After talking with my daughter as well as many other people over the years, I realized most don’t understand what a “millionaire” is. My daughter thought a millionaire meant you’re “rich” so you have a yacht, live in a mansion and wear only fancy clothes due to a prestigious job with a high income (granted, she’s only 10). However, being a millionaire has little to do with your income and I’m willing to bet most millionaires don’t own a yacht or live in a mansion.
A “millionaire” is a person whose net worth is at least a million dollars. In simple terms, net worth is what you own minus what you owe.
A couple owns a home valued at $200K, cars valued at $15K, has $15K in a savings account plus $400K in retirement accounts, a total of $630K.
The couple owes $50K on their home, $5K on their cars and $2K in credit card debt, a total of $57K.
Therefore, the couple’s net worth is $573K ($630K – $57K) or over half a million dollars :-).
This couple is not quite to millionaire status but could be one day if they put a financial plan in place. When I say “financial plan” I don’t mean budget. A budget is how you allocate your income on a monthly basis which ties into your financial plan. Your PLAN involves the “how” and “when” of your financial goals (the “what”).
Here are some examples of financial goals that can be included in your PLAN:
1) How and when you’ll pay off your credit card debt (hopefully at a fast pace so you’re not paying a ton of interest and then never use your credit card again!)
2) How and when you’ll pay off your student loans (if you have any but unfortunately it’s a common debt these days)
3) What amount should be in your emergency savings account and how and when you’ll reach that goal (should be 3-6 months of expenses)
4) How and when you’ll pay off your mortgage (and it shouldn’t be in 30 years – why not aim for “as fast as possible”)
5) If you don’t have a mortgage, how and what you’ll save to get at least a 20% deposit (to avoid private mortgage insurance and to get a head start on paying off that mortgage quickly).
This list can go on and on depending on your own goals (think vacations, costs of having a baby, new cars, etc…)
I digress for a reason. With a solid financial plan that ties to your budget, you can become a millionaire at any income. However, this means you have to follow the budget and financial plan.
The standard financial rule is to save 15% of your income for retirement and is one of the primary ways you reach millionaire status and financial freedom. It doesn’t happen overnight. It takes consistency and time. Compound interest is a wonderful thing! You should start by paying yourself first and then the rest of your money is allocated to standard bills and goals. In other words, your take home pay is what you use to create your budget and financial plan. You’ve already paid yourself by contributing 15% to your retirement account. Most employers offer a retirement plan such as a 401(k), 403(b) or a 457. Make sure you contribute 15% of your pay to the employer plan and invest it in an index mutual fund (mimics a market index so provides broad market exposure and low operating expenses). Contact a financial advisor if you need help with this. Your money will grow at a decent pace even though there’ll always be ups and downs in the market (remember to ride the roller coaster – would you jump off a roller coaster?).
Here are two examples of how income doesn’t matter:
The US Census Bureau of 2014 reported the median household income as $51,939. If a household making this amount of money were to invest 15% of its income starting at age 30, they would reach millionaire status by age 60 with the following assumptions:
- $650 (15%) into retirement account every month with no pay increases (of course pay increases typically happen)
- 7% compound interest (the market average from 1926 to 2011 was 11.69%). I use 7% to account for inflation and dividends
- No debt and a paid off house with a $200K value (what you could get for it if you were to sell)
Here’s another scenario using 7% interest with a goal of having $1,000,000 cash (retirement account) by age 65. Below are the ages you need to start investing and the amount saved each month:
- Age 25 – $417/month
- Age 30 – $602/month
- Age 35 – $882/month
- Age 40 – $1,317/month
- Age 45 – $2,032/month
- Age 50 – $3,316/month
- Age 55 – $6,031/month
Remember in this scenario though that you are not a millionaire if you owe on anything at the age of 65 (credit card, cars, house) UNLESS the value of what you own (house and cars) exceeds the amount you owe.
This second scenario demonstrates one of my original comments that becoming a millionaire takes consistency and time. I read a great book called The Minimum Wage Millionaire by Bill Edgar. I plan to have my kids read this while they’re in high school. Having financial problems creates a huge life imbalance so I want them to learn at a young age how important it is to have and follow a budget and financial plan as well as saving, regardless of their income. I want my kids to do what they love for their career plus I don’t want them to think they have to make a high income to live a happy and fulfilling life. On the contrary, if they make a high income, I want them to handle their money properly. It’s amazing to me how many high income earners are BROKE (negative net worth). I want my kids to know they CAN have financial freedom if they follow Mom’s advice. ?