I have a friend at work who is in his mid-twenties whose extended family owns land in Texas. Recently his family struck oil and are now receiving a windfall. This morning he found out what his cut was going to be, and it will essentially double his current income. He was ecstatic. He immediately came into my office and asked me what he needs to do to become a millionaire in 10 years or less…
I guess a little background is in order as to why he asked me, of all people. This guy was a financial mess just a few years ago… living paycheck to paycheck… a lot of credit card debt… and just bought a new truck for almost $40k… and he was really stressed out all the time. I made a quick budget for him showing that he was spending more than he was making. Last year, when he got married and had a kid, I helped him calculate how to adjust his tax withholdings to maximize his paychecks instead of getting a large refund at the end of the year. I also advised him to contribute to his 401k, even if it was just a little, so that he could get the company match. When I showed him the miracle of compounding interest, he was amazed at how much even just 6% of every paycheck would end up giving him at retirement (around $1.5 million). After we were done, he just about was breaking even every month. So I’ve become somewhat of a financial advisor to him.
Back to my office this morning… so I asked him…
“aren’t you still renting?” – yes
“and didn’t you just move into a new house where the rent will be 50% more?” – yes
“don’t you have almost $20k left to pay off that new truck you got?” – yes
“and you still don’t have any money in savings?” – no
“and your baby turned how old this month?” – 8 months
… yeah, don’t reserve a dock at the marina just yet…
For the next half hour, I talked to him about putting some money away in savings and to save up for a down payment on a house… getting rid of his remaining debt… maxing out his 401k… I could completely tell that I was quickly letting the wind out of his sails. His look of joy slowly faded into deep concentration.
He asked… “so how is this going to help me become a millionaire by the time I’m 35?”
I told him that it probably wouldn’t unless he was really lucky. I tried to console him by saying that I could advise him to do some really risky things which could net him the cool $1mill, but it would mean living with his mom, taking the bus, and eating bologna sandwiches every day… well, plus the risk that he would have to do that the rest of his life if it didn’t work.
He jokingly told me to stop killing his dreams and that he wished he had never spoken to me so that he could live in his blissful ignorance. It got me thinking… is it better to think that you will be rich someday soon and not only be disappointed but also potentially broke by over-estimating how much you can afford? I think I read somewhere that 1 in about 160 people in the U.S. is worth over $1 million (not including the value of their primary residence), and that most of them got that way by frugal living and safe, steady investing… and that the two things most common among these millionaires is that they simply own a home and drive older cars.
He told me that he was hoping for some sexy get-rich-quick plan from me because he wanted it all NOW. I told him that is the attitude that will actually ensure it that he most likely won’t get rich… unless he’s really lucky, that is… but I suppose that someone whose family strikes oil can’t be too unfamiliar with luck.
So, in the end this is the non-sexy advice I gave to him:
- Raise his 401k contribution to get the maximum employer match possible (heck, you try to find an investment that will give you a floor minimum 50% return on your investment immediately)
- Open an online savings account (at 5%) for general savings and to save for a down payment on a house
- Open a 529 college plan for his son
- Send in extra payments on his truck so he’ll have it paid off in a year.
When it was all said and done, he had maybe $400 extra from his oil royalty checks every month to spend on whatever he wanted… not quite tycoon-like pocket money.
I told him if he does this, he may not feel rich, but he’ll have peace of mind… and who wouldn’t want that?
I’m impressed. Very practical and effective advice.
dang, your coworker sounds like me…does he play poker?
If one in 160 americans are millionaires, I refuse to believe it isn’t based largely on property values.
Regardless, can we all take advantage of your advice!? You are 100000 x’s better than my guy!
I saw a segment about something like this on the Today show this morning. Hmmm… it would be nice if we can come up with a sexy get-rich-quick plan. Hehe. But then again money can’t buy happiness.
I want the benjamins NOW!
you could do a lot with $400 a month… from my parents i have definitely learned the benefits of spending wisely. that is to say, i come from an average income family and have been to disneyworld way too many times for someone who doesn’t live in florida.
yeah i agree with gooseflesh. four hundred is a lot to throw around. you could do a lot of good helping your family with just that amount. good plan. i’ll probably come to you for financial advice too, when i get to that point.
