Money Secrets of the Millionaire Mailman: Part 2 – Growing Net Worth
Last week, we brought you part 1 of how a friend of Dave’s helped him pay off his debt. Now, we bring you part 2, with even more insights and lessons learned from Dave Naylor and Sean Johnson.
During part 2, they discuss building net worth and the many ways Dave continued to keep a budget even after he had all of his debt paid off. Jerry advised many useful ways to build net worth, such as saving a small percentage of each paycheck over time, even when it doesn’t seem like you have that much to spare, because having money saved just in case will provide not only security but also peace of mind. It’s as simple as setting aside a set amount of money each month to ensure that you will have some amount saved, even if it is very small!
Part 1 was only the beginning of many valuable lessons to learn, so be sure to check out the newest episode of The Motivational Intelligence Podcast, entitled: “Money Secrets of the Millionaire Mailman: Part 2 – Growing Net Worth”. Also, be sure to check us out on social media and let us know what topic you’d like us to cover next!
Interested in hearing more? Follow us via LinkedIn, Instagram, Twitter or Facebook and let us know what topic you’d like us to cover next!
Money Secrets Part 2
Sean Johnson: All right. We’re back for part two money secrets of the millionaire mailman.
David Naylor: There you go.
Sean Johnson: Our man, Jerry. Last time we talked about your experience with Jerry. Can you give a quick recap on who Jerry was? Just in case somebody is listening to this that hasn’t listened to the first episode, which if you haven’t listened to the last episode before listening to this one, I highly recommend it, go back and listen to part one, cause it’s gonna build on this. But, for people that listen, just a quick refresher.
David Naylor: So, when I was starting out in my life. I found myself in a position where I basically was making no money and living off of credit cards for a period of time, racked up about a little over $38,000 in credit card debt was basically using one credit card to pay off a minimum payment on another credit card.
So, needless to say, there was more than a little financial pressure, which financial pressure ripples in every aspect of your life. It’s what couples fight about, and keeps you awake at night. There’s a lot of stressors that can come with that as
Sean Johnson: You fight about cans of clams.
David Naylor: There you go. Exactly. So as I was struggling with all of this, there was a gentleman that I had met when I was in college, who was a retired mailman and come to find out a multimillionaire despite the fact that he never made more than $50,000 in a year of his life.
And so Jerry and his wisdom and kindness, decided to take me under his wing and teach me what he’d learned about; really controlling your money and building your net worth.
In the first part, we talked about the three components of really controlling your money, which is:
- putting in place a budget
- making it a mission to minimize or outright eliminate your personal debt
- putting in place a “save and buy” mentality.
So that you’re not falling victim to really what most people, a lot of people fall victim to in the, in the financial world. I remember Jerry said, as I was kind of grappling with what he was teaching me, he said, “if you don’t control your money, he goes, other people will. So you just simply gotta make a decision. Do you want to make them rich? Or do you want to make yourself rich because that’s really what you’re dealing with.”
Sean Johnson: Your choice. Yeah, and particularly what he had said about being much more aware of the interest that you’re paying and how much that adds up over time, was huge for me after the last time we talked actually.
I went home and this is good, cause I hadn’t done a lot of this stuff. And I went home and actually kind of said, “all right, Sean, I’m going to treat myself as a business.” So I, using a lot of the stuff we were talking about was like, “all right, I’m going to put together my balance sheet. What are my operating expenses?” Which I kind of use as like the fixed costs.” What are my costs of goods sold, like what are the things that I want to buy, in the future? What am I revenue streams coming in?”
So I have the income statement. I have the cashflow statement. And it was actually like incredibly helpful. It was cause so much of it was just jostled around in my head and you can’t really get a good feel for what does it, my financial picture actually look like?
And so doing that, and you could probably find just templates of these like basic business financial documents online, which is what I did. Just to make it simple on yourself so you’re not starting from scratch. But, it was super helpful for me to kinda just get a picture of like, all right, “here’s where I am.” Which I feel like gave me at least a much greater sense of control because before it was just kinda like flying by the seat of my pants.
David Naylor: We live more and more in a cashless society and it’s gotten to the point where whether we’re paying on our phone or, whether we’re pulling out a credit card or whatever it is, it makes it so easy not to think about the fact that every time you do that, it’s money coming out of your pocket or coming out of your bank account. And, and that’s, it’s a, it’s a genius strategy for the financial institutions because the the, the, the more they take that sense of a loss from us, the easier, and that’s painless. They make it, the easier it makes it to spend money,
Sean Johnson: and the more money we’re naturally going to spot.
David Naylor: Exactly. And then the more debt you run up, so the more interest they make. So it just becomes this perpetuating cycle. And for if you look at a financial institution the the interest, we pay on credit card, it is their highest margin product.
Sean Johnson: Yeah. I definitely fall into that category of “I rarely ever use cash.” I never carry cash anymore because I don’t really have to. Yeah. most places, 99% of the places I go, they take credit card and if I would need in the past and others, then most or like you’re splitting a tab with people.
