What is this strange new world called financial freedom? The more I watched her show, the more I wanted it.
Essentially, do I take the blue pill or the red pill?
As the title of this post implies, I took the red pill.
Financial Independence. I wanted the ability to do what I wanted, whenever I wanted without being tied down to a 9-to-5. But how would I do it? I needed a plan.
Much like the Scooby gang needed a Scooby trap, I was going to have to plan my way out of the rat race and into financial freedom. A financial road map. That’s what I needed.
It was like what Gail Vaz-Oxlade of Til Debt Do Us Part would always say in the intro of her show, I needed to go from red to black. My investment picture of over more than a decade is listed below.
Here’s a sneak peak behind Greenbacks Magnet financial magic curtain. Up first, from red. Then fade to black. Or in my blogs case, green.
Financial chaos bleeds. Here’s the red.
Oct, 2023: -$16,000 (market + house value ↓ )
Sep, 2022: -$22,000 (market crash + loss of 2nd income)
Feb, 2020: -$19,000 (market crash; where the bleeding really starts)
May, 2019: -$10,000 (market crash)
Dec, 2018: -$14,000 (market crash)
Oct, 2018: -$10,000 (market crash)
Feb 2018: -$4,900 (market crash)
Jan, 2016: -$4,000 (market crash)
Aug, 2015: -$5,000 (market crash)
Jun, 2013: -$4,000 (market crash)
Sept, 2012: -$14,000 (market crash + cash crash + got a new home!)
Feb, 2010 -$1,000 (market crash + got a new job!)
May 2009: -$3,000 (market crash + laid off)
Financial triage has prevailed. Here’s the black.
Nov, 2023: +$27,000(market rebound + 2nd job + house value ⬆)
Oct, 2022: +$17,000 (market up + mad hustlin’ 2nd job)
Mar, 2022: +18,000 (market up + bought condo)
May, 2020: +27,000 (market rebound; the green starts rollin’ in)
Jun, 2019: +$9,800 (market rebound)
Jan, 2019: +$10,000 (market rebound)
Aug, 2018: +$6,300 (market up)
Feb, 2017: +3,900 (market rebound)
Mar, 2016: +$5,000 (market rebound + tax refund)
Oct, 2015: +$6,000 (market rebound)
Feb, 2015: +3,300 (market up)
Aug, 2014: +$2,000 (market up)
Jun, 2010: : +$4,000 (market rebound)
May 2008: +$2,000 (market up)
Dec, 2006: +$1,000 (got a new job!)
First, I got rid of any payday loans and made a promise to myself to not ever sign up for them or any car title loans. Done.
Second, I needed tp pay off my car loan and stay away from car payments. So I paid off my SUV and freed up that monthly payment of $448.65 in 2009. I have not had a car payment since. Done.
I needed to get rid of the $20,000 personal loan I took out for $333 monthly. Done.
I needed to increase my income. So I finished my bachelor’s and got a higher paying job. Done.
I needed a goal to aim for. I decided upon one short-term and one long-term and one sensational dream goal.
Short-term I needed a $10,000 savings emergency fund. Done.
Long-term I wanted to retire a multi-millionaire. So I needed at least $2 million. Sensational dream goal is $10 million. I decided to break this all up into smaller goals. Therefore, I would start by having investable assets of $100,000. Done.
Then $250,000. Done.
Next was $300,000. Done.
Although, having over a quarter of a million-dollars is an incredible feat in itself, I had no time to rest on my laurels. I must keep going.
Then I started to press on toward my next goal of $500,000. After that is accomplished, I will set my sights on $750,000. The next leg in the journey would be $1 million.
At that point, I would be a 401k millionaire.
The next goal is to double my money. I would get to my next several money milestones by increasing my 401k contributions by 1-2% every year.
No vacations unless they were paid for with cash.
I also got a second job to bring in more income.
I signed up for credit card and checking account bonus offers that brought in thousands.
I invested my old car payments in index funds like the VTSAX and individual stocks like Apple, Google and Amazon.
And every time I got paid I would put a small portion in my Roth IRA.
I also make sure to keep track of my investments every month.
I’ll breakdown more of my behavior on how I went from $0 to over $300,000 in my next post.
Merriam-Webster definition: Rockstar: a famous and successful singer or performer of rock music.
