I had no idea how to build wealth when I started. After 705 days of obsessively tracking my credit card debt, I stared blankly at my Excel sheet. I didn’t need to enter any more data. I had paid off over $20,000 in credit card debt in the past 705 days. The crisis had passed.
Now what? I hadn’t planned beyond a debt balance of zero.
I got into trouble with debt by trying to get out of the rat race with “get rich quick” fantasies:
- Penny stock trading
- Online Poker
- Selling sports collectibles on eBay
My motivation to work hard and earn more had been satiated by crushing my debt. I still had student loan debt but it was at a low fixed rate that I’d pay off in less than five years.
Frustratingly, I was back to my original problem of not understanding my introversion. The workday was draining me and I wanted to pursue intellectual and challenging hobbies that did not pay the bills.
I needed my next mission. My next worthwhile pursuit. But I hadn’t a clue how to build wealth.
I’m Out of Debt. Now What?
This is the part where I tell you I slashed my expenses, invested in low-cost index funds, and rode the bull market to prosperity.
I actually had to spend money at this stage in my journey to appreciate what I could do with money. Poker and paying off credit cards brought no tangible value so I still didn’t see the purpose in learning how to build wealth.
To motivate myself toward a worthwhile goal, I had to find pursuits I valued and learn how money could help me access or create that value. Some activities I started to spend money on that improved my understanding of why I would want to build long-term wealth:
- Traveling west to ski
- Going to National Parks
- Guitar lessons
- Investing in my health
- Getting involved in committed relationships
(Not that this costs money, but the relative stability in career and finances allowed me to open up to long-term relationships.)
Taking Risks, Increasing Income, and Investing in Myself
Now that I saw money as a means to add value to my life and reclaim time, I endeavored to learn how to build wealth in a sustainable way. I was no longer just making money and paying down debt.
A large part of my wealth building was taking risks to increase income and making investments in myself. Some are advisable, others are not. The point is I took actions that I thought would help first pay down debt and then build wealth. Here is a brief summary:
|Quit job in 2010 to pursue a new field while in grad school||(100%)||29*|
|Took internship in new field of interest while in grad school. Later negotiated a salary for three days a week of work||(48%) from previous job||30*|
|Joined a small consulting firm of three people in new field of interest in which I had very little experience||+50%||31*|
|Worked hard and long hours while going to grad school to learn new field and provide value on small team||+33%||32*|
|Finished grad school with two advanced degrees and another year of experience at small firm||+25%||33*+|
|After realizing I had no chance of equity in the consulting firm after being there 3.5 years, and the firm growing around me, left the firm for a new organization in a niche field that I had been exposed to as a consultant. Worked long hours under a lot of stress to learn new industry and develop strong relationships.||+40%||34+|
|Raise at current organization after taking on more responsibility and hiring a team||+18%||35|
|Under stress of external and internal factors, left organization to pursue position more in line with long-term interests and stability.||(24%)||36+|
|Small end of year raise||+0.5%||36|
|In second half of 2017, negotiated with current employer to work as a consult for a new organization in the niche from previous job. Earned almost two full-time salaries for second half of 2017.||+61%||37|
* Denotes years with no access to a 401(k). Traditional IRA contributions only.
+ Denotes years I drove Uber at times back when it was highly profitable before drivers flooded the market. Point is, nothing was below me to attack my debt while I learned how to build wealth.
Main Takeaways from Increasing Income:
- I took risks to better align my career with my interests, including some drastic salary reductions and leaving stable jobs.
- Sometimes you don’t know exactly what job you are preparing for. I took some detours that seemed unrelated but ultimately prepared me for my current situation.
- I got to this situation by making and maintaining high-quality relationships. Your reputation and integrity are vital to people hiring you at higher and higher levels. Add value on the way up and treat everyone with respect, including yourself.
- As an introvert, learning to develop and maintain genuine relationships was difficult, but a vital component of how to build wealth.