It’s not like you need cash anymore. You’re just like, all right, I’ll send you a 20 bucks for to split the bar tab or whatever it is. But I think you’re right. That makes it so much simpler, which makes it easier to spend money. Right. You’re more than
David Naylor: attached from from that concept of that if you’ve got to pull $20 out of your wallet, it’s a whole lot different…
Sean Johnson: handing that over is much more painful than just swiping a credit card.
David Naylor: Or sending it via Venmo.
Sean Johnson: Yeah. So that’s what I did after our last conversation. So thank you for that, Jerry. Yeah. Thank you, Jerry, wherever you are…so that was super helpful. I would recommend doing that or some version of that. Putting together the budget. I kinda just went, “let’s put together everything”, which was super helpful. What that started to do, was shed some light on where I am now, in terms of these things, “What am I spending on the budget? What’s my debt look like? What are the things that I want to buy in the future? , but it also kind of, I think is a good setup to our conversation today about kind of, part two of Building your net worth is, okay, here’s what my picture looks like right now. “How do I grow this? How do I add things to this balance sheet to get my money working for me?”
That was kind of the second place that Jerry took you, right? So what did he teach you in this phase? Once you’ve got control over your money, how do you start to build your net worth?
David Naylor: Yeah. So I mean, for everybody listening it’s, at least for me getting control of my money didn’t happen overnight. It took a couple months to really start to feel like I had a handle on things and a good sense of where money was going and, and some kind of a decision making process about I want to spend this much in this area of life. And so it took a little bit of time to get there.
And so Jerry, he was really cool. We would get together about once a month and he asked me how I was doing and what I was struggling with, and he’d get my head set straight. But a couple months in, when I had some measure of control over things, that’s when he took me to this second conversation, which is very much about: now that you’re controlling your money, you’ve got to work on building your net worth.
There were four elements that he taught me. And again, it was a little bit over time, but the first one was a philosophy that he had told me and it was called “pay yourself first.”
That was the very first thing you focused on. The second thing he really focused me on was learning about “how to invest your money and what to invest in to grow your money.” And the third thing we talked about was the big purchase, and for most people the the biggest purchase they make in their life as a whole, really “understanding when you should buy a home, why you should buy a home, those types of things.”
And then the fourth and final thing, part of that was really now taking the time, to “protect what it is that you’ve worked so hard to build.”
Sean Johnson: Yeah. Okay. So that gives us a good outline. Let’s get into the nitty gritty. So you said the first thing he mentioned to you, the voice, this philosophy of pay yourself first. What do you mean by that? It would be putting money in your back pocket. What do you mean pay yourself first?
David Naylor: So what he did is he gave me a book, “The Richest Man in Babylon”. It’s been so long, I don’t remember who the author was, but it was a short little kind of parable book that talked about these brothers and the way that they were using money and stuff like that.
And in the end, the basic premise of the book was all about tithing. Right. traditionally, at least for me, when I thought about tithing, I connected it to religion. I think in the Mormon religion, they tithe 10% of everything that they make to the church.
Yeah. So the the premise behind the book was that you should pay yourself first before you pay anybody else. And so what Jerry recommended was a minim of 10% of every dollar that comes basically into the house, you take 10% off the top of it and that you funnel into some type of an investment vehicle.
Sean Johnson: Okay. So you’re taking this 10% off, is this before? How about your personal debt? At this point, it took a couple of years to work down that debt? Should you be doing this? Should you get a ring getting rid of all your debt first and then doing this, or are you doing both at the same time? Does this apply when you have a lot of debt?
David Naylor: And that’s actually exactly the question that I asked Jerry, because I’m like, Whoa. Jerry, I’m like, got 30,000 in credit card debt. it, and you’re telling me I should just take 10% and, of every dollar and I should, would not be better off taking that 10% and, and putting it to paying down the debt.
And, so what Jerry said to me was, he said, “look, Dave, right now you’re wasting that 10% on something and it’s just money that’s flying out the window on little purchases and things like that.” What will happen is he goes, “set it up like in your bank so that you do an automatic transfer out of your checking account into like a savings account or something. if you get paid on the 15th and the 30th, there’s 10% comes out on the check that comes in on the 15th and 10% comes out on the check that comes in on the 30th.”
What’ll happen is that, “you won’t have egos. The first couple of times he goes, you’ll notice that the money’s not there, but what will happen in pretty short order is, you won’t even notice that that money isn’t there.”
And, so I said, “okay, that makes sense. But I’m just starting out here in my career. I’m not making a lot of money so we’re not really talking about all that much money.”
And he said, “it doesn’t matter, over time that 10% will grow into a substantial s of money, so don’t worry if it’s $100 is coming out on the 15th, and on the 30th or whatever it is. It’s more about the power that you gain over time.”
The other thing, and this was really cool, and it was something that I don’t know if I really understood when he first talked to me about it, but he said, “over time what will happen is, that that money will accumulate. You’ll be investing it. So it’s going to be growing on top of what you’ve actually put in there. And as it grows, having that money there will give you tremendous peace of mind because, it’s there. It’s your safety net and your security.”
And he was 100% right. Those times in life where you have the ebbs and flows and those kinds of things. But knowing that you’ve got this chunk of money that’s there. Yeah, it not only has it grown over time to become more substantial, but it definitely does give you a sense of kind of calmness.
