There are 10 million households in the U.S. with a net worth of $1 million or more. Which means a lot of people you bump into or see in the grocery store buying Raisin Bran probably have deep pockets. And you can learn a lot from them. There are no secrets when it comes to building wealth and having a life of abundance.
Here are four common things people have done to hit the $1 million mark.
1. Live a modest lifestyle
Warren Buffet back in the 70’s after he had made tens of millions of dollars, was still driving around town in a Volkswagon Beatle. He figured compounding at 20% a year, $25,000 would come out to $958,000 after 20 years. He reasoned that was just too much to pay for a car.
Most millionaires don’t live in big mansions in gated communities or drive Aston Martins. They live in middle-class neighborhoods and drive used cars. The same cars that are mass produced that you might drive, like Ford F–150s, Toyota Camry’s, and Chevy Blazers.
Why would someone who can afford just about any car in the world drive a basic car? If you ask, most millionaires will tell you they got to where they are not from the latest hot stock tip, but by saving early and saving often. Year after year.
A survey of investors with a net-worth of at least $25 million found 60% regarded their frugality as a key wealth builder.
Note frugal doesn’t mean being a Scrooge. Not a life of misery. Saving every last dollar and never eating out, never having fun. It does mean:
- spending less
- avoiding bad debts
- delayed gratification
How to live a modest lifestyle
Save your raises
You’ve got to get the debts paid off first – credit card, medical, car loans, etc. But when you are free and clear, you already have adjusted to living on what you make. If you make more, commit to saving 50% of all your future income increases.
Save 1/2 your raises. Save your bonuses. Save your tax refunds.
All that money adds up to a huge stash over time.
Choosing affordable housing
I went through a series of downsizing from a 2,200 SF house to a 1,200 SF townhouse, to a 1,000 SF rental home, to a 400 SF bedroom living with my in-laws for a year. Some of those moves were by choice, others by circumstances.
You can bank a lot of extra money by paying rent for a bedroom at the in-law’s place compared to a $2,200 mortgage on a house.
Nobody has to go that far – but your choice of housing plays a big role in how much you can save.
The rule of thumb for how much house you can afford – depending on who you follow – is 28% of your gross monthly income or 25% of your take home income. That’s a benchmark.
It isn’t realistic if you’re living in New York City. The less you spend on housing each month the more money you can put towards investing.
Spend on what you love
We don’t really love our cars that much, as evidenced from how frequently they get traded in, and how much dirt ends up on the fenders before you take it to the car wash.
If you’ve lived in a few homes, do you remember your first couch? Or if you have a nice couch right now, are you just dreaming about it all day long at work? Is your greatest joy to run home and lay down on that specific couch?
After the first couple weeks of newness is gone – it’s just a couch.
To make the most of your money, try a spending plan that has experience-based goals – a trip to Disney, a weekend getaway, an afternoon at a horse ranch, an evening dining at the new hot restaurant.
The money you save on things you’ll eventually sell, throw away, or trade in can go a long way to reaching one million dollars.
Warren Buffet still lives in the same home he bought in 1958 for $13,000.
2. Make smart career moves
At age 26 I earned a C-level title (Chief) at the Fortune 500 subsidiary I worked. I busted my butt for five years getting raises and promotions along the way to quadruple my starting salary.
The one thing you have control over in your working career is your income.
You are the boss of your desk (or cube, or car).
Smart employers reward good employees. How do you get to be a good employee? You have to add value to the company’s bottom line.
- Decrease costs
- Increase profitability
- Increase sales
- Avoiding absenteeism
Those things raise you above your peers, some of whom are just punching the clock. 1 in 5 people are just checking in according to a study by American Association of Labor. If that’s you, perhaps you need to start looking for work you’re going to be more passionate about doing.
If you like your job, your efforts can get you beyond the average 3% cost of living raise. Maybe you get to the 5% raise saved for the cream of the crop.
The 2% difference may not sound like much, but if you get that extra bit every few years, it adds up to a lot over your working lifetime.
Make a horizontal move
If your boss has been at the same position for the past ten years, it’s much harder to move up the corporate ladder.
Making a horizontal move can make it easier for you to make a verticle one later on. For example, switching from marketing to entry level sales, or vice versa.
Make more by moving
My brother Terry moved from Virginia to Wyoming for several years in a sales-type position within his company. He spent his time on the road visiting customers.
When something opened up in the company back in Virginia, he moved again and started working back up the ladder. Sometimes you have to go where the jobs are in your company – even to the cold and windy state of Wyoming for a 3-year pit stop – if you want to keep working your way up.
Make more by moving on
The biggest salary bumps come from changing employers. Instead of a yearly 1%, or 3% standard of living salary increase, it’s possible to get 20, 30, 50% raises or more, by working for someone else.
3. Follow the F.I.R.E strategy of investing
A stockbroker is someone who invests other people’s money until it’s all gone – Woody Allen.
Most millionaires aren’t into exotic investment schemes. More than 75% of a millionaires investment portfolio is in stocks/bonds/cash. Not hedge funds, derivative contracts, start-up businesses, gold, or ice cream shops.
Wall Street’s business and the business of advisors, brokers, salespeople, endorsed services, is to sell stuff. Take something complicated, convince people there is some magic to it and they will never understand it, and sell it to them. They get rich off of convincing you they will make you rich.
Most people selling investments would starve to death if they explained a simple strategy of buying good low-cost index funds and holding them for 30 years. Now, they know this is a great strategy for you to build wealth, but it’s a lousy strategy for them to get rich or even for them to buy groceries and pay their mortgage.
You’ll find many people in the FIRE community – Financially Independent, Retire Early – follow the same boring investing principles.
Here’s what Warren Buffet put in his will. It was instructions for the trustee managing the wealth he is leaving to his wife:
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguards.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
One of the richest people in the world, told the people after I’m gone, invest in index funds, preferably Vanguard.
4. Fend off the tax man
What you earn doesn’t matter as much as what you keep.
You will pay 1/3 of your income over your lifetime in taxes.
- income tax
- property tax
- car registration tax
- sales tax for clothes and electronics
- capital gains tax
- deferred tax on your qualified company retirement plans
- gasoline tax
- taxes for services
- tax on taxes
Some estimates put the amount we pay at 50% of every dollar.
Paying a good tax expert and planner for advice can save you years on your retirement.
Many people major in minor things. They spend hours pouring over their 401(k) plan trying to squeak out an extra 1/10 of one percent in returns.
You would be far better off paying a tax expert for a couple of hours of their time and having them help you with a long-term plan to save you 10–20% on your tax bill.
It’s your money – don’t waste it.
Yes, anyone can do it
Building a $1 million nest egg isn’t rocket science. There’s no magic. It’s within anyone’s grasp who chooses to grasp it.
If you’re a little late to the game, you can get started.
If you’re age 35, you can get started.
If you’re age 25, you can get started.
If you’re age 55 or older, you might have another 30 or 40 years to live. So you can get started too.
If I’ve learned one thing from the millionaires I’ve talked to (and I’ve talked to a lot), it’s that they all started with nothing, and none of them got rich quick. They all lived beneath their means and continue to do so. They built their wealth over long periods of time. None of them would claim to have any special gifts or powers.
In other words – they are just average people that achieved extraordinary wealth by following simple principles that anyone can follow.