Did you know that you don’t have to invest a revolutionary product or find a lucrative penny stock to invest in to become a millionaire? While these are the paths most of us know, many millionaires built their wealth solely from nurturing good financial habits and making sound financial decisions. Here are three proven steps you can implement to see your own future financial success!
Step #1: Establish A Frugal Lifestyle
Setting up a frugal lifestyle involves downgrading your living standards despite a robust financial standing. This doesn’t necessarily imply pitching camp inside a van to save on rent, far from it. Frugality is the equivalent of walking a 20-minute distance instead of taking an Uber. Or halting your TV subscription because you rarely watch TV anyway. See? Being frugal shouldn’t deteriorate your lifestyle in any way or act as a large inconvenience. If anything, setting up a frugal lifestyle is the key that opens new financial opportunities for you. It helps you save money, boosts your net worth, and helps you ward off the financial stress of sustaining an inflated lifestyle. However, this is easier said than done. While the idea of frugality appeals to the masses, it’s only a handful of people that understand how to tackle it. Because when everything seems necessary and convenient, how do you draw the line between what’s worth spending money on and what isn’t?
This is where money dials come in.
Money dials are simply things you’re willing to spend guiltlessly on after eliminating or cutting back massively on stuff you’re unattached to. These are things that bring you incredible value for your money, and you wouldn’t mind dedicating a significant fraction of your budget to cater to them. As expected, money dials vary from person to person. While one person’s money dial might be traveling, another person can readily strike-off traveling expenses without a second thought. Similarly, someone else may be so fascinated by cars that they would rather forego flying first class and maintain their vehicles.
In the same way, it’s essential to identify your money dials. If you bagged a $15,000 windfall, what are the first 3 things you’d spend it on? Whatever your mind captures within the first few seconds is your top money dial. So, what business do money dials have on your road map to becoming a millionaire? When you make your money dial the focal point of your expenditures, you spend on what truly matters to you. You’ll find it easier to get rid of unnecessary expenses to provide enough elbow room for other living expenses. Most importantly, you’ll spend on things you naturally love without feeling guilty since you’ve sacrificed a lot of things to do so.
This can do a number on your whole budget. Having identified your money dials and downsized other facets of your expenses, you significantly minimize money wastage. Plus, more disposable income puts you in a great position to save and invest more money. Figures add up quickly, and just by shrinking your expenditure by $1,000 every month, you can rack-up a whopping $12,000 annually. This isn’t small money, more so when invested in a market that capitalizes on compound interest. According to the rule of 72, an investment that pledges a 9% rate of return will take 8 years before it provides double the invested money. So at a rate of return of 9%, $12,000 transforms into $24,000 every 8 years. If you consider the fact that you’ll be topping up this money every month, you can crack how easy it is to become a millionaire.
However, without consequential budgeting, your efforts will hit a wall. Tracking your expenses and laying down a budget is the surest method to evaluate what you’re spending money on. Conventionally, the 50/30/20 budgeting rule rings true. This budgeting rule recommends spending 50% of your disposable income on needs, 30% on wants, and putting 20% towards savings.
When you apportion your spending this way, it’s easier to seal cracks in your wallet and shift the mismatched funds’ course. Fortunately, technology has made the budgeting process faster and painless. As you key-in your daily expenses, budgeting apps conjure up a visual version of your costs. This is usually in the form of graphs and pie charts. Out rightly, a visualization of your expenditures is easier to crack and digest. This makes it a good way of unveiling what you spend the most money on.
Once you’re done with this step, you’re ready to proceed with the next one. One massive advantage of setting up a frugal lifestyle is that you’re not susceptible to lifestyle inflation even if your income increases.
Step 2: Acquire or build a reliable stream of income
The second step you should follow to become a millionaire is to acquire a reliable income stream and indeed, one hallmark of millionaires is that they have sources of income they can depend on. Not one, not two, but seven streams of dependable income! That’s right. The average millionaire has money rolling in from seven different directions. Now you see why they’re always ahead of ordinary people when it comes to their finances!
