6 Rules to Become a Millionaire in 5 Years
The 5-Year 'Broke to Millionaire' Playbook
- Create wealth through concentration and preserve wealth through diversification - you have to make big bets in order to move the needle
- Be comfortable with a certain level of risk - if not, change 5-Year to 20-Year, stop reading now and go here
- Make money via three channels - standard income, side businesses and market bets
- Save, save and save - the easiest way to make money is by having money
- Privacy is your ally - stay distraction-free and focused by keeping the details of your financial goals close to your chest (hence why I'm remaining anonymous!)
- Find motivation - something that keeps you on course and moving forward, no matter what
Year 1 - The not so good start
I was 26 years old and took a $50,000 cash advance against my Bank of America credit card in order to play the market. I was a Series 7 licensed broker who worked for one of the largest investment firms in the world...what could go wrong? Well, it took 4 months for something to go very wrong. In September of 2008, I lost everything. I went from being a debt-free 25 year old with a $47,000 net worth to owing $50,000 to the last person in the world you want to owe money to: your credit card. I saved every penny since I was 5 years old (I'm not joking) and in 4 months it was all gone. I had 12 months to pay off the balance (in full) before the 0% cash advance interest free loan came due and an additional $11,000 in "phantom" interest was added to the tab. Note: I wasn't able to find any info on phantom/ghost interest...happy to write a post on that topic (let me know in the comments below).
A few questions come to mind:
Q: How were you able to get a $50,000 cash advance on a credit card a 26?
A: This was pre-financial meltdown, I had this credit card since I was 18, I paid it off in full every month and requested a line of credit increase every year. That's how I was able to have such a high limit on a card at such a young age. I was obsessed with having "purchasing power."
Q: Why did you think taking a cash advance of $50,000 was a good idea?
A: No interest for 12 months seemed like a safe bet. I was making decent money at my 9-5 job as well as trading the market, but I didn't have access to enough capital to make a real impact to my bottom line. I was in need of capital in order to move my net worth needle.
Q: Are you an idiot?
A: The jury is still out on that one. Ha!
None the less, I was in major trouble after my $50,000 investment went down to $22,500 in 4 months. For some reason I didn't panic, I almost found a new gear in terms of motivation. This is very hard to explain, but I think it's linked to my entrepreneurial spirt and the fact that I was very private (Rule 5) and stayed motivated (Rule 6).
When your back is in the corner - double down!?!?
Down over 50%, I did the only thing I thought made sense at the time: I sold every single stock holding I owned and went all-in on one stock position + added my entire life savings of $25,000 to make a $50,077 bet (Rule 1). I learned early that you create wealth through concentration and preserve wealth through diversification from a Partner at my Consulting firm (funny enough that was never a strategy my Investment Firm pitched, regardless of what Boiler Room portrayed). A mutual fund or index fund was not going help me achieve my goal of being a millionaire by 30. No one ever made 1,000% one-year gains by owning a well-diversified mutual fund. This is when your risk tolerance compass kicks in - Rule 2. Only you know how much risk you're willing to take, I'll explain my risk rational in a later post.
It get's worse, this concentrated stock position lead to even more losses. By the end of 2018 - 2 months after I purchased the stock, my $50,077 bet turned into $9,769 #deadmanwalking. I remember attending a wedding shortly after and my date was complaining about something while we were driving to the rehearsal. I broke Rule #5 and said, "You think you have it bad, I lost my entire life savings + $50,000 in 6 months, so suck it up." It's the first and only time I've ever opened up about my personal finances. No joke - my wife is learning a ton about our financial situation because of this blog. Yesterday she said, "why do you make us feel broke and you just showed me a graph that says we have $3,000,000 dollars?!?!?!" Let's keep moving forward...
Doubling down will do 2 things: 1) a quick death or 2) an even quicker rebound. I didn't sell my $50k stock position that went down to $9k...I was determined to ride it out to zero (we got to $0.05/share so very, very, very close to zero). At this point, I decided I would rather tell a story about me losing every penny versus cutting my losses and taking $9k home (remember, I still owe $50k to BofA). I stuck with it and by some miracle my one stock made a comeback for that ages. As I write this, I'm still shocked I didn't sell when the stock his $0.05/share in order to get something back. By the end of 2011, I went from a portfolio low of $9,769 to $164,119. A 1,580% gain in 12 months time...I was back!
Making money on the side
Now that I was off the financial ledge, I wanted to use my extra time in a productive way and make some money on the weekends/after work. Uber wasn't a thing in 2010, so I had to find a way to make side money in order to supplement my $75,000/year salary.
Construction was my calling. I was able to add another $40k a year by picking up construction jobs, in addition to working my 9-5pm job (or more like 8am-7pm!).
I purchased a partially renovated home right after the housing crash for 30% below market value, remodeled it and lived in. I had a roommate and made $800/month in rent.
6 months later, I purchased a house in the burbs and rented it for $2,000/month.
18 months later I purchased a condo in foreclosure for 50% below market value, renovated it and rented it for $1,250/month.
On December 12 (5 years from the brink of being a mid-20 year old bankruptcy story), I was officially a millionaire at 30. Now, that only lasted for one day because the market moved on my stock position the next day and I feel out of the millionaire club for the next 28 days.
Wealth break down
I'll keep this short, because my wife said my writing style is verbose. I'll break out this story in more detail in future posts (e.g. how to started a side business, renovation 101, how to make money buying investment properties, stock market stories, losing my life savings in 6 months, how to save money, how to stay motivated, etc). My first million was heavily weighted towards security, representing almost 60% of my net worth. The rest came from standard income & side business. The below graph represents my net worth growth from 25 years old told to 35, with the first million coming at 30.
You can see how bad I got hammered from 25 to 26 in the below zoomed in graph. Debt destroyed all of my wealth and then some, taking me into the negative.
One thing to note: I'm well aware of the risk I took to get here in terms of taking a concentrated position in a single stock, but remember, I still created $410,000 worth of wealth in that 5 year period that's completely independent of my stock gamble. In future posts I'll dig into the detail of how to create independent wealth and what you HAVE to do in terms of revenue generation and saving habits. Also, I'll break down what financial focus means in terms of having a plan and staying motivated.
At this point of my journey, I was 30 had a net worth of $1,001,140 and felt broke. I had $14,000 in my bank around, I couldn't access most of my wealth #notliquid, and I was one busted AC unit away from having to sell a property to make my mortgage payments. Well not really because I have a secret sauce for emergency situations that would have kept my little empire up and running...more to come.
