Millionaire Librarian

Everyone knows the story of Goldilocks. She wants the porridge that is not too hot and not too cold, but just right. Similar can be said for buying a house.

Buying too small of a house is the lesser of two evils. However some financial gurus go to the extreme by trying to live in a tent to retire a few months earlier. A too small house may be a little cramped, but hopefully that means you will spend more time outside and in a rural area you should have a yard to do that. Another thing to keep in mind is perspective. The average house size in 1950 was 983 sq. ft. and it housed 3.37 people. In 2023 the average house size is 2164 sq. ft. and the average family is 3.13 people. In short, houses have doubled in size and families have gotten smaller. Everyone expects to have a huge house like their parents when it may have taken decades for your parents to work up to that house.

If you have read my previous post, then you know I prefer living in LCOL areas where housing is still affordable. However, even though you may be able to buy a $500k house there are plenty of reasons why not to.

First an expensive house means an expensive neighborhood and if you are like most people then you will probably get a case of “keeping up with the Joneses.” This happens in several ways but here are some examples:

People in expensive neighborhoods generally have nicer cars and if you are stretching your salary to get in a neighborhood, then how will you feel when you are driving the beater car on the block. A horrible reaction would be to try to keep up with your neighbors. Almost always car values drop in value considerably and are the easiest way to detonate your financial future. In a middle class or working class neighborhood it will be easier to fit in if your car is a little weathered.

Landscaping is another thing you need to probably budget for in an upper class neighborhood. Mowing your yard yourself every few weeks and having a few bare spots from the dogs is okay in a middle class neighborhood, but once you enter the world of HOA’s, then you will have the added HOA expense as well as the pleasure of paying for professional landscaping less you make those that have no life place a lien on your house. That’s right a HOA can take your house if you don’t follow the covenants.

A smaller house means less house to repair when you need to repair. Smaller roof, plumbing system, eletrical system, HVAC system and less walls, floors, and ceiling to maintain. If you need to replace any of these systems, then it will be cheaper and because you are not house poor then you will have the money to replace them. If you need to reinsulate the house then a smaller sq. footage will allow you to do it for cheaper. Simply less house means less to repair.

The linchpin in my entire system is buying an affordable house so you have a large gap between your expenses and earnings so you can save as much money early in your career to get it compounding. Also though there are considerable expenses when buying and selling houses, buying a small house early and then upgrading later when you are on firm financial ground with your investments is a great and responsible plan. I believe that throughout our lives we work and live in different seasons. Frugality for a time early means you can be extraordinarily generous or a spendthrift later while maintaining excellent financial health.

It also needs to be said that there isn’t any shame in appearing middle or working class. In my post titled Stealth Wealth, I make the argument that it is much better “to be rather than to seem” wealthy.

It is a hard sell for me to tell you to buy less house than you want; much of American culture and commercialism preaches for you to buy more and more forever, but there is financial independence, retiring early, and creating generational wealth to gain of you can follow the path.

The acronym IRA sounds complex, but they are extremely powerful and relatively simple. IRA is short for individual retirement account. Instead of an employer providing this account; you can make your own. Opening one at Fidelity, Charles Schwab, or Vanguard will take you about 10 minutes at most. Currently in 2023, you can contribute up to $6500 a year to the account. Occasionally Washington increases the amount you can contribute. However, there is one catch. What you contribute must be earned income. That means that you must earn the money from an employer. You cannot have the money gifted to you and the money cannot be earnings from investments. For many of us in the middle class that isn’t much of an issue because once we start driving, then we start working.

If you read my last post, then you followed the hypothetical situation of Emma. In that hypothetical, Emma receives $2800 that is invested for her when she is born from a generous, loving, and compound interest understanding parent or grandparent. When Emma turns 67 then she will have a little over $2 million if it grows at an average of 10%. However. Emma will have an ugly problem when she trys to sell; taxes at the tune of up to $400,000. Things could be worse, but by utilizing the Roth IRA when she starts working in her late teens or early twenties she can save her almost all of the money that would be taxed in the prior scenario.