Sean Johnson: Yeah, that you’re not going to slip back
David Naylor: exactly
Sean Johnson: You have something that’s growing.
When it seems like, for this first part of paying yourself, is there’s the tactical side of it. Which is start to get your money to work for you. But it seems like the reason for doing this first is even more mental than just the mathematics of it. Where you kind of talked about developing the habit essentially, and developing in putting together your budget. I think you’ll probably curb down some of that spending, but also just is developing the habit of investing this and going forward. So even if you’re not making a lot of money now, you’ll be in the habit when it’s going to be a substantial amount of money. Right?
David Naylor: Yeah. When I was putting money into a 401k and those kinds of things, I asked him, “Jerry, this does this count as my my 10% account?” And he goes, “No, you want egos maximize what you’re putting away in your in your retirement and those kinds of things, but still keep that 10% account.”
Sean Johnson: Interesting. Okay. So it’s not your 401k? That was going to be my next question. Where are you putting this? Should this be on top of what you’re putting into your gross 401K, off the top of your paycheck?
David Naylor: Yup.
Sean Johnson: So he’s recommending for the 401k max out what your contribution can be in particularly?
David Naylor: Obviously there’s a significant tax advantage to putting money into a 401k or an IRA or those kinds of things, plus a lot of companies have matching programs. In talking to people over the years, a lot of people, they’re not even aware of the fact that that is available to them.
For some companies, it’s dollar for dollar up to a certain point. Some companies at some percentage, but that’s free money. That’s above and beyond your salary that people can be taken advantage of and it’s something where it’s tax deferred. Anybody was not maximizing on what they’re putting into their retirement accounts is missing out on a significant financial opportunity.
Sean Johnson: Yeah. All right. So you’re maxing out what you’re gonna put into your retirement accounts?
That’s different than the getting yourself first, that 10% okay. So after you’re putting the money into the 401k, you are maxing that out. Whether depending on what your company set up is. The second, the next thing you’re doing is you’re paying yourself, you’re taking trim and 10% off of what you’re making. Where are you putting that money?
David Naylor: Okay, so this is where Jerry’s started to teach me about investments. We sat and we talked, and candidly that was very overwhelming to me.
Sean Johnson: It can be very intimidating….
David Naylor: Decidedly was to me and I didn’t really understand all the different options, the advantages, and typically, I think, at least for me, if something seems overwhelming and intimidated, you tend to shy away from it.
Sean Johnson: Yeah, sure. Well, you had a finance back, right? I have a finance background too and its intimidating. Even when you do have a finance background, which I can’t imagine it’s going to be probably even more intimidating when you don’t.
David Naylor: Right., and I mean, there are people who their whole life is is tied up in studying different stocks and what companies are doing this and what companies are doing and who’s got this breakthrough new drug that’s coming out and all of those kinds of things.
So, as a person who doesn’t have access to that information, nor really the time to get immersed in it, it decidedly seemed like something where there was much higher likelihood of me screwing it up than doing it the right way.
Sean Johnson: Right? Yeah. And so how do you kind of tame that beast? I’ll take an aside. this 10%, I want to get it working for me. I want to invest it. Right?
There’s so many options out there for what you could do with that money. There’s stocks, bonds, annuities, mutual funds.
Where do you even start and how do you go about, or should you even go about, picking between those things? Or is there something else we should be doing?
David Naylor: That’s exactly where I was at. Jerry basically broke each one of those down and he what he explained to me was this, “There’s two problems with just investing in stocks. If you invest in a given stock, you have no diversification of risk. So if that company goes down, your investment is getting wiped out or significantly reduced based upon the ebbs and flows of that company. Stocks in and of themselves can be very dangerous for an individual investor. You have to realize that as an individual investor, you’re also playing against all kinds of investment funds and the people on wall street and things like that, and they make money differently. Then you make money as an individual. They’re very sophisticated, so they can structure investments. So they make money if the investment goes up or they can structure it so they can make money if it goes down. From a Wall Street’s perspective, volatility is a good thing.”
Sean Johnson: Yeah. That’s where they make their money, right?
David Naylor: Yeah. He said, “from an individual investor standpoint, volatility can be a very bad thing. Particularly if you’re investing more for the shorter term, cause you could catch the cycle wrong. You could have a substantial loss.” So he helped me understand the value of diversification or minimizing risks.
Sean Johnson: Yeah, understanding where you are outgunned right? Over the years with you the wall street and these hedge funds and now they got like the quant funds and they got machine learning that’s crunching numbers and making trades intensive a second. And that’s what you’re up against?
David Naylor: Exactly. So he said, “you can’t win that game, so don’t play it.” Which I think is a good point. Can’t win, don’t play.
And the other thing he taught me is he said, “I’m trying to minimize your personal debt so that you’re minimizing the interest you’re paying. The same concept applies when you’re investing. Almost any investment that you have, there’s going to be some type of a fee attached to it that’s going to the investment companies. Those fees over time cut into the amount of money that you can make on whatever your investment is. The most important thing to you, the two most important things to understand from an investment standpoint is about diversification of risk. And about minimizing your fees.”
