How I Started with Nothing and Made a Million and You Can, Too: The 401(K) Millionaire

Back in the mid-1950s, when I was just starting out, I was a big spender. Like many other carefree bachelors, I had to marry a good woman before I set my priorities straight. It was time to deep-six the bachelor mentality and create a budget so I knew where our money was going. My wife, Pat, and I both wanted a family and a nice house, and we knew we wanted to save for long-term goals, like college for our kids and a nice retirement for us. I've been a runner ever since my high school days and I still try to put in my miles. During my daily run, I'd try to figure out how to pull some money out of our budget for investing. Keeping track of your dollars and cents is the first step to becoming a 401(k) millionaire; it's the bedrock on which everything else rests. Once you record your monthly expenses and compare that with your monthly pay, you can adjust your style of living accordingly. And the earlier you do it the better. If you don't pinch pennies in the beginning, you're squandering a golden opportunity to make more money down the road. It's what economists call “compound interest”— that's when you earn interest not only on your original investment, but also on the interest it has already earned. Through compounding, your investment assets grow, slowly at first, then at greater speed as the years go by. By the time you get to the end of this book, you'll understand that compound interest is the fuel that makes your 401(k) run.   Consider a monthly investment of $300. Given a 9 percent rate of return, that $300 monthly investment turns into $22,627 after 5 years; $58,054 after 10 years, $200,366 after 20 years, and an astounding $336,337 after 25 years. In fact, the longer you leave it alone the more the interest “compounds.” No wonder Albert Einstein referred to compounding as the most remarkable mathematical discovery ever! I call compound interest your very own personal money-making machine.   Back to the budget for a moment. Now, if you're thinking that Pat and I lived on oatmeal and dressed in threadbare clothes so that we could save enough to retire as millionaires, think again. We simply developed a sensible financial plan that enabled us to save money without depriving ourselves of the occasional movie or night out on the town. In fact, I don't recall being deprived of anything in those early years. All I remember is that before setting up a budget I had a hard time making it from paycheck to paycheck. After the budget kicked in, it seemed like we had extra money. Even to this day, though I can well afford it, I have never bought a new car. I'll look around for a low mileage, two-year-old car and let someone else take the depreciation. In fact, my current car is twelve years old and has rust spots, but it runs just fine. (On the other hand, though, I just bought a $500 fishing rod. You just have to learn how to keep your priorities straight!)   At first we put away only what we could each month. Another night at home instead of dining out, a few degrees lower on the oil heater, and other small household cutbacks gave us an extra $10 or $20 a month. Before long, we were putting even more away—$30, $40, and even $50 a month. Believe me, that was big money to me back in 1960.   To make the most of the extra money we were saving, I joined an investment club shortly after starting our budget. Once a month after work, I met with about six other like-minded savers who got together to take advantage of the growing attraction of the stock market. There I learned the importance of doing homework and taking responsibility for your financial future. Each month one club member would handle the research and recommend stocks to the group, who collectively gave the proposals a thumbs-up or thumbs-down. I noticed that the club members who had done their homework the best were the ones whose ideas made the most money. Thus, an avid research hound was born. To this day I read as much as I can about the financial markets, and you should, too.   At the investment club, I learned another key financial lesson: diversify. At the time, my company, Hooker Chemical, was struggling financially. The company's stock was floundering as well, and me along with it. I owned a bunch of shares myself, as did the investment club, and we all took a financial bath as the stock headed south. We'd learned that lesson the hard way, and it stayed with me the rest of my life. Always diversify your investments so that you're not too reliant on one stock, one bond, or one mutual fund. By allocating a mix of stocks, bonds, and mutual funds in your portfolio, you can minimize losses in one area and even make it up simultaneously in another area.   After I left Hooker Chemical and moved to Louisville, Kentucky, to take a job at another chemical company, my family had doubled in size so I shifted my financial plan into second gear. I shed the bad habit of being a frequent trader in favor of a buy-and-hold investment viewpoint: buying a stock or a fund and hanging onto it for a long time. As a “day-trader” (one who buys a stock in the morning and hopes to sell it the same afternoon for a profit), all I'd been doing was making my broker rich. I remember calculating that over 70 percent of the stock selections I was making at the time were money-makers. But the bottom line showed me losing money because of the sorry performance of two big stocks I held and the hefty commissions I was paying my broker for all the trades I was making. After three years, I figured I had about broken even and my broker had made $20,000 while I took all the risk. Hello, Knute? Something's wrong here! I decided I'd better quit hot-dogging and learn more for myself about how the stock market really worked.   In addition to hanging on to stocks longer, I also began paying attention to things like company balance sheets and price-earnings (P/E) ratios. By spending a half-hour on the train each morning reading about the companies I was investing in, I learned to invest in the company and not the stock, another lesson that still rings true. I also adopted the Peter Lynch (the famed original portfolio manager of Fidelity Investment's Magellan Mutual Fund, the biggest fund in the world) approach to picking companies. Lynch would walk through malls and see which stores were crowded and what products customers were buying. Taking a page out of the Lynch handbook (and then some), I'd ring up the customer service center and find out how committed the company was to satisfying customers and whether or not they stood firmly behind their product.   I also began to recognize the wisdom of investing in mutual funds and the risk of investing in individual stocks. In those years, I considered my stock investments as my potential big-ticket, home-run-type investments and my mutual funds as a savings-account-oriented afterthought. Lo and behold, my financial statements began telling an interesting story: my funds—which I never touched—were making more and more money each month while my stocks-—which I traded frequently—lost me money over the years.   By the 1970s, I had left the chemical company in Louisville and switched to a career in sales. The increased demands of my new job made it more difficult to track company and industry research. Thus, I adopted an ill-advised investment strategy called “market-timing” to handle my stock investments (market timers attempt to guess the peaks and valleys of the stock market and invest accordingly). A few specialized newsletters and financial services companies claimed they could plot the timing signals for me, but you could just as easily catch a hummingbird in your hands as you could forecast the intricate patterns of the financial markets. Another lesson learned too late, as the market-timers repeatedly guessed wrong and again my investment portfolio suffered.   Fortunately, I found the silver lining in my unfortunate market-timing years that led me into the world of the 401(k). In the early 1970s, the U.S. government gave a green light to the first Individual Retirement Account (IRA), a tax-advantaged plan that enabled Americans to sock away up to $1,500 per year tax-free (that number was raised to $2,000 several years later and to $2,250 by 1998). During the stock market decline of 1973,1 lost a lot of money on stocks that I would never make back again. But the mutual funds in my IRA kept my retirement portfolio on an even keel as I kept pouring money into it during good times and bad. Another lesson learned: the value of dollar cost averaging. More on that later.   IRAs also served another valuable purpose: they taught me the increasing value of making an investment plan and sticking to it like carpenter's glue for the long haul. For years before IRAs, my eyes would be riveted to stock listings in The Wall Street Journal. Stock gyrations of a couple of points or so were cause for either great satisfaction or considerable consternation in the Iwaszko household on a daily basis. Or, if I saw a mutual fund that doubled its money in a year, while mine returned only 25 percent, I'd grow very frustrated. I willingly let myself get jerked around by short-term market swings. Nobody wants to go through life like that. My IRA taught me the common-sense value of a long-term investment approach and afforded me a new—and valuable—outlook on my investments: patience.