I Met the Millionaire Next Door on my Trip to Alaska

I recently returned from a 10-day trip to Alaska, which was amazing and I would highly recommend to anyone. It’s a stunningly beautiful destination that feels so well preserved and uninhabited compared to the rest of the U.S. There are abundant amounts of wildlife, mountain ranges, and vast wilderness. It’s a truly remarkable place.

My wife and I were lucky enough to travel to Alaska for virtually nothing due to a travel agent discount via a family connection. Something I am truly grateful for. Our 10-day guided tour through Alaska retailed at approximately $4,000 per person, plus $500 per person for airfare. So roughly $9,000 per couple, plus spending money, and Alaska is really, really expensive. I heard it was expensive, but it was even more than I expected…like New York City and San Francisco prices for dinning out.

Our guided tour through Alaska included 30 other people on board, most of which were Baby Boomers, if not older. We did introductions at the beginning and everyone was very educated. We had teachers, dentists, accountants, engineers, scientists, and a number of other professionals. And what was truly remarkable was their appearance. Everyone appeared to be your average Joe. No one “looked” like they would spend well over $10,000 on a vacation. That’s an expensive vacation for anyone.

I know this is judging a book by its cover, but it brought me back to one of the best, and most enlightening, books I have ever read; Thomas Stanley’s The Millionaire Next Door. A big premise of the book is that millionaire’s don’t usually “look” like a millionaire. They often don’t drive luxury cars; they’re more prone to drive a Ford F-150 or Toyota Camry. They don’t exclusively wear designer clothing and they are not shopaholics. They are frugal savers, not spenders.

Well the group of 30 Baby Boomers I traveled to Alaska with recently felt like this very crowd. Their attire consisted of wore jeans, sweatpants on some individuals, old sweatshirts, cheap windbreaker jackets, etc. A lot of JC Penny and Kohl’s shopping it looked like. Nothing fancy whatsoever. These were people who had money, they just spent $10,000+ on a vacation, but they save and spend on experiences, e.g. travel, versus materialistic items like cars and clothes.

It’s all very eye-opening to me, as a Millennial who wants to retire rich. As every passing day goes on I am becoming better at delaying short-term gratification because of my long-term financial goals. I’ll hold off on buying a “want” item so that I can continue to save more and more aggressively for my family’s future. So that I can ensure I am one day truly wealth via net worth, not the vanity items people see me with where I “appear” wealthy. The perception of wealth is very different than truly being wealthy. I am locked in only on the latter because I am striving to be the Millennial Millionaire Next Door.

Roth IRA vs Traditional IRA

There are a number of options for retirement investing outside your employer sponsored retirement plan, which is typically a 401(k). The two most common outside plans are a Roth IRA or a Traditional IRA. So what is the difference?

What is a Roth IRA?

The difference is rather simple; the Roth IRA allows you to contribute after tax dollars, meaning your money has already been taxed and there is no tax deduction on your contributions. So when you retire the money held within your Roth IRA is 100% tax free. This is the primary reason to invest in a Roth IRA, whether it is your only investment option because your work doesn’t offer a 401(k) plan, or if you are simply trying to increase your retirement savings. In 2016 the Roth IRA contribution limit is $5,500 ($6,500 if you’re 50+).

Roth IRA Rules

  • You may contribute at any age
  • Can’t contribute more income than you make
  • Income eligibility ranges based on filing status
    • Single: $117,000-$132,000
    • Married: $184,000-$194,000
  • $5,500 contribution limit ($6,500 if you’re 50+)
  • No tax deduction
  • No penalties on withdrawals of contributions
  • Interest earnings will receive a 10% federal penalty tax
  • No required minimum distribution (RMD)

What is a Traditional IRA?

The Traditional IRA is exactly like the Roth, only your contributions are tax deductible on both state and federal returns. The tax deduction gives you an immediate tax break the calendar year of your contribution. The Traditional IRA also has a contribution limit of $5,500 per year or $6,500 if you’re 50+.