Greenbacks Magnet definition: Stockstar: a successful investor of stocks and index funds.
I knew there were only six ways to get rich rich: marry money, inherit money, build a successful business, exploit a talent, get lucky i.e. win the lottery, and spend less than you make and invest your savings wisely over a long period of time. That is basically it. The rest are details.
There are many roads and paths to wealth, but all of them come down to six once you weed out all the details. Wealth has to be pursued. It will not just fall into your lap. You have to work for it. The result of hard work is success. The success is measured in dollars. Even though money is just a tool and one barometer for measuring success it is the yardstick that lets you keep tabs on how far you can come in a job done well.
But as we all know building wealth is easier said than done.
It can be as elusive as getting those Taylor Swift Eras tour concert tickets! And like her, I have a blank space and I’ll plan to write millionaire after my name. Ha!
After reading books like The Automatic Millionaire, The Simple Path to Wealth, Your Money or Your Life and a ton of celebrity autobiographies, it occurred to me that even on a modest income, you can rise out of the poverty ashes and rise like the phoenix to wealth.
You just need a plan. If you tried your hand at the first five ways to wealth and failed, you could always be working on the sixth path of saving and investing your way there simultaneously.
If I could not be a ballplayer, rapper, or business owner, I could always invest my money and be the CEO of my stock portfolio. I could be a stock CEO. I could be a stockstar. No college diploma required.
There are 5.3 million millionaires and 770 billionaires living in the United States. Millionaires make up about 2% of the U.S. adult population. Therefore, if you make it to $1 million in investable assets, you are wealthier than 98% of the U.S. population.
Statistics show that the top 2% of the United States population has a net worth of about $2.4 million. On the other hand, the top 5% wealthiest Americans have a net worth of just over $1 million. Therefore, about 2% of the population possesses enough wealth to meet the current definition of being rich. Having $1 million will put you in a very exclusive club. The double comma club.
Although, the top 1% can earn as much as $955,000. Those annual earnings can seem far out of reach in a country where less than 10% of all households earn more than $200,000, according to the U.S. Census Bureau.
Working toward $1 million is still a lofty and worthy goal. Forbes reported in 2022 that the bracket’s minimum net worth is much higher — a cool $11.1 million. That would mean to be in the top 10% would be a minimum net worth of $1.1 million. This is an achievable goal. See some of my investments below.
My index funds are shown in dollar and my individual stocks are shown in shares.
Stock Portfolio
Investments
2012
2018
2020
2022/23
VTSAX
$20,000
$100,000
$158,000
$220,000
Amazon
102
Apple
20
50
100
Google
330
Over time, I have increased my exposure in individual stocks while also investing in my index funds. I also decided to open up four different retirement accounts: Traditional IRA (Rollover from a previous job), Roth IRA, 401k and Roth 401k. I was able to get both the Roth and regular 401k from my employer(s) over the years. The IRA’s are what just happened over time.
Each retirement vehicle offers different benefits. In order to have more flexibility with my money I have two of each IRA and 401k. See below for definitions and pros and cons or the Roth 401k and IRA and more her from Empower.
What is a Roth 401k? A Roth 401k is an employer-sponsored retirement plan. But unlike a traditional 401k, contributions are made with after-tax dollars.
The Roth 401k was introduced in 2006 to give Americans a new type of retirement savings vehicle to complement the popular Roth IRA, which was introduced in 1997. Roth IRAs and Roth 401ks are similar, but there are some pretty significant differences you should understand when deciding which one is right for you.
Pros and cons of a Roth 401k A big advantage that the Roth 401k has over the Roth IRA is the possibility of an employer matching your contributions up to a certain percentage. Employer matches are the closest thing there is to “free money,” so if you’re deciding between a Roth 401k vs. a Roth IRA — keep this in mind. It’s also important to note here, though, that if you receive an employer Roth 401k match, the matching funds could also go into a traditional 401k.
A con, however, is that a Roth 401k account can sometimes have fewer investment options than a Roth IRA.
Pros and cons of a Roth IRA On the flip side, Roth IRAs generally offer more investment options than Roth 401ks. With a Roth IRA, you generally have a large number of investments to choose from, including stocks, bonds, cash alternatives, and alternative investments. With a Roth 401k, you are limited to the investment options offered by your employer’s 401k plan.
