“Most people fail in life not because they aim too high and miss, but because they aim too low and hit.”― Les Brown
Many of you reading this found me through my guest posts over at Financial Samurai and 1500 days. Ever since those posts went live, I have been getting a lot of questions about my $10,000,000 net worth goal. Some people think I am nuts and question if I really need that much money. But even more than that, they want to know how I plan to get there by the time I am 48.
I have a tendency to set goals and then work backwards, or “reverse engineer.” When I set that goal I had no idea how I was going to get there other than through pure ambition and determination, and of course substantial increases in my income in order to fund enough investments to ultimately achieve that gargantuan number. One of the reasons this blog was born was to serve as a source of accountability to myself on the way to achieving my goals. A lot of pressure and motivation comes from publicly announcing goals and tracking progress online, hanging out in “public” for all to see. This is especially true in a socially “taboo” arena such as personal finances.
(It always surprises me how uncomfortable people are when talking about finances. Yet they feel comfortable airing and unloading so many other kinds of dirty laundry.)
So after putting this post off for a while so that I could think about how I would reach my goal of $10M, I finally sat down and started crunching the numbers in Excel.
What do the numbers look like on the road to $10M?
There is an old adage that says “a picture is worth a thousand words.” Below is a picture of the number crunching that I did in my handy-dandy Excel spreadsheet. Excel is probably my favorite tool in the entire world with the exception of the internet. For me, the table and the chart below says it all. I clearly see the milestones I have to hit if I want a chance at achieving my goal of $10M. But since you don’t live in my head like I do, I probably need to expand on my assumptions and give a bit more narrative of how exactly I plan to get there.
Let’s break down the Assumptions
After I explain the components and the plan I have in order to achieve $10M in net worth, we will get to the income side of the equation ($50,000/month). First things first: is my plan aggressive or conservative? In all honesty, I think it is conservative on the income side of the equation but aggressive on the assumption of an annualized rate of return of 8.8%. Taking those facts into consideration, I would tend to believe that my plan lies somewhere in the middle and lands at moderate. Only time will tell. What is great about putting a plan like this together is that it gives me milestones to hit along the way, and check both my assumptions and stretches.
OK, let’s dive into the meat and potatoes of the assumptions of this plan and figure out how it all comes together to total $10M.
Starting Net Worth: As of my January financial report, you can see that my starting net worth is $195K. I only recently started tracking this but will update this number on a monthly basis via my detailed financial reports. I have created a dedicated Financial Stats page that will summarize my progress and it will provide links to all of my detailed monthly reports. I think it’s important to point out that I’m starting from very humble beginnings. I will say this though, it doesn’t really matter where you start as long as you get started!
Net Worth Growth Assumption: I have factored in a growth rate of 8.8% which I mentioned above may be a bit aggressive. The stock market has returned around 8% historically and the real estate market around 5% (in California). Although this may be aggressive, I think it is offset by my conservative approach on my income assumption.
Income: This assumption represents total household income (for both Mrs. GYFG and myself). If you look on my financial stats page you may have noticed that in 2014 we brought in $214K, yet I am forecasting only $178K for 2015. This largely has to do with a 2014 windfall of about $20K and income from my side business of $18K that we don’t expect in 2015. These two items not carrying into 2015 explains the drop in income.
Income Growth Assumption: In my model, I have assumed an annual increase of $20,000/year starting in 2016. Now keep in mind that the income is actually a combined figure for both my wife and myself. Additionally, the income increase can and will come from various sources including jobs, rentals, online business, and other cash flowing investments in post-tax accounts. This may seem very aggressive, but we are both in the sweet part of our careers, and the upside is looking really good. I alone have averaged increases of $12,000/year and based on my career path, don’t see that stopping or decreasing anytime soon.
If anything, that number is likely to increase over the next five years. Additionally, my wife made a strategic decision to take a pay cut of almost $25,000 to join her parent’s family escrow business two years ago (2013). She did this knowing that if she put in the time and the work her upside was much larger than at her old corporate job. In the coming year, we anticipate her income jumping substantially. There is also a ton of upside in the online business piece of the equation that could blow this current assumption out of the water by 2-3X. So I think this assumption over the next 5-7 years is conservative.