Traditional IRA Rules

  • Must be under age 70.5 to contribute
  • Can’t contribute more income than you make
  • No income restrictions
  • $5,500 contribution limit ($6,500 if you’re 50+)
  • All or some may be tax deductible
    • If you are not covered by an employer retirement plan, you IRA contributions are fully deductible
    • If you are covered by an employer retirement plan, you may partially deduct your IRA contributions, depending on your income
  • You’ll pay ordinary income tax on withdrawals
  • 10% federal penalty tax on both contributions and earnings
  • You must take your first required minimum distribution (RMD) by age 70.5

Why the Roth IRA is Best

The Roth IRA is absolutely your best option for a retirement plan, especially if you are a Millennial because you have ample time for your contributions to grow tax free. Even if you’re not a Millennial, a Roth IRA is your best bet.

Its hard to predict what your tax bracket will be when you retire 10, 20, 30, maybe even 40 years from now. Contributing your “taxed” dollars to a Roth IRA and letting them grow is a very sound retirement move. Just make contributions regularly via dollar-cost averaging and invest weekly or at least monthly.

I’ve never been a proponent of taking money out of your retirement accounts. Ever. But life does happen and if you don’t have an emergency fund, a Roth IRA can serve as one for you. I personally have an employer sponsored 401(k), as well as a Roth IRA. So I do look at my Roth IRA as a secondary emergency fund. I do have a fully funded emergency fund as well. All of your contributions to a Roth, not your interest earnings, are allowed to be withdrawn without penalty.

I’ve spoken with my Certified Public Accountant (CPA) and he agrees that a Roth IRA is a great retirement vehicle. My wife is a small business owner and I asked him if we should be contributing to a different retirement account for the tax benefits, and he told us not to do that until we max out our Roth IRA. That was first and foremost in his eyes. Then any extra after that can go to tax deferred retirement vehicles like the Traditional IRA, SEP-IRA, or Simple IRA.

Best Podcasts for Millennials

I love the quote, “If you’re not growing, you’re dying.” I live by this in my personal and professional life because I am a strong proponent of investing in yourself. You are your single greatest asset so you need to continue your education, whether that be formally via schooling or self-educating via reading and learning on your own. Obviously the latter is much more cost-effective but doesn’t look the same on a resume. That is your call.

If you are looking to educate yourself on topics like money, personal finance, wealth, and investing, I have some great Podcasts for you Millennials that pertain specifically to money and managing your finances.

I started getting into Podcast years ago and absolutely love them. I still enjoy reading the occasional non-fiction business, money or investing book before bed, but Podcasts are unbelievably convenient. I listen to them while I workout, run, walk my dogs, driving to work and while at work. I always have my phone on me so its very convenient to listen whenever and wherever. I strongly urge all my fellow Millennials to check out some of the below Podcasts on money and investing. They have been very beneficial to me and I believe they will to you as well…hence why I call these my best podcasts for Millennials.

Best Podcasts on Money for Millennials

The Dave Ramsey Show Podcast

This is my go-to daily podcast on money and personal finance. Dave Ramsey is probably the most well known “financial coach” out there. He is the one who got me going financially and got me and my family on a budget. He is self-referred to as “Get out of debt Dave” and he is really good at conveying a great plan at doing just that. With that said, I’m not a huge fan of his vague investment advice of all “growth” mutual funds. He’s actually just trying to get you to contact one of his local financial advisors, which isn’t a bad thing, but he does this because he gets a referral fee. I also think you can manage your investments on your own by listening to some of the below podcast in addition to The Dave Ramsey Show.

The Motley Fool Podcasts

There are several Motley Fool podcasts, but I especially love three of them; Money, Answers, and Rule Breaker Investing.

Motley Fool Money

The “Motley Fool Money” podcast is a weekly show released Friday morning. Motley Fool Money Podcast features a team of Motley Fool analysts to discuss the week’s top business and investing stories. They recap what has transpired in the market that week, which is very helpful for anyone looking for a greater understanding of the stock market. They also interview at least one prominent person on money and/or investing. They also discuss stocks on their radar. This Podcast is more for a general understanding of what is going down in the market.

