How I Became a Millionaire (Part 1: Childhood)

One of the most complicated questions I’m asked is, “How, exactly, did you do it? How did you become a millionaire?”. I find myself scratching my head and “uhmm”-ing in response, not because I don’t remember, but because it was a process rather than one identifiable event. My short answer is this: we lived below our means and invested in our future. But it’s way more than that — you’ve likely learned bits and pieces about many of the actions I took as I sprinkle them throughout my blog posts. Today, I’m putting the pieces together to illustrate how it’s a culmination of the little choices we make that add up to something big.

I’ll start at the beginning with some lessons I learned as a child. (Parents take note: perhaps you can glean some useful information for your children.)

Part One: Childhood

I didn’t grow up with money: When my legs outgrew my pants, Mom sewed extra fabric around the cuffs. Our family of five shared a cozy two bedroom apartment. We kept our cars until the wheels fell off (literally, once). My parents were frugal role models.

After their divorce, Mom, who was admittedly terrible with keeping her checkbook balanced, assigned this task to me. I was 13. She gave me and my siblings $25-40 each a month – which was a generous allowance back in the day – with the stipulation that we pay for our own clothes, school lunches, books, recreation, yearbooks, bus fares, etc. I quickly learned that if I spent too much money at the movie theater with my friends, I could kiss hot lunches and new socks goodbye. This taught me the value of money and forced me to budget and delay gratification at an early age.

If I wanted more, I had to work for it. At age 13, when I was old enough that my peers started poking fun at me about my well-worn clothes (kids can be cruel!), I took my first job: delivering the morning newspaper before school. Oh, but I am not a morning person, and I struggled to wake before dawn. Misery was my motivation for invention; I created ways to make money that were in alignment with my interests. I loved animals, so I started a dog walking service. An entrepreneur was born.

During my 14th summer, after hearing one too many whiny complaints of “I’m sooooo bored!”, Mom helped me arrange an unpaid apprenticeship with a dog trainer at a boarding kennel. I fed the kenneled dogs and shoveled sh!t in the mornings, and in exchange, the trainer taught me how to train dogs. Through apprenticeship, I learned a valuable new skill that years later, I would turn into a thriving business of my own.

I thought I wanted to be a veterinarian when I grew up. Thankfully I explored this option – before enrolling in veterinary school – by “shadowing” a vet for a few days. I observed the vet as he performed his daily work to see if the profession was a good fit for me. After fainting repeatedly at the sight of blood, I learned it wasn’t my dream job after all. I discovered I liked working with healthy animals, not sick ones. Exploring my options via shadowing spared me costly tuition and many years of study that would have been for naught.

…to be continued, next, in Part Two: Early Adulthood

Readers’ Questions Answered

Are you still renting? Will you ever buy a home again?

Yes, we’re still renting. We’ve been renting since we sold our last home in May 2003 in anticipation of the housing market crash. As home prices plummet in today’s market, we’re watching the price-to-rent ratios. When this number drops once again to long-term historical norms, we’ll consider buying. I have been keeping my eye out for real estate bargains. Cash is king in this market, and we have plenty of cash sitting on the sidelines. I’m watching the fundamentals and ratios that indicate housing affordability. I expect housing prices to continue falling for at least the next year or two. (A common consensus appears to expect an additional 15-20% national average price drop.) Therefore, I’d need to find a seller anxious to unload at a steep discount to convince me to buy today.

Eventually, we’d like to build our own home again. We’ve been collecting photos and ideas for our “dream home”: we’re envisioning a not-so-big (1500 sq. ft.) house filled with interesting architectural details, lots of natural light, cheerful colors, renewable resource products, off-the-grid energy, and perhaps enough room for a pony and a few chickens in the backyard.

In the meantime, we’re looking to downsize into a mere 230 feet… on wheels! When our current lease expires this summer, we’d like to travel the country for awhile in an RV. (Anyone selling a used 28′-29′ Airstream with rear bedroom and mid-bath?)

How is your portfolio currently invested?

