How We Made Our First Million Accidentally
Ok, I admit it, the title “How We Made Our First Million Accidentally” is designed to sound as impressive as it can. I enjoy looking at things from both the best and worst perspective possible. In this case, that just happens to tip the scales over into that 7-digit territory. But I am really just an ordinary person with a normal job. If you are reading this and thinking “pfft, been there, done that” then I hope there may still be some tips you can pickup (or feel free to provide your own advice in the comments). If you are reading this thinking the opposite, then there are two main things that my parents taught me from a very young age:
- how to save money
- how compound interest works
Yep. Those two boring throw-away lines together form the basis for that title.
It may sound strange, but when I was young I loved watching how the bank kept topping up my account with extra money! It helped that back around 1990 interest rates for term deposits were around 10-15%, but the idea that keeping my money in the bank rather than a jar resulted in me getting more money was amazing! It made me want to save more. Saving more made the balance rise faster. The balance rising made those interest payments get larger too.
Unfortunately my records from back then are not as good as they are now, but by the time I was old enough to think about getting a job, I had quite a nice little nest egg. I believe it was around $5,000. That may not sound like much, but when you are just saving 1990’s pocket money and Christmas/birthday presents it defiantly felt like a LOT.
My first job brought a whole different dimension to the game. Suddenly my income went from being a fixed weekly payment to a limitless pool of money to draw from. With my pocket money there was no option of “working more hours” or “working faster”. With a job, my income was now supplemented by trading some of my time for money. And at that age time was limitless.
The job was delivering newspapers. I believe I was paid around 15c per newspaper. This included stuffing the ads, folding it, and putting it into a plastic bag if it looked like rain and of course the delivery itself. At first I loved it, but quickly realised that by paying me per newspaper they had taken time out of the equation. The discussion of paying per hour vs paying for results is an interesting topic that I may look at in the future.
I quickly traded up to a better paying job, and then a second concurrent one. Throughout all this my love of saving grew. I did have goals, like buying a camera, or a computer, but often when I reached the goal I could not bring myself to trade the money for the item unless I really needed/wanted it.
My First Financial Investment
During university I continued with my part time jobs that were now paying much better until I finally graduated and got my first full time job. At the seemingly young age of about 23 I had saved around $40,000 and wanted to invest some of it. This was before the “first home saver account” existed, so I decided to split my money into 3 groups:
- One third in cash ($12,000 in a high interest bank account)
- One third in shares ($14,000)
- One third in property ($14,000)
Two things stood in my way. Firstly $14,000 was not enough to invest in property the way I knew (buy a rental). Secondly I did not know what shares to buy, which ones were good, or how much diversity should I have. So I decided to combine the second two and buy a collection of 6 managed funds. Some focused on Australian shares, some on international, and some on property. I felt this was a good compromise.
Over the next 4 or so months I watched as the prices soared, at one point reaching a gain of $7000 (25% return in 4 months is fantastic)! Unfortunately I had no exit strategy, no rebalancing strategy, and was not attempting to keep up with the economy. I had done my research and was sitting back to watch. As you all know, the GFC was not the best time for investors like me. Before long 50% was wiped off my managed funds.
I started saving again.
Before long “I” became a “we” and we decided to combine our finances. This provided an instant boost to my savings (ok, our savings), and resulted in the search for a house commencing. We had our 20%+ deposit easily covered and it was growing every week. Our current rent was about a third of what our minimum mortgage repayments would be, as our place was modest. This made saving easy.
Eventually we found a place on the wrong side of half a million, but not too far the wrong side, and we set about paying it off as fast as we could. Fast forward to 2015, and our house was paid off. I couldn’t believe it. So I went back to what I knew best – saving for something else. In this case I was saving for a safety net. After all, our money was all tied up in our house. After a while I started to wonder how much of a safety net was enough. So I began looking at where our assets were, what their value was, and looking at asset allocation (including our primary residence).
After a quick “best case” spreadsheet, I saw that the total column had hashes in it down the bottom. My brain stopped for a second as the reason for this began to crystallise in my head. I had sized the column for one dollar sign, one comma, and six digits. This means that there were extra digits. How would extra digits get there? (The cogs spin slowly in my head.)
Our First Million! More than 6 digits in the total means that our net worth is over a million!
As I said, this is an optimistic view. I didn’t feel like a millionaire, and today a million does not go as far as it used to. Nevertheless it is still a wonderful sight to see. I had reached a goal that I hadn’t even set!
