Who wants to be a millionaire? Well, you don’t need to win a gameshow to pull it off! In fact, in the United States, more than half of us have the mathematical capability to retire a millionaire without ever “catching a lucky break” or even getting a raise!
“Rachael, that can’t be right! If half of us could be millionaires, then why aren’t half of us millionaires? The U.S. has around 11 million millionaires, not 150 million.”
Unfortunately, yes, there are far fewer millionaires than the math tells us there should be. So why the disconnect? First of all, let’s establish what a millionaire is. It is not a person who makes over $1million each year. A millionaire is an individual whose net worth totals $1million.
Assets – Debt = Net Worth
So if a person’s total assets (including investments, house, cars, vinyl collection, etc) minus his or her debts comes out to $1million, that person is a millionaire. Becoming a millionaire is simply making the choices that result in strong asset growth while avoiding debt.
This is confirmed in the research done by Thomas Stanley, who profiled the habits of the typical millionaire – small business owner and compulsive saver who avoids debt like the plague that it is. And while a high income can certainly speed up wealth accumulation, there is no income level at which you cannot spend yourself back into poverty. A person making just $30k a year who invests 15% of her income from age 25 to age 65 will retire with $1.2million in the bank if they never get a raise and the market makes 4% less than it ever has over that length of time. If you are reading this and you make more money than this, or plan to at any point in your life, you should retire a millionaire.
Many won’t, though, because they refuse to make the choices that lead to wealth accumulation. They choose to send their money to banks, burger joints, and brokers that suck the life out of their ability to save. In this article, I will highlight 5 dumb habits that we all engage in (including myself) that is keeping us from millionaire status.
#1 – Debt
Debt really has two negative effects on your net worth. The obvious effect is that debt is deducted from assets to produce net worth – therefore the more debt you have, the more your wealth suffers. But the true effect of debt on your financial health is far more insidious than that. Payments on debt rob us of our ability to save and invest. In the example above, our relatively poor investor is saving less than $400 a month. But if she’s like most of us, she can’t afford to save $400 a month because that’s her car payment. And as soon as she pays that car off, she’s going to go get a new one. Altogether, those cars can cost her the entire $1.2million. I hope you like the car!
#2 – Vice
How much of that $400 can’t be saved because it’s going to fuel her latte addiction or smoking habit? The average American household spends $70 on alcohol and tobacco. Illegal drugs are traded on the black market, so accurate spending data is hard to come by, but it’s safe to say that these highly-addictive habits are a drain on finances and harm a person’s ability to succeed professionally, according to an addiction treatment center in California.
#3 – Overspending
Still more income is slipping out of her hands because she is not being intentional about how it’s being spent. 40% of Americans live paycheck to paycheck, meaning every dime that comes into the household goes back out in expenses. Doing a written budget every month can have the same effect as getting a 20% raise. Our $30k saver hopped on everydollar.com and freed up an extra $400 from her budget the following month – more than enough to reach her millionaire goal.
#4 – Poor Investments
So now our example saver has cut up the credit cards, kicked the habit, and budgets on purpose every month. She’s built up a decent emergency fund and is now pouring money into retirements and investments. She is well on her way. But there are still potholes on the road to wealth in the form of poor investments. Her income level qualifies her for a Roth IRA/401k, which she should be utilizing, since these investment vehicles grow tax free. The money that she contributes to these accounts can be put in any number of investments, but not all are created equal. For example, if her investment advisor says the words “cash value life insurance,” or “structured annuity,” she needs a new investment advisor. CD’s, Money Market Funds, Bonds, Annuities, or gimmicky, complicated investment vehicles all essentially underperform indexed mutual funds. Our investor should fill her IRA with funds in this category that have performed well over a long period. Then she should leave it alone until she retires – regardless of who wins the election.
#5 – Lack of Vision
The biggest reason none of us reach the million-dollar net worth is because it sounds impossible. A million sounds like a lot! But just a little discipline over a long enough timeline can easily get almost all of us there. The first step to taking action is believing that you can succeed. No matter where you are on your journey towards financial freedom, you can begin taking the first steps today. Even conservative math says that you can do this! Raise your sights and start putting your future together now!