The Millionaire Formula
I recommend reading, “The Millionaire Next Door” by Dr. Tom Stanley, to better understand this plan and why it works. The book is also a great teaching tool to living below one’s means. Financial experts recommend this book. Scott Alan Turner, the “Financial Rockstar” recommends this book in over five different episodes of his podcasts alone. Ramsey recommends this book to individuals and couples struggling to get on a budget and get out of debt.
Ramsey and Turner are millionaires, I am not. If you question anything in this blog, (and feel free to), then go ahead and ask them. They may not agree 100%, but this basic plan, not necessarily in this order, is how they made their millions.
Here is the time proven “millionaire formula” guide to building wealth and becoming a self-made millionaire. The plan itself is simple. Read SIMPLE not easy. It’s not sexy either. It’s not extravagant cars and houses. If you did your research on the book however, you would already know this.
The details themselves can vary greatly from expert to expert, but the overall plan is agreed upon by many experts. The order I present the plan can be changed. Dave Ramsey recommends his “baby steps” go in order. I have not included his “Baby Step 5” of a college fund for children, for different reasons. The following is the order in which I have been presented the plan and how to follow through on it.
- 1. Plan your spending. Financial experts stress the importance of getting on a budget. How the budget is presented and follows in up to the individual or couple, but a plan must be followed and spending must be tracked.
- 2. Eliminate Debt. This is the HARDEST step in my opinion. Eliminating debts can take YEARS. Expenses pop up, emergencies happen. We want that new car, new house, new phone. We swipe that card and it’s ours now. We take out those large student loans to pay for education. We put that coffee, dinner, or fancy wine on our credit cards and forget it. As Ramsey says, “We wander into debt, but can’t wander out.”
There are 2 recommended plans to eliminate debts. They are the debt snowball (Ramsey’s “Baby Step 2”) and debt avalanche. I won’t go into too much detail, but will give a quick overview. Essentially, you focus on each debt, one at a time throwing any excess money at a single debt, until all are paid off. The difference is the debt snowball orders your debts from smallest to largest. The small wins keep you motivated to knock out the higher debt. Once the smallest debt is paid, the money used to go towards that debt goes to the next highest debt, until all your debts are paid. The debt avalanche is the same method, except debts are ordered by highest interest rate.
- Build an Emergency Fund. Experts differ on whether this step comes before or after debt elimination. Ramsey recommends this after debt elimination, using fear as a motivator, to get out of debt more quickly. Ramsey also recommends a $1,000 emergency fund before getting out of debt (“Baby Step 1”), and then building a larger emergency fund of 3-6 months of monthly expenses (“Baby Step 3”). Others say to build this while getting out of debt or before and recommend anywhere from 3 months to a full year of expenses.
- Increasing Income. This is where the wealth building really begins. Some experts say to invest, buy real estate, start your own business, or a mix of these. Starting a business can be added to any of these and is highly recommended by experts for the tax benefits and potential higher earnings. Investing takes advantage of compound growth where money you invest makes more money (many experts call it compound interest). Here is the millionaire formula through investing: $350 to $400 (about $10 bucks a day) invested and returning about 12 percent over 35 to 40 years yields over one million dollars. Invest this money in retirement accounts to take advantage of tax breaks.
Real estate and owning a business takes advantage of passive income which is income you earn even if you aren’t “working.” I will post more about compound growth at a later date.
- Pay Cash for Large Savings Goals. Vacations, cars, primary residences or rental properties are some examples. When you don’t have debts taking large portions of your monthly income, paying cash for bigger purchases becomes a lot easier. If you already have a mortgage, experts suggest paying it off early and investing the payment into retirement or other investment accounts. The recommend percent of investing income is around 12-15 percent.
So why should you work this hard, just to have a million dollars at or near retirement? Well, do you want to worry about healthcare, emergencies, others in need, and other life happenings? I don’t. The average family, according to three different articles*, has only $5,000 to $20,000 saved for retirement. For most families, that is only SIX MONTHS (based on a median household income of $40,000).
I want financial freedom, the ability to help myself and others, and a retirement I spend in enjoyment and not worry. To me, the end goal much outweighs the expensive houses and cars. I want my retirement to be my actual golden years. Don’t you?