always lost money. There balances got smaller and smaller, and they were pissed off.

When you trade often, you are gambling.  In both cases, you always lose money in the long run.  You can bet on that!

RoM

There are no quick fixes or “neat tricks” that get you out of debt and into investing faster than the tried-and-true old fashioned way.

Find a way to live your life where you can put a larger and larger portion of your paycheck away every month as savings, and eventually, investments. Yes, easier said than done.  There are  lots of blogs that address this.

The financial world makes a fortune trying to sell people on complicated strategies, timing the market, and deciding what stock is hot.

Mad money

Everything they sell is useless in my opinion. The strategy is not nearly as important as the fact that you do invest, and invest as much as you can.

Total Money Makeover by Dave Ramsey is a good book for getting out of debt.

Jim Collins new book is the best out there for getting rid of debt and putting your finances in order.

His book, The Simple Path to Wealth, explains how to get out of debt, then covers how to invest once you’re there. If you are too cheap to buy his book, read his blog.

 

My two cents on debt.

The first thing you need to do is make that life transition from consumer to saver. Stop spending and start saving.   This needs to become a way of life, although you will be able to ease back on it once you are debt free and have some wealth built. This was easy for my wife.  She’s anti-consumer.  She’s naturally a saver.  Harder for me and many others.

One of the first steps is establishing an emergency fund. Common sense. You need cash sitting around for a rainy day so you don’t take a credit card advance or a payday loan to fix your transmission when your car brakes down.

Systematically pay off your debt. I’ve heard of systems where you  work on the smallest balances first to give you a sense of accomplishment. You also need to take into account which loans have the highest interest rate, then prioritize.  We systematically paid off our student loans and credit cards, starting with the highest interest first.

If you work at McDonald’s, this method might take you 80 years. The point, you have to combine paying off debt fast with finding a way to boost your income.  Side hustle.  Tons of blogs on this.  For my wife and I, it was taking 2nd and 3rd jobs to get student loans paid off quickly.

You need to save for retirement next (This comes before normal investments in a brokerage account).

That’s what we did.  We maxed out our Roth IRA’s every year and contribute the max to my military TSP Roth account, which is roughly the same as a normal workplace 401K. That ends up being quite a bit more than 15&% of my income.

This is easier to do once you are debt free (including mortgage). While you are still in debt, 15% is a great goal.

Keep in mind, I’ve been saving for retirement my entire career EVEN THOUGH I will probably end up with a military retirement, which is one of the best retirements out there.

Why???

Just to be extra safe. Now if I do get that great military retirement, the rest of my retirement savings is just gravy. I don’t need it to survive, I just get to live comfortably in retirement. I have more choices, which translates to freedom. It gives me the option to TRULY retire at the 20 year point of my career if I want to.

Once your consumer debt is gone, and you’ve got a system in place for 15% of your pay going to retirement, then you start a college investment account for each kid. There are tax advantages to doing this.  We set it up at our bank, USAA. It was easy. Do it.

I love this next step that I took from Dave Ramsey’s book The Total Money Makeover, because it blew my mind when I read it, and it goes against what most people building wealth would do. The get-rich-quick people would definitely skip this step. I’m also pretty sure Donald Trump would laugh at you for doing this.

PAY OFF YOUR HOME.

Wait, what!! OO, you mean eventually pay it off!

No, I mean pay it off before you invest in other things!

O, you mean 15 years instead of 30???

No, pay it off as fast as you can!!!!!!

I have to admit, when I read this, I was against it. I wanted to start buying stocks and getting rich. I wanted to flip houses and buy properties no money down and be a real estate mogul highly leveraged with massive debt and have a yacht and a Porsche, just like the info-mercials.

yacht-sportscar-girlMaybe the girl too.

NO NO NO!

Debt is not a tool. You might be ok if you ignore this advice. You might become rich faster than others. But on average, you will do worse financially in the long run. Ever seen the little disclaimer at the bottom of infomercials “Actual results may vary.”?  They vary a lot!!

Anyway, easier said that done, but we PAID OFF our primary mortgage in six years, and it was one of the coolest things we’ve ever done!! It was a surreal experience to call the bank and tell them I had the remaining $5k or so and I wanted a payoff statement. They gave it to me, I sent in the money, they congratulated me, and my loan was gone.

Forever.

I cannot begin to tell you how much faster you build wealth when you

  • Don’t have a mortgage payment
  • or car payment
  • or payments of any kind each month

It might seem like a faaaaar off goal, but it’s attainable and worth it! Some will do it faster than me, some slower. The important thing is that you realize it is necessary and start doing it today. Use me and my readers (if I ever have any) as well as the readers of more established blogs as people to reach out to as you encounter struggles. There is an entire community here cheering you on that knows you can do it!

YOU CAN DO IT!!!

 

 

Just do it. Come tell me when you do.  I want to hear about it.

By the way, you think paying off your primary residence is awesome?? What about the day when you have a rental property paid off!?!!!?!?!

I paid cash for my first rental property, and then rented it out. Talk about boosting your wealth building again! Not to mention, when I bought the house for cash, I think I signed two documents. When you buy a house with a mortgage, you sign maybe 50 times and look at 100 pages? Avoiding that was awesome.

Once you’ve paid off your primary residence, it’s time to build wealth. How to do that?

So now you are debt free, and you are starting to pile up some cash.

What to do now?

There is soooooo much B.S. out there. I’ve experimented with many different forms of investing, and failed.

