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.
To listen, use the player above (Adobe Flash required), download the podcast here, subscribe to the podcast RSS feed, or use the iTunes link. Note: open links in a new window (Ctrl-click or Command-click) to avoid interrupting the podcast.
[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
We always welcome feedback from listeners. If you have any comments for this episode or for any other, or if you have suggestions for future episodes, please leave us comments here or email us at podcast at this domain name.
For most humans, life is much shorter than we would like, and for many of us saving even ten percent of our income will never result in a state of wealth within our lifetime. There are too many forces working against this endeavor: a lack of sufficient opportunity, inflation, and unplanned events to name a few. In addition, most people, at least in the United States, save much less than ten percent. It’s no wonder spending other people’s money and going into debt is so alluring for many.
Even if wealth eventually arises through conscious, compounded saving, by the time we reach a level of net worth that qualifies us to fall into the category we have set as a goal for ourselves, we are too old to enjoy what we have set aside. Putting aside the noble, selfless acts of passing our assets to charitable causes and descendants, the point of accumulating money is not to have a large bank account; the purpose of saving is to do something with the money.
When we save, we are putting aside our desire to do something now for the chance of doing something more later. Those nurturing a superfrugal mindset argue you should always choose the latter. The problem with the future is it never arrives regardless of how long you wait. Even though there is always a place or time or dollar amount where you can draw the line and begin living your life, that line may never come.
I will freely admit that I am not particularly adept at focusing singularly on the future. I likely fall somewhere along the spectrum of forward-thinkers. While I am not overly concerned about the present and I do not need immediate satisfaction, I do have my doubts about the future. I am saving money for retirement, including putting money into accounts that can’t be touched without penalty until several decades pass, but there is a possibility I may not live long enough to reach that goal. I am sacrificing a part of my life — not only the selfish activities in which I’d like to participate but the good, charitable things I could be doing with that money now — for the chance of doing more later.
If I don’t have the opportunity to do more later later, I would have made many needless sacrifices.
There are no certainties, so how can anyone truly offer advice about how much someone should save for the future? Life is short, and it’s important to make the most of it while you have a chance. No one knows what tomorrow will bring, so we guess and we offer suggestions. Save ten percent of your income (a weak but popular rule of thumb), or save as much as possible, but don’t completely sacrifice your life now for your future.
With your finances in control or on the path to being in control, ensure you are making the most of the short time you have on this planet. The slow road to accumulating money is the road that most people will take, so enjoy the scenery. The future may never come, so don’t deny yourself all joys of experiencing life now, however you define these joys, in deference. If your approach is causing you to miss out on aspects of life that you find important and will later regret, you may be saving too much money.
Between March 1917 and January 1984, there have been thirteen major changes in the rules for the estate tax, a tax paid by heirs for wealth inherited. Of these thirteen changes, eight were tax increases and five were tax decreases. In 2001, A study by the University of British Columbia and the University of Michigan determined that the timing of death surrounding these changes is elastic.
When the estate tax increased, individuals with wealth to leave to their heirs were more likely to die in the days before the increase than they were after the increase. The reverse is true when the tax law change favored the wealthy. When the estate tax decreased, individuals with wealth were able to hold on to life longer in order to save their heirs money owed to the government.
Here’s the study.
Right now, the estate tax is one of the IRS’s more complicated systems. Keeping it simple, the gross estate, after deductions, is used to determine the amount the heirs owe in tax payments. There are fourteen tax brackets from a rate of 18% for amounts below $10,000 up to 45% for amounts above $1,500,000. Keep in mind these are marginal tax rates. If you inherit $2,000,000 you do not owe 45% of that entire amount ($900,000), you owe $555,800 plus 45% of $500,000 ($725,000). But this is not currently relevant because the “first” $3,500,000 is excluded from the estate tax; effectively, the amount an heir would owe would be 45% of the amount inherited over $3,500,000. This greatly reduces the effective tax rate on an estate — for the 0.3% of all estates that end up owing taxes, their average effective tax rate is under 20% according to the Urban Institute-Brookings Tax Policy Center (source).
Unless Congress changes the law — a legitimate possibility — anyone who inherits wealth from an individual who dies in 2010 is exempt from the estate tax. If history is a guide, we should see the same pattern of convenient timing; those close to death at the end of this year will manage to hang on another week or two to pass away in a more heir-friendly tax environment.
And if the law sunsets in 2011 and the estate tax is back in force, those nearing death at the end of 2010 will accelerate their passing to get in under the wire.
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
We spend our life in modern society accumulating Things and possibly accumulating money. When you take a step back and look at life on the larger scale, money is not a goal in isolation. We strive to accumulate wealth not to die with our names in various banks’ computers associated with high numbers. There must be something else we intend to do with that money, as it is only a tool, a means to an end.
Among the ability to buy and accumulate Things, having money allows us to have more options. Having money allows us to have children — although the lack of money rarely stops people from procreating. Parents who have unspent money may decide to transfer their wealth to their children as they approach or reach the end of their lives.
The decision to leave money to children is personal, and there are many arguments both for and against. But assuming you’ve made the decision to pass wealth to younger relatives, how do you decide how much each heir should receive?