However, one con of a Roth IRA is the income limit associated with this type of account. If you earn too much money, you won’t be able to contribute to this option. Roth IRAs also aren’t sponsored by an employer, which means that there is no employee contribution match.
The most distinguishing characteristic of 401(k)s, whether Roth or traditional, is the high contribution limit, allowing employees to save up to $22,500 per year in 2023. For workers over age 50, the ceiling is $30,000.
Meanwhile, annual IRA contribution limits are $6,500, while workers over 50 years old may contribute up to $7,500 per year.
A Roth 401(k) has a required minimum distribution beginning at age 73, but starting in 2024, the minimum distribution requirement will be eliminated entirely for Roth 401(k)s thanks to the SECURE Act 2.0, which was passed at the end of 2022. Previously, Roth 401(k) account holders could roll their plans into a Roth IRA and avoid the requirement entirely.
That means if you are one of the lucky ones with access to the Roth 401k, then you can essentially put money away for retirement with after-tax dollars and pay nothing on the earnings when you begin your withdrawals and no tax period in your retirement.
I knew that if I could make sure to always focus on investing a portion of my income that I could build wealth no matter what.
My definition of a stockstar is listed above. However, I have a barometer to measure my goal as well.
In order to be a Stock CEO and be one of the big boys, I looked at the compensation packages of CEOs in America. And CEOs are paid! The average salary of a Fortune 500 CEO is $15.9 million per year. The highest-paid Fortune 500 CEO is Elon Musk. In 2021, Musk saw compensation worth around $23.5 billion. He achieved this by exercising Tesla stock options given in a 2018 multiyear moonshot grant.
CEO pay has skyrocketed 1,460% since 1978.
CEOs were paid 399 times as much as a typical worker in 2021; that is up from 366-to-1 in 2020 and a big increase from 20-to-1 in 1965 and 59-to-1 in 1989.
The average CEO salary in the United States is $821,100 as of May 25, 2023, but the range typically falls between $620,600 and $1,057,900.
However, some CEOs like Warren Buffet accept a salary of $100,000. Some have gone so far as to take a salary of $1. For example, in 2010–11 Oracle’s founder and CEO Larry Ellison made only $1 in salary, but earned over $77 million in other forms of compensation. In some cases, in lieu of a salary, the executives receive stock options. Top CEOs like Elon Musk & Mark Zuckerberg take 1 dollar salary. and know the history of a $1 salary & perks that comes with a one-dollar salary.
Why do CEOs make $1?
The CEOs can afford to earn $1 as they make money through other ways like stocks and equity. This also helps them in avoiding taxes.
Who are the CEOs in the $1 salary club?
Some of the CEOs who take a $1 dollar salary are: Elon Musk (Tesla), Mark Zuckerberg (Meta formerly Facebook), Meg Whitman (Quibi), Larry Page Sergey Brin (Google).
Once I did my homework, I decided that I was going to be a stock CEO.
I may not be running a billion-dollar Fortune 500 company, but could manage a million-dollar stock portfolio.
Every dollar I invest would be my employee.
I would unleash these little worker bees to do their thing and help me build wealth with the power of compounding. That would be my equity pay package and golden parachute when I left work behind.
For example, Presidents / CEOs at companies that have raised Over 30M typically get between 250K and 5M+ shares. However, smaller companies that have raised Under 1M are more generous with their stock compensation as it ranges between 2 and 40%+ for Presidents / CEOs.
Therefore, I could reckon that a CEO of a small firm could get around 100K and between 10K-200K shares. Let’s say a small cap company like Ethan Allen, which has a share rice of $26.40 and a market cap of $667M, then a CEO would have between $263K and $5.28M in stock.
Therefore, if I had bewteen1K and 10K in stocks or index funds such as GOOGL at $125 a share or the VTSAX at $101 a share, I would have $100K to 1.25M in investments. This is a CEO stock equity level right there. Having 10K in shares or $100K-1M in investments means you are a stockstar.
At 550K in investable assets, you are in the top 20% in net worth. At $1.1M, you are in the top 10% of net worth individuals. Think of it like this, if you can’t be a rap star, baller, or Rockstar, you can be a financial Rockstar. Just keep investing.
Like Rihanna, said:
To be what you wish You gotta be what you are Only thing I’m missin’ Is a black guitar index fund
The House of Representatives and Senate voted to pass the bill and President Biden signed it into law today.
