1) I recently came across an article, This janitor in Vermont amassed an $8M fortune without anyone around him knowing, about how when Ronald Read, a retired gas station attendant and janitor in Vermont, died in 2015, his friends and family were shocked to learn that his estate was worth $8 million!
Did Read win the lottery or have a big inheritance he kept secret? Was he smart/lucky enough to buy a stock like Berkshire Hathaway (BRK-B), Microsoft (MSFT), or Apple (AAPL) decades ago?
Nope. Rather, he did three simple things...
First, he was extremely frugal. As the article put it:
Read's friends remember him driving a second-hand car and using safety pins to hold his worn-out coat together. He even continued to cut his own firewood well after his 90th birthday.
It's a painfully straightforward approach: Spending less than you earn leaves you more to invest and generate wealth over time through investments.
"I'm sure if he earned $50 in a week, he probably invested $40 of it," said Read's friend and neighbor, Mark Richard, according to CNBC.
Second, he invested in safe, blue-chip stocks like Wells Fargo (WFC) and Procter & Gamble (PG) and held them for a long time.
And, lastly, he lived until age 92, so the magic of compounding could work for decades.
My parents have a similar story... They can squeeze a dollar until it screams.
Growing up, we almost never went out to eat – going to Friendly's once a month was such a treat! My mom clipped dozens of coupons from the circular in the Sunday paper, and when she came home from the supermarket, she would crow about how much she had saved. And she bought most of our clothes at secondhand stores. She still tells my sister and me that our costly educations were funded by her thriftiness.
We never had a new car. My dad is a good mechanic, so we always bought 10-year-old cars that he would nurse along for years. I remember in the 1980s when we lived in western Massachusetts, we had a beaten-up 1960s vintage Mercedes. Its heater had stopped working long ago, which was a big problem during the bitterly cold winters. But no matter – we all bundled up in our down jackets and used de-icer spray on the inside of the windows.
Similarly, Warren Buffett, despite being one of the wealthiest men in the world, is still very frugal. He could afford to live in a massive estate but instead has lived in the same house for 61 years! When he first started flying in a private jet, he felt so embarrassed that he nicknamed it "The Indefensible."
Once you have developed good financial habits and are saving money every year, you need to invest your savings wisely.
The good news is that it's not hard...
First, max out your retirement plan(s) like an IRA or 401(k) – especially if your employer will match at least some portion of it (this is free money – take it!). Tax-deferred savings are much more valuable than taxable ones because you won't have to pay taxes on your realized gains each year. The difference over time is enormous. Also, because there's a penalty for taking the money out before you're 65 years old, you're less likely to do something stupid with it.
Ideally, set up an automatic withholding from your paycheck into your IRA (or another retirement fund) – this makes it easier to save because you never see the money.
Then, set up a plan such that the moment the money hits your account, it's automatically invested in an S&P 500 Index fund. (If you want to set aside money to invest on your own, that's fine – use our newsletters here at Empire Financial Research to help you do so... For just $49 for the first year, our flagship Empire Stock Investor newsletter is a no-brainer!)
Finally – and this is key – don't look at it! Just let it build, year after year, decade after decade. Whatever you do, don't panic during times of market turmoil and sell – just about everybody who does this has terrible timing and sells at exactly the wrong time (for example, in March 2009 or 2020).
Consider the extreme case of my sister, who had a retirement account at her old employer, then switched jobs – and forgot about it! Years later, she remembered it – and discovered hundreds of thousands of dollars because she had done everything right up front: Her employer automatically withdrew the maximum retirement contribution from her paycheck and then invested all of it in an S&P 500 Index fund.
When my parents moved to Africa 26 years ago, first to Ethiopia and then, nine years later, to Kenya where they have since retired, I took charge of their financial affairs. Though neither of them had ever had a big salary, they had both worked for their entire careers, earned decent incomes, and lived super frugally. As a result, they had built up a nest egg of around $800,000.
But they were much too conservative in how they had invested it. Though they were still in their mid-50s and would likely work another 15 years and live into their 90s, their savings were mostly in cash and bonds – an allocation more appropriate for 80-year-olds.
So I put a third of their savings into my hedge fund and another third into an index fund, such that two-thirds of their savings were in stocks.
It was the right call...
More than two decades later, they're in their early 80s, and their net worth is multiples of what it once was. They're comfortably retired – though you wouldn't know it from how frugal they still are. When they came back to the U.S. for a couple of months last summer, as they do every year, my mom refused to get a SIM card for her Kenya cell phone that would allow her to make and receive calls, get her e-mail, etc., because it cost too much: one dollar per day!
2) Picking up where I left off in yesterday's e-mail, here are three slides related to step 4, The Initial Follow-Up, from my presentation on "How to Cultivate Mentors, Make Friends, and Develop Deep Relationships" (again, much of this advice applies to job seekers as well):
In Monday's e-mail, I'll continue with step 5... Stay tuned next week!
P.S. I welcome your feedback at [email protected].