How to Become a Millionaire

How to Become a Millionaire

The house, the cars, the corner desk and executive title, fancy vacations, private schools, private yachts, private jets, the glamour, the luxury, it all can become yours if you want it.  But is all that stuff really what you want out of your life?  Or is the thing you want actually the intangible quality that a millionaire has of simply not worrying about money because they have more than they need?  You don’t have to have a million dollars to be a millionaire.

Without further ado, the recipe for financial freedom.

Maximize your income.

Mind the gap.

Invest wisely.

That’s it.  That’s the entire recipe for finding financial freedom and building a life free from financial worry and stress.

Maximize Your Income

Take time to develop your career, especially early on.  If you put a lot of effort and focus into it, you can grow your income quickly.  Always negotiate your salary, and don’t be afraid to ask for raises or bonuses as appropriate (like when you take on new responsibilities).

The fastest way to increase your income is usually to find a new job or new company. If your income isn’t as high as it could be, take some time to update your resume and sharpen your interview skills.

Don’t be afraid to take on a side hustle.  It can be a lot of work, but I’ve really enjoyed renting out my house.

Mind the Gap (between income and spending)

You have to spend less than you earn.  This is the key to financial freedom.  There’s no other way around it.  The bigger the gap between earning more and spending less, the healthier your financial life will be.

Tackle any debts head on.  They’re dragging you down.  Make sure you’re addressing any habits that brought you there in the first place.  Eliminating debts frees up your cash flow.

Cutting your spending is more effective than increasing your income.  It increases the amount you can save each month, and it means you need less money to live off of for the rest of your life.  A little discomfort when you cut your spending is OK since it helps you realize what you value and rethink your spending.  Try cutting things out, and know you can always go back to spending more if needed.  However, at a certain point, cutting spending further becomes extremely uncomfortable, so you have to revert back to increasing your income to increase savings.

Frugal habits are essential.  Frugal, not cheap.  Frugality is not about deprivation.  Frugality is about being smart with money.  Focus every purchase on maximizing personal happiness.  I find that my frugality keeps my miscellaneous spending very low without even really trying because I’m busy enjoying my hobbies like working around my house and experiences like frugal travel.  I don’t regularly go shopping because the artificial happiness created by swiping my credit card isn’t lasting, and I have enough stuff in my life without adding more to it.

Save First, Spend Second

I don’t have a formal monthly budget.  Instead, I decide how much money I want to save and direct that money into the appropriate accounts.  In order, money automatically goes to my 401k, my HSA, my Roth IRA, my taxable savings, my emergency/slush fund (anywhere from $100-500 per paycheck depending on “slush” used/needed), and THEN the rest goes into my checking account.

I use credit cards to help track spending and earn cash back.  On pay days, the first thing I do is pay off my credit cards online in full (twice a month).  Then I pay my mortgage and car payment.  Once my bills are taken care of, I note the dollar amount left in my checking account.  If there’s a lot, I might shift extra to savings or start planning a trip.  If the dollar amount remaining is low, I try to “live lean” and be mindful of spending for a couple weeks until the next paycheck.  I never spend what I don’t have in my checking account.

This method “artificially lowers my income” and makes it incredibly easy to spend less than I earn.  In fact, it takes almost all thought out of my money management.  In my mind, you can’t spend something that’s not there, and it’s “not there” if I don’t see it.

 

Invest Wisely

Be patient with the market, and remember you are investing for the long term.  A bear market (when the market is going down) is a buying opportunity for you, especially early in your career. You get to buy into the market at a discount.  This is one of the best things that can happen early in your money-saving journey.

I choose to invest in index funds with low expense ratios.  Studies have shown time and time again that an index fund with a low expense ratio will beat an active fund most of the time.  I don’t feel the need to make time for individual stock picking, because an average of 7% growth between now and retirement from simply doing nothing sounds great to me.

You might choose to buy a house or buy investment properties that you rent out.

Start investing early so you have as much time as possible to save.  Never take for granted the power of compounding.  Don’t short change future you.

After doing all three…

I’ve all but forgotten what it means to worry about money.  To be honest, I probably feel more like a millionaire than the person who has a million dollars.

3 Replies to “How to Become a Millionaire”

  1. Great write up! I’m interested in how you decide on how much to automate to each account above? The only account I automate is my 401K. I can’t seem to find a good balance on automating my Roth IRA, taxable savings, an emergency fund. I seem to be the type that likes to see big chunks of money hitting my goals by priority. So when I automate the above accounts I only see small changes. I have felt like I might be missing something with automation. But then again it could be I should just stick to what has worked. I like keeping things simple with finances and spend more time on other things. Just seems automation would make it simpler but it has had a reverse effect. Really like your style of writing and your blog.

    1. I get paid bimonthly, so 24 paychecks a year. My 401k (1/24 of $18,500) and HSA (1/24 of $3,450 minus employer contribution) are automatic payroll deductions. Then I use my direct deposit options at work to automate certain dollar amounts to certain accounts. I have multiple checking and savings accounts set up for different purposes (First the tax/escrow which is 1/24 of the house tax + 1/24 of house insurance, then the emergency/slush fund of around $4-5k which varies from $100 min up to $700 per paycheck depending on if I used some of the money and is adjusted when needed, then the normal checking account). I don’t do automatic deposits into my Roth IRA. Instead, I aim to make my deposit to my Roth IRA early in the year with credit card cash back, tax refunds, Christmas gifts, and any other windfalls. I also have drained my emergency/slush fund before to fund my Roth IRA if I know I don’t have anything coming up and then crank up the direct deposit to refill it (usually low risk with the escrow fund as backup cash anyway). This just about taps me out with all the savings I aim to do for the year, but I direct any extra to my mortgage or car when I have extra. (My house is paying for itself, though. I think that’s cool.) I’ve mainly been using any excess toward trips, house projects, and other various endeavors like $800 to start the blog. I think it encourages more saving overall to err on the side of “more to savings” because there’s usually a second thought before you remove the cash from a savings account, or you might live lean for a bit as a result and then adjust your direct deposit instead. I don’t stress about it, though. As you pointed out, everyone has different goals and methods they find helpful. If you like seeing big chunks of money at once, you’re likely better off sticking to your current method. 🙂

      1. Wow, you are crushing the FI game. I never thought about using credit card cash before. I have about $700 worth of points in my chase account right now. If I don’t use it for travel I’ll definitely cash that in and invest it. Thanks for giving me that great idea. It opens a whole new aspect of CC hacking.

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