When you think of millionaires or multimillionaires, what comes to mind? Perhaps the heir to a family fortune who drives a luxury car (or five!), resides on a sprawling estate and spends summers partying in the Hamptons?
There are plenty of millionaires who fall into that category. But many others came from humble backgrounds and built their wealth through a longtime strategy of planning for future goals, spending modestly, saving a significant percentage of their income and investing their savings wisely.
Want to join the ranks of the nearly 22 million Americans who can call themselves millionaires? Check out these six secrets of millionaires that you can put into practice in your own life.
Millionaire’s secret #1: Spend modestly.
Millionaires don’t always look like millionaires. That’s because they spend their money modestly instead of pretentiously. Think crockpot meals at home instead of trendy restaurant dinners, a 23-cent cup of coffee from home (versus $2.70 for a basic cup of coffee-shop joe) or getting another year’s wear out of that old winter coat.
To get a handle on your own spending, try a free personal finance website or app like Feed the Pig® or Mint®. Once you start tracking your various accounts and activities, you’ll quickly be able to see where the bulk of your discretionary spending is going — whether it’s to dinners out, expensive coffees or premium cable channels. Then challenge yourself to cut spending in that category by half or more each month and stash the rest in savings.
Making it to a million: You might be surprised by how much these small changes can add up. Based on the coffee calculations above, if you brew coffee at home every day instead of going to the coffee shop, you could save almost $1,000 in a year. Make your own coffee for 20 years and you could save roughly $20,000.
Millionaire’s secret #2: Live in a modest home, drive a modest car — and hang on to them.
If you’re like most Americans, housing and transportation combined account for just over half of your annual spending.
A smart move involves buying a home that meets your needs but doesn’t stretch your budget. Then stay in your home as long as you can to maximize your monthly investment. When it comes to your home mortgage, take a cue from billionaire investor Warren Buffet. Buffet bought his home for $31,500 in 1958, and it’s likely worth close to $800,000 today.
When you buy a car, keep in mind that it won’t increase in value like your home will. In fact, the average new car loses over half its value in the first five years — but still has plenty of life left. It’s often smart to buy a used car, but make sure it’s mechanically sound and new enough to include the latest safety features. Then keep your car as long as you can to get more mileage out of your investment.
Once you pay off your home mortgage and your auto loan, a big chunk of change that would have gone to those two major expenses can be channeled toward investments instead.
Making it to a million: Let's use Buffett’s strategy for home buying (and staying put!) for example. Living in a $400,000 home with a paid-off mortgage could save over $27,000 per year. Live in that house mortgage-free for 20 years and you could save more than $540,000!
Millionaire’s secret #3: Steer clear of credit card debt.
If you use a credit card for convenience and emergencies, be sure to pay it off every month. The average American owes $6,270 in credit card debt. And in 2021, the average interest rate on credit cards was 16.45%.
Making it to a million: If you plug in the numbers from above - a $6,270 credit card balance at an interest rate of 16.45%, with a minimum payment of $100 every month, it would take you 13 years to pay off this debt. And you'd pay $8,145 in interest to boot. Pay it off entirely - or signficantly more than the minimum monthly payment - and avoid costly interest charges.
Millionaire’s secret #4: Save (and invest) early, consistently and wisely.
If you want to be a millionaire, start saving as soon as you start working to let the magic of time and compound interest work for you. “Pay yourself first” by saving a significant percentage of your income every month. A few key points to keep in mind when investing:
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Take advantage of any employer match for your 401(k) or other employer-sponsored savings plan. It’s like free money!
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Most financial planners recommend setting aside three to six months’ worth of living expenses to give you a cushion in case you lose your job or encounter another emergency.
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Keep things simple. Avoid complex investments and plan administration fees.
Making it to a million: According to the Department of Labor, if you save $5,500 annually over five years and earn seven percent interest, you would have $138,210. But if you save the same amount at the same interest rate for 35 years, you would accumulate $760, 303 in retirement savings!
Millionaire’s secret #5: Plan ahead.
Spend some time thinking about your future goals. Maybe you’re hoping to travel, send your kids to college, retire comfortably or all of the above. Just remember that a little short-term sacrifice can pay big dividends in the future. With your goals in mind and some figures to work with, a retirement savings calculator can give you a better understanding of what you’ll need to meet your future financial goals.
Making it to a million: Whether you are preparing for retirement or planning to start a family, having a solid financial plan in place helps you balance your future financial goals with present-day desires.
Have adequate insurance coverage. As you find ways to cut expenses, one thing you shouldn’t cut back on is insurance. Protect your family and financial assets against potential losses by making sure you have adequate insurance including health, disability, auto, home, liability…and legal insurance.