The Frugality Part of the Equation
If I had simply inflated my lifestyle at each step, I would not have been able to:
- take the risks I did (e.g. leaving jobs, going to grad school, negotiating contract work)
- save money to increase investments
In 2015, I found Mr. Money Mustache. I devoured every blog post. My mindset on ordering takeout food, the need for cable, and being a smart and more patient consumer changed drastically. To be honest, I was probably too restrictive to where it depressed me for a while as I was “catching up.”
I have now found a good balance between frugality and consumption. That balance is valuism.
For example, I place tremendous value on spending income on a personal trainer because I view it as an investment in my (and my wife’s) future self. He is our coach. He keeps us accountable and strong. What is the point of financial independence if I cannot ski, surf, hike, walk my dog, and wrestle with my kids?
An Investment Plan. Not a Good One. But a Plan.
Looking back on my investment plan was laughable. But at least I had one and started. I set up a spreadsheet and using compound interest figured out that I needed to only trade my principal balance 150 times at 3% to get to a million dollars.
I figured I could do this in about ten years. At the time, I didn’t realize what an amazing feat this would have been if I actually accomplished it. Ignorance and luck kept me afloat.
For a few years, while I had no 401(k), I traded the $14,000 I had left over from when I cashed out my IRA to go to grad school.
I followed a biotech investor that seemed to do no wrong and basically copied his trades and built that balance up. Luck turned my way on one of the biotech investments. My balance was still pretty low after that trade (~$60,000) but I had had enough of gambling on biotechs. I’d been convinced low-cost index investing was how to build wealth for the long term.
Riding the Bull with Low-Cost Index Investing
Now that I had a solid income and no debt, I started to max out my 401(k) and make a contribution to my IRA.
I used FutureAdvisor to determine which low-cost index funds to put my money in and how to allocate my assets. I’ve stuck with this method to the present day. I make the trades in my brokerage account myself, which was cheaper than paying a robo advisor fee.
2019 Update: Sadly, FutureAdvisor no longer offers a free portfolio allocation service. They area fee only roboadvisor. I now use M1 Finance as my investing platform. M1 is a great option because there are no fees for buying or selling shares, you can buy fractional shares, and they have expert portfolios you can invest in or you can set your own allocations.
Following the advice of FutureAdvisor was a big mindset shift. I had to let go of the thought that I could trade into riches and that I somehow knew better than other people.
What’s the prayer that they use in AA? I think its pretty appropriate when it comes to investing.
God, grant me the serenity to accept the things I cannot change, Courage to change the things I can, And wisdom to know the difference.
Low-cost index fund investing was the way to go. Timing the market was impossible. Picking individual biotech stocks was gambling. It was time to be a disciplined index fund investor.
Index fund investing helps me sleep at night, focus on the things in life that I value, and increase my income production, something that is much more in my control than the movements of the stock market.
Tax-Advantaged Savings to Grow Wealth
Negotiating the arrangement to work for two organizations certainly has allowed me to save a lot of my income over the past several months. Setting up a Solo 401(k) allowed me to put a large portion of my income into the tax-advantaged account. I am both the employee and employer in the Solo 401(k) and so I can put in the employee deferral of $18,000 and an employer deferral of 25% of my net income up to a total of $55,000. The Solo 401(k) is an absolutely huge wealth building tool! (Look into it for your side hustles as well)
I am hopeful the arrangement lasts through 2018 (and beyond?) I only can control how much value I bring to each organization. External factors and internal politics are beyond my control.
How to Build Wealth in 4 Steps
Okay, so what did that story have to do with you? Let me break down the content above into four easy and actionable steps for you to build wealth.
- Refinance and pay off debts.
- Increase income by taking risks that align with your professional interests, becoming competent and demonstrating value, acting with integrity to build and maintain relationships.
- Spend less than you earn so that you have the flexibility to take risks and invest.
- Work on an investment plan. The easiest and most likely for success is low-cost index investing.
There you have it. That is how I built wealth from nothing in three short years.
Do I wish I had started earlier? Of course. Dwelling on the past, your stage in life or circumstances will not build wealth. Working on the four steps above will.
- November 2018 Net Wealth Update
- October 2018 Net Wealth Update
- July 2018 Net Wealth Update
- June 2018 Net Wealth Update
- April 2018 Net Wealth Update
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