Since my investment style is to follow momentum trends, I’ve been moving out of stock mutual funds and into cash since early 2008.  86% of our investment portfolio is parked in FDIC-insured banks; the balance is invested in a variety of Upgrader funds. When the markets show upward momentum again, I’ll move my cash incrementally into the new market leaders as they emerge.

Suze Orman’s 2009 Action Plan

Suze Orman outlined her 2009 Action Plan today on the Oprah Show. For the next week, you can download her new book for free or order a print copy of Suze Orman’s 2009 Action Planat Amazon for $9.99.

Here are the notes I took from the show today:

Tell the truth. Take an honest look at your financial situation and discuss it openly with your spouse or life partner. How much do you owe? How much do you have in your savings account?

Pay off credit card debt BEFORE creating a savings account. List your credit card accounts in order of interest rate. Pay extra on the account with the highest rate first, while paying minimum payments on the rest. After the highest rate card is paid off, get to work on the next highest. And so on until you no longer have credit card debt.

Improve your FICO score. The higher the number the better (850 is the highest). In today’s economic climate, under 700 is considered low. Did you know that potential landlords and employers also use your FICO score to determine how responsible you are? Yep, so do insurance agencies. Those with a high FICO number score big when it comes to loan rates, jobs and insurance premiums.

Ways to improve your FICO score:

1) Pay more than the minimum payment on each credit card.
2) Pay on time. (This constitutes 35% of your score.)
3) Never go over your credit limit. If you do, they raise your interest rates.
4) Don’t close your credit card accounts. This hurts your score. Why? Because 30% of your FICO score consists of your debt to credit ratio.

Separate WANTS from NEEDS.
If you have debt or no savings, ELIMINATE THE WANTS!

Save 8 months of expenses in an emergency savings account. Decide how much you can save each month and add 20% as a stretch goal. Search for the highest savings account interest rates from FIDC-insured banks.

Investing:

1) Don’t panic when the market goes down.
2) Keep investing in your 401k or IRA.
3) Money you need in the next 5 years DOESN’T BELONG IN THE STOCK MARKET. If you need your money in 5 years or less, take it out of the stock market.

Suze’s pledge idea:

1) Don’t spend money for 1 day.
2) Don’t use your credit card for 1 week.
3) Don’t eat out at at restaurant for 1 month.
(The first two pledges are easy ones for me, but not the third!)

10 Essentials for Success

Publisher and Editorial Director of SUCCESS magazine, Darren Hardy, offers the following advice on how to make 2009 your best year ever:

1. Decide to be Successful – Success is not a dream, hope or fantasy; it is a decision. Make the decision to change, improve and act on your ambitions.

2. Design your Best Year Yet – As an architect would design a skyscraper, write out the goals, plans and actions it will take to achieve the life you want to live.

3. Identify Your Passion – What are your unique interests, talents and gifts? Passion attracts success. Find what you love to do – you will never “work” again.

4. Program Yourself for Success – You will see, perceive, expect and create what you think about. To program your mind for success – read watch and listen to materials that will support your success.

5. Surround Yourself with Success – You are the combined average of the five people you hang around the most. Surround yourself with healthy, success-minded achievers.

6. Model Success – The best way to learn to be successful at anything is to find someone who is where you want to be and model their success habits.

7. Master the Fundamentals – Don’t complicate it. About a half a dozen things make up 90%+ of what it takes to be successful at anything. Keep it simple.

8. Get Fit – The mind cannot achieve what the body cannot perform. Your family, friends and career and future depend on your good health. Make it priority No. 1.

9. Remember What’s Important – At the end of the journey what will have mattered most will be your relationships – the people you love and those that love you. Make sure they are on your goal list.

10. Make a Difference – What do you want your life’s legacy to be? You have the power to make a positive difference – to a single person, a neighborhood, a community, a nation, the world. Realize that power in 2009.

5 Things The Marshmallow Test Can Teach You About Money Management

Tina is an intellectually-gifted bartender who struggles to pay her bills. Tina serves martinis to Susan. Susan is no more intelligent than Tina, but Susan is a millionaire. If not intelligence, then what explains the difference between Susan’s wealth and Tina’s financial lack? And what do sticky, gooey marshmallows have to do with it?