He said, “So you mentioned annuities. What it’s supposed to do is put this amount of money into an investment and then at some time in the future, they say that you’re going to get this revenue stream off of it. The problem with annuities is that the fees tend to be very high and with the investments, they’re going to tend to be sort of mediocre.”
So he wasn’t really a big fan of, of annuities in, in that sense, because the fee structure and it wasn’t really necessarily a great investment.
Sean Johnson: Yeah. I think 1.2 to kind of highlight, which I’ve heard before, but you mentioned fees and being cognizant of the fees that you’re paying on these things. I think it’s something that I know the more that I’ve looked into it I’ve recognized. The general consensus or I guess not the consensus, but the instinct or the reaction is typically to look at the fees and say like, “alright this is 3% versus 1% what’s the difference?” Right? And there’s a big difference but I think a lot of people don’t really recognize that. How does that play out over time? If you’re investing in something that’s 3% fee versus a 1% fee, but feels insignificant?
David Naylor: Yeah. But if you stop and think about it, if it’s the difference between making a a 10% annual return or 7% annual return there’s something in investing.
It’s called the rule of seven. I remember Jerry talking about it and it basically what you do is you take whatever the return is on, whatever you’re investing in, and you divided into the number 72. It tells you how long it takes for you to double your money. So if you’re making a 10% return, divide that into 72, you’re going to double your money every 7.2 years.
Yeah. So if there’s a 3% fee on that, then you’re only making a 7% return. So now you’re going to double your money a little bit over every 10 years. Wow. So 3% doesn’t seem like much, but it takes three more years to get to the same place.
Sean Johnson: Double your money. Wow.
David Naylor: Wow.
Sean Johnson: Yeah. So over time you extrapolate that out to 20, 30 years or whatever.
David Naylor: You’re going to end up with like half the money. Isn’t that insane?
Sean Johnson: Yeah. But most people are looking at this and going, yeah, “what’s 3% or 1% what’s the difference?”
David Naylor: They don’t even ask the question.
Sean Johnson: That’s probably even more common, “What are your fees?”,
“I don’t know…Whatever the normal is”
David Naylor: Exactly. And it’s buried in the literature and those kinds of things. So it’s hard to find if you’re not specifically looking for it.
Sean Johnson: Yeah. Well, and I think that that’s part of. In the same way that all these credit card companies are making money on your interest, the financial institutions are making money on these fees, right. And so in talking about how it feels overwhelming and very complicated, it’s really in their best interest to make it feel that way so that you don’t bother to look into it and really understand.
Oh, wow. , I’m paying double what I should be paying right here. , I don’t understand it, so I’m just not even gonna look into it, right?
David Naylor: Yup, exactly. So, here’s what Jerry said… He was a huge fan of mutual funds, specifically index funds. So an index fund is basically where there’s a couple of different kinds of mutual funds.
There’s the actively managed funds where there’s an individual who’s kind of like the investment manager of this mutual fund and probably a team of people who are out there researching different companies and trying to decide which ones they should invest that the funds money in.
So that’s an actively managed fund and the other type of fund is what’s called an index fund, where the investments are not actively managed.
It’s a set portfolio of companies. So for example, if it was an S and P 500 index fund, it’s just a fund that owns those 500 companies. And so there’s no one picking and choosing those things, that’s just what they invest in, and because it’s not actively managed, the fees are significantly lower.
Sean Johnson: Cause there’s not anybody doing the research or anything?
David Naylor: Exactly. You don’t need to have a big staff of people that are researching and those types of things.
Now, so I said, “You’ve got a group of smart, educated people that are out there researching and looking at all these things… wouldn’t they do better than just having a set index fund of these stocks?” and he said, “if you go and look at it historically, the answer’s unequivocally no. In fact it was interesting a couple of years back, Warren buffet, who’s perhaps the most famous investor of all time, made a comment where he said ‘it’s very, very hard to beat the index.’”
Sean Johnson: Wow.
David Naylor: And, so here’s the best investor of all time who’s saying that for the average person, index funds are the way to go. And so it gives you broad diversification of risks, it gives you very low fees and that was what Jerry recommended.
There’s now more recently, I think it was like in about the mid nineties, there was something that came out…exchange traded funds or ETFs, which is in essence, another form of a of an index type fund. They trade a little bit differently. There’s slightly different, tax ramifications, and for the most part, they’re very, very similar. But Jerry was a huge fan of index funds, and there’s funds that are S technology index funds, and there’s the Russell 2000 fund, and there’s the Dow funds.
And Jerry was a big fan of the S and P 500 fund, because it’s 500 of the most successful companies. Over time, those have changed, but it’s got really good diversification in terms of companies that are consumer products and technology
Sean Johnson: So protecting against different industries, right?
David Naylor: So this ones going up, the other’s going down and so it creates more of a balance. And if you look historically, I think the S and P 500 was established in the middle part of the 1920s, so it’s been active for almost a hundred years at this point in time.
And the average return over time has been about 10%. If you look at that with the low fee structure, I personally use Vanguard, and the mutual fund company for their index fund, and I think their expense ratio is 0.17% wow.
