With Sandra Block, Senior Associate Editor for Kiplinger’s Personal Finance
Podcast: Play in new window | Download
Your Odds Of Becoming A Millionaire Are Higher Than You Think
A record number of U.S. households have reached and exceeded millionaire status through careful planning and disciplined savings. Sandra Block, Senior Associate Editor for Kiplinger Personal Finance, outlines the five routes to financial success that sound simple enough but are really hard to implement in practice. As Sandra puts it, it’s not rocket science, but it does require a certain amount of discipline that doesn’t come easily to many.
Stocks Aren’t The Only Way To Riches
Most people think high net worth households typically accumulate wealth through stocks, but that’s not necessarily true. While long-term investing in stocks beginning at a young age does offer the greatest chance of getting to a $1 million nest egg by the time you retire, it’s only one piece of the puzzle.
Entrepreneurship, too, can lead to financial success even though it’s a risky business, fraught with failure. Steve opines that those who succeed at business, even modestly, have a really good chance of getting rich if they find a niche they can excel in.
How Does A Business Create Wealth?
Steve believes a big driver of wealth creation is having positive, stable, recurring net cash flow after all expenses and salaries, including yours, are paid. That recurring cash flow has value, and someone might be willing to pay a multiple on your cash flow to buy the business off your hands. For example, someone may pay $10,000 to get steady net cash flow of $1,000 per year, and it’s this 10x (or 5x or 20x) multiplier factor that creates sizable wealth.
Don’t Count On Getting An Inheritance
There’s also a sense in America that people often inherit their millions, but this is no longer a sure thing. As Sandra says, people need to be realistic about the likelihood that they will inherit money because as parents live longer and as healthcare costs continue to rise, they won’t have a lot of money left to leave. That said, baby boomers are sitting on a lot of assets, some of which they will pass on to their children. But, regardless of the size of the windfall, one must focus on using the inheritance well by either getting out of debt or investing those assets to achieve even greater financial success.
The Obstacles To Financial Well-Being
Next, Steve wants Sandra’s thoughts on the obstacles to becoming financially successful. For one, Steve points out, people spend more when they get more, such as a raise. Experts call that lifestyle creep, says Sandra, where you earn more and then decide to buy a bigger house or an expensive car, etc. But the problem is that these types of expenditures do not increase your overall wealth but take a bite out of it because many items such as cars depreciate over time. And while houses might be a good investment, the bigger the house, the more you spend on mortgage payments, property taxes, utility bills, upkeep and maintenance and have less left over for your savings and investments. So, increasing your living standards as your income rises will get in the way of attaining financial success.
As an example, Steve cites Warren Buffett who can have any house or car that he wants but has lived modestly from the beginning and reinvested almost all of what he earned.
Steps To Achieving Financial Success
Steve’s advice is to start with automating your savings, such as opting for contributions to an IRA or 401(k) plan, where money goes directly from your paycheck to the plan, before you even see it. Then, make sure you increase your contributions as your income goes up.
Steve also likes Buffett’s approach of buying shares of good companies and holding onto them for the long run, without timing the market. He also sees low-cost ETFs as a good way to diversify one’s portfolio and ride the road to financial success.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Your odds of becoming a millionaire aren’t what they used to be—they’re better. A record number of US households have reached that enviable goal. I’ve asked Sandra Block to join me to outline the five roots to success. Sandra is Senior Associate Editor for Kiplinger’s Personal Finance. Hey, Sandra, welcome to the show.
Sandra Block: Thank you for having me.
Steve Pomeranz: Five roots to success, sounds simple. Is this one of those things that’s simple but not easy?
Sandra Block: [LAUGH] Yeah, it’s not rocket science, but it does require a certain amount of discipline that many people find hard. In fairness, too, often times people do have setbacks that they aren’t responsible for that can get in the way of getting there. But the steps aren’t genius; they just require that you school yourself.
Steve Pomeranz: And exhibit some discipline to try to get to your goal.
Sandra Block: That’s right.
Steve Pomeranz: A lot of the ways that people think that high net-worth households have accumulated their wealth is mostly with stocks, but that’s not necessarily true, is it?
Sandra Block: No, it’s across the board, I think. In terms of your long-term investing, stocks do have the greatest potential for growth and people who invest regularly and early in the stock market have the greatest chance of getting to a $1 million nest egg by the time they retire, but that’s just one piece of the puzzle.
