$400,000: A Net Worth Milestone Requires Reflection on How it All Happened

Elizabeth Holmes, the founder and CEO of medical device startup Theranos, has had a rough week. Theranos was once the darling unicorn of biotech. The company sought to disrupt blood testing technology by providing more accurate, faster results with a single drop of blood. The idea wasn’t as pie-in-the-sky as human gills, but it was close.

Theranos hyped its reputation all the way to a $9 billion valuation on the backs of faulty science and a misrepresentation of facts. Against any claims of wrongdoing came the brazen counterattacks by the 32-year-old CEO, whose voice is so deep that she could put Barry White to shame.

Behind that $9 billion valuation of Theranos was a $4.5 billion net worth of our alto CEO, Ms. Holmes, who owns half the company. She became the world’s youngest self-made female billionaire.

And then, she wasn’t. With its operator’s license pending suspension, the house of cards called Theranos finally came crashing down.

With the company now valued at just $800 million, Holmes’ share of half the common equity is now buried under tranches of preferred stock and creditor liens. Elizabeth Holmes, as of June 1^st, has a lower net worth than my two-year-old.

Net Worth Tells All

One could argue that Holmes’ net worth should have never been in the billions in the first place, and I can understand that. But, this startling example of net worth destruction shows that net worth, in the end, holds no punches; it tells all in neat black-and-white numbers. It is the first number in your financial life that matters, and it is (for better or worse) the barometer of success in modern society.

When a person’s net worth moves across big thresholds—like reaching $1,000,000 or climbing back to zero, it makes for an opportunity to reflect on how it happened. Yesterday, such a moment happened to me. The threshold, $400,000, lacks the sexy of a cool mil, but it is still meaningful to me. I had been trudging along with a 3-handle for almost two years. The stagnation of NYC and the $60,000 spent therein on rent and lost wages weighed heavily on progress. Getting out of that number zone means a lot to me.

In commemoration of this event, I wanted to go over how this all happened.

Not the King of the World

I will readily acknowledge that a $400,000 net worth for a 31-year-old is not going to shake the foundation of society. Other bloggers have hit far larger numbers at similar and even younger ages.

According to Shnugi, the median net worth of a 31-year-old is just $14,450. That puts my $403,000 as of this morning in the 94th percentile. That’s amazing to me, given that we don’t conform with the typical frugal lifestyle. We’ve had one kid and a stay-at-home-mom for several years now. That means just one income—and a modest income at that, given our location.

We live in one of the most expensive counties in America—a Virginia suburb of DC. We have two luxury cars–both were financed. We dine out….often. We have iPhones with big data plans, drive like the blue blazes even if it’s right up the street, buy enough shrimp and Keurig pods to sink a battleship, pump the heat in the winter, and take a vacation almost every month….the list goes on.

Then, there were the big mistakes.

Between 2007 and 2009 I gambled away a good $25k (about a third of my net worth at the time) on a wrong-way stock bet that I just couldn’t let go of. Tack on another $5k lost from my excursion into writing puts on triple-leveraged ETFs and you get a nice fat $30k up in smoke.

My year in NYC, as I mentioned, was a nice $60k spent on rent (we still had our mortgage, btw) and lost wages. Yikes.

And even bigger one-time expenses…

We had a $20k out-of-pocket hit on our wedding. That figure doesn’t include the ring I designed for my wife, which is certainly the world’s best (another $12k).

$10k on a couch and bedroom set? Why not, we got it like that.

Anyone else out there with two pure-bred Sphynx cats (priced at a thousand bucks apiece)?

And Yet, Here I Am…

Even with all that craziness pulling me down, here I am. I’m comfortably sitting atop $400k. Every month I add about $4k to new investments, I pay down $1200 in debt, and I receive another $900 in dividends. Even if the stock market falters, that new capital and debt reduction continues to push the needle higher. It’s a strong, ceaseless rise that over the years has looked like this…

My income is growing. My dividends increase by about 2% per month. Our cars are getting paid off. And every month, a greater portion of my mortgage payment goes toward the principle.

It is reasonable that my net worth will rise between $75-90k per year for the last four years of my working life just from new capital and debt reduction. Tack on any market returns (say, 8% per year), and I could potentially retire in about four years with a net worth of almost a million.

I’ll be 35 years old.

While nothing is guaranteed, from here, things look realistic.

I’ll try not to get ahead of myself. Life will change. I might get laid off, or contract a serious illness, or North Korea might finally get the bomb. Anything can happen. While Kid #1 has been remarkably inexpensive, it remains to be seen what will happen with subsequent children. There are many unknowns, so I can only keep on doing what I’m doing.

Keep on Keepin’ On

Speaking of that. What is it, exactly, that I’m doing?

I suppose if I had to cite three things, it would be: Paying Myself First, Tax Reduction, and Watching the Pennies

Paying Myself First

It’s a tale as old as time (…song as old as rhyme?). To be financially successful, pay yourself first. In the hands of lesser men (myself included) dollars sort of just…go.

Solution: never let the dollars in your hands in the first place.

I’ve maxed my 401k and IRA every year I’ve been working. I never noticed the money was gone. Sure, there have been some tight spots and cash crunches here and there, but we humans have an overwhelming ability to adapt to the situation.

If you take the money out of your paycheck before if ever hits your checking account, you’ll make it work. You’ll drive less, you’ll eat what’s already in the pantry, you’ll stay away from ATMs and roulette wheels, you will be smart about how you travel. The list goes on, but the lack of money will create a motivation, a creativity, to do better and to be more efficient.

