Unlocking Financial Success with Michael

In the world of personal finance, high net worth individuals often seem like enigmatic figures, their wealth shrouded in mystery. But sometimes, a peek behind the curtain can reveal insights that may inspire and educate. In this newsletter, we had the privilege of interviewing Michael, a 43-year-old Software Engineer from Melbourne, Australia, who has amassed a net worth between $8 and $9 million. Michael graciously shared his financial journey, offering valuable lessons and a glimpse into the mindset of a high net worth individual.

A Diverse Path to Wealth

Michael's journey to wealth is a testament to his diverse and strategic approach to financial success. According to him, "It's been a mix of hard work and smart choices that got us here." His net worth can be broken down into several components:

1. Savings and Consulting ($1 million): Michael's career began as a product manager, and he gradually transitioned to the engineering side of tech. Reflecting on this journey, he said, "I started making small changes, changing text, colors of buttons, and progressively harder changes until one day I found myself on the engineering side." About 6 years into his career, he ran his own consulting agency for seven years, building websites and apps. "It was a learning experience that paid off," he added.

2. Real Estate ($2 million): Michael and his wife invested in properties in some of the world's most expensive cities. As property prices rose, they profited from several sales, including single-family homes, apartments, and small commercial properties. He quipped, "We were fortunate to be in the right places at the right times."

3. Company IPO ($3 million): A significant windfall came when the company Michael worked for went public. Reflecting on this pivotal moment, he mentioned, "About half of this was 'lost' to taxes since this was a windfall pretty much all in one year, but it's still a substantial amount."

4. Stocks and ETFs ($1.5 million): Michael wisely reinvested capital gains and dividends from his tech-focused stock portfolio, including the Vanguard 3-fund portfolio. He explained, "I've always had a passion for tech, so investing in tech stocks was a natural choice."

5. Inheritance ($1 million): Michael's wife received an inheritance a few years ago, further bolstering their wealth. He admitted, "This unexpected windfall was a pleasant surprise."

A Varied Career Path

Throughout his career, Michael experienced a wide range of compensation levels. He started as an accounts clerk earning $13,000 per year before working his way up to a software engineer with a total annual compensation of $1 million, including a substantial equity component. While he acknowledges that he might have earned more by starting his career in the U.S., personal reasons kept him in Australia. Nevertheless, he is content with his choices, saying, "There are other (personal) reasons not to be in the U.S., so I’m fairly happy with the decisions we’ve made."

Financial Strategy and Organization

One of Michael's financial strategies involves a family trust structure. This approach allows for tax optimization, income distribution among beneficiaries in lower tax brackets, and protection from legal liabilities. Michael provided detailed insights into how this works, particularly in the U.S. context.

"In the U.S., trusts are powerful financial tools that serve various purposes," Michael explained. "They can be revocable or irrevocable, and their setup and operation can be quite complex. But the benefits can be substantial."

He elaborated on the key aspects of trusts:

1. Revocable vs. Irrevocable Trusts: Revocable trusts can be altered or revoked by the grantor (the person who creates the trust), while irrevocable trusts typically cannot be changed without the consent of the beneficiaries.

2. Tax Efficiency: Trusts can provide tax advantages by allowing income to be attributed to beneficiaries in lower tax brackets.

3. Asset Protection: Trusts can shield assets from creditors and legal claims. "For those concerned about litigation and risk of bankruptcy, trusts offer peace of mind," he emphasized.

Michael also highlighted the concept of income attribution, common in the U.S. context. "All income and capital gains earned by the trust can get attributed to any number of beneficiaries at the end of the year," he explained. "Usually, we attribute the income to the person(s) on the lowest income tax bracket."

He continued, "You can add whoever you like as beneficiaries, so it’s very tax effective to attribute income to retired parents and children. You can also have a company as a beneficiary, so the highest tax bracket we get taxed at is the corporate tax rate, which is usually always lower than the highest personal income tax rate."

However, he cautioned that setting up and managing trusts typically involve legal and accounting professionals, with associated compliance fees. "It makes sense if your tax savings outweigh the compliance fees and if you have beneficiaries at lower tax brackets," he advised.

A Glimpse into Daily Life

Michael lives in a four-bedroom house that he owns in Melbourne, Australia. He and his wife receive $5,000 per month in rental income from their properties. Their investments generate around $10,000 per month, a combination of dividends and capital growth from stocks. He admitted, "It's nice to have that steady income stream."

While he tracks his portfolio using Yahoo Finance, Michael keeps his investment approach fairly simple, using Vanguard, Schwab, and his bank for brokerage services. He also has some investments in cryptocurrency, which he humorously noted, "I need to find the app name!"

Key Financial Beliefs and Advice

Michael's financial philosophy centers around viewing money as a means to an end, not an end in itself. He emphasizes striking a balance between risk and caution, saying, "Risk a bit, but not too much and not too little." He believes it's easier to optimize tax structures than to consistently outperform the market.

In terms of advice for readers, Michael shared, "The first $100,000 may be the hardest, but with patience and smart financial decisions, growth becomes more rapid."

Parting Thoughts

Michael's journey is a testament to the value of diverse income streams, strategic investments, and a thoughtful approach to finances. His insights provide a valuable perspective for those seeking to build their wealth and financial stability. We are grateful to Michael for sharing his story, and if you'd like to connect with him, you can follow him on Twitter at @michael_c_h_o or check out his latest 2 businesses: joybird.ai and langbites.co.

As always, remember that individual financial situations vary, and it's important to consult with financial professionals to tailor strategies to your unique circumstances. Stay tuned for more inspiring stories and financial wisdom in future newsletters!

Disclaimer:

Net Worth, affiliates, and related parties do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Legal Disclosure: Net Worth is not a financial advisor. The information contained in this article is for entertainment purposes only. Before investing, please consult a licensed professional. Any stock purchases mentioned here should not be considered “investment recommendations”. Net Worth shall not be held liable for any losses you may incur for investing and trading in the stock market in attempt to mirror what what the author of this post has done. Unless investments are FDIC insured, they may decline in value and/or disappear entirely. Please be careful!