Our guest on today’s podcast is Jen Smith, the “Millionaire Mommy Next Door.” By age 40, Jen had become a self-made millionaire and she and her husband are now financially independent, stay-at-home parents. In our interview, Jen describes her path from minimum-wage jobs to financial freedom.
Jen has appeared on The Montel Show and shares with Consumerism Commentary and is scheduled to appear in an upcoming film, Secrets of Money: The Documentary Movie. She writes regularly on her blog, Millionaire Mommy Next Door.
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[00:00] Introduction from Tom Dziubek
[00:44] Interview with Jen Smith, Millionaire Mommy Next Door
– [01:02] Why and how Jen set out to be a millionaire
– [04:22] How Jen has lived differently since achieving millionaire status
– [07:55] Jen’s unconventional path to becoming a millionaire
– [10:34] Apprenticeship as an alternative
– [17:38] Why Jen started the Millionaire Mommy Next Door website
– [19:28] Jen’s donations to micro-lending website Kiva.org
[21:06] End
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It is a shame that people are still fascinated with the idea of being a millionaire. According to an online etymology dictionary, the word “millionaire” was first seen in print in 1826, a year when having a net worth of one million dollars was an amazing accomplishment. An inflation calculator puts this into perspective; $1,000,000 in 1826 has the same buying power as $19,359,086.05 in 2009. There is nothing wrong about aspiring to become a millionaire as long as you realize that over time, the cachet of this status decreases and the number of millionaires increases.
Financial authors still look to millionaires as examples for the rest of us. Books like The Millionaire Next Door by Thomas Stanley and William Danko point out that most millionaires have self-made wealth, are business owners, and have a mostly frugal attitude towards spending.
A net worth of one million dollars in 2009, even if this does not include money tied up in the value of a primary home, will not provide financial independence for most people in United States. Assuming the one million dollars is invested in the stock market, and assuming financial planners’ recommendation of a safe withdrawal rate of 4% for maintaining value, a retiree or retired couple would be living on $40,000 each year. Considering families in this economy may be wary of investing their total nest eggs in the stock market, 1% or 2% may be a safer withdrawal rate.
One million dollars is not going to provide enough income each year for full retirement unless investment income is augmented by income from working, which defeats the purpose of traditional retirement, drastically reducing expenses to the point where retirees might need to redefine their planned retirement adventures, or moving to a country with a lower cost of living. For these reasons, my Number is well north of the one million figure. Note that I don’t call any certain number a goal, a real goal is not a number but the purpose behind acquiring wealth.
Rather than looking at the habits of millionaires, many of which are helpful but commonplace, I’d like to see more books focusing on the habits of those who have amassed wealth in the eight or nine digits. A quick look at the list of the world’s top billionaires (see Wikipedia) shows that like millionaires, the richest people in the world built their wealth by being atop the world’s largest corporations, and in Warren Buffet’s case, great investment prowess.
I prefer to focus on those who have achieved my Number, somewhere above “millionaire status” but below the stratospheric net worth enjoyed by the richest in the world.
Photo credit: TEDizen
The American Dream in terms of being wealthy, is to work only four hours a week, outsource your tedious chores to those whose time is worth less than yours, and to put your feet up and relax while being pampered from all sides. With more money, you’ll get there, right?
It turns out that wealth is a predictor (i.e., not necessarily a cause or effect) that people will spend less time on pleasurable activities.
People who make less than $20,000 a year… spend more than a third of their time in passive leisure — watching television, for example. Those making more than $100,000 spent less than one-fifth of their time in this way — putting their legs up and relaxing. Rich people spent much more time commuting and engaging in activities that were required as opposed to optional. The richest people spent nearly twice as much time as the poorest people in leisure activities that were active, structured and often stressful — shopping, child care and exercise.
Commuting, traveling from affordable homes to well-paying jobs, is an activity of the wealthy, and those who are wealthier spend more time doing this than others. Is this what we have to look forward to as we work to increase income and net worth? More stress?