While carving out seven sources of income is a long shot for most people, you can start with one. The thing is, building steady sources of income is the bedrock of attaining financial freedom. Luckily, these income sources can be anything under the sun, as long as it’s legal, of course. A traditional job, for instance, is the main stream of income for most households. Although fading in popularity, a monthly, salaried position offers immense income security. So long as you show up to work and match-up to your employer’s expectations, you’re sure to have money entered into your account every two weeks. If you choose the right career path, this is going to be good money. Careers such as software engineering can net you hundreds of thousands of dollars a year and if you adhere to a frugal lifestyle, there’s no way you’ll be unable to save and invest part of it.
But unless you fancy yourself as the Sherlock Holmes of your field, earning this much from your job may be tough which will require you to add on other streams of income. You’ll have to explore more options for minting the dollar. Passive income is the most feasible option since it only requires a minimal time investment. In this case, your payment is not contingent on the amount of time you spend on a task. Passive income streams include dividends earned from holding a company’s shares or the interest that accrues when you save through a money market fund. Other examples include selling products through online stores, earning rental income, or earning royalties from a product you designed. With an online store, for instance, customers can make purchases even as you sleep at night. Once you overcome the hurdle of setting up the website and viciously promoting your offerings, you’ll be collecting payments on the regular!
By putting your eggs in different baskets in this manner, you’ll be better cushioned against income loss. Suppose this fading pandemic has taught us anything; it’s the fact that nobody is immune to the heavy financial beatings of economic downturns. You could lose your job or have your business on life-support when a recession hits. When it happens, make sure it finds you standing on the right foot. With at least 3 income sources, I’m sure you’ll find a way to pay your bills and sustain some of your investments as you figure things out. Even better, without getting entangled with debt.
Remember that becoming a millionaire will require you to have at least $1,000 every month to invest. So whatever you do, make sure your additional income sources can generate at least this amount. This is because investing $1,000 every month for the next 20 years will make you a millionaire. So depending on your current age, you can adjust this amount to coincide with your financial goals. If you intend to retire sooner, brace yourself for the sacrifices you’re about to make. The sooner you plan to retire as a millionaire, the more you will have to invest. Speaking of investing, what’s the best way to tackle it?
Step 3: Set up an automatic investing system
Automation is a sweeping wave, and the financial world isn’t lagging behind. Today, many financial bigwigs swear by automated investment systems as the answer to streamlining finances. Similarly, putting your savings and investments on autopilot will benefit you tremendously.
As mentioned earlier, you’ll need to set aside a minimum of $1,000 a month at a 7% return rate if you want to retire a millionaire. If you’re wondering how I arrived at that, I simply used a compound interest calculator. Compound interest is simply interest earned on interest. When you invest money, it accrues interest, which increases the principal amount. Over time, this new principal also accrues interest at the set rate of return.
And with automation, the $1,000 will seamlessly slide into your investment account without passing through you. If your financial discipline is shaky, this is the surest way to uphold the culture of saving and investing. Technically, it’s impossible to spend what you don’t have. So once you invest your money first before anything else, you’re sure that you won’t withdraw it and spend it on things that bring no value. But even with an automated investment strategy, what are the best investments you can use to grow your money? Obviously, the stock market, is a breeding ground for many millionaires and may be one of your best bets. If you’re still in doubt, use TESLA as an example. Over ten years, Tesla’s market value has ballooned by more than 3600%. This means that an investor who bought $1,000 worth of Tesla’s stock in 2010 would be worth roughly $36,000 as of today. Similarly, you should identify listed companies that have great potentials for growth. If you find it too risky to invest in one company, you can opt for index funds and invest in a portfolio of stocks that track a particular index.
Not to mention, investing has become much easier through the use of robo advisors. With robo advisors, you don’t have to worry about spearheading the investment process. They are automated invested aides that use computer logarithms and financial software to guide you on how and where to invest. The good thing is that unlike traditional portfolio managers, robo advisors demand very minimal requirements and with high degrees of accuracy.
In closing, I just want to reinforce the importance of investing your money instead of saving it. Are you familiar with the term inflation? This refers to when the purchasing power of money diminishes due to sloppy economic conditions. In 30 years, for example, a million dollars will have less buying power than it has today. This means that if you save a million dollars for 30 years in a saving account that yields no interest, you will have less money, although the face value seems to be the same. Therefore, prioritize investing in funds that increase your cash and protect it from inflation.
There you have it. Those are the three steps anyone can use to become a millionaire!