Motley Fool Answers

On “Motley Fool Answers“, host Alison Southwick and personal finance expert Robert Brokamp “answer” your money questions weekly. Alison is a very fun, light-hearted host who helps lighten up personal finance expert Robert Brokamp, whom she refers to as “Bro”. He gives off the reserved banker personality but she helps lighten it up a lot, and keeps the dialogue fairly informal. The two challenge the conventional wisdom on life’s biggest financial issues to reveal what you really need to know to make smart money moves. This is one of my favorite Podcasts for Millennials on money right now.

Rule Breaker Investing

Last but not least from The Motley Fool is “Rule Breaker Investing“, hosted by co-founder David Gardner, who is a very well respected investing expert. Gardner has fantastic insight on all things related to money, investing, and the stock market. I truly respect his opinion and he always comes across as open-minded with his and others ideas on investing. My only knock on this podcast is that its more of a stock-picking investment strategy and I’m 100% an index fund investor. I don’t own any individual stocks at the moment and don’t intend to any time soon. I like the buy as much of the market as possible via an index fund at a really, really low expense ration. With that said, Gardner provides great insight on what is currently going on in the stock market, specifically with individual companies. All of this is very helpful nonetheless.

Sound Investing by Paul Merriman

Sound Investing, hosted by Paul Merriman, a financial educator and advisor. Merriman is a retired financial advisor who now seeks to educate common investors with best practices, for free. His articles are published weekly on MarketWatch and he is well know for being a very strong advocate for Small-Cap Value index funds and their long term buy-and-hold benefits. In 2008 Money Magazine voted Sound Investing as “Best Money Podcast”. I strongly agree…its a great weekly listen. His audio quality could be better, but now I’m just nitpicking.

Million Dollar Plan By Pete the Planner

This is perhaps my favorite personal finance podcast at the moment. Peter Dunn, (aka Pete the Planner) welcomes one person per episode on a quest to make them a millionaire. He digs deep into their financial life, fixes problems, and lays-out a detailed plan on how to accomplish their goals. Each guest is given their Million Dollar Day. The former comedian makes a seemingly boring topic, interesting and funny. Despite the fact Pete was a former comedian, his financial advice is no joke and worth taking seriously.

Better Off with Jill Schlesinger

The ‘Better Off’ podcast with Jill Schlesinger just began in early 2017, so she is new to my playlist but I really like her advice and opinions on personal finance, money management, investing, and retirement planning. She always takes one call each episode to walk someone through their finances and to help them out with a money question. Considering Jill is a CFP, I think her advice is extremely credible. And as always with the people calling in, they are usually the same money and personal finance question we all have and struggle with. Jill also interviews informative guests each week to discuss topical money matters. The show is sponsored by Betterment, so there is a heavy lean towards using their robo-advisor feature (hence the Podcast title ‘Better Off’). However, the push for Betterment is actually fairly soft and doesn’t bother me at all.

The Dough Roller Money Podcast

The Dough Roller Money Podcast is another fairly recent addition to my Podcast playlist collection. This podcast has been around for awhile though, but I just recently found out about it and like the subject matter. I think its another great “money” Podcast for Millennials to give a listen to. The premise is to help all listeners make the most of their money through interviews, finance news, and resources so you can take your personal finances and money planning to the next level.

Chris Hogan’s Retire Inspired

Chris Hogan is a Dave Ramsey personality and specifically speaks to retirement planning. He has been a guest on Dave Ramsey’s popular daily talk show for a while, and now has his own Podcast on retirement planning and research, which helps out everyone from the Millennial generation to Baby Boomers. I do like Chris Hogan’s subject matter and I actually feel like he caters his agenda to helping Millennials plan better for retirement so they can actually retire at a decent age. Hogan likes to say, “retirement isn’t an age; it’s a financial number!”. And he is so right. He helps you understand your retirement goals and what to actually strive for when investing and saving for retirement. Its not about your age, its about setting a goal amount and shooting for that. That number says you are financially free and financially independent, allowing you to work and stop working whenever. He lays out a great road-map to retirement and does so through various ways of telling a story to get a point across. Oh, and his voice is as deep as the night is long. Unbelievable. When he talks you simply listen. Chris Hogan’s Retired Inspired is another great money and retirement Podcast for Millennials.

How to Effectively Listen to Podcasts?