The First Million Breakdown
The following is a rough breakdown of our net worth and some pointers to where optimism and luck played a role:
- House – $610k (this uses the average house price increase stats since we bought the house and does not include any fees for selling)
- Super – $240k (this is the combination of both of our superannuation accounts – think 401k/IRA if you’re in the USA.)
- Savings – $70k
- Shares – $40k
- Land – $40k (this is another unfair advantage, a gift from grandparents)
While I said this is an optimistic view, it does not include items like cars, jewellery and other possessions that either decrease in value or have a low value.
Now you have read this (assuming you made it this far) I would encourage you to give it a go. See what you are worth. Be optimistic with your calculations. But most of all use it as encouragement to improve and move forward. If your calculations end up negative there is no better day than today to start turning that around. If you find yourself just short of a milestone, use it to give you additional motivation to get there. And of course, there is a chance you will be pleasantly surprised with the results!
Bravo! Congrats Tom. Keep it up, it appears your success is directly correlated to your ability to save with discipline. I am impressed.
Thanks – a lot of saving – yes. But also some luck (my super was basically in fixed interest just before the GFC and then automatically removed and put in shares as they bottomed in AU) and good fortune (grandparents land). Now my goal (one of them) is to get the savings to work for me. Dividend, rental income etc.
Congrats man! Must say you tell a great story here, I was captivated by the title & curious and the way you told the story it had / has all the makings of an E-Book 🙂
Looking forward to following how you go with it all!
Well Chosen title… It got me interested. The story did not disappoint me.
Well done on managing your finances this way.
I love how you provided your net worth at age 23.
I am young and at the beginning of this wealth accumulation process, so when I hear about how successful people were managing at around my age, I feel inspired and motivated to keep at it!
Thanks Elle – I know that whenever I start something it can feel overwhelming to see what others have achieved. But when people actually look at the start it can really make the first few steps easier. The net worth back then is rough however, I just know that I had about $40k in savings and didn’t have any real other assets. I also know how much I lost in the GFC 🙁
For me it has been interesting to watch my savings at a young age account for almost all of my increase. Whereas when you build up assets the balance tips to asset growth/income producing more of your gains.
Simply being interested in finance and trying to make good decisions puts you ahead of so many other people. I always try to make sure people who are further along than I am are used for inspiration rather than resentment. There will always be people further ahead and behind where you are.
Great story, congrats on the first million! Great achievement to have a fully paid for home in Australia! We have quite a lot in common so look forward to following your story to the 2nd million!
Very interesting post, Tom. Thank you for sharing. Just wondering, have you worked out how much your net worth needs to be before you can consider yourself financially free? I’m in a similar situation to you, a young couple although we do have a young child as well. Based on our annual expenses we worked out that we need roughly $1,250,000 in net worth to buy have to work for a living. Just curious if you’re thinking along similar lines or whether you guys have a different goal in mind?
Good question Len. We don’t have a set goal in mind, however we are including the house in net worth. That means that a good chunk of our net worth is not income producing. All the calculations we have done are based on income producing assets rather than net worth. The hard part has always been factoring in inflation over the next 50+ years. $1m now can provide income that we could easily live off, but in 30 years it won’t. So we have always attempted to maintain the principal against inflation, and therefore live off the income over inflation. For most of the calculations (done a while ago now) we have set inflation at 2-3% and interest at 5-7%. Factoring in tax can also erode those numbers too. I think excel gave a number closer to $3m with a worst case of $8m, when those factors are taken into account.
Given those numbers are unlikely, we have sort of changed from “live off income” to part time and/or work we love to boost the income and keep growing the capital (eg starting our own business). So far we haven’t run any of those numbers however, mostly because I do enjoy most of my job, and the numbers still feel too far off. Our first realistic step is to reach a point where our essential bills are covered by our passive income. By essential I mean food, electricity, rates, insurance, but not holidays, meals out, new car (when required). Currently I think we are almost half way there.
You have made me want to do some more calculations now – there goes my weekend 🙂
Hmm we are also thinking along similar lines. To slowly transition to working for ourselves or from home.
It’s interesting what you say about inflation. I might have to revisit our calculations as well. Our expenses are around $50k/year. Is my number of $1.25mil way off the mark?
I’m not sure. I will have to do some more maths. Your $50k is roughly what we are thinking as well. I tend to run scenarios (best case, average case, realistic, optimistic, and worst plausible case). I think I will try and do a blog post once I get around to doing it. Hopefully I will have some more down time over Christmas.