The Year The 3MM Strategy Is Born

2016

*Quick note: Following the advice of Warren Buffet, we will talk about our stock holdings “at cost” meaning the amount we paid for them. This is will show you the amount we invested, rather than unrealized gains our investments have earned. We want to show you the power of investing, not the power of getting lucky with market returns. We believe the important number to follow is not its market value, which can vary wildly over time, but the amount of earnings the companies we own retain.

Over the long term, the companies of the S&P 500 have retained about 4.5% of their earnings. We consider this amount to be real (passive, tax-deferred) income and share that amount with you whenever we talk about other sources of income.

Relatively up-to-date info of S&P 500 earnings can be found at Standard and Poor’s website or (in a more user friendly format) at multpl.com.

Starting net worth: $9,000

This is the year the 3MM strategy was truly born.

We were actively investing extra money in VOO each month. I can not describe how this felt to us back then, to have extra money. Like honest-to-god extra. I can say that it brought our stress and worry levels down quite a bit.

We had (and still have) a choice at this point: We could either pay down the mortgage or invest. Our decision was based on some key factors:

  1. The long-term average return of the S&P 500 (including all the crashes and panics of the last 100 years) has been 8% after inflation.
  2. Our mortgage interest rate was/is 4%.
  3. The money we pay in interest is tax deductible.

So, hypothetically, if our businesses made $100,000 dollars overnight, should I invest that money or pay off my mortgage?

  1. If I invest it: I will gain about $10,000 dollars per year in passive, tax-deferred income from the retained earnings of the 500 S&P companies (I used data from multpl.com to calculate this)
    or
  2. If I pay off the mortgage: I will gain about $5,000 dollars per year (a year’s worth of our house payment) in extra income, but lose $5,000 dollars in tax deductions (which amounts to us paying about $1,000 extra income tax each year. This would be a net yearly gain of $4,000

This is why we have not made extra payments toward our mortgage principal. That money is far more profitable when invested.

This is a concept called Opportunity Cost. If The Power of Compounding is the greatest financial magic to be found (and I believe it is) then Opportunity Cost is its next-door neighbor.

So what about our car loans?

They are higher interest, and not tax deductible, so they got paid off ASAP.

Income

Leslie: $28,000

Ben: $28,000 (I stopped tutoring at night and am only teaching during the day.)

The store was making good money. We made enough to fully finance our emergency fund and continue our investing plan.

We were trying to balance reinvestment in expanding the store with our investment goals. We knew that we needed to invest a little more each month to reach our $1 million goal, but the opportunities the store had created were more promising. We even used a little of our HELOC to buy inventory, which is why the amount we owe this year remains unchanged.

We were actively looking to reduce expenses. We have given up on traditional budgeting entirely. We leaned heavily on ‘pay yourself first’ and a sort of envelope style of saving. Basically, we sent up bank transfers so that on Monday of each week, a small amount of cash was taken from our checking account and went into different accounts for different things (like groceries, guilt-free spending, and large future purchases.)

We started only focusing on those accounts. We viewed them as the only money we could touch. Everything else was for insurance, mortgage, college savings… you know, grownup stuff.

We were trying to keep our monthly costs around $2,000. If we could sustain this and invest the rest, we would be able to “retire” in 10 years (meaning, the passive income of our investments will exceed our expenses).

Assets

Equities @ Cost: $14,000

Cash/Equivalents: $12,000

Ending net worth:

$26,000

On to 2017 ($26,000 – $50,000)

Back to Income Reports

Closing Thoughts

Looking back, it all seemed so subtle. I don’t think I realized what a life-changing thing we had stumbled on.

And even now, it is fairly simple.

And powerful.

We didn’t realize it at the time, but the business model that we came up with mimicked a much larger company; Berkshire Hathaway.

That’s the company that Warren Buffett uses as his investment vehicle.

In shorthand, Berkshire works like this: a bunch of operating businesses generate cash (Buy selling insurance, batteries, underwear, or whatever) and then that cash is invested in stocks.

And we had done a similar thing on a much smaller scale.

In simple terms, we had two core operating ‘businesses’ that generated cash for a third Investment ‘business’.

What were our core operating businesses?

Our Amazon FBA Storefront and our actual Jobs.

Cash came in from those. We paid our bills and expenses, and everything that was left over got invested.

This means, for Berkshire and our family, that a high percentage of the money we make is given the opportunity to compound.

Bonus: It compounds tax-deferred! We won’t pay tax until we actually sell our shares.

Double Bonus: When we do sell, we will pay less than our normal tax on that profit.

This is at the heart of our 3MM investment plan. To actually achieve the dream of owning a million-dollar business that can be run in three months or less, you’ll need a three-pronged approach.

You need to build the right kind of business, use the right kind of productivity systems, and invest in the right kind of assets.

Check out our guides to see how.

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