One option would be to divide your estate equally among all recipients or equally among recipients of the same level. For example, with $30 million to distribute and two children and four grandchildren, you could leave $5 million for each heir. Another option would be to leave $8 to each of your two children and $3.5 million to each of the grandchildren. Either one of these options might be considered “equal.”
What if one of your children is a successful entrepreneur who is wealthy in her own right and the other is a successful non-profit manager who has not earned a fortune on their own but has struggled for an important cause? Would it still be right to leave equal amounts to each child? What would you do if one of your grandchildren is developmentally disabled and would benefit from several million dollars to cover a lifetime of health care expenses?
“Equal” is not always the same as “fair,” and it’s usually easier to determine what is equal than to determine what what is fair. How would you decide to allocate your wealth among your heirs? This dilemma could be avoided by giving your fortune to charity. However, assuming you’ve decided the money could be well cared for in the hands of offspring or other heirs, what would you do?
Even though I share my financial reports every month, I don’t see increasing my financial wealth as a goal. The accumulation of money is not a destination. I am not aiming for any particular measure of financial worth, such as ten million dollars of net worth or one million dollars of passive income each year. While these milestones would be nice, they, or any other financial metrics, are only means to an end — or to no end.
Money is only worth what you can do with it. What is the point of accumulating a higher balance in a banking account or a higher value of investments if you never put that money to use? I will concede:
- Leaving money alone to appreciate through compound interest or investment gains is a great way to build wealth over time.
- Saving as much as possible when you are young allows you to have more options as you proceed along your journey through life.
But money has very little meaning now on its own. There is no money, there are only bits and bytes in banking institutions’ extensive computer server farms. You trust that when your banking institution says your bytes have changed to award you a higher number, you can connect that account to someone else and transfer your bytes to pay for an expense. In rare cases, you may even wish to turn those bytes into pieces of paper or coins.
So when I hear that someone’s goal is to have a nest egg of ten million dollars, it is an empty goal. This goal is nothing more than having bits and bytes in a certain configuration on a certain server in a database record associated with your identity. I accept that it will be difficult to get the bytes to arrange in that fashion, but look beyond this. What would you like to do with that money?
You may feel happy or proud when you reach this or any milestone you set for yourself, but wealth doesn’t do any good sitting in your bank account. I mentioned above that saving more now provides you with more options in the future, so rather than looking at a number, start deciding which options you would like to pursue. Here are a few in no particular order. Assign your goals to the reasons you are saving money, not the money itself.
Providing the basic necessities for yourself and your family. Many people build wealth simply so they can survive, sometimes with just the necessities and sometimes in the style to which they are accustomed. These financial needs, including shelter, food, water, and health, need to be taken care of before you can consider doing anything else with your money. If you plan to stop working and expect your income to cease, saving for the necessities is essential.
Leaving money to your heirs. If you don’t have children, perhaps this is not a concern. But many people do have children and would like their wealth to pass along to the next generation. Not everyone with children will choose to set aside money for their children. I have heard arguments claiming that children are better off without trust funds and what may be excessive support from parents, but I feel that children can succeed with as many options available as possible.
Education for yourself and your family. Analytical people suggest basing decisions about education based on your financial return on investment. If you spend $100,000 for a degree, or much more if you have loans with interest to pay, how quickly will your new degree allow you to recoup those expenses? Well, thankfully not everyone believes that the only value of education is the ability to earn an increased income. A life without teachers, non-profit organizations, researchers, and artists would not be worth living. Saving for future education expenses, for you or your children, will reduce the difficulty in affording an educational program that does not put one on track to become a hedge fund manager.
Be a positive force in the world. There is at least one issue that is important to every adult. Money allows you to change the world if you concentrate your funds towards that issue. For example, Bill Gates believes that it is despicable that people throughout the world are still dying of malaria, a preventable and treatable disease. Through the Bill & Melinda Gates Foundation, an organization whose existence is possible due to his financial success, Bill uses his wealth to help eliminate needless death in Africa.
It’s admirable to want to increase your wealth, but that can’t be a goal. It’s one step on the way towards other goals. Money is nothing by itself, particularly if it is sitting in your bank account.
Why do you save money?
I came across this today:
Whatever the reason, experts say that at our core, there’s one reason we find wealthy men attractive: instinct. Women, research shows, rank the ability to provide as the most important quality when selecting a mate. Men, not surprisingly, prize a woman’s looks and youthfulness over her other qualities, because those are indicators of fecundity. It’s all about finding the best person to breed with.
As it turns out, we’re all just slaves to our prehistoric urges, even in an era when none of those millenniums-old rules would seem to apply…
A 2006 study done through the University of Chicago shows that men who post online profiles indicating income of $250,000 a year generate significantly more contacts (up to 151% more) than those who make under $50,000…
The article continues to say that the relationships formed between wealthy men and younger, beautiful women start off great but aren’t made for long-term relationships. So here are a few questions. Do you believe money is a turn-on? Can long-term relationships be formed with a disparity in wealth?
Is Money an Aphrodisiac?, Kris Frieswick, MSN Money, July 4, 2008
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
Email this article
Print this article
