Our best investment strategy was inspired by this below Paul Samuelson quote (a 1970 Nobel Prize winner in economics):
“Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
I’ve been reflecting on the investment strategies that have worked for the best for us recently. I believe that if you can understand your past, you can best prepare for your future. Study what has worked, and not worked. The way to success is to simply repeat the actions that have worked for you, and dump the actions that haven’t worked.
I want to reflect on the steps that led me to being a successful investor in this post. When I get anxious in the present moment, I just remind myself to keep doing what has worked in the past. And what has worked in my past, honestly, has been as boring as watching paint dry or grass grow.
I first became an active investor 5 years ago. We first met with a financial adviser to get help, and through him, we made our first investment ($22,000) into four funds that he recommended. We maxed out our retirement accounts that year ($5,500 each) for the first time, and we had $11,000 leftover that we used to buy our first shares of taxable mutual funds. I spent the next year learning how to follow the performance of those shares, and I learned the general workings of the stock market. While learning, I became fascinated with the revelation that investing is actually the art of building your own money-printing machine.
I enjoyed learning how to be an active investor in that first year. I discovered there was a relationship between how much money we had in the bank, compared to how well I slept. I just slept better knowing I had money in the bank. So we did the logical thing, and saved and invested every chance we got. As I reflect on this period, I can now see that there weren’t any exciting or miraculous things that happened during this time. There were just thousands of small logical financial decisions that were made consistently over a 5-year period.
Just like the quote says in the beginning of this article, the investing strategy that worked for us wasn’t a thrilling experience like the feeling of winning a massive bet on a sports game. It was actually boring. Our best investing strategy was just making logical financial decisions over and over and over again. In this micro-view, our investing strategy was about as exciting as watching paint dry. But when you look at the results that were created in the macro-view, many exciting, life-changing financial events were taking place.
Here are three steps we took to get our lives and finances together. This is the investment strategy that led us to our adventure to create wealth:
Our Best Investment Strategy, Step #1:
Our first step was when we chose to live frugal lifestyle, over a luxurious lifestyle, no matter how much money we made. My wife and I chose to see luxuries as an expense that we just didn’t need to be happy. We realized that our happiness didn’t change all that much if we were in a $3,000 car, compared to a $60,0000 car. We learned that we were actually happier engaging in outdoor activities like biking and hiking that were free to enjoy, rather than paying hundreds of dollars to feel fat and lazy eating and drinking at bars and restaurants. This decision to live cheaply, over expensive, was the first key we embraced to unlock our journey to wealth.
We stopped eating out. We stopped buying clothes. We shopped on Craigslist, Ebay, and sought diamonds in the rough at Goodwill. We chose hobbies such as exercising in nature, which were free and open 24 hours a day, rather than paying for concerts and sporting events to be entertained at. We filled up water bottles from fountains, and we brewed our own coffee, rather than paying a 1000% mark up for them at a store. We thought long and hard about the vacations we took, and searched for ways to tighten our budget every way we could.
I remember a conversation that my wife and I had that summed this period of our lives up: One morning we were hungry, and we stopped at McDonald’s for breakfast. The sausage Mcmuffin’s (without the egg) were .99 cents. The Egg Mcmuffins were $3+. I remember both of us looking at each other, and saying, “Today let’s go with the .99 cents option. And because we were smart with our resources today, one day we’ll be able to buy a real egg-mcmuffin (WITH THE EGG!!!!) guilt-free. But today is not that day.” Making the decision to save, rather than spend, over and over again, was the first step that unlocked the next steps, which led our money to start accumulating into snow drifts, from snow flakes, in our bank account.
Our Best Investment Strategy, Step #2:
The second step in our investment strategy was saving the down-payment for our first house so we could get married and move out of both of our parent’s house. But rather than buy an expensive house that was at the max-limit of what the mortgage lenders were offering us, we let our frugal mindset guide us to buy the right financially-smart house.
The mortgage company was willing to loan us $300,000 based on both of our incomes. But we made the decision to base our home purchase on ONLY my wife’s $30,000 annual income. Her income got us approved for a $165,000 loan with a 20% down payment, so we ONLY looked at houses that were listed for $165,000 or less.
