Do you remember when Youtube was still a startup and Google decided to buy them for 1.6B$? That was 10 years ago, in 2006. Georges W Bush was president, Lost was one of the most popular TV shows and the iPhone didn’t exist yet (it was introduced in 2007).
That much time ago is when I started to track my net worth. It’s been 10 years and I’m now approaching the double comma club. This is an article for anyone starting out with their finances to see what a progression to 1M$ looks like.
This article is part of a series on what I’ve learned from tracking my finances for the last 10 years. The next articles will be posted in the coming weeks and a link to them will be provided back on this article, so be sure to check back in!
Before we get started, the graph below represents my monthly net worth as a single person, before my wife and I merged our finances together. I also removed the $ amounts on purpose. Not because I want to keep them secret, but because they are irrelevant to the discussion. What is the important is the trend, how it relates to your own experience and what I’ve learned in the process.
There it is:
Out of college, a computer science major, I started my career with no debt. It was a great start that I got through a combination of scholarships and Mom&Dad financing.
The only money goal I had at the time was to have enough money to go out, party and travel. If I had kept track of my savings rate back then, it was probably between 0% and 5%.
I wasn’t rich, but I felt rich.
This early spending spree lasted 2 years until I somehow managed to accumulate a small stash. I started tracking my net worth in April 2006 because I thought it would be fun. This might not be your definition of fun, but it was. Maybe I’m weird. It also made me wonder what people do with their money. I was so clueless.
Overnight success is 10 years (or more) in the making.
The main point here is that there is no overnight success.
I started from 0$ and was a completely illiterate finance-wise. Building wealth takes time. I was lucky to have no student’s debt, but I also wish I had an investment plan early on.
The earlier you invest, the quicker the wealth builds.
The Value of Switching Job
Even though the overall progression looks like smooth sailing for 10 years, there are actually 4 distinct phases, each with a substantial impact on my overall net worth growth.
The first phase corresponds to my first job. The salary was below average for a fresh out computer science engineer but I really didn’t care then. I was eager to work, get a paycheck, be independent and have the money to spend on what I wanted.
The second phase corresponds to my second job, after I quit from the previous one. It was for a larger company, with more benefits and my salary went up 50%. I probably had a low savings rate back then because my net worth was now growing more than 3x faster.
Then the third phase came with my third job, when my company got acquired by a much bigger one. I got promoted and got another 50% raise. They knew how to make the acquisition feel good. They even gave me a sign-up bonus and stock options. I only realized a year later how lucky I was when they let go 90% of my department, as part of ‘synergy savings’.
Then the fourth phase came along and I didn’t change jobs. No promotion, no salary increase, nada. There were no illegal business going on either. What happened then is that my wife was finishing her MBA and she got a course on “Personal Finance Management”.
This particular MBA class changed everything.
Taking Care of My Own Finances
When I saw the material for that course, I instantly devoured it. It talked about so many things about which I literally had zero knowledge at the time like index investing and asset allocation.
It taught all these MBA students how to manage their personal finances as if they were part of Family Money Management, Inc. That course was such an eye opener, by itself it made the MBA an investment that paid itself back multiple times over.
We became money conscious, not frugal
Writing this now almost 3 years later and blogging about it, I almost feel like the most inadequate person to write articles about money.
Luckily we have done very well since then and we were quick to apply what we learned:
- We opened an account with Vanguard and we set up automatic contributions.
- At work, we updated our 401k contributions and maxed them out.
- At home, we looked at how much we spent on a yearly basis. We were shocked, it was un-freaking-believable.
A change of mindset
We became “money conscious”. Not frugal, just aware of what we’re spending and what value we were getting in return. We renegotiated our insurance (down), our rent (no increase for 5 years) and cut down on all the stuff that felt like a rip-off (eg. the $200 monthly Comcast bill).
Everything else went straight to investments.
The result is what you see in the fourth phase, what looks like I got a huge increase is in fact the start of my Path to Financial Independence.
Here’s the graph again:
The fact that we challenged our finances led to the biggest “salary increase” so far. Becoming money conscious led to the equivalent of a 50% salary increase. Doing nothing. Now, that’s powerful stuff.
Unfortunately, I can’t say that we gained any significant wealth from our investments yet. We started investing seriously only since 2014 and the stock market hasn’t really gone anywhere since.
I wish I had started earlier.
When an Emergency Fund can be useful
I know Emergency Funds can be a controversial topic, so I’ll just share my experience.
Just when I changed jobs the first time, at the end of 2008, you can see the graph going to 0$. My net worth didn’t actually go to nada in a month. But I was so stressed money-wise that I forgot to track my net worth for 2 consecutive months.
When I got my second job, I bought a car cash. I also had to move all my stuff, relocate and get a new apartment. With my little savings and my limited cash flow, I almost became cash strapped. Not at 0$, but maybe 100$. As a paycheck would come in, my checks would be cashed.
I was so embarrassed that I couldn’t have planned this better. At some time I even thought about asking my parents to lend me some money for 1 or 2 months. There I was happy to be out of college, claiming to be independent and I was thinking of going to be bank of Mom&Dad again. I only had a debit card at the time and I stopped going out with friends. I didn’t want to see my card rejected at a restaurant or a bar. When everything went back to normal, I swore to never be cash strapped again. Now I have several months of emergency cash available. It might not be as relevant anymore since we have ample cash flow and resources, but it just feels right.
So my recommendation? Do what you feel is best for you. From no emergency fund to several months of expenses, do what feels best for you and your family. Readers of this site have an average of 2 months saved up.
Ten years ago, I wish I had known about investing. I would have saved more and invested more. And earlier.
By now, I would likely be Financially Independence already. But I don’t regret anything, those were fantastic years.
Nonetheless, I wish I knew this out of college:
- Building wealth takes time, start as early as possible. It doesn’t have to be a lot of money but building a habit of being money conscious and investing goes a long way. After all, we know that most Americans can become millionaires. Once the investments start to compound, the pace of wealth growth increases and then amazing things start to happen. It takes time and consistency, but it’s exponentially easier.
- Switching jobs is a great way to increase salary. This has probably been one of my biggest realizations writing this article. I know that switching jobs is great for raises, but I had no idea it was 50%. That’s crazy. Remember that you don’t get what you deserve, you get what you negotiate.
- A high salary isn’t necessarily a high income. Lifestyle inflation and the consumer mindset can be a huge drag on our finances. When I made the switch, I gave myself the equivalent of a 50% pay raise, doing nothing but making better use of what I already had. That means I can make 100k$ and still have more income than a friend making 150k$. The Savings Rate is one of the most important elements of building wealth.
- The best investment is in ourselves. In the 10 years I have been tracking my net worth, the annualized growth rate has been a little over 35%. It’s amazing. This is easily the best asset class I can invest in. Education, health, relationships, everything contributes to our own financial situation. Is it expensive to invest $5000 to take a training on a subject that matters to you? Maybe, but it is also likely to return a lot more than the same amount invested in the stock market.
- An Emergency Fund can be useful, especially when starting out. The stress of not having the cash to make ends meet isn’t worth it. But it also kills the money growth mindset. If Maslow’s pyramid of needs applies to finances, we need to feel secure before we can grow. What’s a good amount? It’s the amount that makes you feel safe.
I wish someone had written such a post for me out of college, it would have saved me a few years.
I hope it helps you.
And if you have your own life lessons that you’d like to share, please do so in the comments below!