Good financial planning. Compound interest rocks my socks.
I like what you said about the most common things among millionaries is they own a home and drive old cars. I know my husband and will be millionaries someday because we 1. work hard 2. spend less then we make 3. are content with old cars 4. save money. Plus, he’s a kick-ass money managers. Good Advice!!!! ~ L
Wow! You gave him great advice. The only thing that’s disappointing is he will probably blow all his newfound money and then come to you AFTER when he’s back in a hole to ask for help again.
Great GReat Great advice! I try to put as much into savings as I possibly can…even if it means giving up my dream blouce of the month. I want to retire early and travel the world…even if that means I have to live like a student for a few more years…
Hopefully he will com to you before making any big purchases.
I’m baffled by people who spend money like there’s no tomorrow, and then are surprised when it doesn’t accrue in the bank, instead. I see people blow all their cash on new cars and other crap, and it just seems like such a waste.My grandparents are filthy rich, and it’s because to this day they still haggle over how to get the best deal on every little thing. Our christmas presents come from the friggin thrift store that my grandmother works are part-time (to keep her occupied). Everyone has dreams of hitting it big, fueled perhaps by events like the dot-com boom and celebrities in general, but for most millionaires the life-style is much less sexy.
heck I sure wish I had a friend like you who could hand out the finical advice..for free non the less. Man I could use some advice lol, not that I’m hurting but any advice on a future sure would be great and to be honest I don’t knwo any one around me to trust them enough lol. Oh well. But too bad you gave great advice and it seems wasted, hopefully not.
Must be nice to have that monthly royalty check. I say ditch that 529 college plan and instead your friend should use the money to save more for his own retirement. His son should be able to fund his way through college with student loans like most of us are able to do. With such fruitful advice, why aren’t you a financial advisor but an engineer (if I recall correctly reading one of your previous posts)?
All, thanks for the props, but really, I only know this stuff because I researched it for myself and would only know what to do for people in similar circumstances as I’ve been in. In no way do I have the knowledge to advise a broader scope of people.
empress, I think the number seems inflated because they’re counting retirement plans and pensions… the number actually went up to 1 in 50 if they included home values.
vintage, just keep reading my xanga… it’s a compulsion of mine to write entries about finances.
drive2fiji, yeah, there are those who say that the parent should think about their own retirement before their kids’ education for specifically the reason you stated, but with the advice I gave him, he’d be approaching the federal limit to contributions in his 401k anyway (my company matches up to $12k, regardless of salary) and he’d be ineligible for any other additional IRAs due to his income, so aside from other taxable investments, there’s not much else he could do to add to his retirement (tax-free, that is). And with the new laws about 529’s not being counted toward the student’s financial aid eligibility AND the fact that the earnings won’t ever be taxed, I’m a fan… in fact, I have 529’s for my niece and nephew to which I add birthday and Christmas cash gifts to.
You’re a cool uncle! That’s really great that you’re helping fund their college education, especially putting your cash gifts aside like that. My sister’s birthday is today, and I’m insisted on adding some moolah to her online savings because after much questioning, I still have no idea what the girl wants. Reading your financial advice blogs is much like reading the personal finance news section but slightly better with the story behind it and you get feedback from the author. Thanks for sharing!
Hey, quit doing my job! :)Oh, excuse me. I’m not a financial planner, I’m a financial “rep”. My bad. HAHAHAHAHAHA!!!!! Still, that’s pretty basic fact finding and I’m glad that you did that for him. Some of them financial advisors and planners (not all, mind you) need to get off their asses and serve their clients instead of taking their money…
I’m down with that financial stuff. Although, I’d qualify my comments about the employer matching funds in the 401k based on his expectation of staying with the company till he’s fully vested. And 5% savings account? CD’s or mutual funds would be better – possibly much better.
But the interesting thing to me was the whole Red Pill, Blue Pill question…
http://video.google.com/videoplay?docid=-3170787386244810664
It’s a reall catch 22. You have no information on which to base a judgement, but the issue is whether or not to stay ignorant. So researching the issue is a decision…