You may have heard that numbers don’t lie. You may have also heard that compound interest is the most powerful force in the known universe. These clichés are unusual – because they are actually true.1 They are even more unusual in that they’re actually useful – especially if you want to learn how to become a millionaire!
I haven’t made my first million yet. But by making it a daily ritual to repeat these two clichés while I tap the heels of my ruby slippers together, I soon will – despite graduating from seven years of post-secondary education into the “worst economy since the Great Depression,” underemployed at a part-time minimum wage job with about $175,000 in student loans to start my career about nine months later at the average garbage man’s salary, my debt having grown to $197,000ish at its peak due to the Hulk working against me for months.
The world is more full of wealth than ever before. The United States in particular is drowning in unprecedented oceans of wealth – which most Americans remedy by tossing buckets of wealth back out into the ocean.2 For example, 25 years ago, a device that could hold an entire album of music and fit in a pocket was incomprehensible and would have been prohibitively expensive to develop, assemble, and bring to market. Now, thanks to investment, wealth-growing technological advancement, and free-ish markets, some 91% of adults own a cell phone3 that can hold more albums than any one person can have the time to listen to, while also connecting them to their families, friends, and the entirety of accumulated human knowledge on this little thing called the internet.4 To accumulate enough of this super-abundant wealth to call yourself a “millionaire” requires only a simple six step process.
Without further ado: How to Become an Eccentric Millionaire
Step 1: Realize that money can buy happiness.
Let’s start by busting a cliché that is entirely, unforgivably, immorally wrong. Money is not the root of all evil:5 It is, thanks to capitalism and compound interest, the single greatest tool ever devised by man for achieving happiness.
Money can’t buy happiness by purchasing stuff or experiences. You can’t achieve happiness by buying a bigger house in a swanky neighborhood, by getting a bouncy castle for the kids,6 or by going to every concert and play you can scrounge up the money for in between the couch cushions.
The reason is psychological: hedonic adaptation. Basically, the human tendency to adjust to any situation after experiencing it for a long enough period of time. Each new promotion, fancy car purchase, cell phone upgrade, and hot girlfriend/boyfriend is met with excitement, but eventually they all become the “new normal.” And so the goal shifts further away and the unhappiness creeps back in. We want a new high.
Things and experiences can’t give you a sustained high. They are a temporary happiness at best – a temporary and fake happiness based on the sensation of “newness,” at worst. So if not things and experiences, what should you invest your money in to achieve happiness?
There’s a consistently popular myth that the single biggest investment of your life should be your home. If it’s happiness that you’re seeking,8 your single biggest investment must be in the freedom to spend your most precious resource – your time – as you see fit. Invest in your freedom from those avoidable interruptions which detract from your happiness: time wasted in a cubicle, time away from the people you’d choose to spend time with, concern for where your next meal/rent payment/Armani suit will come from, or even waking up before you’re well rested because, damnit, it’s time for work and you have bills to pay.
There’s a term for this kind of freedom: financial independence. It means that you have invested your money such that you no longer have to devote any time to earning more unless you choose to partake in a potentially money-making activity simply because it pleases you. No more alarm clock five days per week. No more commute.9 You’ll finally have time to be a good goat owner and take Billy for the regular walks in the park that he deserves. Financial independence is the ultimate form of valuing your time, and it takes a lot less money than you think.10
Financial independence is also subject to hedonic adaptation, to a point. I haven’t reached financial independence yet, but I’m sure that I will be extremely excited when I do. That excitement will fade away. What remains, though, is what makes freedom worth buying: I will have the flexibility to find new experiences to adapt to all the time, and I’ll be able to do it with those I care about the most. That freedom is guaranteed to make anybody happy.
Step 2: Make goals for how to spend your money and time.
This may be the hardest part. (In fact, I’d argue that this is the ONLY hard part.) Between the news, our schools, and the retirement stereotype of ancient couples relocating to Florida to fish, drink sweet tea, and die, we are raised in a system designed to make us produce things for the profit of others and to stress out about things we don’t control. We lose a little bit of ourselves in it. Figuring out what you would do with unlimited free time is a huge challenge, especially if you haven’t thought of it as a serious option before.
This challenge is made immensely simpler by giving less fucks and making appropriate adjustments to your Circle of Concern and Circle of Control. These changes improve your productivity by strengthening your focus on important things, and they reduce your waste by making you less susceptible to the perception is reality fallacy, and therefore less likely to be a financial black hole.
