Tag: retirement

Top 5 Millionaire Habits

Top 5 Millionaire Habits

Posted on by kaitlyntessmer

When you think of the word “Millionaire” what comes to mind? Oceanfront mansions, Lamborghinis, personal jets, and a life of luxury? If those things scream Millionaire to you, you’re not alone. In fact, often times when I think of Millionaires I think of celebrities vacationing on private islands and shopping on Rodeo Drive. Recently, my eyes have been opened to the fact that anyone can become a millionaire. You don’t need a six or seven figure salary to join the Millionaire’s club. You can take steps today to prepare your bank account for a nice pile of cash.

The Millionaire Next Door

If you haven’t read Thomas J. Stanley’s, Millionaire Next Door, you have to check it out. I highly recommend renting a copy for free from your Public Library. But if you prefer your own copy, you can grab it from Amazon, too. A few decades ago Stanley and his colleague, William D. Danko, studied the habits of hundreds of millionaires (people with a net worth of at least 1 million dollars). Their findings will likely shock you. Almost everything they found is counterintuitive to what you and I think when we hear the word Millionaire. If you want to become a Millionaire, keep reading.

Top 5 Millionaire Habits

During their multi-year study, Stanley and Danko discovered several millionaire habits. Surprisingly, a large number of Millionaires have a modest salary. Having a high salary isn’t an indicator that you will become a Millionaire, having self-control and developing good habits are bigger indicators of whether or not you will become a Millionaire.

Millionaire Habit #1: Spend Less than You Earn

This first Millionaire Habit is obvious. Of course, you have to spend less than you earn if you want to build wealth! But the fact of the matter is, 60% of Americans consistently spend more than they earn. Don’t believe me? Take a look at one of the richest men in America, Warren Buffett. Known for his love of McDonald’s, Buffett splurges, only when the stock market is doing well. What’s a typical splurge for Buffett? Spending $3.17 on breakfast at McDonald’s on a bacon, egg and cheese biscuit sandwich.

Millionaire Habit 1 : Spend Less Than You Earn

The first step to living off less than you make is to create a budget. A budget is a great way to guide your spending. Creating a budget doesn’t have to be difficult. In fact, once you create your budget you can easily replicate it month after month. To start your budget preparation, begin tracking your monthly expenses, this will give you a baseline for how much you are spending on food, entertainment, and miscellaneous.

Check out my Foolproof 8 Category Budget for more budgeting essentials.

Millionaire Habit #2: Buy Used

One of my guilty pleasures is watching Reality TV. There I said it. I am a recovering Reality TV addict. One of my favorite TV shows used to be 19 Kids and Counting. You may have heard of the Duggar Family, they’re known for their Conservative Christian values and brood of 19 children. While I don’t agree with everything they believe in, they do have a great saying “buy used and save the difference”. Buying something used saves you money in the short and long term

Millionaire Habit 2: Buy a Used Car

If you are morally against buying used clothes or furniture, I get it. But one area of your life that you should ALWAYS buy used is you car. Cars depreciate 20% the second you drive it off the lot. So that $20,000 new Toyota you just bought is only worth $16,000 the second you drive it off the lot. Ouch! Depreciating $4,000 hurts. The average new car payment in America is just under $500 per month. To throw away money at an item that depreciates in value is insane! Most Millionaires see right past the shiny exteriors and updated navigation systems of new BMWs and opt for a more economically sound used Toyota or Honda.

Check out: How to Drive Free cars for LIFE!

Millionaire Habit #3: Choose a Modest Home

Three times more Millionaires live in homes valued at less than $300,000 than more than $1 million. Why do Millionaires live in modest homes? Housing or rent is going to be the biggest expense in your budget, accounting for 25-30% of the money you spend every month. So, the more expensive your home, the more money you will spend every month to pay for that home. Big houses come with big mortgages, big utility bills, and even more property taxes. The more money you spend every month on your home, the less money you can save and invest every month.

Millionaire Habit 3: Buy a Modest House

Most Millionaires live in modest homes that they’ve owned for decades. Take the richest man in Mexico, Carlos Slim Helú, he’s lived in the same 6 bedroom house that he’s owned for the past 30 years.

Millionaire Habit #4: Stop Keeping Up with the Joneses

You know the Joneses, they’re the people who always seem to have the newest car, newest iPhone, coolest vacation. Stop trying to one-up them. One thing you’ll never know about the Joneses is how they paid for their luxury items. For all you know, the Joneses are in debt up to their eyeballs and have no savings or investment accounts. When you try to keep up with the Joneses you overspend. The comparison trap is real. It’s easy to get sucked into having the latest and greatest and showing it off. But remember, the more you spend on things the less you spend on long-term investments.

Millionaire Habit #4: Stop Keeping Up with the Joneses

The Everyday Millionaire knows how destructive keeping up with the Joneses can be. That’s why they mind their own business. Millionaires create a monthly budget and stick to it. They don’t care what others think about them and they aren’t in the business of showing off. The Everyday Millionaire knows that having a full bank account is going to give him more happiness and fulfillment than the latest and greatest iPhone.

Millionaire Habit #5: Pay Yourself First

I’ve saved the best for last. The #1 Millionaire Habit is to pay yourself first. What do I mean by that? Most people say they don’t save enough money for retirement, invest enough, or have a big enough emergency fund, because they don’t have the money to save more. That’s why most Millionaires pay into those accounts FIRST. They treat saving like a bill.