Yeah. So I mean, it’s virtually nothing. If you look at an average 10% return, over the course of time, about every seven years you’re doubling the money that you’ve put in there.
Sean Johnson: Yeah. Wow. So when you’re having this conversation with Jerry, this 10%, is all of it going into like a hundred percent is going into an index fund, right? Of this 10%, you’re paying yourself first, put it into an index fund.
David Naylor: Yeah. So, many funds have a minimum. It’s funny, I actually just looked at this because I was getting my son started in investing. And a lot of times the minimums will be like $2,000 or $3,000 somewhere in that phase.
So, what Jerry did is he had me put it in a 10%, which was basically just a savings account until it accumulated enough for me to make that minimum purchase. That’s one of the advantages of the exchange traded funds, they don’t have the same minimums.
So if you were starting out in investing, it’s a little easier to step into the ETFs than an index one, because you’re not going to have a minim.
Sean Johnson: Gotcha. Okay. So that’s kinda the main difference between them. Alright, so you mentioned buying homes only when you’re ready…
So after the 10%, you’re taking the 10%, you’re putting into some sort of index fund and you’re doing it because over time, and I think that’s just as important. Point two is the longterm versus short term, the longterm versus short term ramifications or longterm versus short term view.
Can we talk just for a second about volatility? Because I think the notion for a lot of people, and my dad’s a financial planner, so he gets these calls all the time.
The market has a down day and everybody freaks out. So why should we not be, or should we be concerned?
If the market has a down day or there’s a bad year right? There’s this impulse to pull your money out, right? And stuff it under your mattress or whatever it is, or get into something else. How should we be thinking about it? When these types of things happen?
David Naylor: So in terms of investing, it’s very difficult to win in the stock market if you’re investing for the short term, because you’re are going to have that volatility. So you go back and you look over the course of the last 90 years, the average has been 10% now so maybe one year it’s 5% maybe another year it might be a negative 3%.
But over the course of an extended period of time, it’s been about 10% or a little bit more, so that’s where you have to mentally condition yourself to realize you’re going to have the ebbs and flows.
You’re actually better off not paying that much of attention to it. There’s a saying on wall street that “scared money never wins.” And trying to time the market is virtually impossible to do. There’s something called dollar cost averaging. So if every month you’re putting that 10% into that index fund, what happens is sometimes you’re putting money in a downtime, sometimes you’re putting money in an uptime, and so the dollar cost averaging comes out to be somewhere in the middle. So you’re gonna kind of even out your investment amounts in that sense of things.
But the media likes to make a big deal out of the fluctuations in the market. And certainly in the recent few years, we’ve seen some big fluctuations in the market. But the reality is, I mean, if you look at where we were in 2008, when the stock market was crashing and everybody’s investments were upside down and your way down.
And here we are 11 years later. And if you look at where the market is relative to then, anybody would have lost in that. And in that sense, they made more back over the last handful of years. So again, that’s where you have that longterm mindset and just remind yourself that over time you’re going to have about a 10% return.
Sean Johnson: Yeah, a good point is you talked about the time timing never wins. And it’s a very hard difficult/near impossible, particularly for an individual investor to time the market. I think that over time you have to think about the opportunity costs of not being in the market.
So if it does go down and you freak out and you pull your money out and then it starts to go back up, by the time you get your money back you’ve missed out on that interest and that growth.
David Naylor: Where else are you going to put your money? You’re going to put it into a CD where you get 2% or 1.5% or something like that. I mean, if you look at that as compared to over time, about 10%.
That’s a huge difference. Do the math, if you’re getting 2% on money in a CD, that’s 36 years to double your money. So financially the return is so much different, one versus the other.
Sean Johnson: Yeah. Well, I think the good news with the index funds is it seems to be largely once you’re saying, all right, I’m going to pull 10% out and I’m gonna put it into an index fund. So that was largely set it and forget it, which I think is probably a relief for a lot of people to hear. Not only can that be a possibility, but it’s actually the smarter move over the long term.
David Naylor: Yeah, picking individual stocks, you’re not going to win. Because there’s other people that are far better equipped to be able to do that than then you are.
But with the index, you’ve got broad diversification and you minimize your risk and you’re getting the best technology companies, you’re getting the best consumer products companies, you’re getting into best defense companies. You’re getting the best, you really are getting the benefit of investing in the Googles and the Facebooks and the Microsofts and the Amazons, and all kinds of sexy stocks. But at the same time, you’re not getting the risk that comes with only investing in those.
Sean Johnson: Yeah, sure. You’re getting the stocks that are doing great, but nobody’s ever heard of. After this 10% goes into an index fund. You said the next thing that he talked about was big purchases and particularly the big one being homes and only buying homes when you’re ready. How do when you’re ready?
David Naylor: So for most people that the the single biggest purchase they’re ever gonna make is their house and it’s also kind of the American dream to be a homeowner. So people feel, to a certain degree, compelled to do that at a certain stage of their lives.