Through the process of deciding what your true goals are, something becomes clear: Since happiness is your ultimate goal, and happiness is rarely achieved by sitting in a cubicle, your goal shouldn’t be to sit in a cubicle for most of your waking hours just to buy more stuff. Your lesser goals – whatever they may be – are better achieved by getting out of that cubicle ASAP.
But you need to eat. You need shelter. And the thought of living the Amish life doesn’t appeal to you. You need to pay into the concept of the modern life, and you intend to enjoy modern conveniences, like electricity and Keeping Up With The Kardashians. That’s exactly what these financial goals will accomplish.
Your non-negotiable financial goals (Cliff’s Notes for achieving financial independence):
- Reduce your expenses to increase your savings rate. Lower expenses have two awesome powers: (1) You save more, growing your personal stache more quickly, and (2) You require less to survive on later. The net effect: Your goal investment portfolio becomes smaller and smaller even as you approach it faster and faster. Your spending is thus much more important than your income, and I can prove it.
- Save enough that you can cover your expenses by withdrawing 4% of your investment portfolio annually,11 as this frees you from the requirement of working for the rest of your life. Why 4%?
For my girlfriend and I, it stacks up like this: Expenses of about $28k soon dropping to about $24k, other than my remaining student loans. Disregarding my student loans for our savings rate calculation – they would be savings had I not made the mistake of spending far too much time and money in school with far too little return on my investment – our goal can logically be set at as little as an investment portfolio of $600,000 in today’s money, with a 50/50 ratio of stocks to bonds (although we’re young, and so we’re fans of the greater gains of stocks for now – if we experience a loss, we have plenty of time to make up for it). Our savings rate of take-home pay combined with any principle payment to a loan and any deferred compensation comes out to 51.83% (soon to approach 60-65%), so we know we’re on track to retire in about 14-15 years if we had no pensions12, no social security13, no raises,14 no lottery winnings15, and no windfalls of any kind16. And considering our age, education, motivation, and existing pensions, it seems extremely pessimistic to assume that we’ll be tied to full-time work in a decade. Curious how that math works out? You should be!17
As for your time goals: This part I can’t help you with. You have to do a scary thing: introspection (self-reflection). Understand what you do that makes you happy. The people who do this usually end up being the most interesting people. I’m sure the eccentric millionaire with his goat on a leash really loved raising that goat, for some reason.
Considering that newness gives everyone a temporary high, there’s not a lot to lose in simply jumping in to an unfamiliar scenario and trying it out to see if it sticks. So learn an instrument, go skydiving, start knitting, find an underground boxing club and punch Brad Pitt, whatever. Just do something and see where it takes you. If that sounds wayyyy too difficult, there is something to be said for the Jim Carey cure. (Try saying “yes” to every request for a week. There’s no way not to experience something new.)
Step 3: Get excited over $1.
My girlfriend got an unexpected refund check in the mail for $2.36 recently. I lost my mind. I did my happy dance. Diving headfirst into the check didn’t turn out well, but I don’t regret it.
There’s a common trope amongst financial advisors who allow at least half of their words to come from their mouths: The Latte Factor.18 This is the rule – and I mean rule – that a latte a day is a gigantic Hulk of an investment. Because I’m not partial to lattes but I enjoy the occasional trip to the movie theater, let’s consider the cost of seeing one epic Marvel movie per week.19
Say I pay $7.50 for a ticket for each movie. I also take my girlfriend because I’m nice like that,20 so it’s $15. She loves popcorn and I love butter, so we shell out a grand total of $20 once a week to watch Vigilantes throw cars, travel through space-time portals, command ant armies, and crush Villains. That is $20 per week that could have been invested instead. Given an average investment return of 7%, that weekly contribution of $20 to Mickey Mouse’s wallet could have left me $15,374.94 richer in 10 years!
With the same interest, compounded monthly, I see that making only one positive $5 choice per day can easily yield $1,053,662.51 for me if I live to the life expectancy – plus 10 years, since I’m an optimist – of a white American male born in the year I was born.21 That is why I am so excited to see $2.36 come in unexpectedly, and you should be, too.
