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From $75,000 in Debt to Millionaire

I read a lot of personal finance blogs and publications but one thing strikes me; there are so many writers that are telling their heroic stories about how they got out of debt. Guys like Grayson Bell from Debt Roundup is seen like a superhero when he gets out of $75,000  of consumer debt in 4 years.

I am all for getting out of debt and sites like Grayson’s does help thousands of people get out of the debt trap but there is nothing heroic about getting into debt in the first place. This guy racked up $50,000 of credit card debts on top of his $25,000 car loan and Jet-ski loan!!! Wish more people would save $75,000 in 4 years and avoid debt all together but I guess that is not a compelling news story…

I do not understand why someone that got out of debt quickly is more admired than someone who saved and invested quickly, but that’s just my opinion. However, these blogs still offer a lot of value to its readers and can greatly help you out of debt if you feel trapped and powerless facing mountains of debt. Today, I comment on two articles to go through the two extremes; from the negative net worth to millionaire net worth.

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The snowball is famously accredited to Dave Ramsey.  This famous financial guru has figured out the method that works toward a person’s emotions.  The reason this method works is due to how it keep you motivated during a long debt payoff. You’re looking for the emotional wins. – Grayson Bell

 

I think that the snowball can really work for someone that is currently clueless about his finances and has no intentions to ever dig into it. If you do not want to understand the math behind interest and the actual cost of borrowing, then this method could work for you. It is a sub-optimal method to pay off debt but it is better than simply doing the minimum payments.

 

To start the snowball, you must work on paying off the smallest balance first, while still paying the minimum monthly payment on the other debts. – Grayson Bell

 

This method pays off one lender after the other, starting from the smallest balance to the largest, regardless of the interest rates. This is mathematically incoherent but personal finance needs to be personal and some might not be inclined to think logically.

 

The Avalanche method is more about math than emotions.  It does not deal with your psychological mindset, but pure math. – Grayson Bell

When you list your debts by interest rate, descending, you are effectively taking the shortest amount of time to pay off your debt.  You are also going to save the most money in interest.  – Grayson Bell

 

This is the only method I would consider if I ever had consumer debt. The avalanche method seems, to me, to be more of the obvious method since I am math inclined but again, I prefer the don’t-get-in-debt method. 😛

I appreciate the fact that someone is taking the time to write these methods down since it definitively helps some people. However, I much prefer avoiding consumer debt all together! I use credit cards for all my purchase to maximize my rewards but I pay my balance in full each month. I much prefer living below my means (half way below actually) and investing towards my future goals. Now to jump to the other end of the spectrum, let’s look at a few methods average millionaires live by.

 

Tricks and Tips from Millionaires - You deserve financial freedom. #debtfree #investing #money

 

On the other end of the spectrum, there are the millionaires that (mostly) live very normal lives in middle-class-America. In this article from U.S. News or the book by Dr. Thomas J. Stanley.  and Dr. William D. Danko The Millionaire Next Door, you can notice common traits of millionaires and see how frugal they actually are.

I think this is a cool way to compare your own habits and learn from ones who achieved a high accumulation of wealth without necessarily being the CEO of a huge multi-national or receiving a large inheritance.

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By retirement age, married people have nearly 10 times the financial assets of singles, according to a study by the National Bureau of Economic Research. – Liz Weston

[…] people who split up experience an average wealth drop of 77 percent. – Liz Weston

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The first point made is about long-standing marriages and long-term home ownership. Choosing the right partner can be crucial, not only to accumulate wealth but to keep it. 🙂 I am very fortunate to have someone with the same values and beliefs by my side. We both share the common goal of financial independence and early retirement and work together towards our first million. Having a common goal with your spouse can accelerate your accumulation phase and if you are both frugal, ensure that you spend less than you earn. Staying out of consumer debt and saving aggressively together will greatly increase your net worth over time.

Of course, a divorce can be very costly in legal fees and the division of goods can greatly lower your net worth. In addition, there is a lot of costs to being in a single household. Having your own personal apartment or house, appliances, bills… All these expenses will not cost twice as much if you are living together. You can see it for yourself by tracking all your expenses with Personal Capital, you will quickly see where your money goes.

To continue about long-term house ownership, choosing to stay in a home for decades instead of consistently moving every 4 or 5 years will save you thousands in commissions and moving costs. In addition, you may owe capital gains taxes if you are selling your residence rather than passing it to your heirs. I think that mobility could be a great advantage to your earning potential but it has its downsides too. If you are in a field where moving and job hopping can greatly increase your income, then renting might be a better option. You need to consider so many factors to see if moving will be advantageous such as the cost of living, municipal taxes, and income taxes but that’s a whole new post by itself.

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Millionaire portfolios tend to be widely diversified, with investments in stock funds, bonds, cash and real estate. – Liz Weston

 

Now it’s time to see where those millionaires invest their millions. It turns out that you cannot grow massive wealth with guaranteed investments that don’t even keep up with inflation (Shocker!)  Millionaires invest in diversified investments and do not need to take massive risks in penny stocks or private equity deals to strike it rich. In fact, they mainly invest in the exact same investments I suggest. Guessed it yet? 🙂

 

The most popular investment choice? Low-cost Vanguard index funds, according to the 2014 CNBC Millionaire Survey. – CNBC

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That’s right, millionaires in America invest mostly in Vanguard index funds, just how I do with my own portfolio and just how you should do too.

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Nine out of 10 millionaires surveyed by BMO Private Bank in 2013 had a college degree and over half had a professional or graduate degree. (For comparison, just 36 percent of people ages 25 to 29 had college degrees in 2015 and only 9 percent had graduate degrees, according to the National Center for Education Statistics.) – Liz Weston

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The next point mentioned is education. A vast majority (90%) of millionaires surveyed holds a college degree. I think this is a great point to make to encourage higher education but I would be curious to see the percentage of them that finished school with massive student loans. Education can be a great tool to get you ahead in your career and accelerate your earning potential, however, there are only a few cases where I would suggest taking on massive debt. Shop around colleges and grants available to you to minimize your debt load.

The last point I want to focus on today is financial advisers.

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Seven out of 10 millionaires surveyed by the Spectrem Group in 2014 used financial advisers. Many said the primary benefits were improving their knowledge of investing, having access to a wider range of investment opportunities and boosting their returns. – Liz Weston

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I agree with the fact that advisers can definitively bring something to the table. Investing in a simple three-fund portfolio with Vanguard can be very effective and hyper-low cost for a DIY investor but it is not for everyone. Behavior could be a huge detriment to your returns and DIY investors might get wiped out by their own weaknesses. You really need to be able to handle the ups and downs of the market and stay on course when it hits the fan to succeed as a DIY investor.

With a proper asset allocation, you can reduce your portfolio’s volatility and increase your chances of success but it can be hard to get to that perfect asset allocation without lengthy research. If you need help, you can try Personal Capital‘s advisory services. They are slightly more expensive than the do-it-yourself method but considerably cheaper than traditional financial advisers. I like their service since they will work with you to optimize your portfolio and advise you on the next steps to take. Through diversification, automated rebalancing, better behavior, and lower fees, you can optimize your returns to achieve your goals earlier than expected!

To resume, try to stay out of consumer debt and follow millionaire habits by taking the right financial decisions throughout your life. I hope you the best in your investment journey and never forget to stay happy along the way! Xyz.

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4 Comments

  1. I feel like a superhero when I’m able to save $100 by the end of the month!

  2. Love the blog. . Heroics are great when it comes to paying down consumer debt, but let’s also get inspired by those who made smart choices right from the beginning. Keep up the good work.

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