This “smaller” loan, combined with the 20% down-payment, helped us avoid a PMI payment, and allowed us to have a house payment of $900 a month (And since we received $1200 back at the end of each year due to a property tax refund), our house payment really was only $800 per month. $800 per month is pretty dang reasonable, considering a 2-bedroom, 1000 sq ft apartment in our area easily goes for $1,200 per month. And we got a 2,000 square foot house with 3 bedrooms and 2 bathrooms for $400 less than that. Even better, every month when I paid the mortgage, the loan balance dropped $200. And even better, we knew our first house could become a perfect rental property a few years down the road if we ever wanted to move. So we were helping ourselves in 2 ways buying our first home: We were collecting a future asset, while at the same time, solving our need for a nice place to live.
(Disclaimer: Just be aware when you own real-estate, not everything is going to go as rosey as the numbers make it seem when you first buy a home. Things are going to break. Appliances are going to fail. Storms are going to hit and damage stuff. These acts of God can become frustrating and very expensive, so be prepared for that. If these things cause you to cringe, then it’s Ok to bypass the entire real-estate owning experience. I know a lot of millionaire friends (Millennial Revolution, and Budgets are Sexy to name 2) who are happy and rich renting, or avoiding real-estate altogether, and live full time in an RV like Steve and Courtney at Think, Save, Retire do.)
I credit my DIY attitude for helping me overcome the frustrating sides of real-estate ownership. Which is: stuff is going to break, and not everything is going to go as planned. But rather than calling an expensive professional every time something broke, I learned how to enjoy working on home projects, and did most of the home maintenance on my own. This DIY attitude has saved me tens-of-thousands of dollars on real-estate projects over the last few years. When something breaks, I don’t feel helpless or stress out. I just buy some tools, watch some youtube videos, put on old clothes, and get to work. This is the attitude you should definitely embrace if you’re going to win with real-estate.
Our Best Investment Strategy, Step #3
Finally, the third step of our investment strategy began once the two above steps (Frugality, and Low Living costs due to home ownership), (combined with 2-paid off cars, and no consumer debt), put us in the sweet position to save ALOT of money in a short period of time. With low expenses, we didn’t need to make massive incomes to become wealthy. (For example, my wife and I combined have never made more than $100,000 in a year.)
With low monthly payments to live our lifestyle, we were able to save around 50% of our income, which was around $20,000-$30,000 per year. We then used this “dry-powder cash” to buy more stocks and more cash-flowing real-estate when the right opportunities presented themselves. (Cash, or other liquid assets, is often referred to as “dry power” in the investing world. Having cash available is important in case an unexpected investment that you don’t want to miss suddenly appears for a limited time, or you find yourself in a financial emergency that cash can help you escape.)
These assets helped establish our first passive income streams, which is basically money we were making even when we weren’t working. But rather than spend this money, we chose to re-invest it to buy more assets. Having this money is invaluable to me. Because having this money, takes my money-stress away, which is ultimately my goal of saving all this money. Because even if I lose my job, I don’t have to be afraid of losing my life. And when you don’t have to stress about money, you can focus your stress on the things that really matter, like achieving the life God wants you to live.
This third step has really just been repeating the first two steps (frugality, and saving to buy investments) over and over over again the last five years. We sneak in the occasional ski trip, or mountain biking adventure on a budget as we go, just to make sure we’re living fun, fulfilling lives as we focus on saving and investing.
Here’s a list of my 5 Favorite Investments That Can Make You a Millionaire.
It’s still amazing to me that we’ve accomplished all of this in the last five years. In the micro-view, it didn’t look like anything was happening. But in the macro-view, amazing things were taking place. Over a period of years, one investment account turned into five, and the number of houses I own has grown to two. I have to remember that investing done right is alot like “Watching paint dry,” when I start getting impatient and anxious. Investing done right takes time. I just need to continue the same logical, methodical approach I’ve taken the last five years, and I should be fine.
I’m not trying to become wealthy to buy expensive crap I don’t need. I also don’t want to quit my job, retire early, and do nothing with my life. I am self-employed and like the job I created for myself. My goal for financial independence is just to reduce the stress I have when I think about money. Once I have a million bucks in the bank, I will never have to stress about money again. My passive income streams will be large enough to keep me living a sweet life no matter what happens to me. Once my money stress is gone, I can focus on living the life I really want to live: I want to accomplish every goal that God — Not my boss — puts in my heart.