Continuing with our prior scenario at around 20 years old Emma’s little account will be worth around $16k. Emma gets a part time position where she earns income then she can sell her brokerage funds for the amount she makes that year from her job and use those funds to fund her Roth IRA. She does this for a few years until all the money is gone from the brokerage. From that point on then her funds in the Roth IRA will grow forever tax free until she needs them at 67 when they will be worth $2M.

There are some pitfalls for this scenario. First $16,000 at 20 years old is extremely tempting to blow on a better car or improving an existing car. As Dave Ramsey says “We want this money to be a blessing and not a curse.” Allowing a young adult the power to buy something that could hurt them like drugs, alcohol, or a muscle car would be a detriment to them. Another pitfall would be to spend it at 30 when they are buying their first house. At that point the money would be around $50k and would make an excellent down payment on a new house. Though there are far worse things than buying a house; your child or grandchild may buy more house than they could afford or maintain. Later we will talk about the importance of buying a house only as large as you will need.

If you can stress the purpose of this money, which is for retirement and if they follow the path you lay out before them, then not only will they have an amazing retirement, but they can also leave substantial generational wealth to their loved ones.

In my last post, we learned about compounding and in my hypothetical example Mary worked from 25 to 67 and saved an impressive 1.5 million by only saving $200 a month during that duration. We are going to have another hypothetical person, Emma. Emma is born and her parents want to make her a multi-millionaire by the time she retires at 67. If the money grows at 10%, then how much do you think her parents would need to put in as a lump sum to get her to $2 million dollars. The answer is a little below $2,800 dollars. This isn’t 2,800 each year, but $2,800 one time when she is born. As explained in my earlier post, with a sum $2 million then if you were to make 10% the next year then you would have an additional $200k that year without putting another dime in.

This is a great technique for new grandparents or parents who may not have much money now to leave behind considerable wealth for our grandchildren and children decades in the future.

In my next post, we will look at some ways of making this money tax free so when they retire they get to keep more of their money.

Update:: With the new Secure 2.0 at the beginning of 2023 you can now roll a portion of a 529 to a Roth IRA for a beneficiary. This allows flexibility for recipients to turn education money into retirement money. This additional perk persuaded me to park our own daughters $3k in her 529 for her future retirement. There is still the requirement for this money once rolled to a Roth IRA to be earned income and you are still limited to the annual limits when you do the rollover.

Einstein is attributed with the saying “”Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Using my example of Mary who is able to save $200 a month from age 25 until age 67 earning 10% annually. She will have more than $1,548,000 after ten years. How much do you think Mary contributed to this huge amount of money? Would half be believeable? That would a little over $750k. Obviously, this post is about compounding so it may be less she put in.

How about half of that being $325k? It is even less than that. Over the forty two years Mary only contributed $100,800. That means that over 1.4 million was growth and compounding. Take a second to reread that last sentence; over 1.4 million was growth and compounding. If Mary delayed investing one year, then she would have around $150k less. Additionally, if her money spends one more year compounding then she will have a similar amount more. This is because of how percentages work. 10% of when she is 26 after only one year of investing is $240. 10% of 1.5 million is $150k.

This is why it is extremely important to save anything and everything as early as you can. You want to get your snowball as big as possible early on, then you can start taking your foot off the gas once your money begins working as hard as you do. Think of it this way. If you are at $1.5 million invested assets. You could burn $150k a year in a bonfire and if you were able to continue living off your income from your job then you would be in the exact same place next year minus some inflation cost of hopefully around 3%.

It is all about scrimping and scraping for that big initial snow ball. Charlie Munger says it bluntly and best: “the first 100k is a bitch, but you gotta do it.”

Huge financial snow balls is why the rich keep getting richer and they are able to pass down generational wealth, which we can look how to build in my next post.