Savings Rate: A very large part of this 20-year plan to $10M is heavily reliant on an after-tax savings rate of 50%. If you would like to see the formula I will be using, please visit Mr. Money’s Mustache’s post here. He details it very well and I would rather let him lay it out for you, since that’s where I got it. You will notice that based on the formula Mr. Money Mustache presents, that my savings rate will be calculated on after-tax income (I do deviate slightly by including healthcare insurance expenses as a tax, as they are required by law).
What will the asset mix of the $10M look like?
Great question. As many of you know from reading my posts on paying down my mortgage in seven years here and here, a large chunk of my net worth will be tied up in my primary residence. I factor in 20 years of compounding for the value of my home at a 5% rate of value appreciation. Pretty conservative for where I live. Also, from the table above you can see that almost 40% of the net worth comes from savings alone. But let’s break it down.
As I write this, I see the $10M net worth being comprised of 5 major categories:
- Real Estate
- Peer to Peer Lending
- Cash and Equivalents (things like CDs and money market accounts)
Over time, as my net worth grows, I realize that there will likely be new doors that open up that are typically only open to accredited investors and high net worth individuals. But we will cross that bridge when we get there. For now, this is where I see the mix.
Before I can give you percentages, let’s work backwards…
Real Estate Valuation
We currently own our primary residence as well as one investment property. In my model, I assume a 5% annual growth rate of these over that 20 year period. Also based on the accelerated mortgage pay down strategy on our primary residence, we will have this completely paid off in seven years instead of the 30 year term. We are also ten years into a 30-year mortgage on our investment condo and will have this paid in full by the time we turn 48. We have no current plans of paying it off early.
Update: we actually sold our condo as of October 2017!
Our current holdings bring us to a net worth valuation of about $1.5M. We do have plans to add another investment property sometime in the next 6-12 months. We will assume a $300K purchase price while financing 80% of that (or $240K). Let’s also assume a 4.5% interest rate and that by the time we are 48, we are 19 years into the loan. This would leave us with a mortgage balance of approximately $125K.
This now gives us a total valuation of $2,277,361. We have to deduct the mortgage balance to get the net worth portion of our real estate holdings ($2,277,361 – 125,000), which gives us a total real estate net worth of…
Real Estate Net Worth = $2,151,361 or 22% of total net worth.
One of my goals is to turn my passion for personal finance and financial freedom into a business. To see examples of others who have monetized blogging and podcasting, look no further than John Lee Dumas of Entrepreneur On Fire and Pat Flynn of Smart Passive Income. These two really show what is possible with a completely online business.
I have big plans for this blog as a platform and a business. The best part is, I plan on doing this while still giving away 99% of what I do for free. You will see some affiliate links embedded in posts and a few product links and recommendations in the sidebar, but I promise to do this in the most tactful and unobtrusive way possible (the last thing I want to do is distract you from the content). I will only recommend products that I use myself or have used in the past. They will always be from companies/people that I know, like, and trust. In many cases, the products/services will be FREE to you.
A perfect example of this is the Personal Capital banner you see in the sidebar to the right of this post. Personal Capital is a wonderful technological tool to manage all of your financial accounts in one place. It fits my vetting criteria as something I use myself, something that will definitely help you out on your journey to Financial Freedom, and best of all, is absolutely free to you.
Now let’s talk dollars and cents. I believe that I can grow GYFG into a business that can produce $25,000/month in gross revenue. I know it is not going to happen overnight and could take years (and still may never reach the potential I see). But if I am successful, revenue will come from various sources that may include, but are not limited to: affiliate links, ads, digital products, sponsorships for a podcast, online financial summits, coaching, and other ideas I have.
If you look at Pat Flynn and John Lee Dumas (who are absolutely crushing it online, making between $100,000 and $300,000 a month from their online business), you can see I am talking peanuts compared to their success. If I do better than this plan calls for, it will just be gravy. The guys over at Empire Flippers say that an online business can estimate its valuation by multiplying monthly net profit by 20 (representing 20 months). Let’s assume I can keep expenses at 20% of gross revenue. This would produce net profits of $20,000/month.
