With David Muhlbaum, Kiplinger’s online editor
Have you heard the one about the woman who worked as a librarian her entire life and left behind $7 million to charity at her death? How about the janitor who amassed an $8 million fortune that went to his local library?
We scratch our heads and wonder how they did it.
David Muhlbaum, the online editor for Kiplinger.com, has some interesting observations and opinions on this subject.
Wealth accumulation for dummies.
These people didn’t hit the lottery, nor did they inherit from a rich dotty aunt, nor did they pull the magic lever in Vegas. They worked and they invested wisely; simple as that.
These silent millionaires, these seemingly low-key everyday-men-and-women next door do have a secret and it has to do with their mindset. David says the attributes common within this group are “thrift, it is not spending beyond your means, not taking on more debt than you can repay, and not essentially going in too much for the ‘treat yourself’ mentality.”
Education as a calculated tool toward wealth.
How does the level of education play into this idea? The silently wealthy begin with a mindset that evaluates education as a means to future earnings; they assess how a particular field or degree fits in with the marketplace and they go at it.
Don’t let student debt become your albatross.
The desire to feed the underprivileged in a small far-away country is admirable, but you should think twice about incurring student loan debt for a degree in social work. It’s vital, warns David, to evaluate your earning potential in a given field against the debt you’ll be trying to pay off for years to come.
Prepare for retirement from a distance.
At the first point of employment, the silent millionaires all know what to do: you start saving. You set up a 401 (k) or the like and you begin the magic of compounding. You avoid impulses to overspend and keep a steady rhythm going with your savings. It begins slowly, but then it builds over the decades until you reach your goal of financial security and a worry-free retirement.
But life happens!
The best laid-plans are open to the unexpected, and David, again, advises a calculated plan of action: You must have life insurance, you must have liability insurance, and you must have health insurance. The premiums you pay for the coverage provided will not only save you sleepless nights, they will protect what you have saved for and worked so hard for.
Not by bread alone
Although there needs to be a balance between fulfilling your life’s desires and the reality of the cards you’re dealt in life, choosing your career field will have an enormous impact on your wealth creation…and, ultimately, on your financial security.
Steve Pomeranz: Do you know someone like this? On the surface they look and act just like you and me, but they have a vacation house at the beach, they didn’t have to borrow a dime to send their kids to college, and they’re even donating to charity. How do they do it? To find out, I’ve invited my next guest. He calls it the secrets of the millionaire next door, and he’s here to fill us in. He’s Kiplinger editor David Muhlbaum. Hey David, welcome to the show.
David Muhlbaum: Hi, great to be with you.
Steve Pomeranz: You know, in the online world where flash, million dollar mansions, expensive cars, and garish lifestyles are celebrated, there are many people out there who are what you’re calling the invisible rich. Does this money come from inheritances, lottery winnings? Where does this money come from?
David Muhlbaum: Normally, earning it at their job and then putting some of that aside in investments that add to their earnings, and build up over time.
Steve Pomeranz: Just kind of the basic, boring stuff of wealth accumulation, I guess, right? Are you saying that these people generally are not in flashy jobs, they’re not earning big paychecks necessarily? What is the first clue in terms of how they’re able to save enough money, and then to properly invest it?
David Muhlbaum: I think it’s a mindset question. You have to have certain attributes, you have to have certain approaches to your money. Core among that of course is thrift, it is not spending beyond your means, not taking on more debt than you can repay, and not essentially going in too much for the “treat yourself” mentality.
Steve Pomeranz: It’s not necessarily buying the car of your dreams all the time, it’s maybe buying the car that is just a great car, maybe you bought it a year or two after it’s new, and you hold it for a long period of time and you’re just kind of using it more for utility rather than an object of art. What other characteristic do they have? Are these people generally well educated, or do they live a life of constant education for themselves? Are these the kind of people we’re talking about?
David Muhlbaum: Well, when you’re talking about education, you’re talking about decisions that have to be made early on. There’s no doubt that education still pays, although there are questions about how much you should borrow to pay for it. Nonetheless, the basic principle of education equaling lifetime earning potential is there. These are people who have made good decisions early on to educate themselves. Yes, you’re right. It’s not the end of it. They’re looking at their careers, they’re reconsidering whether they might need to add a certificate program, whether they might need to go back to school, even as late as their 30s and add a degree. Thinking about that, looking at their education and reevaluating it to make sure that it fits in the marketplace to keep that earning potential high.
Steve Pomeranz: You know, we live and work in a very dynamic economy, and there’s no question that the rate of change has accelerated. It’s so important for all of us to stay up with your business, to see opportunities of new add-ons to your business, and like you said, new certifications. Anything you can do to enhance your knowledge, make yourself more valuable in the marketplace. Really, it’s something that you should be doing all the time, even after you stop working. I think, in my personal opinion, it’s kind of the definition of a life well lived. How important, David, is picking the right field to work in?