Substancial wealth is not made overnight or doesn’t even require an extremely high income. In the book, “The Millionaire Next Door” the primary premise is that many millionaires just saved a large percentage of their income and spent very little. Ironically, the people flashing Rolexes and driving fancy depreciating assets / cars have spent their money and therefore likely don’t have much.

Stealth wealth is my goal. Steath wealth is when someone has loads of money, but you would never be able to tell unless they told you. The wealthiest person I personally know is an elderly, retired lawyer. He has three cars, but the average age is well over a decadeand they are all Hondas. He has slowly invested his money in real estate, bonds, and farmland which he leases out. He has lived in the same house for over 50 years. Many people would laugh if you pointed to him, his car, or his house and you claimed he had lifechanging wealth. He likes to donate money to those in need. He gives to charities. He donates to his church. Also he will leave his wife, children, grandchildren, and great grandchildren generational wealth.

How did he do this? He lived well below his means and invested his money in appreciating assets for an extremely long time.

The word millionaire evokes images of suited CEOs and executives sitting around a table in a high-rise in NYC, NY. However according to the largest study on millionaires performed by Ramsey Solutions the third most profession of millionaires was a teacher. This should be surprising. I was initially surprised when I heard it. As Americans we harbor many money myths that hamstring our ability to build wealth.

Building wealth is a slow deliberate process. It is more the slow drop of water eroding a stone than a jackhammer bashing it. To illustrate this point lets ponder a hypothetical.

Mary completes college at 25 years old and saves $200 each month from her position as a teacher and invests it in an index fund averaging 10% until she is 67. She doesn’t increase her allotment even though it is likely her pay will increase either through cost of living adjustments or through a promotion. At 67, Mary will have around $1,548,000. However, time in the market is everything. If she waits until she is 35, then she will only have around $557,000. This is much better than most people, but some discipline earlier means the world of difference.

When you are young your dollars are extremely powerful and only grow weaker as you age until it is too late.

Geo-Arbitrage has become a popular term in the post Covid world. In its simplest form it is living in a low cost of living area while having the benefit of a higher cost of living job. With the rise of remote work this generally means remote work. However, I have been benefiting from geo-arbitrage in another way for almost ten years.

I have a federal position in a low cost of living area. Federal positions pay slight more locality pay to be in a HCOL area, but I don’t believe it is worth it. As a GS-11 step 1 you can expect to make $69,106 in 2023 in any LCOL area in the U.S. In the highest cost of living area as a federal employee you make $78,591. In my small town in rural America the median house costs $175k, while in Washington D.C. the average house is $630k. That extra $9000 doesn’t come close to filling the gap when comparing housing costs. Other needs will likely be higher in a HCOL due to everyone needing a higher salary for the same standard of living elsewhere.

If you are the type of person who needs to live in a giant city, then know that unless you have an extremely high wage it will be very hard to save any money much less become financially independent or retire early.

Remember it doesn’t matter how much you make, but how much you keep when saving money. Finding a unicorn job where you have a better than average salary and pay very little in housing is one of the best ways to do it.

I am sitting here with less than a week left of my 12 weeks of parental leave from working as a federal librarian. My newborn daughter is in her automatic swing sleeping in front of me, while my three dogs sleep around my small house located in rural middle America. My job is very comfortable and my salary is moderately higher than median. One of the reasons I chose the librarian profession, though requiring a master’s degree and generally not paying very well, is because it should be low-stress and I can perform this job well into my old age. I am extremely grateful of the life I live.

So why am I interested in finance and more specifically FIRE (Financial Independence, Retiring Early)? I want to provide a good life for my wife and family. I want my newborn to be able to attend college without going into debt. Finding a new job as a librarian can be extremely time-intensive so if I get a new boss and am miserable I want what JL Collins calls FU money. This is money to separate from my employer and go my own way for as long as it takes. That is the true power that money can bring. The ability to have the exact life you want.