  • I learned how to read stock market charts and look for “breakouts”
  • I invested with Bear Stearns, who gave me some rich guy in a big office who invested my money for me and charged me 1% (they went bankrupt while my money was parked there)
  • I worked at Fidelity Investments and saw how they “pushed” their investments on people
  • I heeded the brilliance of my bank’s investment advisor who convinced me to invest in aggressive growth and lost 50% of my money in one month. Best financial lesson of my life.
  • I invested in new construction at the height of the real estate bubble! That sucked!

I will give you the best advice there probably is out there. It’s the advice I’ve heard since I was a teenager, but was always hoping for something much sexier that could get-me-rich-quick.

Invest in index funds with low fees.

RoM

That’s it.

This is the advice that Warren Buffett has always offered. His feeling is, if you don’t have time to make a 40+ hour-a-week career of studying and watching the market closely, you are better off putting your money in the S&P 500 index and not touching it.   These are the instructions he has put in his will for his wife.

90% S&P and 10% cash in short term government bonds. If it’s good enough for Warren’s wife, it’s good enough for me!

He can’t even be sure Berkshire Hathaway, the company he built that made him the richest man in the world, will outperform the S&P 500 over the long term, and he’s right. Statistically, this is extremely difficult to do, no matter how smart or savvy you are.

I would argue that the cases where certain funds or stock-pickers beat the S&P 500 over a long range of time is largely attributable to luck.  Nobody wants to believe that (especially “successful” fund managers), but it’s true.

The first finance blog that I ever ran across and inspired me to become a finance blogger myself is Jim Collin’s Stock Series. Make him your idol. He’s like Warren Buffett, but accessible (for now).

The essence of what he says is that investment advisors suck, and you should invest all your money in Vanguard Total Stock Market Index for the rest of your life (VTSAX). I might have oversimplified it a little. You better go look yourself. Even better, buy his new book.

I have been lucky enough myself to have followed Warren’s advice with all my retirement account and some of my normal investment accounts, and have done well since 2000. Unfortunately, I keep cashing out my S&P 500 Index shares to fuel my addiction. It’s an affliction that has plagued me since I was a child. It’s the addiction of investing in real estate.

I’ve been drawn to real estate since I was a kid. My grandfather was a general contractor who was in charge of building large developments of single-family homes throughout Southern California.   I loved the smell of the houses as they were being built. The fresh wood, drywall, or even fresh paint all equally excited me.

I remember at a young age being so proud of the houses he was building. I also remember thinking to myself when I was around 8 years old how rich I would be if I could buy property at that time, and keep it until I was an adult.   I remember thinking at the same age how smart it was to own houses and collect rent from the people living there. It wasn’t until I was 29 years old that I would be able to buy my first property.

I don’t want to rehash how I made money in real estate here. Read that part of my introductory post.

My Wife Knows Money

I plan on sharing in much more detail how I made money in real estate. I’ll go house-by-house and show what I did. Sometimes I kicked ass.  Sometimes, not.

I haven’t been able to find many blogs on real estate investing that impress me. That’s one of the reasons I decided to start my own. I will recommend one that stands out above the rest.  It’s the one I’ve taken as my golden standard to use an example of what a great real estate blog should look like.

Paula Pant is not overly concerned with making money from her blog, she seems more concerned about having great content and entertaining her audience. Take a look. I’m still learning from her.

www.affordanything.com

So there you have it. I’ve philosiphied (word?) on money, and recommended some book and blogs that closely line up with my thoughts on Money.

Do your thoughts differ much from mine?  Comment below.

 

 

Rich on Money

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4 Comments

  1. Paul

    I just came across this blog and can’t wait for future posts to come out. I hope that one day you write a post comparing the pros and cons of investing in real estate vs index funds (obviously once the mortgage is eliminated) including the financial and time implications of each. I’m guessing there are some instances in which real estate investments would outperform stock investments!

    • I’ll write that post in the future. I will say that stock investments will fluctuate a lot more. Even the S&P 500 could fluctuate up or down by 50% in a year. The returns from real estate will fluctuate much less. In the long run, your just looking into a crystal ball trying to guess which one will outperform. Even using past performance of S&P 500 as a gauge is flawed. There is no guarantee the future looks like the past.

      Rich on Money

  2. JNL

    OK – So I found your blog via your post on Go Curry Cracker. And I love your writing. However – I have a question, and perhaps I just haven’t successfully navigated your posts sufficiently to find the answer yet? So apologies if that is true. You can reply via link to the appropriate post if helpful.

    Here’s the question: Once you pay off your primary mortgage, how do you rent? I know this may sound crazy to someone who moves a lot. However – in my area in the PacNW – rents are rising and I would expect to pay $1200-1800/mo for a small place for my family. When my current mortgage is about $800/mo (and we are on track to pay off soon) – I’m not really seeing how I can move. Unless – I research and move to a place where real estate values are not peaking… But then that would involve job change – and that seems to rather defeat our financial goals. So it seems the best option would be to set a budget for a reasonable annual household expenditure (e.g. RENT) – then sell the primary residence and invest in an area as you describe elsewhere (where the primary residence sale can fund rental properties)… Thoughts?

    • Thanks for the great comment! Congratulations on being close to paying off your primary residence. That’s a huge feat. Most people will never see that. If you need to stay in this area and work, there is no need to sell your primary residence. Live in it for free since it’s paid off. Now your savings are accumulating that much faster because you don’t have a mortgage payment.

      So now you are living in your paid off primary residence and it’s time to buy a rental. The rich on money way to invest in real estate is save up enough money to pay cash for your property then buy it. If you don’t want to wait that long, put 20% down and finance your first rental property, but pay it off as fast as you can. Don’t buy a second rental until the first is paid off! That’s my advice. Email me if you want to further discuss.

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