Jerry said “you never want to buy a house until you can put a minimum of 20% down on it. The reason why is if you put less than 20% down, you go into, what’s called principal mortgage insurance, which is a very expensive insurance that the mortgage company requires you to have to basically protect them in case you default on the mortgage”
So it becomes a significant financial expense for you, that again, is taking money away that you could be using to pay off your mortgage sooner. There was the 20%, don’t buy a house that you can’t put at least 20% down on.
He goes, “you never want to buy a house where your mortgage and your property taxes, school taxes or whatever taxes you pay, in association with owning that home, is taking more than 25% of what you make every single month. If you end up purchasing something where it’s taking more than 25% of what you’re making, you’re basically house poor at that point in time.”
And, so those were kind of the parameters that he set up for for buying a house and really knowing how much you could afford in a house. And that’s the stuff that the real estate companies and the banks aren’t necessarily going to tell you. In fact, if you look at what happened in the financial crisis where the mortgages, it was those numbers were way out of whack for people, because the banks were again, they were flipping the mortgages. They weren’t making money on them.
Sean Johnson: So 20% down. So if you’re in a situation where, alright, “I want to start to work towards buying a house” but you don’t know where you want to go, what you’re looking at, you don’t have that 20%.
So you want to start working towards it. Should that be set aside differently or on top of the 10% you’re putting into an index fund? Is that a separate after that 10%, are you putting that into a separate savings savings account?
David Naylor: I’m a huge fan of doing that and I’ve done that. Largely because of what Jerry said with a lot of things in our finances. So, for example, I take money from every paycheck. and I put it into a separate account for kind of those unexpected expenses…something breaks in the house, you need to get a roof fixed or the car repaired or something like that, that you can’t really budget for because you just don’t know when they’re going to happen.
I’ve got a savings account where there’s just a chunk of money there for the unexpected kind of expenses, that way if something happens, I’m not stressing out about it. And that just automatically comes out every time there’s a paycheck that comes in.
Sean Johnson: Is that a specific dollar amount or is it a percentage of per paycheck?
David Naylor: Again for myself, what I do is I pull $500 out of every paycheck and that goes into that account. And then I use that when there’s an unexpected expense or when there’s a big bill like my car insurance, our car insurance. I think that comes through twice a year, every six months? And so it’s usually it’s a chunk of money..I pulled that out of that account.
So that way it doesn’t send the budget out of whack when when you have those expenses that are the irregular expenses that are coming in.
I came to the number of $500 just because whenever those things happened, that was enough money in that account to cover it.
So that was just kind of trial and error. It wasn’t something that Jerry said “take this amount of money.” I’m a huge fan of setting up those automatic withdrawals. I do the same thing for our mortgage with the bank. The bank would pull out the taxes, but the problem is they’re controlling your money.
You’re not controlling your money. So over time what I did, I just set it up so every paycheck, a certain amount of money comes out. So that when, we have to pay taxes in February and September, there’s the money sitting in the account.
And I’ve been making money on it though through the whole year instead of the bank making them money on it. And it’s just those automatic withdrawals. So it’s a great strategy. It’s been hugely helpful and relieved a ton of financial stress.
Sean Johnson: You can kind of automate your finances to a large. How should we be thinking about putting it into a savings account versus just putting that extra money into more of the index fund? Why do one versus the other?
David Naylor: It really comes down to when you anticipate needing the money. Okay. So again, when you’re investing in the stock market, whether you’re doing it in stocks or index funds your money is subject to the ebbs and flows of the market.
So short term money, it’s not a good idea to put it into something where you’ve got more variability in your returns. You’re better off having that in something that’s more stable, longterm money, you’re infinitely better off having it in an index fund. So what it really comes down to is, short term money or long term money?
Sean Johnson: And by short term, you talking like, within a year. So within a year, it should be in a more of a savings account, more liquid-less volatility. If it’s more than a year out, you’re probably better off putting it into an index fund.
David Naylor: It’s longterm investments, so retirement, those types of things. There’s other types of funds where there’s less volatility, that’s what you’re really looking at. The shorter term, the money, you want less volatility or lower risk in the money so you can invest in treasury bonds and treasury bills and things like that that are very stable.
There’s not a lot of variability in it. You’re not going to get a 10% return. But you’re also not subject to the fluctuations either. So if it’s short term money, but let’s say it’s something that you’re anticipating needing within the next year or two years, I would look for something that has less risks than necessarily an index fund. If you put that money in the index fund and the stock market crashes next year, it’s going to have a negative ramification.
Sean Johnson: Yeah. Gotcha. Okay. So, all right, so homes are big purchases only, when you’re ready, homes in particular. You’re buying when you’re ready because you’re able to put 20% down. And it’s not more than, between the mortgage and the taxes, It’s not more than 25% of what’s coming in.
David Naylor: And then if you go back to what we talked about, what Jerry had me do there, is again, split the payment in half.
And pay half my mortgage on the 15th and half my mortgage on the 30th. And that is on a 30 year mortgage, will take about 10 years off of your mortgage. Now 10 years, you’re not paying interest.
Sean Johnson: Wow. Yeah. It’s amazing how like the little nuance, huge difference. There was one last part in terms of building your net worth, which you kinda mentioned protecting it, protecting what you’ve built. What do you mean by that?
