Why the Second Million is MUCH Easier

This is a guest post by Derek Foster, author of the popular book “Stop Working, Here’s How You Can!”

Throughout my 20s I never had a high-paying job, but I focused on saving some of everything I did manage to earn. To be fair, I could have saved much more quickly, but I also wanted to enjoy my time – so I spent a summer backpacking around Europe, a year traveling around Australia and New Zealand, and lived in Asia for a couple of years. But I also saved – religiously!

I was too much of an idiot to start my own business and earn big bucks, so I invested in the businesses of others – through stocks. I took calculated risks – even borrowing to invest at times, but the big break for me came during the tech stock bubble of the late 1990s. I never made a penny from tech stocks because I never invested in any.

However, while other investors chased the “easy” money from tech stocks, it opened up opportunities to buy boring income trusts at VERY cheap prices. At that time I was buying investments yielding 12-13% in some cases – all tax-advantaged due to income trust tax rules. These lush yields allowed me to earn a decent, tax-advantaged, passive income and retire at the age of 34.

I became a millionaire in my mid-30s through investing. But I slowly began to realize that high dividend yields were not the key to growing my wealth, but instead higher-growing yields (and earnings) were the key! This factor is why the rich get richer over time and the second million is so much easier to get than the first. Let me explain…

The Concept of “Look Through” Earnings

Warren Buffett has used the term “look-through” earnings to account for the earnings of the massive stock portfolio at Berkshire Hathaway. The concept is simple. For example, Berkshire owns billions of shares in Coca-Cola, but the company only counts the dividends as income (for accounting purposes). However, Coke might only be paying 50% of income in dividends and the remainder is being reinvested in expansion or used to buy back shares.

So in reality, according to Buffett, over time Berkshire is becoming wealthier at the rate of Coke’s earnings even though accounting only counts dividends in Berkshire’s earnings. In other words, as part owners of Coca-Cola, whenever Coke invests in new plants or expands its business, Berkshire is becoming wealthier (which will be reflected in the stock price over the long-term).

How Does “Look Through” Earnings Apply to You?

It’s the same thing with you if you’re an investor. Think about this…

Suppose you are on a “million dollar journey” and you work and earn $100K per year, so let’s say $70K after taxes. If you save $30K and live on $40K, you would be gradually moving towards you million dollar goal…

Now let’s suppose you earn $40K per year in dividends (and pay little or no tax depending on your situation). Let’s assume your stocks have an average of a 40% payout ratio with the other 60% being reinvested in your companies – so you’re in essence accumulating wealth at the rate of $60K per year!

From this, it only makes sense that even though you are spending every last cent of your income, you will still accumulate another $1 million much faster than working for it! This is the reason the rich always get richer – automatically (unless they spend their capital).

This realization has allowed me to travel around North America for a year with my family and not worry if I spend every last cent I earn (even though “paying myself” is ingrained as this was the key to my financial freedom). My stocks are doing the heavy lifting of wealth accumulation for me!

My portfolio has a payout ratio of around 35% with dividends increasing annually at a pretty good clip. This means that over 60% of my “look-through” income is quietly building wealth for me, WITHOUT taxes reducing its growth! Many people have asked why I chose the stocks I did and this is the reason I did…I want to build wealth without having to save any more money.

The second million is much easier!

About the Author: Derek Foster left the rat race at the age of 34 despite spending his 20s backpacking across Europe, Australia, and New Zealand – and living a number of years in Asia. He later became “The Idiot Millionaire” using a simple investment strategy outlined in his 6 National Bestselling books.  In his free time, Derek writes a free monthly newsletter http://stopworking.ca/free-newsletter/

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SST
7 years ago

Thanks Cathy, but no adulation required.

I seek only to expose factual truths, especially when it comes to money matters. Most of us spend our lives working too hard and too long to be bamboozled by salesmen of any stripe.

However, some people, on both sides of the equation, would rather not face facts. Some would rather remain doe-eyed at their ‘Heroes of Hope’: “If he can do it, I too can become an Idiot Millionaire!”. On the flip side, some know that exposure of the truth could reduce, or eliminate, their vantage point.

As an example, Mr. Foster has never once publicly addressed, either in the media or in his publications, the issue of his utilization of the National Child Benefit Supplement low-income family payments to supplement his million dollar portfolio (kinda Lance Armstrong-ish).
It’s much easier “to build wealth without having to save any more money” when a third-party is supplying a nice chunk of your income.

Lifted from LessWrong.com:
” ‘Truth’ is a very simple concept, understood perfectly well by three-year-olds, but often made unnecessarily complicated by adults.”

cathy
7 years ago

@SST Bravo! I am glad to see that someone finally spoke the truth. When I saw his interview article with the globe and mail, it was unbelievable to know that asset rich people can collect so much money from government in Canada. He was not shy about it. His wife is a Korean like me. I was pretty upset about that. Since I love Korea. I was working hard and struggling to take care of my young child. I felt very much cheated. His suggested early retirement is not honest approach.
Back then he had two children. Collecting about $400 according to the article.
Child support should be based on the asset and the income. Working and building personal wealth has been blessing. My family asset is about1.5 mil. Which is from frugal life style, saving and investment in stock, mutual fund and property.