Business Management Daily found that businesses that kept their office supply closet stuffed to the brim had employees that instinctively took more than they needed. Are these employees bad people? No, it’s human nature. If you see an abundance of something, you’ll naturally take more of it. Anyone who has ever been to Golden Corral has seen this first-hand.

It’s no different with your checking account. If it’s flush with cash, you’ll naturally be less frugal, even careless, with it. Conversely, if the account is teetering around zero (or some safe margin away from zero, but still low), then you’ll be far more reluctant to spend cash like it’s going out of style.

And lastly, after you pay yourself first, where should the money go? For me,

• My 401k is 100% in an S&P 500 index fund,
• My unsheltered taxable brokerage is in a preferred stock ETF (for fixed income exposure),
• My IRAs are predominantly in dividend growth stocks (with some speculative stocks like Netflix, Tesla, Google, and Bank of Internet thrown in).

Here’s my portfolio.

Tax Reduction

I’ve worked inside the federal government for my entire adult life. Let me be the first to say that your tax dollars are not being well spent. Much to Nancy Pelosi’s chagrin, the cupboard is not bare. I could point out a good dozen people on my floor that would not be missed if they simply never came back after lunch.

Your tax payment is the least rewarding investment you’ll ever make. It is only logical to reduce it as much as legally possible. Alongside taking the baby for walks and watching documentaries, tax reduction is one of my favorite hobbies—which is why I’m an aspiring CPA. Naturally, taking up tax planning courses will be beneficial in managing your finances including tax reductions.

My effective federal tax rate* in 2015 was 2.8%. My effective state tax rate was 3.2%. Not too shabby for a six figure income.

*Note: Effective tax rate is measured by: (Tax Paid)/(Gross Income)

Some of that is a result of the income and filing status that go into the tax calculations:

• We have just one income
• We have a child
• We have a large home mortgage interest and property tax deduction

But, some of that low tax rate is intentional:

• I max out my 401k and Traditional IRA (the Traditional IRA is the only smart path to take, IMO)
• We harvest investment losses
• Our dividends are of the “qualified” variety
• We donate household goods and keep good records of any charitable miles
• We carefully offset any business income with reasonable business expenses

A dollar saved in taxes is one of the easiest returns you can ever receive. I strongly encourage readers to get familiar with the internal revenue code (interpreted well on the IRS website). I know that sounds about as much fun as a colonic in Tijuana, but seriously, take a look at a few sections that interest you and your tax situation.

Every year, thanks to the aforementioned and well-known strategies and circumstances, I avoid around $15-18k in taxes. That adds up to a lot of money over a decade. And no, I’m not worried about my retirement assets being locked away until I’m 59 1/2.

Watch the Pennies

Benjamin Franklin once said, “Watch the pennies and the dollars will take care of themselves.”

This is essentially where most FIRE blogs prove their worth, including this one.

There are some certain, big-ticket things you can structure in your life that will enable financial success:

• Living near your work
• Living somewhere less than you can afford
• Having a spouse that is on the same financial path
• Avoiding kids until a bit later in life
• Having no car or one very cheap car (in cash)
• Avoiding student loans

Those are all great things, but often these items are either, A) no longer in our control (past decisions) or, B) core to our happiness or life situation.

Those limitations are why most blogs concentrate on how to watch the pennies. This is what I do, and the rewards over the years are compelling.

Look at this brief list of typical things I do to save money, and the savings over twenty five years (at 8% returns). (The chart says 10 years, but should say 25.)

This is an example of how much money can be spent wasted on such innocuous, middle-class frivolities.

This list doesn’t include countless other things, like mindfully shopping for groceries, using gift cards for dining out, doing family-fun and free entertainment, doing your own housework, selling stuff from around the house, or avoiding the oft-mentioned morning coffee. I still have my vices, but in general, I try to live a normal life that is slightly averse to doling out cash for stuff that I can easily and enjoyably do myself.

And In Closing, a Look to the Future

Behind pushing a net worth update, though, is the more important task of achieving financial independence and retiring early. I would forego even being a billionaire if it meant the opportunity to retire young and enjoy decades of free life with my wife and children.

Therefore, the goal is unchanged. I still have work to do to generate enough passive income to cover my living expenses. My passive income sits at $910 per month. That’s great, but against $5k in expenses, I still have much to do. Foremost is getting that income to around $2,500 per month (by mid-2020 is the goal).

Second priority is to build up enough home equity (perhaps$250k) to trade our home in NoVA for a similar home in one of America’s less-expensive, warmer locales (also hoping to do this by mid-2020). That switch will drop our expenses to well below our passive income, and retirement will be imminent.

If I fail, that’s okay, as it won’t be by much. And for what it’s worth, life is pretty darn great right now.

Take yesterday. Last night after work my wife picked me up from the park-n-ride. I put the baby down for a nap while I did some homework. After she woke we went for a 90-minute walk around the neighborhood. During the walk I started drafting this post in my head. We ate fried rice when we returned home and watched ESPN’s Believeland. After some playing around, we went to sleep. Not a bad night, and except for the many hours at the office, not all that different from how I want my life to be after I retire.

This Thursday we are headed to Miami for a cruise (flights and hotels are free, thanks to travel hacking); our fifth cruise overall and second with the youngster. Yes, it’s a good life and I’m satisfied with it. But, I know greatness is possible, and just around the corner.

You can follow along here to watch it happen.

Thank you for reading my blog,

Eric