David Naylor: Okay, so you’ve worked so hard to get control over your money. You’ve worked on building your net worth, but then the reality is sometimes unfortunate situations and circumstances happen, and so what Jerry said “you can’t account for that. You just don’t know what, you hope that you’re always going to be healthy, but God forbid something happens. You want to make sure that that your family is safe if, if something happens.”
So that’s where he started to talk to me about insurance, specifically life insurance. he said, “traditionally people don’t like to think about life insurance because they don’t want to think about themselves dying”.
Sean Johnson: right….
David Naylor: But he sat down and he really talked to me about the importance of it. He said “you want to make sure Michelle”, and at that point, we didn’t have kids, “if you have kids later on, that she’s not gonna have to worry.” It really helped me to understand about life insurance and the different types that are out there and how much to buy and all of those kinds of things.
Sean Johnson: Yeah. Alright. So, let’s go there. How much to buy or how much life insurance do you need?
David Naylor: Jerry’s rule was, “did you take your income and multiply it by 10..and that’s how much you should have.”
The other thing is he said, “you got to think about kind of the stage of life you’re in. When you’re younger, your risk of having something happen is lower. Because it’s lower life insurance tends to be less expensive. As you get older, that risk of something happening to you, it goes up and therefore life insurance gets more expensive. But what you also gotta realize is that as you get older, typically your expenses go down. You built a larger net worth, your kids are maybe out of college and those kinds of things.”
He said, “life insurance isn’t as important when you’re six years old as it is when you’re 30 or 40 years old.” So his rule was 10%, and he said, “if you’re looking at kids’ college expenses and things like that, you may want to add a couple of percent onto that to make sure that if, God forbid, something was to happen to you, that Michelle and the kids can maintain the lifestyle that we built for yourselves.”
Sean Johnson: So about 10x the income or a little bit more depending on the stage of life you’re in, if you’ve got kids that you’re trying to send to college and whatnot. There’s a lot of different types of life insurance, so how do which one you should be buying? What are the different types and then how do you pick?
David Naylor: So and again, that was something that Jerry talked to me about it. He said, “so there’s really three primary types of life insurances. You’ve got term insurance, you’ve got whole life insurance, and you’ve got universal life insurance.” The differences is term life is just pure insurance, right? So if you’ve got a million dollar policy and something happens to you, then it pays out $1 million to your spouse. Whole life insurance is like term insurance, but with an investment built on.
So you’re building cash value. So in essence, if you’re paying $100 a month for life insurance, $80 of that would go towards the insurance piece of it, and $20 of it would go towards some type of an investment. The universal life is very similar in that regard, there’s an insurance component and an investment components.
Jerry wasn’t a big fan of whole life and universal life for a couple of reasons. He said,
“what insurance companies try to do is they try to sell you those because in essence, it’s kind of a forced savings or a forced investment to type of a program. So for someone who’s got no control over their finances, they hadn’t done any of the other things that we’re talking about. It’s like a forced savings plan for them.”
So in that sense, it’s not a bad idea, but the problem that Jerry had with it is he explained is “because the investment component of it”, he goes, “it tends not to be a good investment. It tends to have a lot of high fees tied to it. So it sort of defeats what you’re trying to accomplish from an investment perspective. You’re better off the low cost term insurance, which is cheaper when you’re young, and take the extra money that you would’ve paid and put it into your index fund.” From an investment standpoint, it’s a far better investment with far lower fees.
Sean Johnson: Okay. All right. So you’re better off with the term, right? And any money that you would have put into whole life or universal policy, just take that, put it into the index fund, because you’re going to do better there anyways.
David Naylor: You do far better from an investment perspective and your insurance will be significantly less than term policies are, especially when you’re young. I mean, if you’re in your thirties you can get a million dollar term policy.
It’s different for men and women, and it’s different if you smoke or not, there’s some variables and things that are tied to it. It can be as low as a couple hundred dollars a year, so if God forbid something was to happen, for $200 a year, you’re looking at your spouse saying, “well they’re gonna have $1 million to make sure that they’re going to be okay.”
Sean Johnson: Yeah. Okay. So in terms of building your net worth, you’re paying yourself first. And first, even before that, you’re going to max out your 401k, right?
Second, you’re paying yourself first, you’re taking 10% off the top. You’re going to put that into an index fund because it’s tough to beat and really low fees. You’re buying homes only when you’re ready, when you can put 20% down and the mortgage and the taxes are less than 25% of what you got coming in the door. And we’re looking at term life insurance as opposed to whole or universal. And any money you would save on term, you’re going to put back into the index funds
David Naylor: in roughly 10% of whatever your annual salary is. You should have that roughly about that much. Yes. Insurance. Okay.
Sean Johnson: So, In order to wrap up, before we kind of close this conversation on money, I thought it would be good to talk about the mindset that people have around money, that the mindset particularly they have around wealth.
And kind of, the importance of that, could you speak to, when we’re thinking about building our net worth and we’re thinking about wealth, I think there’s kind of two components to this. There’s the first part, which is, sometimes there’s the perspective that money is evil or that you don’t deserve it. And then there’s also a part of, having an abundance mindset when it comes to finances versus a scarcity mindset.