Thank God for blessing me to raise my children with honest money.

P.s. I read all his books. Borrowed from library last year out of curiosity.
We should all write a book with a catch title like “How to be a smart millionaire without child support benefit…”

SST
8 years ago

A “troll” for wanting truth and transparency?

Funny, funny stuff.

Mike
8 years ago

FT, can you not ban this troll?

SST
8 years ago

One: “…he doesn’t have to provide you with an answer and/or it’s none of your business.” True, it’s not. But when a person sells themselves and their product as being one thing, yet it is something else in reality… ‘Legal fraud’, as I like to call it; unfortunately not an arrestable action. Foster seemingly has no problem discussing other areas of his income (dividends) or government transfers (taxes) — yet refuses to discuss the whole truth on other income and government transfer topics.

Two: What better way to conduct an investigation than to go straight to the source — Derek Foster himself? None of his past interviewees have bothered to ask him any sort of questions regarding this issue, either because of lack of knowledge or lack of guts. Fortunately, we still have privacy laws in this country which don’t allow citizens to root through their neighbour’s documentation.

As for your concern over anonymity…the very host and owner of milliondollarjourney.com is anonymous and Foster saw no problem lending his name and content to such. If Foster sees such forums appropriate to push his products, then the same forums are just as valid place to seek the truth.

Merely wanting to get 100% of the facts before I decide to part with any of my hard fought cash for any of Foster’s products.

Again, thanks for caring.

lpc
8 years ago

SST:
Good for you for having enjoyed Hawaii. I’m just coming back myself from my cottage on Nantucket Island.

You say: “Mr. Foster continues to diligently avoid chewing on this slice of his financial pie. I have repeatedly questioned the source, it has repeatedly remained silent.” And he hasn’t answered, with good reason: he doesn’t have to provide you with an answer and/or it’s none of your business. So, that begs the question, why are you persisting in asking? Two, why aren’t you independently conducting a private investigation to uncover the truth without Mr. Foster’s help? Three, why haven’t you gone to the authorities with your suspicions already?

If you haven’t done an investigation or gone to the authorities, why do you think these anonymous posts on this forum is an appropriate venue to get your accusations resolved and answered? You’re just crying wolf, otherwise.

I’ve already asked some of these questions in my previous post, and instead of answering, you try to turn the situation around by insinuating that I’m supporting fraud. Really? You need to stoop that low because I refuse to believe you without proof?

I’m asking again: where’s your proof and evidence to back up your accusations of fraud? Until he’s arrested, he’s presumed innocent under the law. Or don’t you believe in that concept either?

SST
8 years ago

LPC, you seem to care a lot about what I care a lot about…I love you, too.
I only go on about this as much as others go on about the infallibility of the stock market or mutual funds.

From Mr. Foster’s very own fingertips: “posts should be factual, imo…people seem to believe anything and don’t question the reliability of the source…”

As it stands, in February and now (and always), Mr. Foster continues to diligently avoid chewing on this slice of his financial pie. I have repeatedly questioned the source, it has repeatedly remained silent.

Yes, yes, I know, we should all just shut up, turn a blind eye, and let the hoards of financial industry gurus and semi-professionals spew out whatever kind of fantastical drivel they wish. Perhaps you are a staunch supporter of disclaimer-based legal fraud?

Or we can strive to propagate truth and integrity — in all forms — in capital markets. I choose the latter, although it might be more successful trying to breed unicorns.

As per your request to “Get. A. Life.”, me and my life just enjoyed a three week paid vacation in Hawai’i (gotta love gov’t jobs!). Thanks for caring. :)

LPC
8 years ago

SST, you’re still harping on about this after all this time?!? I mean, you have the time? Get. A. Life. Do your research and only come back when you have proof that Mr. Foster is getting Government assistance. Maybe the rest of us will care by then. As it stands, in February and now, you don’t have the facts, like Mr. Foster’s tax return to back-up your accusations. Better yet, go to appropriate authorities with your suspicions instead of continually spreading rumours of wrongdoing based on your interpretation of someone else’s lifestyle.

SST
8 years ago

As I was checking updates on my Suncor holdings (dividends 4.5%, cap gains 105%), I ran across this current Derek Foster interview for Motley Fool Canada:

http://www.fool.ca/2013/09/10/bestselling-author-derek-foster-talks-suncor-imperial-and-why-he-likes-buybacks-as-much-as-dividends/

What caught my attention definitely wasn’t what Foster said about oil — we use it now, we’ll be using it in 50 years — it’s what he says about his current account and lifestyle:

“I don’t spend all of the money that my portfolio brings in.”

Of course he doesn’t.
If he did, he would be living on far more than his last reported $40,000/yr and would NOT qualify for any “poor family” government assistance money.

I applaud Foster for being a true Capitalist and taking advantage of the system (money doesn’t have morals, after all). Just wonder if The ‘Idiot Millionaire’ will ever come clean and re-dub himself ‘The Low-Income Millionaire’?

SST
8 years ago

Anyone discovered yet if millionaire Mr. Foster uses the National Child Benefit Supplement low-income family payments as a portion of his income?

Or if his books state using government transfer payments as income to “STOP WORKING” ?

Is Mr. Foster even relevant? :|