Saving tips and how to become a millionaire
Can I be honest? Iím tired of hearing people make millionaires out to be big, bad wolves. That all wealthy people are evil, greedy, self-centred people who inherited or stole money to get rich. Itís as if there were something wrong with being wealthy.
Listen, people: money is neutral ó what matters is how you get it and how you spend it. And most of the wealthy people I know didnít swindle anybody. They worked hard. They saved. They sacrificed. And now they get to enjoy the results of that patience and perseverance.
I get it ó not everybody wants to travel the world. Their lifestyle and wants are simple and uncomplicated. But for a lot of Americans, becoming wealthy isnít just a lofty dream ó itís a necessity. Here are four reasons why itís okay ó and important ó to become a millionaire:
1. The length of retirement
Back in 1960, people retired around age 65 and had a life expectancy of 80, so they only had to fund their retirement for about fifteen years. But now, according to a recent Gallup poll, current retirees said goodbye to the workforce at age 61 and current workers expect to retire at age 66. But people are living longer now. The current life expectancy for Americans is 84 years for men and 86 years for women, and one in four people will live past age 90. That means youíll need enough money to live on for at least 20 to 25 years.
2. The cost of healthcare
According to a recent Fidelity study, a 65-year-old couple retiring in 2018 would need $280,000 to cover their medical expenses during their retirement years. Now, that amount doesnít include long-term care, like living in a nursing home or home healthcare. That could cost an additional $138,000 per person.
I know youíre thinking that youíre healthy and you wonít have extensive medical needs. Sorry, but the Government has estimated that someone whoís 65 years old today has almost a 70 per cent chance of needing long-term care at some point.
Let me be crystal clear: Healthcare in retirement is expensive. Thatís another reason you may need to hit the million-dollar mark.
3. You canít count on social security
I canít count how many times Iíve heard people say theyíll just live on Social Security when the time comes. Thatís a very bad idea. In 2018, the maximum monthly benefit a person can receive at full retirement age is $2,788 in the US. But the average payment in August 2018 was just $1,415, which comes to just under $17,000 annually. Thatís only about $5,000 above the poverty line of $12,140.
If thatís not reason enough to kick your wealth building into high gear, listen to this: you may not get the full amount you expect by the time you retire. Even as we speak, Social Security payouts are higher than its income. If things donít change, its reserves will go dry in 2034. To make sure it doesnít, lawmakers want to decrease the amount people get in monthly payments. Nothing has been settled yet, but itís on the back burner.
4. You want to leave a lasting legacy
This final reason to build wealth isnít about facts and figures. Itís about your family. Most people I talk to want to leave a strong financial legacy for the people they love. Nobody wants to see their kids or grandkids struggle. Knowing that your family will be taken care of long after youíre gone gives you peace of mind. Having that safety net in place lets you sleep easier at night.
Even if you donít have family, you may want to leave a legacy by giving generously to others. We all want to make a difference in the world. Thereís nothing like surprising that single dad with money to buy his kids Christmas gifts. Or leaving a $100 tip for an overworked server. Or paying for someone to go on a mission trip. Giving away your money is the most fun you can have with it.
Sure, you might not have to break the million-dollar mark in your piggy bank. But given these reasons for building wealth, why would you try to gut it out with less? Especially since becoming a millionaire is very possible.
How to become a millionaire
Listen to this: nearly 10 million people in the US reported a net worth of $1 million to 5 million in 2017. And that doesnít even include the value of their home. Do you know what this tells me? That becoming a millionaire is possible for anyone. Itís not just for trust fund babies or lucky lotto winners. So, how do everyday people like us make it happen? The formula is simple ó but following it takes patience and perseverance. Here it is:
Monthly contributions + mutual funds ◊ time + compound interest
I told you the process is simple. But Iíve met a lot of people who donít use all the pieces of this formula, so they donít maximise their wealth-building potential. Letís look at each of them.
Making regular deposits into your investment accounts is a key component in building wealth. You canít become a millionaire by putting away money when you feel like it, or when you have money left over at the end of the month. It must take priority.
You need to invest 15 per cent of your gross income every month. Since youíve already got an emergency fund in place, and youíve paid off your debt (except the house), hitting that mark is absolutely doable. You may have to sacrifice some things ó like that fancy vacation or designer wardrobe ó but you can invest that much. Iíve talked to enough teachers, custodians and blue-collar workers to know itís possible.
How can you make sure youíre putting away money every single month? Automatic withdrawals. Whether youíre investing through work or through a brokerage firm, you can arrange to have a portion of your paycheque (either a fixed amount or a percentage) go into your investment account. That way, you arenít tempted to use that money for living room furniture or the newest tech toy.
You may get tired of hearing this because itís not flashy or trending, but the best way to grow your money is to invest it in mutual funds. Yep. No get-rich-quick schemes, and no pyramid marketing ploys peddling skincare or kitchen items. Just simple mutual funds.
Spread your investments across four groups of funds: growth, growth and income, aggressive and international. This mix of funds will balance out your portfolio, and protect it against the ups and downs of the market.
At least once a year, sit down with your investing pro to look at the funds youíre in. Make sure theyíre still balanced. One sector of funds may go wild (like technology) while another struggles (like textiles), so you may have too much (or too little) money in one fund.
Time and compound interest
Building wealth doesnít happen overnight. Money needs two essential sidekicks to grow: time and compound interest ó and theyíre inseparable. Hereís an example to illustrate.
Cathy starts investing $500 a month at age 25. She continues to do this for 30 years until age 55. In that time, she puts away $6,000 a year or $180,000. She invests in a balance of mutual funds through her workplace 401(k) and earns a 10-12 per cent return each year. At the end of 25 years, she might amass $1.085 million. If she invested 35 years, or until age 60, she tops $1.7 million, assuming a 10 per cent rate of return. Thatís consistent investing in mutual funds, plus the power of time and compound interest.
Cathyís next-door neighbour, Carl, got serious about his investing at age 40. He has realised the importance of building wealth and wants to reach the million-dollar mark. If he wants to invest $500 a month, he will need to delay retirement until age 70 to hit $1.05 million. Or, to reach $1 million at the same time as Cathy (age 55), he will need to invest $2,500 a month. Carl has to play catch-up, because he has a smaller time window for the compound interest to grow.
Itís time for a change. Itís time for a new way of thinking. Itís time for ordinary people like you and me reclaim the possibility ó and ability ó of becoming millionaires. But it can only happen if you decide to take control of your finances and turn the tide in your favour.
ē Chris Hogan is a No 1 national bestselling author, dynamic speaker and host of The Chris Hogan Show. For more than a decade, Hogan has served at Ramsey Solutions, equipping and challenging people to take control of their money and reach their financial goals. His second book, Everyday Millionaire: How Ordinary People Built Extraordinary Wealth ó And How You Can Too, releases in January 2019. You can follow Chris Hogan on Twitter and Instagram at@ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360
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