Note: This post is part of a series that starts here.
Sticks And Bricks
Having two major home renovations under our belt, we opted to create our third home from scratch this time around. In 1994 at age 30, we invested the $40,000 cash we had earned from our two previous sweat equity projects into a seven acre piece of weedy land upon which to build a barn and our next home.
We planned to live in this home indefinitely, but we picked a floor plan and house design with resale in mind anyway. We cut out the middleman and acted as general contractor, hiring, organizing and overseeing various tradesmen to do the work we weren’t qualified to perform. My husband and I spent months painting walls, laying tiles, and transforming the weedy field into a garden oasis.
An after-construction appraisal indicated that nine months of hard work had earned us $130,000 in sweat equity.
+ $290,000 post-construction appraisal (in 1994)
- $40,000 cash down payment
- $120,000 construction loan
= $130,000 net equity
My Takeaway: Learning how to be a do-it-yourself-er can pay off handsomely.
Money ranks as the first most argued topic for many couples. It has been estimated that an astounding 80% of divorces are the result of money disagreements. Having a child is now the single best indicator of financial collapse.
I wanted children, but I didn’t want to be one of those statistics.
My choice to form my family through adoption rather than pregnancy was a decision I made when I was an idealistic teenager. The way I figured it, why “make my own” child when there are countless orphans dying for a family already.
Since I planned to adopt, my biological time clock wasn’t a ticking time bomb. My husband and I wanted to achieve financial freedom before adopting our daughter because we didn’t want to repeat our own parent’s experiences. We both grew up with young, struggling, work-all-the-time parents and quite frankly, that often stunk. We didn’t want money issues to negatively impact our family.
But how would we accomplish financial freedom while we were still young enough to enjoy parenting?
My answer came in the creation of a plan using Microsoft Money’s Lifetime Planner. I used this inexpensive software tool to problem-solve, create “what-if” financial scenarios, and monitor my progress along the way.
My Takeaway: Keep an eye on the big picture as you tweak the details.
Part One of my financial freedom plan was to make more money. Not more work, though, just more money. Neither I nor my husband were willing to work overtime hours; we weren’t interested in giving up our evenings, weekends or holidays.
For 12 years, my husband had worked as a company-employed construction worker for hourly wages, earning $20,000 to $35,000 annually. Meanwhile, his boss made many times as much revenue off of my husband’s efforts.
At age 30, my husband quit his job, affixed a rooftop pipe rack onto an old Econoline van and became his own boss. He hired a bookkeeper to handle the office-related tasks, and after a year or two, his annual net income climbed to $60,000 before leveling off. He was on the right track, but for the hours he worked, he wasn’t earning what he could.
I reviewed his business operations and found inefficiencies. My husband is an excellent tradesman with fantastic people skills; however, the math and minutiae of business management wasn’t his strong suit. Thankfully, that’s where I shine so we joined forces and doubled the annual net income to $120,000 the following year.
Statistically, the majority of millionaires are self-employed business owners. But it’s difficult for one entrepreneur to wear all the hats. My husband and I both have different strengths that we bring to the table and together, we make a great team.
My Takeaway: Stick to what you’re best at doing and get help with the rest.
Outwardly Simple And Inwardly Rich
Part Two of my financial freedom plan was to cut expenses. Rather than keeping-up-with-the-Joneses behavior, we embraced a lifestyle of voluntary simplicity. We shared one used car, shopped at secondhand clothing stores, and didn’t buy stuff.
But that didn’t mean we lived a miserly lifestyle. Far from it, actually. We learned to live our lives and spend our money in ways that are in alignment with our values. For instance, since we don’t care much for stuff (fancy cars, designer clothes, glitzy jewelry, electronic gizmos), we could afford to spend generously on things that are important to us (recreation, weekly massages, organic foods, travel). We learned how to be green. By reducing our consumption, we saved money in the process.
My Takeaway: A life well lived does not require stuff.
Managing two businesses had me working more than I wanted, so I sold my pet care and training businesses ($60,000) and put a down payment on a single-family rental investment property. My initial plan was to add a new property to my real estate portfolio every few years. I had hoped this was my ticket to a lifetime of passive income. But after three years of landlording hassles, I realized this source of income would never be passive enough for me. I abandoned this plan and sold my rental at a net profit of $15,000.
My Takeaway: If it’s not a good fit, ditch it and move on.
Dear Broker, You’re fired!
I’m sure there are investment brokers worth the fees and commissions they charge, but I haven’t met one. I burned through five brokers before realizing that no one cares as much about my money as I do. Brokers are salespeople. Naturally, they cared more about their bottom line then mine.
Each year, I’d compare our broker-managed IRA accounts’ long-term performance with the stock market indexes (Wilshire 5000, S&P 500, Dow Jones Industrial Average, NASDAQ, MSCI EAFE, etc.). I found that despite paying a decent sum to brokers for their expertise, our portfolio was under-performing the standard index benchmarks.
I decided to make it my job to learn how to invest. For two years, I studied equity investing via books, web sites, and conversations with other investors. Once confident that I had acquired the knowledge, confidence and skills necessary to invest successfully on my own, I fired our broker.
Not only did our return on investment (ROI) improve, but over the course of our lifetime, we will save thousands of dollars in commissions and fees.
As I watched the astounding power of compounding grow our portfolio, I knew I’d discovered a source of passive income I could embrace. I paid ourselves first, investing 15-20% of our income plus all unexpected windfalls (such as tax refunds). I made maximum allowable annual contributions to our IRA retirement accounts and automatically reinvested the interest, capital gains and dividends.
My Takeaway: Become the expert of your own money.
In 2004, I read a book that at the time sounded like science fiction. But author and economic consultant John Talbott presented the facts so well in his book, The Coming Crash in the Housing Market : 10 Things You Can Do Now to Protect Your Most Valuable Investment, that I was convinced financial aliens would soon be landing upon our house to snatch away our sizable home equity.
Talbotts’s analysis made so much sense to me that I decided to foil the aliens by selling our home and cashing in. We became renters.
In doing so (and when explaining why) most of our friends and family thought we’d lost our marbles. “Renters throw their money away”, they’d say. Everyone seemed to believe that real estate prices would always go up. So did many readers of my blog, when in the fall of 2007, I first shared that I was a renter. But there is no doubt about it now — the equity-sucking aliens have landed upon our rooftops. It should come as no surprise really; a 120-year historical graph shows that home prices in the U.S., adjusted for inflation, stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006. No irrational bubble can continue to inflate indefinitely.
In 2004, after sticking a “For Sale By Owner” sign in the front yard and selling the home we had built and lived in for nine years (at a net profit of $335,000), we rented and invested the cash – and our monthly savings — into a diversified portfolio of mutual funds.
Renting was much less expensive for us than owning and by putting our equity to work, our net worth surged exponentially.
My Takeaway: Follow common sense, not the crowd.
… continued in Part Five: My Early Forties…
The beginning of this series started here: How I Became A Millionaire: Childhood
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