So just in general with kind of all those pieces in play, how can we, how should we be thinking about this? How can we kind of cultivate the right mindset, now that we kind of know the fundamentals of this, we can stick to it and want to stick to it.
David Naylor: Yeah. The things to understand about money is that with regard to money, time is your best friend. So for a lot of people, what they do is, when they’re in their twenties, they’re sitting there thinking, okay, I’m trying to build a life.
I’ve got a nice car, I’m thinking about where I wanna live, all of those kinds of things. So people tend to be very distracted in their twenties. A lot of people really don’t start thinking about about retirement. Cause when you’re 20 years old, you’re thinking, Oh, I’m gonna retire them 65 and that’s 40 years from now. And so they’re very far removed. Remember, go back to that rule of sevens, right? So if you’re getting 10% on your money and your money is roughly doubling every seven years.
So if you’re 20 years old and you don’t start investing until you’re 34, that’s two doublings. So you start thinking about that and you’re going, Oh my God, that could be hundreds of thousands of dollars difference. So that was one of the things I actually started up a couple of years ago with my son. Ben is 21 now, and so he’s 19 when we started this. And he had a little bit of extra money from graduation and that kind of stuff. And I sat down with him and I said “Ben, let’s put it into a mutual fund?”
And I was just trying to get him in the habit of putting money away on a regular basis. Because it’s like that compounding effect. That’s another thing, buffet said the most powerful force in the universe was, it? Was, was it buffet said it or was it Einstein?
It might’ve been Einstein who actually said that was the most powerful force in the universe is the “compounding effect of money.”
Sean Johnson: Both pretty wise guys. Yeah, you’re pretty good.
David Naylor: You can take advice from me, the one you’d probably be okay.
Yeah and is there a philosophy that money is the root of all evil? Well, I don’t know that it’s money that’s the root of all evil. I think people are the root of all evil and the decisions that they choose to make… What Bill Gates has done, he’s one of if not the wealthiest people in the world, but what he’s done with the Gates foundation.
So however you decide, what you decide to do with your money is entirely up to you. If you build a net worth, now you have more of a net worth to be able to give to charities and give to causes that mean something to you…you build a measure of financial peace of mind for yourself and your loved ones. And so it’s money in and of itself isn’t the root of all evil. It’s what people choose to do with it that makes it that way.
Sean Johnson: Yeah. Well, I think, I think somebody, I can’t remember where I heard this, but you’ve heard the saying, and I think there’s so much truth to it that people think that “money changes people.”
Money doesn’t change people. Money just amplifies who they are. For people listening to this, you’re a good person. There’s so much truth to that four, four, if you are a good, a good person, money is just going to amplify the amount of good that you can do.
David Naylor: Well, I remembered the movie star, I think she was in her 20s or 30s. May West was one of the big movie stars back in the day. And there was a great quote that she had where she said, “I’ve been rich and I’ve been poor, and it’s better to be rich.”
Sean Johnson: Yeah…
David Naylor: The reality is, money gives you options. Money allows you access to more experiences in life. It allows you to do more good if you choose to do good. It amplifies who you are.
Sean Johnson: Yeah. I think the other piece of it too, at least in my view, is a misconception is that money is a zero’s game. I don’t look at it that way, because people kinda think “if I’m making money, then somebody else is losing money.” Right, but I think that’s not necessarily true.
David Naylor: Well, that’s based on the assumption that if that money is a finite resource. And the reality is it’s not, money increases the value of things over the course of time. And the government hasn’t stopped printing money, so it’s not in their interest to make it a finite resource. So if one person is financially succeeding, it doesn’t necessarily mean that somebody else has to financially loose for that to happen.
Sean Johnson: Yeah. Well, and I think that’s true, just by the fact that the index funds have performed at 10% returns every year, if it was a finite resource, so they’d go up and they go down.
Right, but they’ve pretty consistently gone up over the course of time. Yep. All right Dave, any other closing thoughts before we wrap up our money chat?
David Naylor: What I’ve found in the journey is that two of the most important aspects of life, and I won’t say they’re the only two, but certainly two of the most important aspects are the time and the energy that we invest in the relationships with the people around us and the peace of mind that we can gain from a measure of control over our finances.
And so if we’re going to invest in anything, those are two things that are pretty good to invest in!
Sean Johnson: I would have to agree with that. There you go. Alright. Thanks for listening.
*Transcription was edited for clarity
Trending Articles, Videos & Books
Articles sourced from Forbes.com
Show Notes: Money Secrets of the Millionaire Mailman: Part 2 – Growing Net Worth
0:22- Recap/intro to part 2
2:23- the save and buy mentality
5:42- Using cash is key!
7:36-How to build your net worth after saving/paying off debt
13:39- Gaining power over time
20:00- How to invest the right way
33:40- What to do if/when the market crashes
38:52- How to know when you’re ready to make big investments
41:36- Where to put the money you save
44:56- Know what you’re investing for
48:24- The importance of life insurance
50:47- How to know what the right type of life insurance is
55:11- Final thoughts