The market has been on a tear once the debt-ceiling bill passed.
The Dow went up 700 points on Friday and Google is up, way up!
As of 30 May, GOOGL stock price was up almost 40% year-to-date. That is great news for investors in the stock. GOOGL opened 2020 at $67.42 on 2 January 2020 and would close at $86.81 on 31 December, a 28% rise.
In its Q4 2021 earnings report, Alphabet announced its decision of a 20-for-1 stock split by way of a one-time special dividend on each share of the company’s Class A, Class B and Class C stock. Stockholders recorded in the company’s books at the close of business on 1 July 2022 received 19 additional shares of the same class of stock that they already held by the close of 15 July 2022.
Keep in mind that GOOGL was trading at $2,200 a share just before the split. The stock closed at $2,255.34 on 15 July 2022 and opened at a split-adjusted price of $112.64 on 18 July.
The reason they proposed the 20-for-1 was to make shares more accessible. If you invested $10,000 in Google’s IPO is more than $300,000!
Although, that much exposure to one stock can be pretty risky as anything over 10% of your portfolio can result in more losses than an investor would like.
That would mean you would need to have a $3 million-dollar portfolio to have this type of exposure to one stock. You may likely want to diversity in index funds such as the VTSAX or VFIAX to keep things more level.
My suggestion is now that we have averted a financial meltdown is to go and buy some stock. The upside can be tremendous if the market continues its upward trajectory.
The easiest method to increase your stock holdings and limit the risk is to invest in a total stock market fund like the VTSAX. It has a market cap of over $1 trillion.
For those investors that could not afford to buy GOOGL or Amazon at their peak price of over $2,000, this is your moment.
Both AMZN and GOOGL are poised to go higher with more people online than ever.
What makes GOOGL special is their powerful search engine. GOOGL handles over 90% of all search queries worldwide, Google is dominating the global search engine market share.
There are 8 billion people on the planet. An estimated 37 per cent of the world’s population – or 2.9 billion people – have still never, ever used the Internet. Therefore, GOOGL has no where to go but up. Get a ticket to this ride as fast as you can.
Personally, I feel the stock is undervalued.
Maybe that is why the company board of directors just approved a $70 billion-dollar buyback in April of this year. What that spells for investors…Cha Ching!
GOOGL also owns YouTube, which just closed on an NFL Sunday ticket access deal worth $2.5 billion. They are making money hand over fist.
Their balance sheet is so healthy because they are flush with cash and so little debt. Alphabet had $12.9 billion in debt in December 2022; about the same as the year before. However, it does have $113.8billion in cash offsetting this, leading to net cash of $100.9 billion.
That is why they can afford a $70 billion dollar stock buyback. Typically, when this occurs the stock price goes up in value due to less shares being available.
Your girl has got in on this by buying shares throughout the last year. Even with a modest stock split in the future, I would own thousands of shares.
At that point, I would likely diversify some this into index funds to limit my exposure to losses in case the market does a swan dive.
As of 30 May, according to Coin Price Forecast, Alphabet price could hit $155 by the end of 2023 and then might reach $163 by the end of 2024. Analysts estimate it could rise to $219 within the year of 2025, and was anticipated to reach $252 in 2026, $302 in 2029 and $362 in 2033.
GOOGL is minting millionaires.
GOOGL can help facilitate the American Dream.
Instead of hoop dreams or being a movie star or Rockstar, you can be a financial Rockstar. You can be a stockstar!
Therefore, if you have champagne wishes and caviar dreams, then this is the place to be.
I remember it like it was yesterday. I was just starting out and knew I needed to look into saving for my future. I was beginning at ground zero with $0 saved for retirement.
This was in line with the average 401(k) balance for a young person starting out in their 20s. My employer was offering 50% for every dollar we contributed up to 6% of our salary. I was all set to start making some moves into investing for my future so I got started right away. Then boom! Barely into starting out on my journey, the housing market crashed in 2008.
The Great Recession rolled in and people were losing homes and jobs left and right. I got my pink slip in 2009. I felt like I had just put $2 in my account. Not only did I lose my job, but also my employer contributions including thousands of dollars due to the fact you had to be an employee for 5 years to be fully vested. I was discouraged, but not defeated.