My secret tip to new Podcast users…take advantage of the ‘playback speed‘ option. You can obviously listen at regular “1x” speed, or you can slow it down to “.5x”, or speed it up to either “1.5x” or the fastest at “2x”. I don’t listen to any podcast at 1x. I only listen at either 1.5x or 2x speed so I can get through as many episodes as possible. Depending on the podcast and the host, the fastest I can go is 1.5, but some are possible at 2x.

Which Podcasts Are You Listening To?

I would love to hear from all my readers which podcasts they love to listening to, particularly those on money, investing, retirement and building wealth. Please comment below if you have a great podcast other Millennials should be listening to as well.

How to easily end up with 10 times your salary

If you save 10% of your pay annually with an 8% annual return in the market for 30 years, you could end up with more than 10 times your pay in retirement savings.

Let me walk you through this scenario so you can see just how easy it is. Let’s say you’re 25 years old, making $50,000 a year. If you save 10% of your pay, or $5,000 annually, and earn a return on your investment of 8% in the stock market, you will end up with approximately $596,500.

Save 10% and Earn 10%

Historically the S&P 500 has averaged 10% annually since 1928. So achieving an annual return of 8% is very feasible. If you were able to achieve an annual 10% return, you would end up with $886,500 after 30 years instead of $596,500.

Pretty nice chuck of money to end up with after 30 years, and all by only saving $417/month for 30 years. Now this number doesn’t account for any salary or savings increases. Both are sure to increase, at least marginally.

Looking for One Million Dollars?

If you increased your savings monthly from $417 to $517, you would end up with just over $1,000,000 (assuming a 10% annual return). If you want to make a safer, more conservative estimate with an 8% return, you would need to save $750 a month to reach one million dollars after 30 years.

All this goes to show that you don’t have to save a fortune to end with one. The power of compounding interest can work wonders if you just save, and invest into the market.

Why you need to get on a monthly budget

I remember being at my wits end back in late 2014 around the holidays. We had just upgraded homes earlier in the year and were on our second home. Our final home though. Something we could grow into and live in forever.

Problem is we over spent on it and went a bit over our budget, which was something we often did, well, because we were never on a written monthly budget. So that was par for the course for us.

We made decent money, probably middle class to upper middle class income. But we never really tracked what we brought in monthly for income and what we paid out monthly in expenses.

We knew the general expenses that come with home ownership; mortgage, water, utilities, cable, plus our car payments and insurance. The typical regular monthly recurring bills we all have. It was the extra items we paid no attention to at all; shopping, eating out, entertainment, coffee, travel, etc.

Always Stressed About Money

Back to late 2014. My wife and I were always stressed out about money because we constantly felt like we were in debt. It never really felt like we had much liquid money in checking and/or savings. We had a mortgage. Her car was paid for but mine was not. I had student loan debt. We constantly had a credit card balance between $1,000 and $4,000. The credit card debt was always there. We’d throw $500+ at it with each bi-weekly paycheck, but as soon as it got low we seemed to figure out a way to rack up more. It was never going away.

The two of us were always stressing out because it felt like we always had a bill to pay and nothing left over for us. We would pay the card nearly every week. Cut back on going out. Then feel like we were burnt out because it was like we never went out and did anything and just paid bills. A credit card could solve all your worries.

Dave Ramsey Budget

I randomly heard someone talk about Dave Ramsey and his Total Money Makeover book. I started listening to his podcast daily and picking up on his “baby steps” and debt payoff strategies. Turns out, the first thing you have to do is get on a written budget! Well, duh. Seems easy enough. Why didn’t we think of that?

That is when I signed up with Mint.com, a free online personal budgeting software. I began tracking ALL of our expenses via this tool. Turns out my wife and I were spending way more than we made each month. We were spending nearly $400 more than we made each month in 2014. Pretty hard to climb out a of a hole that is sinking faster than you can dig, right?

We cut our spending dramatically in 2015 and did a complete 180. We were cutting virtually every expense we could in half. We were spending close to $900/month at the grocery store. Cut that back to $400. Scaled back our cable bill and cell phone plans. Cut back on going out and gave ourselves a budget we had to stick with monthly. It still allowed us to go out but we had to stay within our budget if we did go out once a week. In 2015 we saved nearly $1,000 more than we made each month!