Obviously, your income, your earnings are a big part of that. And one of the things we point out is that people who start their own businesses have— even though it’s risky and a lot of businesses fail—you control your destiny that way. And those folks have a really good chance of reaching a million if they have a successful business and find a niche that grows. I think that was one of the points made in the classic Millionaire Next Door; the survey found that most of the millionaires he talked to did own their own businesses because then you’re not relying on a boss to give you a raise.
Steve Pomeranz: And we’re not talking about having to be the next Google, the next Uber; we’re talking about just good, small, to maybe even slightly medium-sized businesses where you can build in a good profit margin and hire just enough people and keep the rest for yourself.
Sandra Block: That’s right, and you find a niche that there’s room for. And in stories I’ve written before about people who’ve started their own businesses, one of the things that experts say is you should start a business with the idea that someday you will sell it to someone bigger.
And that’s how people really get rich.
Steve Pomeranz: Yeah.
Sandra Block: If you start a business that somebody, some huge entity— and we see this practically every day—when Facebook buys some app or something like that. The ability to scale up is key to really making a lot of money as a business owner. But to start out, it’s just a matter of finding a market where there’s a need.
Steve Pomeranz: Well, if you think about it—and we’re going off topic here just a little bit, but I enjoy talking about this stuff—what creates wealth in a case of a business?
Well, you know what it is, it’s net cash flow. It’s the amount that you’re getting out of the business. That cash flow has a value to someone, and someone’s willing to pay a multiple on that value. So, if you’ve got cash flow of $1,000, someone may be willing to pay $10,000 for that. And that means that they’re earning a 10% return. They’re spending 10 and they’re getting 1000, that’s 10%. So, it’s that multiple factor that creates this wealth. If the company will pay you 20 times earnings or even 5 times earnings, that can do a lot for you. So, without beating that up too much, I think we’ve covered that.
So, investments, having your own business. What about inheritance? There’s a sense in America that people with inheritances are a large part of becoming a millionaire, is that true?
Sandra Block: Well, I think people need to be realistic about the likelihood that they will inherit money because as people live longer and healthcare costs go up, I think it’s a bad planning error to assume that your parents are going to leave you a lot of money. But the fact of the matter is that baby boomers are sitting on a lot of assets, and some of those assets will pass to their children and the windfall can be modest or large, but it offers so many opportunities for more growth, whether you inherit $50,000 or $250,000, or more. If nothing else, you can use that to get out of debt.
Steve Pomeranz: Yeah.
Sandra Block: You can invest it. The key is, whatever the windfall is, to look for a way to use it that it will get larger. That’s how a windfall helps you become a millionaire.
Steve Pomeranz: Yeah, it’s saving a dollar today with the idea that you’re going to get something far greater than a dollar in the future, and that’s what you’re going to count on.
Sandra Block: That’s right.
Steve Pomeranz: Yeah, so what are some of the obstacles here to becoming a millionaire? I think I know one that comes to my mind is that as soon as the person gets a raise, they start to spend more. Is living large one of the obstacles?
Sandra Block: Experts call that lifestyle creep. You get more money, so you decide to buy a bigger house or a sports car or something like that. And the problem is that these types of expenditures don’t increase your overall wealth. In fact, that can decrease it because cars depreciate. Houses actually might be a good investment, but they cost a lot of money to maintain them.
And the bigger the house, the more you’re going to spend on maintenance. So, the idea that you have to increase your living standards as your income increases is going to prevent you from reaching this goal. And again, in the Millionaire Next Door, what they found was that the millionaires next door didn’t live like millionaires. They drove old cars. They lived in the smallest house in a nice neighborhood. And that’s really the key because it’s just so easy to let your lifestyle get away from you.
Steve Pomeranz: You mentioned the Millionaire Next Door; that’s a book that was written many, many years ago. It’s still in print, I’m sure.
So anybody listening here, just go ahead and get that book. It’s a fascinating book. And it’s the guy next door that’s driving the old Ford pickup truck who you don’t really know what’s worth. He’s not living as if he’s worth…the extreme example of that is Warren Buffett.
Sandra Block: Yeah, exactly. Obviously, he can have any house or car that he wants. But he has lived modestly and basically from the beginning lived modestly and just reinvested everything that he got. All of his earnings he put back into his portfolio. And that sort of began how you keep your money working for you instead of putting it in something static, where it just buys something that costs money to keep.