I always keep an up to date resume so I started sending it out. It took months, but I finally got a new gig that allowed me to be 100% vested from Day 1. This has helped me grow my nest age from $6,500 in 2010 to past a quarter of a million ($250,000) over a fairly short time later thanks to a raging stock market!
Total Vanguard Assets beginning from 2010
After I read a Fidelity report that stated 401(k) millionaires are on the rise, I figured I could be one of them too.
According to numerous financial pundits, it is recommended that you even need a minimum of $1 million to retire.
First, I had to get to $100k and that put me on the path to eventually passing the $250,000 mark. So you see, you have to have a goal. This is what I did to make it happen.
1) Set a goal
You can’t get anywhere without first knowing where you want to go. Therefore, I set a goal for myself of $100,000. I did this because after doing some research, I found that the first $100k is the hardest.
However, once you reach this milestone you can stop contributing completely to your 401(k) and still become a millionaire in 30 years without adding another penny.
As long as the stock market continues what it has done over the last 40 years (1980-2020), then you can expect returns of 10% a year. This will get you where you want to go over the long term. I’ll show you.
In 2012, I had $25,000 invested and by 2015, I reached my goal of $100,000. I have more than doubled my money since that time. You see how much faster your retirement accounts go up once you reach $100k. That money is doing all the heavy lifting for me.
It can take 5-10 years to reach the first $100k, but the next $100k may take only 3 years. Therefore, every year the next $100k takes less time.
Fourpillarfreedom.com
2) Cut expenses
I learned about house hacking from listening to a podcast on Bigger Pockets years ago. House hacking allows you to cut your housing expenses by 25% or more. Basically, you rent out your property and decrease your mortgage payment by having renters and becoming a landlord.
The other thing you can do is move to a less expensive location in order to save and invest the difference. You can also do this with a partner or roommate as you will have shared expenses that lower your living expenses.
I got my expenses down very low which allowed me to go from a savings rate of $1 to $5 dollars a day or 3% of my income to eventually working my way up to saving and investing 40% of my income.
Around 2013, my savings rate was 15%. Then it went to 25% in 2015. And I got it to around 40% by 2018.
I would incrementally increase my savings rate by 1% a month or a year depending on what I had going on. This is one of the best ways to give yourself a raise without feeling like you are being deprived.
Sacrificing when you are young and loose like a mongoose is best. Limiting your expenses during the lean years are well worth it.
Consider this. According to Vanguard, while the average 401(k) savings balance is over $100,000, the median account balance is much less at $25,775.
There was a time I was paying $448.65 a month for a car payment. I also had a $20,000 personal loan at $333 a month. Talk about a money suck!
This was draining my ability to save more. Once I got those items paid off, I started redirecting that money to my savings and investments.
That allowed me to put money into an emergency fund, brokerage account, 401(k) and my Roth IRA.
4) Start an emergency fund
The only way to stay out of debt is to have money in the bank so you will not need credit in the first place. Access to credit can become a nightmare when you have to start paying a large percentage of your income toward managing it. Therefore, I found a good number to start with is $1,000.
Then I worked my way up to $5,000. Again, I moved this number up to $10,000.
My personal suggestion is for people to have at least a minimum 3-6 month emergency fund. You can keep the credit card debt off you, if you can have money set aside for car and home repairs that tend to pop up at exactly the wrong time.
5) Be consistent
No matter what, I made sure to put money in my retirement accounts . If the choice was between having fun on a vacation or saving $10,000 first, I choose to save. Responsibility first, fun later. That is what my dad always used to say.
I save and pay myself first before doing anything else. That includes paying the rent! After my 401(k) and Roth IRA contributions are made, then I pay the bills.
6) Keep increasing your income
I increased my income through both annual cost of living increases, asking for and receiving pay raises, or getting a promotion. I was able to increase my income by 50% from my early 20s.
Every time I earned more money, I increased my contributions. However, please know that income is not enough alone to build wealth. It’s what you save. Notice the Vanguard chart below shows that higher income does not correlate with a higher 401(k) balance.
Annual income
Average 401(k) balance
Median 401(k) balance
Less than $15,000
$8,260
$1,356
$15,000 to $29,999
$13,069
$4,020
$30,000 to $49,999
$29,740
$10,439
$50,000 to $74,999
$66,033
$27,630
$75,000 to $99,999
$113,143
$54,020
$100,000 to $149,999
$177,597
$91,470
$150,000 and above
$298,851
$154,989
7) Live on cash
I know you hear this all the time, but cash is king and it is best to stay away from plastic. Debt just weighs you down. That money could be put to work for you in Mr. Market.