The study mentioned in this article indicates that people assume mistakenly that being wealthy involves playing leisurely sports (like golf, I would assume), watching television and movies on a large, flat-screen television, and receiving massages and other pampering. Is this a stereotypical misconception, or does the study not take into account differences between the wealthy and the ultrawealthy?
Is there a difference between the small company CEO, earning lots of money with lots of responsibility (including stress and commutation) and the very few multi-billionaires that let their money earn more money while they do other things? Is that perception a myth? Even Bill Gates and Warren Buffett are still quite busy running their foundations or businesses. Are there multi-billionaires relaxing on the coast of Mexico without a care in the world?
How Rich People Spend Their Time, Washington Post, June 23, 2008
When I first read The Millionaire Next Door by Thomas Stanley and William Danko, it didn’t inspire me. It’s not that I disagreed with the authors, but I found the book uninteresting. It was one of the first financial books I read after beginning Consumerism Commentary, and it came highly recommended from readers here and participants in The Motley Fool’s community. 
Without getting too much into my problems with the book, I will say that the idea that a “millionaire” is more likely to be your local business owner rather than someone born into a family of money was new to me.
Recently, PNC Wealth Management conducted a survey of people with more than $500,000 free to invest as they like, a fair definition of “wealthy,” and possibly “millionaire” once you begin including home equity and other assets. Only 6% of those surveyed earned their money from inheritance alone. 69% earned their wealth mostly by trading time and effort for money, or by “working.”
Here are some interesting statistics I pulled from an article discussing the survey results.
- 36% of earners and 27% of heirs are concerned about an economic recession.
- 77% of earners and 67% of heirs believe they have a lot of control of their financial future.
- 39% of earners and 21% of heirs are moderate or risky investors.
- 75% of earners and 50% of heirs have less stress thanks to their wealth.
- 51% of earners and 33% of heirs believe their wealth has led to increases of happiness.
- Heirs are twice as likely to believe that their wealth causes more problems that it solves.
- 37% of earners and 25% of heirs believe that luck played a major role in their financial success.
For me, the choice is clear. There is only one option if I want to find myself with $500,000 of investible assets: earn rather than inherit.
[Yahoo Finance, MarketWatch: Earnings Growth]
Let’s face it: if she (and her husband) can, you can, too! While acknowledging that a million bucks ain’t what it used to be, Liz, a columnist for MSN Money, shared her secrets about how her family’s net worth climbed to $1,000,000.
There were no game shows or “reality” TV appearances. According to Liz, here are the elements of her strategy:
You’ve got to want it — and plan for it. “There are few accidental millionaires in the world. People who achieve financial independence, however they define it, make getting there a priority in their lives.” She started investing in her company’s 401(k) in her mid-twenties and chose cheaper trips rather than expensive vacations.
Live within your means. Spend less than you earn, pay yourself first, and set up automatic transfers and investments.
Invest regularly and don’t stop. If you react to market movements, you end up buying high and selling low.
Be smart about debt. Avoid high-rate debt and use low-rate debt to your advantage. “We chose an old-fashioned, 30-year, fixed-rate mortgage because the low payments allowed us to invest more for retirement while still allowing us to gradually pay off our debt. I’m not saying it’s the best mortgage for everybody, but it’s working for us.”
Own a house — and don’t waste it. “There’s no question that owning a home in Southern California got us to the million-dollar mark a few years earlier than I’d projected.” Bingo. Most millionaires have reached that level due to home ownership. It’s one thing to be a millionaire “on paper,” and another to have $1,000,000 of cash at your disposal at any time. “Homeownership isn’t a no-brainer. You can always mess up by buying more home than you can afford, draining your wealth away with home-equity loans or trying to speculate in an unstable market.”
Invest in yourself. “We’ve discovered (duh) that it’s easier to meet your goals, and have money for fun, if your income is rising. So we’ve invested in education, launched our own businesses and looked for new ways to generate cash. In today’s ever-changing economy, you have to be ready to learn new skills and take new directions.” As you can see, income plays a very important role in building your net worth. Keep that in mind when someone tells you, “It’s not what you earn, it’s what you spend.” It’s both. It may be hard to change your income if you believe it is already maximized, but chances are, it’s not.
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