Budgeting is Hard Work, But Worth the Effort

It wasn’t easy at first but once we got used to budgeting and sticking to it, it became seamless. Sure there were hiccups along the way but we got better over time. As time goes on we’re getting even better and therefor saving more money. Luckily our incomes continue to rise as well, so that obviously helps tremendously. So far in 2016 we’re averaging a monthly savings amount of about $1,400. And that is after we’ve put about 20% into retirement savings.

Its Simple, Increase Your Income with a Budget

Moral of the story…you would be shocked at how much money you can save monthly and how much quicker you can move through debt if you just get on a monthly budget. Stick with it for a few months though because it is challenging at first. Most new things are for anyone. But you begin to develop a “budgeting” skill and get really good at it before you know it.

How a Janitor Built an $8 Million Portfolio

Below is a list of some of my favorite money/personal finance articles from this past week. I’ve sifted through boat loads of articles on money, retirement, personal fiance, budgeting, paying off debt, and buying a home.

All of the below articles are highly relevant to the Millennial generation (Gen Y) and their money. Knowledge is power, and you are your single greatest investment, so continue to educate yourself on money and personal finances right here on this very blog so you can one day become financially independent.

This week’s best articles on money and personal finances, specifically for Millennials

The smart investing strategy a janitor used to build an $8 million portfolio

As one-time Vermont janitor and gas station attendant Ronald Read displayed, you don’t need to earn a six-figure income to become a multimillionaire. (CNBC)

International Allocation: Maximum and Minimum

To me, it seems that the starting point for discussion should be a market-weighted portfolio. At the moment, such a portfolio would be invested approximately 40% in the U.S. and 60% internationally. (Oblivious Investor)

The 2015 Retirement Confidence Survey

American workers’ confidence in their ability to retire comfortably, which languished at record lows between 2009 and 2013, continues to rebound. Twenty-two percent of workers are now very confident they will have enough money to live comfortably throughout their retirement years (up from 18 percent in 2014 and 13 percent in 2013). Thirty-six percent say they are somewhat confident. Twenty-four percent of workers are not at all confident that they will have enough money to live comfortably throughout their retirement years (still far above the low of 10 percent in 2007), and 17 percent are not too confident they will have enough money. While nearly half of all workers (49 percent) were not too or not at all confident of having enough money for retirement in 2013, 41 percent report these levels of confidence in 2015. (Employee Benefit Research Institute)

10 Money Revelations in My 30s

A successful financial life comes from increasing your career prospects and saving the difference, but that doesn’t happen with lifestyle creep. Most personal finance experts talk about how much you can save from cutting back, but very few talk about the benefits of finding ways to earn more money. A combination of the two helps with financial security, but the biggest thing most people have a hard time with is keeping their standard of living relatively constant when they do finally start making more money. The secret sauce comes from making more money while not wanting more stuff. (A Wealth of Common Sense)

25x Expenses Isn’t Enough for Early Retirement

How much money do you really need to retire early? I’m sure every reader here has asked that question at some point. The rule of thumb from the early retirement community is to accumulate 25x your annual expenses. This benchmark is derived from the 4% withdrawal rate. So if you have 25x your annual expenses, then you would be able to support your lifestyle by withdrawing 4% from your investment every year. That’s pretty simple, but where did the 4% come from? Is the magic 25x expenses really enough for early retirement? (Retire by 40)

5 misconceptions about robo-advisors for retirement savings

Robo-advisors are poised to change the way people invest their money for retirement with big names like Betterment to specialized firms like Ellevest leading the way. While a 2015 study from global management consulting firm A.T. Kearney estimates only 0.5 percent of investable assets were managed by robo-advisors last year, that number could jump to 5.6 percent in 2020. (MoneyRates.com)

Are Millennials the Renter Generation?

Life looks different for millennials. Rather than rushing out to get married and buy a home as previous generations seemingly did, today’s crop of young adults are taking their time. The median age for a first marriage has been steadily increasing since the 1970s and currently sits at 27 for women and 29 for men, according to the Census Bureau. (US News Money)

Happy reading, my fellow Millennials.