America likes to reward investors and shareholders by paying dividends. The more you invest the more you earn. Without doing any additional work, you are making money from income you already earned years ago. That is truly how you work smarter and not harder.
8) Invest in growth stocks
I started with a few thousand bucks and put it into Amazon and Apple back in May 2013. You can see from below that was the prices they were selling for back then. Amazon was going for $258 a share.
AMAZON.COM INC
Buy
5.0000
$258.84
APPLE INC
Buy
3.0000
$463.66
After investing more with both companies, as you should not only buy the product but the stock as well, the stock splits and appreciation has caused my investments to go up. I remember being amazed that Amazon had gone up to almost $2k a share. I even took a picture of it. Cause you know, seeing is believing. Back then it was going for $1,897 a share.
Amazon is now $3,300 a share! That is inching closer to the S&P 500 price of $4,000. Keep in mind the S&P 500 is made up of over 500 stocks.
Amazon is just one company. Its evaluation is pushing closer to what the evaluation is for 500 companies. Amazing! That is when I learned growth stocks can make you rich.
9) Invest in index funds
I invest with Vanguard because they have the lowest expense ratios I have seen. You can invest in the VITSX or VTSAX and get a low expense ration of around 0.003% and 0.04%, respectively.
The goal is to keep maintenance costs low as this will eat into your money later when you take those required monthly distributions (RMD) .
That is a good reason open up a Roth.
10) Have a Roth IRA
The Roth has no RMDs. You can let it ride forever or whenever you do take money out it is tax-free. Instead of paying interest on distributions with your 401(k), you could get access to them for free with a Roth.
If you are unable to do a Roth due to income limitations, then you can do a backdoor Roth. This allows you to convert your 401(k) into a Roth with a conversion ladder. Due to the Roth allowing you to make after-tax contributions, this is the superior investment vehicle.
Find a way to get one and watch that money go in after-tax and come out tax-free because you have already paid taxes on it.
And there you have it folks.
As of this writing, I have continued to watch my investments go up and continue to invest regularly. It has been awesome to watch my money grow. It has been very rewarding making those early sacrifices in exchange for building more wealth.
I have more money and freedom than I have ever had. All the sacrifice was worth it in the end.
My next money goal is 401(k) millionaire.
Keeping track of my net worth, investment portfolio, spending habits and increasing my savings have all helped me get here.
So my advice to you all is to keep stacking that dough.
The US is now on pace to having a record 12,000 store closures by the end of 2019.
The reason Forever 21 bankruptcy filing stings so much is that the retail sector has lost nearly 200,000 jobs since the start of 2017.
It seems as if the retail sector is having its own market correction. So many businesses were in a constant state of new store openings, ribbon cutting, and champagne toasts that they failed to stockpile any cash for a rainy day.
With many consumers maxed out after all that easy credit flowed like champagne, it is now time for companies to pay the piper.
However, it not just that companies are bleeding cash due to heavy rents and debt obligations. There also is this little thing called a trade war going on. The trade war between the United States and China isn’t helping any. But if we really think back, most retailers put themselves in this vulnerable position by spreading themselves too thin.
Chasing after never ending profits in the quest for the retail equivalent of the holy grail: increased annual revenues.
Think Subway’s $5 footlong. The world’s largest fast-food chain closed more than 1,000 stores last year (Subway closed 1,100). Subway started its restaurant purge in full force in 2016, when it had more US closures than openings for the first time in its history. It said it plans to keep closing restaurants as it tries to become more profitable.
There is also a restaurant apocalypse going on as many as closing including Pizza Hut, as they are getting out of the sit-down restaurant business. It’s becoming a strictly carryout and delivery pizza chain, like Domino’s and Papa John’s.
However, these companies boxed themselves into a corner. What happens when easy credit dries up and customers are no longer willing and able to shop? It’s kind of like that scene in Indiana Jones. You know the one I’m talking about.
As most companies have no leverage with creditors after a bankruptcy filing, in many cases they lose equity or control over their companies.
