Is it Possible?
Becoming a millionaire sound exciting, albet daunting. Can you really do it? In short, yes, absolutely.
So, what’s the catch?
7 Characteristics of the Wealthy
I recently read the book, The Millionaire Next Door by Thomas Stanley, PhD. He performed comprehensive study of millionaires living in the United States. Interestingly, during his study, he noticed self-made millionaire share seven characteristics.
1) Self-made millionaires live well below their means.
What does this mean? It mean’s that even self-made millionaires live on a budget and watch their spending. They were able to accumulate wealth by avoiding a high consumption lifestyle. If they bought every high end thing they wanted, they would not be a millionaire.
2) They allocate their time, energy and money efficiently in ways that build wealth.
Self-made millionaires allocate their time in ways that will maximize their return on investment. They know when to hire help. Self-made millionaires take time to identify great accountants, tax professionals, and legal representation. They understand that Uncle Sam is the biggest threat to their wealth and they need to have the best team in place. This team is not cheap but it is less expensive than paying Uncle Sam. Many times this team can help the self-made millionaire develop ways to continue building wealth.
3) They believe financial independence is more important that displaying high social status.
The wealthiest self-made millionaires do not live in the most expensive neighborhood, they do not drive a new luxury vehicle, they do not buy expensive suits, and they do not drink expensive Champaign.
What do they do? They buy used cars, live in an inexpensive house in a less expensive neighborhood, wear suits from department stores, and drink Bud light.
The wealthiest self made millionaires do not flaunt their wealth – they are not flashy. Many times they do not have high powered executive jobs. In all likelihood, you would not suspect this person is a multi-millionaire.
4) When self-made millionaires become an adult, they do not receive financial help from their parents.
Self-made millionaires do not rely on their parents to be successful. They are successful because they work diligently and persevere through struggle. They do not feel limited in their success because they do not receive economic help from their parents. Instead, they are completely confident in themselves and what they can accomplish as an individual. The sky is the limit.
5) Their adult children are economically self-sufficient.
They teach their children to live below their means, within a budget, and out of debt. Their children value learning and education and do not receive money from their parents. Self-made millionaires do not enable their children by giving them money. On the contrary, self-made millionaires do not give any indication to their children about how much money they have. This means that their children are motivated to succeed and become economically independent, and high contributors to society.
6) They are proficient in targeting market opportunities.
Because self-made millionaires live below their means, when they see opportunities, they can take action. When you do not save, you do not have the capital needed to take advantage of an opportunity to build wealth. Self-made millionaires live on a budget and below their means so that they can take advantage of market opportunities.
7) They choose the right occupation.
Not all careers are created equal and not all education provides an adequate return on investment. There is such a thing as a starving artist. Self-made millionaires choose an occupation where they have the ability to earn. The learn skills that will help them generate wealth. If you are interested in becoming a millionaire, choose the right occupation.
How Long Does it Take to Save $1 Million?
I’m going to share with you a few examples of how you can get to that infamous $1M savings goal so many of us have.
For each of these scenarios I am going to use the following assumptions:
- 100% Stock Investments
- 10% Return on Investment (ROI)
- Compounded Daily
|Savings Rate||Time Horizon||Ending Balance|
|$150 saved every month||40 Years||$1,002,797.58|
|$438 saved every month||30 Years||$1,002,702.14|
|$1,305 saved every month||20 Years||$1,000,209.27|
|$4,851 saved every month||10 Years||$1,000,029.51|
Let’s take a deeper look into one of these examples. In this scenario, you are 40 years old and you want to retire at age 60. You saved nothing in your 20s and nothing in your 30s. You have 20 years until you reach the age of 60. Using the table above, you would need to save $1,305 each month for the next 20 years at an average return on investment of 10% compounded daily.
As you can see, the longer the time horizon the easier saving for $1 million dollars becomes. On the flip side, you can get to $1 million in savings in a relatively short time but you will need to save more.
All of these calculations were performed using the SEC compound interest calculator. Check it out here.
How Does it Work?
Interested in becoming a millionaire and having your money work for you? Two words: Compound Interest.
Just the term compound interest is intimidating. It sounds complex and scary. You may know it has something to do with investments and debt but what exactly is compound interest and how does it work?
Albert Einstein said compound interest is the most powerful force in the universe.
Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.
Compound interest is a term in finance to describe the money your money makes. Sounds weird, right? Let’s use an example to describe exactly what this means.
Let’s say you want to start saving for retirement. You decide to open an IRA account and deposit $1,000. The $1,000 is known as your contribution, or principal balance.
Once the money is in the account you have a variety of investment options. After doing a lot of research, you decide to invest your $1,000 in a low cost total stock market index fund.
You place the order to purchase the index fund at $50 per share, and in return, you receive $20 shares.
That was easy enough. What next? Well, it gets even easier!
After six months you check on the account to see what happened. You notice that sometime in those six months, you receive a dividend of $0.12 per share. It is small but still pretty cool to see.
Since you own 20 shares total, this means you earn $2.40 cents. That $2.40 is reinvested automatically in the same exact investment. But this time the share value increased by $5.00.
You purchased $2.40 worth of shares at $55 per share and you now own an additional 0.04 shares (20.04 shares total).
Additionally, your initial 20 shares each increased in value by $5.00. This means the value of your initial $1,000 investment increased by $100 plus the $2.40 dividend. In six months your account is valued at $1,102.40. Wow that was fast.
It gets better…
Six months later, you check back and you noticed that you received another dividend of $0.12 per share. Same as before, this dividend is reinvested to purchase additional shares of the same investment. So your 20.04 shares earned $0.12 each which means you receive $2.405.
You noticed the value of the shares you owned increased again by $5.00 ($60.00 total value). During the reinvestment, you purchased 0.04 shares at $60 per share. You now own a total of 20.08 shares.
On top of this, your 20.08 shares are worth $60 each for a total of $1,204.80.
In just one year, you have increased your net worth by $204.80.
Like the Energizer Bunny, it keeps going, and going…
This process keeps going and going forever. This is how your money works for you! AND your money is working HARD! This is compound interest. An extraordinarily powerful tool to grow your wealth.
Nothing worth doing is easy – that is how you know it’s worth doing.
- Saving $1 million is not easy. It requires discipline and a clear understanding of why achieving this money goal is important to you.
- How do you get the process going?
- Take an active interest in your personal finances.
- Contribute as much as you can to your IRA Account and 401(k) accounts. These are powerful tax advantaged accounts that will really help you build wealth. Once you max out these, move on to a taxable investment account.
- If you would like to learn more about IRAs and 401(k)s click here.
- If you have any questions let me know! I am happy to answer.
- Sign-up for the Green is Good Cents Newsletter for quick tips on how to get better with money.
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