The Latte Factor is a helpful metaphor to remember the power of compound interest and how much repeated little costs can really add up to, but approach with caution: To save money, you in no way have to sacrifice. Most people who are serious about saving fall apart by missing one key point: forgoing frivolous expenditures makes your life immediately better, and your future life immeasurably better.
Time spent away from the TV is time immediately released to live your own life worth watching.22 Postponing a Marvel movie for another time (and possibly a time when it is significantly cheaper!) may free up the time to make it to your niece’s birthday party. Or to start that side hustle you’ve been meaning to get to. Or to exercise and improve your health, appearance, and stamina to achieve more things with this extra spare time.
If you skip the weekly movie, your future life is made better by the $15,374.94 you just put into your own pocket. Depending on your savings rate, it could mean years less spent in a cubicle or behind a crane control.
Understanding this kind of delayed gratification is one of the benefits of being human and having the faculty of reason at your disposal. We don’t know of any other species of animal capable of planning for the future other than by instinct. Changing environments and predictions of future environments simply don’t seem to register with other living things. A squirrel losing its forest doesn’t plan to store extra nuts because of the decline in the futures market for nuts.
We humans have the gigantic advantage of understanding that, in some instances, good things come to those who wait. Especially when it comes to that all-powerful force – compound interest. Take advantage of that gift!
To have the self control to become a millionaire, you will have to start looking at a dollar for what it is: A soldier in your Money-Castle-building army.
Recruit your soldiers hard. And leave no man behind.
Step 4: Make every decision with your savings rate in mind.
Intelligent, well-informed people say that your possessions own you. It’s a wise sentiment, but it isn’t that simple. With each item you own, your life is a little more beholden to items that you must store/repair/clean/move, and you have a little bit less money out in the world working for you. You’re a little further from financial independence and true freedom. But this only becomes intolerable at a certain threshold. This result is dictated by the law of diminishing returns: the economic principle that flies in the face of the reactionary overcompensation fallacy by stating that each additional unit of production, all other things constant, results in a lesser marginal gain than the previous unit of production and may even result in negative returns after a point.
For example, I love coffee, and it may be beneficial to my health in small doses. So if I drink a cup in the morning, I’m going to be a little happier and better off for it. But the second cup is less delicious and less beneficial, even though it costs the same to me. The net return, then, is less on that second cup. And a third cup makes me jittery and probably cancels out any health benefits the coffee could provide. The return has approached zero. A twentieth cup and the benefits of drinking coffee have probably been entirely overcome by the cost of my heroic death in pursuit of explaining economics.
Owning stuff works the same way. Owning a home (or rights to stay in a home, i.e. renting) is probably going to increase your happiness a lot. Owning two probably won’t, unless maybe you are adding to your stache by renting out the second. Owning a TV might increase your happiness (although it’s arguable that it doesn’t), but shelling out thousands of dollars for a slightly upgraded TV just because it’s “on sale” and “you deserve it” probably won’t result in a net gain for your happiness because it means less freedom.
The acceptable threshold of stuff vs. freedom is different for every person, every income level, and every goal. But it is important to remember that every thing you own – no matter how high your income or how lofty or small your goal – owns a little piece of you. Like Voldemort.
Back in Step 2, you decided what was important to you. As a consequence, you decided upon a savings rate goal. This goal is more important than any temporary high of newness. I don’t care how many processors are in that shiny new iCookieJar, its value isn’t going to outlast that of freedom.
Every decision must be made by considering how it impacts, especially in the long run, your ability to accomplish your goals. Most of all, how it affects your ability to pay off your debt, save your income, and keep yourself unbeholden to happiness-sucking “stuff” and full-time employment. In other words, don’t fall prey to narrow framing – the tendency to make a decision without the necessary context.23 Concepts like “good debt” mean little when you consider that every dollar spent in interest – which yields no benefit to you – could otherwise have been invested by and working for you.24 So, before you go and buy a bigger TV, consider how much freedom that costs you. You might be surprised how much it really is.
Step 5: Be patient. You’ve done well.
The market always goes up. This is a rule you accept as true the second you make a transaction in a capitalist economy – you’re making it happen, and you’re reaping the benefits of it having happened already with previous purchases made by billions of humans throughout history. All borrowed money is a gamble that you’ll earn that amount back and more. With every purchase you make, you’re most likely aiding a business in paying back its borrowed money (i.e. loans, stocks), and a lot of us are paying them with our own borrowed money (credit).