Like what happened to American Apparel. The owner went public and was rewarded handsomely with hundreds of millions in stock. Once the company filed bankruptcy in 2011, share prices went from as high as $15.80 in 2007 to being worth less than 80 cents. The owner had over 800,000 shares of his stock and pretty much 100 percent of his net worth locked up in the company. I’m guessing he never heard of a company called Enron. If so, I doubt he would have so much of his fortune in just one stock. Anyway, what happened next is just heinous. The owner went from $500 million to $0 in net worth once the company went bust.
Some people have no idea how invested an owner is in a company until the tide goes out and see who is swimming naked, which basically means in heavy debt.
In recent retail headlines, stores such as Gap, Charlotte Russe, WetSeal, DEB, Rue 21, Gymboree, Charming Charlie, and Toys’R’Us have all thrown in the towel. What makes Forever 21 stand out in this sea of closures is that the retailer is still owned by the founders. However, they too are having profits squeezed by online shopping and e-commerce giants Amazon and Walmart.
Most retailers in these modern times in the age of Instagram are turning more to debt and becoming highly leveraged as a result. This hurts businesses in the long run. Those who manage to avoid piling on too much debt and stay lean are the ones who manage to stay open and profit.
According to Jeff Spross, avoiding the clutches of private equity can make or break a company. For example, after being bought by a trio of private equity companies in 2004, Toys ‘R’ Us’ debt burden rose from $2.3 billion to $5.2 billion in 2017, while its cash stockpile shrank from $2.2 billion to $301 million.
Simply put, private equity firms take the companies cash in the form of fees and replaces it with debt. Once retailers are unable to sustain the high interest payments on this new debt that was supposedly needed in order to expand operations, then the business goes under.
This wave of bankruptcies is therefore not a coincidence as many retailers were highly leveraged but didn’t file for bankruptcy until the interest kicked in and the bills came due starting in 2019, which will continue through 2025.
The retail chopping block is brutal as store closures can hurt stock prices, brand loyalty, consumer confidence, and retailers bottom lines. For instance, many companies are notifying employees in some cases only days before store closures.
That was the case with Dean & DeLuca in Georgetown as they were riddled with debt and couldn’t pay their vendors. The company was so backed up on rent that it racked up $96,000 in back rent and started get hit by lawsuits from angry suppliers. One funny line in this NY Post article read “Can’t afford that $45 box of cookies at Dean & DeLuca? Neither can Dean & DeLuca.” The domino effect and trickle-down economics also lies in the fact that vendors may go out of business due to Dean & DeLuca’s failure to pay them thus putting more employees out of work and out of a job. The company knew it was bleeding money for years, but only informed employees of its closure less than 72 hours before closing up shop for good. Some of these employees had been with the store since it opened in 1993. After 25 years, these employees got no severance. To add insult to injury, they also defaulted on some employee salaries, which is a double-whammy; no paycheck and no job.
This let’s you know that the employee is the sacrificial lamb that gets slaughtered when a retailer takes all the money out of a company. This feels reminiscent of the rumblings I heard about WeWork before their failed IPO.
According to Scott Galloway, WeWork had numerous red flags:
My goddaughter informed me she’s dating a club promoter, a red flag. Occasionally, red flags marry each other, the Biebs and Hailey Baldwin — what could go wrong? So now, imagine red flags the dimensions of Kansas. Buckle up:
— Adam Neumann has sold $700 million in stock. As a founder, I’ve sold shares into a secondary offering to get some liquidity and diversify holdings. Ok, I get it. But 3/4 of a billion dollars? This is 700 million red flags that spell words on the field of a football field at halftime: “Get me the hell out of this stock, but YOU should buy some.”
— Gross margins are a pretty decent proxy for how good or bad a business is. And this is a sh**ty business.
When the CEO (Neumann) wants to sale so many shares, it gives me pause to wonder why? If you don’t believe in your business (they never turned a profit), then why should I?
One retailer that managed to avoid debt, store closures, and heavy job losses due to avoiding debt and private equity is Best Buy.
Therefore, it is a simple recipe, kind of like KFC’s Kentucky Fried Chicken 11 herbs and spices with a secret ingredient (white pepper in case you were wondering), that will keep retailers or yourself out of the evil clutches of debt. I will share it with you. No debt + tons of cash = solvency.
You cannot go bankrupt if you owe no one.