Ultimately, what I’ve learned over the last 5 years is: Great investing is the result of living a very boring, logical, methodical way of living life. It’s simple to be a great investor: Just live below your means; invest what you save; and re-invest what you make. But being patient enough to pull this off is extremely difficult. The funny, paradoxical thing about great investing is that even thought it’s one of the most boring ways to live life, it leads to one of the most exciting ways to live life. Because once you can afford to do anything you want, you can begin to become whoever you want to become.
This is the best investing strategy I have found. So what has worked for you?
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Great stuff. Love that quote at the beginning. Plus any financial lessons from the dollar menu are great in my book.
Thanks @My Sons Father. I know some people judged us as poor for eating off the dollar menu. I looked back at them, and thought, “It’s not what I look like today that counts. Judge me again in 20 years, and see what we look like then.”
Love reading stories like these. As “boring” as they may seem to some people – the PF community is all about embracing boring! There’s nothing sexy about budgeting, living below your means, or saving 50% of your income, but having F-U money and being able to have the freedom to make your own personal choices without being restricted by financial means? Now THAT IS TITILLATING!
You said it perfectly Amy. “Boring” that is leading you somewhere great, is actually “Fascinating” if you know how to see the magic in the journey.
Yup! It’s really that simple.
When we were in “gazelle mode” to pay off our mortgage, I had so much fun figuring out how to live on as little as possible. Other people called us crazy and extreme. Which leads to a really important tip.
You can’t be successful with money if your worried about what everyone else thinks. Time and time again, I see statistics that 75% of Americans are living paycheck to paycheck. Or couldn’t cover a $500 emergency. These people are our friends, families and coworkers. And they probably won’t support your journey to financial freedom. You need to be okay with that. Because not losing sleep over my finances is priceless.
Right! Negative people won’t support healthy decisions, because that’s what negative people do. What has helped us overcome this fear is that we’ve made the choice to let go of the negative people in our lives and leave them in our past. My mindset is: If you don’t want to be happy for us becoming better, stronger, happier people, then have fun with that. I’m going to use my time and energy to find new friends who are pursuing the same goals, and want to be happy with us. Sometimes losing an unhappy friend, leads to the happy friends you’re supposed to have.
Great post, Billy. I’ve long said that this stuff “is simple, it’s just not easy”. You have to be willing to buck the materialism that’s so prevalent in our culture, and live below your means. Get a few “simple” steps right (the house, the car, and credit cards, and it gets a lot easier.
You nailed it with this comment: “this stuff “is simple, it’s just not easy!” It’s super simple! But super hard. Just get yourself a retirement account, a taxable account, and some real-estate if you fancy that type of thing like I do (Because as Mark Twain once said: Buy land. They’re not making it anymore.), and just fill those buckets up to the brim with cash! Here’s some more reading that recommends my favorite accounts: https://www.wealthwelldone.com/best-financial-investments-millionaire/
It’s super easy! The hard part is looking at all types of cool stuff you want to buy, (for me currently it’s a new dual-suspension mountain bike when my front-suspension bike does just fine on my Minnesota hills) and say no to it. My financially stress-free life is more important than that thing that looks so cool!
#1 has been huge for us. By creating a big gap between our income and spending, we have been able to accelerate our wealth creation. Nice post!
Sweet man! Once that income/spending gap has been created, then take all that margin and dump it into your favorite investment vehicles and you’ll begin to be wealthy, if you’re not already, before you know it!
Do you still have the advisor skimming a percentage off your investments?
Play with this fee comparison tool and see the impact of 1% or 1.5% fees over 20, 30, 40 years. Mind blowing!
Become a DIY, low cost index investor. Keep almost all of your earnings. Our all up cost at Vanguard is .07%.
Bogleheads.org is a great place to spend time learning about low cost, DIY, index investing.
Thanks for the post!
Hey Wade. No, we only had those funds for the first year. Once I learned more, and found out about those fees, I moved them all over to Vanguard target retirement accounts, and Vanguard total market index fund accounts after that first year. I now pay .05% management fee compared to a 1.25% management fee AND a 5% sales charge!
Here is the story of how and why we sold those large-fee mutual funds = https://www.wealthwelldone.com/master-money-and-investing/
Wow, very, very informative article. Great stuff, congrats and thanks. Investing should be dull, you are right!
Great post, Billy. I’ve long said that this stuff “is simple, it’s just not easy”. By creating a big gap between our income and spending money, we have been able to accelerate our wealth creation. Nice post!