In the 1960s, Stanford University psychology researcher Walter Mischel conducted a longitudinal study. Mischel placed marshmallows in front of hungry four-year-old children. He told them they could have one marshmallow now, or if they could wait several minutes, they could have two. Some children quickly grabbed the marshmallow and ate it. Others waited.

Mischel followed the group and found that 14 years later, the children who eagerly devoured the first marshmallow weren’t faring as well as the children who had waited for two marshmallows. Years later, the “grabbers” suffered low self-esteem. Teachers and parents viewed these kids as stubborn, prone to envy and easily frustrated. The “wait-for-two-fers” possessed better coping skills; were more socially competent, optimistic, self-assertive, dependable and trustworthy; and scored about 210 points higher on their SATs.

Perhaps the key difference between financial lack and wealth is not merely hard work or superior intelligence, but the ability to delay gratification.

What can the Marshmallow Test teach you about personal finance?

1. Avoid looking at marshmallows when you’re hungry

During the Marshmallow Test, some successful kids reportedly covered their eyes so they couldn’t see the tempting treat. My take away tip: Avoid temptation– stay away from the mall when you’re bored.

2. Save a marshmallow today and you’ll eat well tomorrow

The children who waited for the second marshmallow were rewarded with a 100% return on their first marshmallow. My take away tip: Unleash the power of compounding and you’ll be wealthy when you retire.

3. Drooling over s’mores? Wipe your chin and wait for the hot goo to cool– because you don’t want to burn your mouth!

One child reportedly licked the table around the marshmallow while waiting for the experimenter to return. My take away tip: Imagine having what you want, but wait until the time is right to consume. If you shop, wait until you have cash in hand to buy– don’t get burned by finance charges and credit card debt!

4. Stick your marshmallow into the fire, keep your eye on it and remove when perfectly browned– before it bursts into flames.

Some successful children watched their marshmallow to prevent others from snatching it, waited patiently until the researcher returned with the expected second marshmallow, then enjoyed their reward– without begging greedily for more. My take away tip: Invest in the market, monitor your investment and sell your shares when they reach your target price– before the bubble pops.

5. Give your children mini-marshmallows and teach them how to make rice crispy bars.

Some kids handled the wait by turning their back to the marshmallow, singing songs or talking to themselves. My take away tip: With practice, kids can learn how to delay gratification. Provide opportunities for your child to develop strategies. Give your children an allowance and teach them money management skills.

Giving holiday gift cards? Give someone the power to change lives!

Be careful where you choose to buy gift cards this year. The recession has walloped many businesses, causing them to close their doors. Considering the weak holiday sales most have experienced, more are likely to fail in the new year. The last thing you want to do is spend your hard-earned money on a gift card that becomes worthless before your loved one can use it.

Big business isn’t the only sector suffering this year. Non-profits, small businesses and families around the world are struggling. So here’s a gift suggestion for you: purchase Kiva.org gift certificates and give your loved ones the opportunity to sponsor a business operated by the working poor. Help these individuals and communities make great strides towards economic independence.

Here’s how Kiva.org’s microfinance program works:

  1. Purchase gift certificate(s) online for as little as $25 each. Print your gift certificate — or save time and postage and email them to your loved one.
  2. Your loved one gets to select a specific entrepreneur in the developing world and uses your gift to fund a small 0% loan – empowering the entrepreneur to lift themselves out of poverty. Each pre-screened entrepreneur is hard-working and hopes to create a sustainable livelihood.
  3. Your loved one watches the entrepreneur’s small business grow over the following months via email updates and gets repaid as the business succeeds.
  4. As the loan is repaid, your loved one can withdraw your gift to spend as they wish, or they can recycle your gift and lend again (and again and again)!

I’ve given several of these gift certificates to others and they have been well received. My holiday tip for you — avoid the traffic and crowds and give someone the power to change lives!

Accept my lender invitation by clicking here. Fill out the short form, then click on “Kiva Gifts” at the top of the page. Tell Kiva your gift certificate recipient’s name, then print and/or email the certificate to your loved one.

Happy Holidays!