You can put that last sentence on my tombstone. Like Drake and 2 Chainz, when I die bury me inside the casket that paid for with cash, put my money in the grave because in the next life I’m trying to stay paid. But seriously, I’d rather you expand your business or wealth portfolio slowly with cash than quickly with debt.
Always remember that patience is not only a virtue, but it is how you can avoid debt through delayed instead of instant gratification, which is how you get and stay rich.
My goal here is to help you along your wealth journey. I hope this post helps you do just that. You are not alone. Have a question? Drop me a line.
If you are part of the financial blog-sphere, then you have heard of a personal finance blogger by the name of Mr. Money Mustache (MMM for short).
He retired early with a net worth of $800,000.
He his famous for his no nonsense approach to cutting out buying crap and not being a Sucka Consumer. I’ll give you an example.
Physical health FIRST: whole system will only perform well if you place its wellbeing first, before anything else. Salads and barbells every day, no goddamned excuses.
Being frugal and fit, as MMM shows, has its advantages. Let’s explore this further.
1. Being frugal could turn you into a millionaire sooner than you think
While reading up on real estate, I came a cross the website Bigger Pockets and also wrote a blog post on them.
One of the co-hosts on Bigger Pockets is Brandon Turner, is an active real estate investor and entrepreneur, stated he brown bagged his lunch to work for 10 years and was able to become a millionaire by putting all his discretionary cash to work investing in real estate instead of happy hours.
2. Simple MATH is the answer
If you can add and subtract, then basically you have the skills to manage your money. Do some million-dollar math. What will it take to make the Almighty Dollar one million times? Sell 100,000 books at $10 a pop. Boom. One million.
Invest $100,000 in an index fund and let it ride for 30 years at an 8 percent return you’ve got your million bucks right there.
Basically, MMM puts it best.
And dozens of ten-dollar bills start to add up to real money pretty quickly, which is something most people don’t realize. The vast majority of wealthy people are the ones who have figured out that a millionaire is made ten bucks at a time.
-Mr. Money Mustache
3. Incomes are not as important as spending habits
Most people are pretty bad at math, even simple math unfortunately.
That partially why so many people are in debt up to their necks. If a credit card company gives you a $35,000 credit line and you are only pulling down $40,000 a year, then you can start to see right there that if you max that sucker out, you will have given away 88 percent of your income. Screw that!
On the opposite end of the income spectrum, an Amazon engineer making $175,000 a year or a Goldman Sachs investment banker making $350,000 a year that likes to tip strippers in $100’s and order $1500 bottle service could blow through a wade of cash in a few months of partying. A coke head with a nasty drug habit could snort millions and lose everything in one crazy summer.
When Google engineers are crying on the news about not being able to afford housing in San Francisco while making $200,000 a year, then something is seriously wrong out here.
They then must decide HOW FRUGAL they are willing to be to change their situation. Living in shared housing with 8 other people, living inside of a moving van, or renting a garage apartment to invest upwards of 60 percent of your income are just a few of the things you will have to consider.
It is not the size of you paycheck that matters, it is what you do with it that counts.
If you ever read that book, Your Money Or Your Life, then you know one of the authors favorite lines was yelling, “how big is yours?” He was talking about your paycheck. This guy worked on Wall St. and still managed to retire early while many folks he saw making millions were living paycheck-to-paycheck.
If you make a million, but spend one million and one dollar, sorry to break this to you, but you are still broke. It is not enough to live at your means, you must live below your means in order to have money to save and invest.
Most high-income people are still within just a few paychecks of insolvency, because it is possible to blow almost any paycheck, simply by adding or upgrading more cars, houses, and vacations.
-Mr. Money Mustache
Therefore, I urge you to slash expenses, take stock of what you have and be grateful.
Focus more on the giving than getting.
Aim at saving 20 percent or more of your income.
If you want to retire early, you are going to have to aim at saving 50-70 percent or more.
Live like it will all end tomorrow, but save like you are going to live forever. You got that? You have to save.
Who wants to be the guy living in a $500,000 home that can only afford to fill it with Christmas trees because he can’t afford furniture?
So get out there and save!!! no goddamned excuses.
Cause living in a rat infested motel is not an option because when the lights go out its a roach motel and their lease is permanent.
All I am asking is for you to do what most people won’t: Save money instead of spending it.
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