David Muhlbaum: It’s pretty critical. We’re seeing a lot of this now in the back and forth about the question of what majors have the greatest utility. There’s a lot of backlash against the humanities, and then sometimes it seems like, well maybe there’s potential there. Nonetheless, the jobs that we identify as having the best lifetime earning potential tend to lead towards technology, tend to lead towards healthcare. That’s where the growth is now and probably for the foreseeable future.
Steve Pomeranz: You know, it’s very fascinating, you mentioned the humanities. I think you’re right. I think for some reason the humanities have taken a big backseat in our society. I personally think that’s a shame. The ability to write well, to read fine works, well written materials, it’s such a joy. To be able to express yourself musically or artistically, this is the stuff of life that makes a life full. Whether you can actually earn a living at it is a different story. I hate to see the fact that the humanities as an area of study are taking such a backseat to things that are necessarily economically better suited.
I also think financially, if you’re going to take out a big loan for a student loan, you really have to be careful of what field you’re getting into. There’s nothing worse than having massive loans and a very small amount of income to help you pay it back. What about saving? How early do these people really get started? Saving is a hard thing for people to do. You mentioned that a lot of it is just kind of attitude and how you think about things. How early do you have to really start saving to become that millionaire next door?
David Muhlbaum: Well, let’s hope that they’ve gotten a culture of savings from their parents, because yes, it really does need to start early. One of the most critical points will be when you have a new graduate with that student loan debt that we’ve talked about who’s got a job and has the opportunity to put money aside in a 401(k) for their retirement. That’s a really critical moment, because they may want to pay down the debt, they may also want to be thinking about putting money aside for retirement, or they may just want to cover the costs of their everyday life. That’s a point where savings, you need to pay yourself first, and need to take advantage of savings plans that are tax advantaged, such as the 401(k).
Steve Pomeranz: Saving early, saving for the long term, not trading the market, not trying to be smarter than the stock market and make it a gambling hobby. Just to stay invested, dollar cost average over long period of time. You’d be surprised how quickly, or rather how successfully this money will build up. It was funny, I was clicking through TV channels the other day, and I saw the program Do You Want To Be A Millionaire. David, do you remember that show?
David Muhlbaum: Yeah, that was a while ago, wasn’t it?
Steve Pomeranz: Yeah it was a while ago, but you know, it’s still on. I didn’t even know that. I had thought about this some time ago and I noticed again that really, in the early rounds, I think the first question you answer that you win you get $250, then it goes to $500, and then I think it jumps to $1,000 then $2,500. There’s a lot of steps, and you don’t really get to the $1 million until the last two steps. $250,000 becomes $500,000, $500,000 becomes $1 million. When I think about that I think about the art of saving and the magic of compounding. The real wealth really comes in the latter years. You’ve got to build up all of that money by beginning with those early steps of $500, $1,000, $2,500. You have to be patient and wait for those last steps.
David Muhlbaum: That’s why it’s so attitudinal. You really do have to have an approach so that it’s not just even a question of years, it’s a question of decades. You have to be prepared for a slow start, but yes, as you point out with compound interest, the magic will happen later on.
Steve Pomeranz: That’s right. How important is protecting yourself against the unforeseen, I guess through certain types of insurance and the like? Is that another characteristic of these people who have accumulated more money than you would expect?
David Muhlbaum: You know, if savings is unsexy, what’s less sexy? Insurance. Really I mean, once people are moving towards having wealth they need to think about protecting it, and they need to think about protecting their potential to make that wealth. There are several categories. One, of course, is life insurance. Another is liability insurance. Once you have a good house, once you have investments that could be taken from you, you’ve got to have umbrella insurance, which often rides on top of your car insurance. You’ve got to cover at least what you own to make sure that you’re not caught up in some law suit that takes it away from you. The other main one is disability insurance, probably above and beyond what your employer offers to make sure your earnings don’t take a hit if you’re too ill or injured to work. It’s hard to grow that $1 million if you can’t earn it.
Steve Pomeranz: You know, there’s a lesson here for those people out there who are opting out of health insurance as well because they do the short term math. If a health insurance premium is $300 a month and that’s $3,600 a year, that’s a lot of money. They go, “Well, you know what, if I don’t do it then I’m going to have a penalty, the government will penalize me and it will be something like $900, so I’ll pay the $900 penalty if the government ever finds me or comes after me, but it’s better than the $3,600 that I’m going to be paying in premium.”
The answer is, that is wrong. That is wrong. If you ever have any surprise health event, you get in an accident or something, it can just totally wipe you out. You really don’t want to be so short term minded and so literal minded in your thinking. Think about the future, guys. My guest is David Muhlbaum. He’s with Kiplinger Mag and we’re talking about the secrets of the millionaire next door. Hey David, thank you so much.
David Muhlbaum: My pleasure.