Steve Pomeranz: Yeah, yeah, and don’t forget if you buy an expensive car, it’s a beautiful thing, it’s a joy to own, but that car depreciates over time. It does not necessarily become more valuable later, and everything you want to think about with your money beyond your basic consumables, is this thing going to be worth more later? So, let’s talk about ways to get to that millionaire level here. Number one, automate your savings. Talk about that.
Sandra Block: Yeah, that’s basically the idea. It’s a typical 401k plan; the money goes into your account before you see it. And that’s how, I think the most effective way for people, particularly when they’re young, to get started. You can’t spend what you don’t have. There’s tons of studies that show now that if people are automatically signed up for a 401k plan, they won’t opt out. But if you ask them to opt in, they won’t get around to it. So just put it on autopilot. Again, that’s a good way to prevent lifestyle creep.
And then make sure that as your income increases, the amount that you automatically have taken from your accounts increases too.
Steve Pomeranz: Also if you don’t have access to a 401k, you can also do an IRA. And one idea is to pay yourself first, be the first-
Sandra Block: That’s right.
Steve Pomeranz: Be the first monthly bill that you pay because that’s going to pay off in spades later on. The next one here is invest in yourself. You have a good story here about a person who is the hearing child of deaf parents. Take us through that.
Sandra Block: That’s right, and basically, her parents owned a computer store back in the 80s when they had big computers and a small part of their business provided assisted devices for the deaf and hard of hearing. And she saw a need there, and she basically bought out the company—her mother was a co-owner—and started a company providing very high-quality interpretive services to social security, to local governments, domestic violence centers, courtrooms.
And at the time that she started the business, there were only a handful of companies doing this. So, she grew very fast. And she’s very dedicated to the deaf community and had a very healthy profit margin. It’s shrunk a little because more companies have gotten into it, but it’s a growing business. And basically, she saw a need and she filled it and grew the company very fast.
Steve Pomeranz: Yeah, when she started off, the company had annual revenues of about $800,000 in 2015 and 3 employees, but it grew to 62 employees and more than $6 million in annual revenues. And I can tell you that creates a lot of wealth, that kind of money, that’s for sure.
Sandra Block: Yes, it does, and especially with the kind of profit margins that she was getting. So, that’s wealth. And in her case, too, I think there’s a great amount of satisfaction in what she does as well because a lot of the services they provide are to underserved, hard of hearing people, who often are in a situation where they’re traumatized or having difficulties, and they can help these people.
Steve Pomeranz: Another idea here is to channel Warren Buffett. We mentioned him a little bit earlier as a way to not experience lifestyle creep. But what other ways can we channel Warren Buffett for success?
Sandra Block: Well, basically, Warren Buffett says that as long as there’s capitalism in this country, you can make money buying shares of good companies and buying them and holding them forever. And basically, it’s a little hard for some people to think about doing that now because the stock market has done so well and they’re worried about how long is this bull market.
And there’s a lot of things going on in the world that makes people nervous, but the tried and true strategy is just to buy good companies and hold on to them, and don’t try and time the market. And I think the other thing that is useful now is, there’s so many ways you can invest in the market; invest in a diversified portfolio for a very, very low cost. You can buy [inaudible] you can buy ETFs. So you’re not giving a lot of money away. If you manage it, you can get a really broad diversification of stocks and other investments.
Steve Pomeranz: I want to talk about timing a little bit because when I started in the business a long time ago, the Dow was at 1,000. The Dow Jones Industrial average was at 1,000. Everybody was worried, “hey, this Dow’s going to go to 800!” I mean, how ridiculous does that sound right now with it around 22,000?
Yes, the Dow is high, but these companies are growing. And if you have enough time, the Dow’s going to be 40,000, it’s going to be 60,000. So try not to worry too much about how current events are going to affect us. Unfortunately, Sandra, we are out of time. Boy, that went really fast. Sandra Block joins me; she’s a Senior Associate Editor for Kiplinger’s Personal Finance. And, Sandra, where can people find you?
Sandra Block: This story is on www.kiplinger.com
Steve Pomeranz: Very good. Sandra Block would be the person with the byline. Thank you so much for joining us and to hear this conversation again don’t forget to join us and to join this conversation at stevepomeranz.com. Thank you, Sandra, really appreciate it.
Sandra Block: Thanks for having me.