Retirement Plan Fees and Expenses

Keeping your retirement plan fees low is paramount in a successful retirement plan. Once you know your target retirement asset allocation, the next step is selecting your funds and making sure those mutual funds and/or ETFs are very low cost with minimal expenses. A funds expense ratio is the cost of owning the fund.

Most financial advisors say the standard benchmark of a good retirement expense is 0.50%. Some financial advisors say you should actually strive to be even lower with a 0.25%. I agree with the latter, because, obviously, the lower the better. I am proud to say that my expenses currently sit at 0.08%.

I have an extremely low expense ratio and this is across my entire retirement portfolio, including my employer sponsored 401(k), my personal Roth IRA, and my wife’s Roth IRA. While a 0.08% expense ratio sounds hard to accomplish when the benchmark is 0.25%, its really quite easy to do with low-cost index funds.

I invest solely in Vanguard funds across all of my accounts. The bulk of my holdings are in the Vanguard 500 Index Fund Admiral Class (VFIAX), which has a microscopic 0.05% expense ratio. In fact, I believe that is the lowest possible fund fee on a mutual fund or ETF. You won’t find anything lower than that. My most expensive fund is the Vanguard Target Retirement 2040 Fund (VFORX) at 0.16%, which is still very low and well below the 0.25% benchmark.

According to The Motley Fool, the current average expense ratio of an actively managed mutual fund is 1.50%. This is really high. Its obviously a lot higher than the above benchmark of 0.50% and way more than my personal expense ratio of 0.08%. To help you understand what this actively managed fund fee of 1.50% means, say one year your fund is up 10% on the year, well after expenses its actually only up 8.5% after fees. If your fund is flat one year, you actually lost -1.50% in the market because of your management expenses.

To make the math even easier, I am going to compare the actively managed expense ratio of 1.50% to the 0.50% benchmark most financial advisors aim for. So a full 1% lower. What does that mean for your investments over the long term? Probably a much bigger hit to your potential future wealth than you think.

Future Value with a 1.50% Expense Ratio ($831,000)

Let’s assume you open an account with $1,000, invest $500 monthly for 30 years, and earn 9% annual returns after expenses. Compounded over 30 years, your final investment final would be worth $831,112.91. That’s actually a great return and a hefty final balance. But could you do better simply by investing in index funds versus actively managed funds that are much more expensive?

Future Value with a 0.50% Expense Ratio ($1,000,000)

Now let’s assume you did the exact same as the above, only you earned 10% annual returns versus 9% due to your lower expense ratio. Compounded over 30 years, your final investment final would be worth $1,004,413.54. That 1% expense ratio equates to nearly a $170K difference. The difference in being a millionaire and just shy.

You can’t control the stock market, but you can help aid your investment returns simply by choosing lower cost funds, particularly index funds.

How did the stock market do last week (August 22-26, 2016)?

Last week, August 22-26, 2016, was a rough week for the stock market and all indexes, including bonds. All stock market indexes ended the week down and the Fed’s speech from Jackson Hole, Wyoming hinted at raising rates sooner than market expectations. Next week the August jobs report will be released, which should impact the Federal Reserve’s looming rate decision.

Last Week’s Stock and Bond Index Performance (August 22-26, 2016)

  • NASDAQ -0.4% (YTD 4.2%)
  • Dow Jones Industrial Average -0.8% (YTD 5.6%)
  • S&P 500 Index -0.7% (YTD 6.1%)
  • U.S. Aggregate Bond Index -0.1% (YTD 5.4%)

How did my retirement portfolio perform last week (August 22-26, 2016)?

Below is a snapshot of my three biggest retirement portfolio movers in terms of percentage lost last week. Everything in my portfolio was down!

The below funds are held within my work 401(k) plan as well as two separate Roth IRA plans. All accounts are held with Vanguard.

  1. Vanguard REIT Index Fund (VGSLX) -0.9%
  2. Vanguard Target Retirement Fund 2040 (VFORX) -0.6%
  3. Vanguard Small-Cap Value Index Fund (VSIAX) -0.3%

Year-to-date my retirement portfolio is up 8.6%. I am my own portfolio manager. I don’t have help from a certified financial planner. I was a liberal arts major and I do all my own research on investing. My philosophy is to use low-cost index funds and its been working for me for a decade.