When you invest in stocks, you gamble. You give some money to someone else for an ownership stake in their business, and you do so for the promise of reaping some of the benefits of the running of that business, whether in dividends or company growth. Investing in Apple, Microsoft, or Bill’s Neighborhood Lost Sock Emporium is a gamble on the success of that one business.
If you buy and hold an interest in a stock market index fund like the Vanguard Total Stock Market Index (VTSMX), your bet is, at its core, that the stock market will continue to exist throughout your lifetime and that it will grow, on average, faster than your withdrawal rate plus inflation. Realistically, it will shrink at times. But the effect is temporary, barring irreversible economic catastrophe on a worldwide scale – at which point you have much greater problems than a reliable self-paycheck. Your best hope then is having made friends with a doomsday prepper.
In a stock market index fund, when a company wins big, you win. When a company loses big, it is replaced. If you pick the right withdrawal rate, this bet is as close to a guarantee as you will ever get beyond death, taxes, and losing your socks in the wash only to see them on display at Bill’s.25
Long story short: Hold on for the long run. Don’t sell because everyone else is; buy extra because stocks are on sale. With patience, you will succeed.
Step 6: Profit.
Maybe write a thank-you letter to the Vigilante for writing the post that exponentially increased your financial success, happiness, and goat-raising ability. Or maybe donate money to the cause of eliminating student loan debt, by donations to the Vigilante. Whichever buys you more happiness!
- No, really. Ask theoretical physicist and greatest-public-speaker-ever Michio Kaku about compound interest. Its raw power boggles his mind, too, and he studies stars that fucking explode.
- Literally, to the detriment of the entire planet.
- Pew Research Center.
- Most of this knowledge can be found on the I, Vigilante Archive. You’re welcome.
- Best stated by Francisco D’Anconia, to whom I defer all questions of money and morality.
- Although it is admittedly difficult to look unhappy in a bouncy castle.
- Not really. The tolerance your body build to most drugs is basically physiological hedonic adaptation.
- And it is. Think that might not be true for you? Think about this: What are you trying to get when you purchase a home, a bouncy castle, or a concert ticket? It’s all purchased for the same core reason: Each purchase you make is assumed to increase your happiness, either by making your life livable (food, clothing, shelter), by providing you with entertainment (concerts, family gatherings, archery lessons), or by increasing your social status (which is the source of most ridiculous anti-millionaire spending). If a purchase isn’t meant to increase your happiness, why would you agree to it?!
- Which hopefully you were doing by a man-powered mode of transportation!
- Approximately 25 time your yearly expenditures buys you a lifetime of learning, growing, and generally being awesome. For my wildly extravagant life, I’d ballpark it at around $600,000 for a 60+ year retirement for a family of three. If that sounds wrong, you really need to read on!
- Give or take, depending on your risk tolerance. Personally, I’m willing to bet that I’ll be capable of making up a $1-2k loss over the next 60+ years if I happen to lose the nearly-sure bet of a 4% withdrawal rate.
- We have pensions.
- It’s still here, knock on wood.
- Since this article was published, I’ve been offered a new job with a 28% higher salary and plentiful opportunities for bonuses. The lady’s next raise is likely less than a year away. So in the short time of about 1 month, this article has already proven to be highly pessimistic.
- Not likely, as the only gambling we do is the occasional game of low-stakes poker.
- But then again, parents die eventually. Thanks, Mom and Dad!
- Until you read my future posts!
- People Magazine: “A latte spurned is a fortune earned.” Catchy.
- If only…
- Actually, she usually pays for herself, but my good-boyfriend-ness isn’t on trial here.
- A very conservative estimate of my years remaining. $5 per day for one day to the first person who can correctly reverse that math to deduce my age. Entrants must show work.
- I’m not anti-TV; watch away when your day is done and you have no more you could accomplish. But looking forward to TV as a replacement for your life is a sad state of mind I aspire to never reach.
- Daniel Kahneman on Big Think.
- Tax benefits on things like mortgages can ease the suffering of paying interest to a third party, which is where the term “good debt” comes from. But no tax benefit is guaranteed, and no tax benefit can even come close to eclipsing the opportunity cost of giving that money away instead of saving it.
- Proof is found in the Trinity Study, which is the foundation of Eccentric Millionaire, Part 2: Taming the Hulk.