Millionaire Habit #5: Pay Yourself First

When you pay yourself first you prevent your future self from buying a round of drinks for your coworkers at the next Happy Hour event. If you’re worried that you won’t have enough money to pay the rest of your bills, worry not! Research shows that when people pay themselves first they are more likely to find ways to meet the rest of their expenses. You’ll be more motivated to find a side hustle, sell unused items, or trim the fat off your budget.

Millionaire Habits Summarized

The Millionaire Next Door is a great weekend read. I highly recommend picking up a copy to read in more detail about the habits of the average Millionaire. As counterintuitive as it is, many Millionaires don’t spend on lavish vacations, buy luxury items, or drive the newest sports car. The Average Millionaire understands the importance of Compound Interest. When you create a budget, live within your means, and save at least 20% of your income, you can become the next Millionaire Next Door.

 

 

Compound Interest Explained

Posted on by kaitlyntessmer

The other day I was taking a look at my retirement accounts and was shocked at what I had found. The amount of money I had in my retirement accounts was way more than what I had originally invested. This got me to thinking about the power of compound interest and why it is so important for Millennials. If you work hard to invest when you’re in your early 20s, the payback will be tenfold.

Simple Interest

To understand compound interest you must first understand simple interest. Let me give you an example of simple interest to help me explain.

Simple Interest

Let’s say you deposit $10,000 into a savings account. First of all, good for you! You’ve worked hard and saved $10,000, that’s a big step right there! If you chose a credit union or online bank, like Ally, you are probably earning 1% interest on that account each year. That means every year your $10,000 will earn 1% or $100. After 3 years your initial $10,000 investment has turned into $10,300. Pretty good, right? Let’s take a look at what would happen if you had invested that $10,000 into a mutual fund with compound interest.

Compound Interest

Compound interest is the interest an investor earns on her original investment plus all the interest earned on the interest that has accumulated over time. Woah! What does that even mean? You can think of compound interest as interest on interest. It creates a mathematical explosion.

Let’s say you take your same $10,000 investment and instead of parking it in a bank you decide it into a low performing mutual fund that earns 1% interest compounded annually. Side note: most mutual finds earn way more than 1%. In fact, you have to look really hard to find such a low performing mutual fund. I digress…You still earn 1% interest but that interest is compounded annually. How does that change your total at the end of 3 years?

Compound Interest

After the first year, you earn the same $100 which brings your total investment to $10,100 at the end of year one. The second year you don’t just earn 1% on your original $10,000 investment, instead, you earn 1% on your new $10,100 total. At the end of year two, your total is $10,201. The third year your total investment compounds again. Your $10,201 earns another 1% and your new total is $10,303.01.
I get it, in this basic example, the difference in money at the end of 3 years isn’t very much. With compound interest, you would have earned an extra $3.01. Not a huge deal. But what if we look at the effects of compound interest in terms of retirement?

How Compound Interest Affects Retirement

The longer your money has the opportunity to compound, the greater the effect will be. If you start contributing to your retirement at the age of 25 keep that money invested until the age of 65 you will be blown away at the results.

Simple vs Compound Interest

Simple Interest and Retirement

Let’s say on your 25th birthday your parents gift you $10,000. My, what generous parents you have! You decide to plop that $10,000 gift into an account that earns 10% interest. Unfortunately, you didn’t do your research and the interest isn’t compounded, womp womp. After 40 years you decide to take a look at that account to see the value of your investment. Your initial $10,000 investment has turned into $50,000. That’s a pretty nice birthday gift, mom and dad.

Compound Interest and Retirement

But what would happen if you invested that $10,000 gift into an account with compound interest? Good question, I’m glad you asked! Let’s take the $10,000 your parents gave you and invest it into an account with compound interest. Hold on tight, I promise you will be blown away by the results. Your original $10,000 investment at the age of 25 will have turned into $452,592.56 by the time you are 65.

That is the magic of compound interest, my friends. Even if you never invested another penny into your retirement account you will still retire with nearly half a million dollars. You did nothing except leave that money in a well-chosen account. You never touched the money for 40 years and it has rewarded you by growing exponentially.

The Importance of Investing Consistently

If you have a large pile of cash laying around or you have generous parents who are able to gift you large piles of money, the example above is perfect for you. You are fortunate enough to take your large sum of money, put it in a good investment account and watch it grow.

The rest of us need to invest consistently. If you invest $200 per month between the age of 25 and 65 you will retire a millionaire. You read that right. If you invest $200 per month over the course of 40 years, you will end up with $1.16 million dollars. 

Don’t Have Extra Money to Invest?

If you’re strapped for cash and don’t have an extra $200 per month lying around, let’s take a step back. In fact, let’s break down the numbers. $200 per month is $6.67 a day. How often do you go out to lunch? Do you stop by Starbucks every day? What about Happy Hour, how many days a week do you meet your friends for half priced drinks and appetizers? Somewhere in your budget, you can find a place to squeeze $6.67 a day into your retirement account.

If you’re looking for a way to invest $200 per month into your retirement account and just can’t find a way to make the numbers work, adjust your budget. I use a 7 category budget to help me stay on track. By using tools like Mint and EveryDollar, I am able to easily track my spending and keep it in check.