If you’ve ever watched “Who Wants to Be a Millionaire”, you might witness the following scene:
Host to Contestant: If you don’t know the answer…you can use one of your lifelines?
Fifty-Fifty – eliminate 2 of the 4 answers
Ask the Audience – poll the audience
Plus One – ask your companion
With much anticipation, the audience waits for the contestant to risk it all by either selecting an answer, or walking away with whatever money he’s won to that point. What would you do? Who doesn’t want to be a millionaire, am I right? We’re all familiar with the phrase “The Millionaire Next Door”. Well, you can be THAT neighbor.
So…let’s look at a few characteristics that most millionaires possess.
First, millionaires don’t spend more than they have. Sounds easy enough….but why isn’t it? Why do we have a hard time spending less than we make? Society and media advertisements scream loud and clear that you can have it now. Not only that, but you deserve to have it now. What ever happened to Slow and Steady Wins the Race? Buying into the mentality that I have to have it now creates unsustainable spending habits that will surely come back to bite you. A few simple tips…you have to know how much you make and how much you spend. When income goes up, don’t increase your spending too. Instead use that money wisely by contributing more to your retirement plan at work or by saving towards other desirable goals.
Second, millionaires pay themselves first. There are many ways to invest in yourself and your future. Whether you are self-employed, a government employee, or work in the private sector, there are options for each of you. Whether it’s a SEP-IRA, a TSP, or a 401(k) plan, all provide tax-advantaged opportunities. Besides the obvious good news that you’re putting money aside for retirement, each of these plans also reduces your tax liability. Some plans even offer ROTH versions of the same. Know the difference before you choose the one that is best suited for you. Key difference is that contributions to traditional plans are made with pre-tax dollars, while the ROTH contributions are made with after-tax dollars. On average, did you know that millionaires save at least 20% of their income each year? How do you measure up?
Third, millionaires prioritize. Millionaires understand the importance of starting today. Think about it…most millionaires didn’t become so overnight. They started saving consistently….the earlier the better. Let’s review the following example:
Lauren and Emily, both 25, start working for the same employer. Lauren learns about the employer 401(k) plan and decides to save $200/month from her salary. After 10 years (assuming an annual rate of 6%), she will have accumulated approximately $32,700. Emily now decides she needs to start saving and also saves $200/month. By age 65, Lauren will have accumulated approximately $398,000. Emily, on the other hand, will have accumulated approximately $200,900. For Emily to reach close to the same amount Lauren saved, she would have to save about $196 more (almost double). Lesson learned…the earlier you start, the less you might have to save.
Fourth, millionaires own, not rent. That’s right…if you own your house, you are modeling the behavior of a millionaire. Just make sure you buy one that you can afford. Home ownership can help build wealth each time you make a mortgage payment. This helps to build equity in your home. Of course, there are tax benefits as well. You can write off the mortgage interest, your property taxes, and in some cases, even your closing costs. In the event you sell your house and have lived in it for at least 2 years, you will qualify for a capital gain tax exclusion. If you’re single, any profits up to $250,000 will be free from capital gain tax. Make that up to $500,00 if you’re married filing a joint return.
While these are just a few attributes of a millionaire, these are ones that you can start implementing today. So get your head in the game and make the wise choice. Instead of using up an uncertain lifeline, meet with a trusted financial advisor who can help increase your odds of creating a plan and sticking to it. Don’t gamble away your future earnings. Instead…make a plan to win the race, slow and steady.