Business Net Worth = $400,000 or 4% of Net Worth. (20,000 x 20 months)
Peer to Peer Lending
Although P2P lending is a rapidly growing market, I really don’t know how scalable this is. Meaning, how hard would it be to put $500,000 to $1M to work? But I will assume that it will only grow in scalability with time. So I am going to assume that I grow this to about $500,000. June will be the first month that we start allocating money to this piece of our portfolio at an initial rate of $500/month.
P2P Lending Net Worth = $500,000 or 5% of Net Worth.
Update: Since writing this several years ago, I have since pivoted and moved into hard money lending for this piece of the pie.
Cash and Equivalents
The goal here is keeping about 10% of our total net worth liquid in order to be ready and able to take advantage of opportunities that come up in the market. I call this “dry powder.” We don’t know what these opportunities will be, but they happen more often than you might think. It could be someone selling a business at a fire sale price because they need the money. Or maybe it will be an opportunity to invest in a start-up. Whatever the case might be, I have always believed it is a good idea to have cash (or something quickly turned into cash like CDs or money market accounts) readily available to take advantage of such opportunities. Hopefully, interest rates will rise a bit in the future so that, properly held, this idle cash can earn something better than 0%.
Obviously, this will be something that is built up over time. But I do plan to have this component set by the time we are 48.
Total Cash and Equivalents = $1,000,000 or 10% of Net Worth.
I envision the majority of my wealth tied up in equities. After figuring out the other four categories, this leaves the remaining 59% of my Net Worth in stocks. You will notice that I don’t have an allocation for bonds, and that is by design. I anticipate rates to stay low for an extended period of time, but I just don’t know how low or for how long. At this point, I am not interested in allocating capital for 30 years for a 3% gain. If rates rise substantially I may reconsider this allocation, but for now, this is the planned allocation. Additionally, I may choose to sell some equities to pay off the remaining debt on the projected third investment property of $125K, if we didn’t decide to do it at an earlier date.
As you saw from the table above, I have planned to contribute almost $4M into investments. As you can probably guess from what I just stated, this will almost entirely go into equities (my favorite asset class to invest in). In doing this, I will be employing options which I use to enhance returns and mitigate risk. I use two main strategies: Covered Calls and Short Puts.
Total Stock Valuation = $5,900,000 or 59% of Net Worth.
The Big Picture
I promised to also touch on the other side of the goal which is a monthly income of $50,000. In the business valuation section above I stated that I plan for GYFG to be eventually contributing $25,000/month in income. The remaining income will come from rental income, dividends, interest, day job (assuming I still have one by then), and any freelance work I might do.
The only other thing I would point out is that I am not planning for this to happen overnight. I have given myself an aggressive timeline of 20 years, but also plenty of runway so that it seems achievable and maybe even beatable. This is something only time will tell. Many people reading this may ask why I want to accumulate so much. The simple answer is because it’s a game and a challenge. Since it’s my game, I get to set the rules of winning, and $10 million is a number that I believe represents enough winning to afford me a lifestyle to do as I please. Personal finance is….well…personal. I don’t expect you to have my same goals, and your motivations may very well be different than mine.
So what will I do with all this money? I don’t know exactly just yet. But that will be a part of the journey. It will be fun figuring that out along the way.
Laying this all out, and having to reverse-engineer it to make the numbers support my vision was actually a very interesting and valuable exercise to go through. Do you think I am a crackpot? Maybe you see places to poke holes through my overall plan. I welcome either of those reactions with open arms. The GYFG blog has many purposes, one of which is providing a place for me to get my ideas, goals, successes, failures, and learned lessons out of my head and out to the world and I appreciate all interaction as I do that. This plan could change entirely in a year or two, but it’s my starting point and something to hold me accountable. Most of all it gives me milestones to hit.
I have always believed that it is better to move forward with a good plan than wait for a perfect plan. If you wait for a perfect plan you may never actually take any action: analysis paralysis. Version one is better than version none! Will this plan change? No doubt in my mind that it will (and has – see “updates”). But it gives me a very high-level roadmap as to what it is going to take to get to my $10M in 20 years goal.
Now it’s your turn
This post has gotten pretty lengthy. But before we go I want to ask you: what is YOUR number? Do you have one? In the comment section below let me know what your number is and at a high level what you envision the asset allocation to be as well as how many years you anticipate it will take you to achieve.
– Gen Y Finance Guy
Still reading? Right on!
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