If you want to become a millionaire, start saving as much as you can as early as you can.
We’ve said it before and we’ll say it again- you don’t build wealth by working more hours a day. You create wealth by taking calculated risks and being smart enough to delay gratification. The basics are simple: earn money, spend less than you earn, save, invest, rinse and repeat.
Though this whole “save more, spend less” game plan sounds easy enough, the reality is that the majority of us aren’t following it.
You are not alone
According to a Bankrate survey, one-fifth of Americans are adding nothing to their savings.
Expenses were cited by 39% as the main reason people are not saving. The second reason is that their job isn’t good enough, while an equal amount said the main reason they aren’t saving more is because they “haven’t gotten around to it.”
The good news: it’s not impossible to become a millionaire
There are no steps, formulas or secrets to become a millionaire. But there are strategies that can help you reach your goals. At the end of the day, you control your future and how you approach it, and that is the biggest determining factor as to whether you will become a millionaire.
Pay yourself first
One of the oldest rules of personal finance paying yourself first. This means before you pay your bills, buy groceries, or spend on anything else, set aside a portion of your income to save. This habit, developed early, can help you become a millionaire.
There are many ways to save more, but to save big, you need to think bigger than giving up your daily cup of Starbucks. There’s a money lesson to be learned from this couple who spent $30,000 eating out in a year– money that could have easily been part of their savings.
Save half your raises
One way to achieve a seven-figure net worth is to put away all the raises and bonuses you get. But as behavioral finance research shows, depriving yourself too much may cause you to binge later. So as a compromise, save 50%. Spending the rest on yourself should help you feel like you’ve celebrated your success without derailing your financial goals.
Re-evaluate your living situation
The rule of thumb for how much house you can afford is 28% of gross monthly income, but who says you have to spend all 28%? Think about it, do you really need the space, or could you be just as happy if you spent a little less on your home? For example, this couple banked 50,000 by paying a smaller percentage of their income on their condo.
Invest, invest, invest
“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” – Albert Einstein
Despite what most people think, investing isn’t an opportunity limited to those who are already wealthy. Forgoing some luxuries can help you save tens of thousands of dollars a year which can be allocated towards investing wisely.
The idea is to take advantage of compound interest. Think of it as the cycle of earning “interest on interest”, so a little money invested now can end up being more than a lot of money invested later.
When coupled with a rigorous savings plan and budget to make sure you never need to dip into your investment pot, the power of compounding is without a doubt more important than any other financial planning aspect.