Becoming an Everyday Millionaire
My husband and I are on our way to becoming millionaires. Although it has always been one of my life’s goals, my husband couldn’t care less as long as he can play golf in retirement.
However, after reading Everyday Millionaires by Chris Hogan, I can confirm we are on the right path as long as we stick to our savings and retirement plans.
In fact, if we didn’t save another dime in our retirement accounts, paid off our house, and let our investments continue to earn interest, we’d be millionaires by our mid-fifties.
However, since we do intend to keep investing and saving for retirement, we will reach millionaire status earlier.
In his book, Chris Hogan shares several stories about hard-working people, who in most cases never made six figures, but still managed to become millionaires through homeownership and good retirement saving habits.
I am going to show you tips and tactics to get you to your first million faster. If you follow these suggested steps, you will become a millionaire with patience, discipline and focus.
Step 1: Know Your Net Worth
Before you can chart your path to your first million, you have to know how much you are worth today.
Doing the math to calculate your net worth is a critical step to knowing how much you need to earn and save to bridge the gap. Simply put, your net worth is all of your assets (what you own) minus all your liabilities (what you owe).
Net Worth = Assets – Liabilities
Examples of assets include the portion of your house that’s paid off, a car you own in full or valuable art or antiques passed down from generation to generation.
Liabilities, on the other hand, are credit card debt, student loans and other debt like the portion of your mortgage you still owe. If you currently have more debt than assets, your net worth is negative.
A negative net worth is not permanent. In fact, many students who have significant student loans start their careers with a negative net worth and move to positive by paying off debt and accumulating assets.
When you follow a plan to pay off credit card and other debt, you find yourself quickly going from a negative net worth to a positive one.
Personal Capital is a great way to track your net worth as you make progress on your wealth journey. It allows you to connect all of your accounts and monitor your spending while educating you on how to understand your assets and net worth.
If you really want to master your net worth, sign up for the Wealth Noir 10-Day Know Your Net Worth Challenge. In just ten days, we will work with you to understand what net worth really means, how to calculate it and introduce you to tools to grow your net worth over time.
Step 2: Follow A Budget
As Hogan confirms throughout his book, even when you have a million dollars, it’s still important to budget. In fact, it’s even more important so you keep the money you worked so hard for. Therefore, it’s best to master this skill before you reach the millionaire milestone.
The goal of budgeting is to give every dollar a purpose. Take all of your household’s income and assign it to a specific expense. You need to account for how much you spend on bills and how much you need to save.
If you are unclear how much money you need for your expenses, start your budget by tracking your spending for a month. Use that information to set limits for each expense in your budget. Each of your expenses should fall into one of three categories: fixed expenses, variable expenses and savings.
Fixed expenses are items that rarely change such as your mortgage payment, car insurance, cell phone and cable bill. Variable expenses are items that happen every month but vary in cost such as groceries, eating out and shopping. The savings category includes what you put aside for emergencies, your goals and retirement.
Your total budget should equal less than your monthly income. If it doesn’t, you need to cut some expenses or discretionary spending so you can live within your means.
A popular budget system is the 50/30/20 rule. Under this budget, your essential expenses do not exceed 50 percent of your income, you save 20 percent and spend 30 percent on fun stuff like entertainment, shopping and eating out. This budget allows you to live a little while saving for your future.
However, you could boost your savings even more if you saved 30 percent and used only 20 percent of your income for discretionary spending. That extra 10 percent could make a huge difference in achieving financial freedom in your forties versus your fifties.
There’s more than one way to set your budget. We’ve broken down several different budgeting systems in the past.
Step 3: Save for Retirement
If you have an employer-sponsored retirement plan and your employer offers matching funds, take it!
I recently reviewed my annual retirement statement for last year. One factor that really stuck out was that I have only personally contributed 50 percent of the money in my retirement savings. The other 50 percent is a combination of free money from my employer and gains in the market. Basically, I doubled my money!
Let me show you what this means with real numbers. If you make $75,000 a year and your job will match the 5% you save for retirement at 100%, that means you could get up to $3,750 in free money each year by contributing $3,750 of your annual salary.
The gains you earn on the money in your retirement account, thanks to the performance of the market, help multiply your money faster. If your employer offers free money, invest in your retirement plan to get every free penny. However, to get to millionaire status, you must save to the max.
In other words, to boost your savings and get to that first million faster, save the maximum you’re allowed in your retirement plan. For 2020, you can invest up to $19,500 into your employer-sponsored accounts. This figure does not include free matching funds from your employer.
At age 25, if you saved $19,500 a year, at 48 years old, you would have over one million dollars in your retirement account, assuming a seven percent return in the market. If you only lived off of four percent of your retirement savings each year, you would still have almost $105,000 to spend each year after hitting $1 million without working. That’s more money than you made when you first started saving.
The above calculation does not take into account the free money from your employer or any other investments such as stocks and bonds, or side hustle income you earn. If you want to be a millionaire before 48, diversify your investments to include income generators too. With the right return on your investments, you could retire early and live off the interest, dividends or passive income you created while working. Then start using the income from your retirement account in your late fifties or early sixties.
Step 4: Pay Off Your House
For most Americans, a significant part of their net worth comes from their home. When you buy a house, within your budget, the sooner you pay it off the sooner that money comes back to your budget to invest in other things.
The quicker you pay off your house the faster you can reallocate the money you used to pay down your mortgage to other income-generating assets like stocks, rental properties, or a business.
There are a couple of ways you can own your home sooner. One option is to have someone else contribute to or pay the mortgage. If you live in a duplex, you could live in one unit and rent out the other. Your tenant could pay most, if not all, of your mortgage.
Also, consider having a roommate for a few years and apply the rent to your mortgage payments. Either way, the tenant or roommate is paying your mortgage.
You could also use your money to make extra payments towards your home’s principal balance. The extra payments could have your house paid off in a fraction of the time.
Make Extra Payments
A second option is to make 13 mortgage payments a year instead of 12. The best way to do this is to pay half of your mortgage biweekly.
If you consistently paid half of your mortgage every two weeks, you would end up making 26 half-payments, or 13 full payments, per year. By paying biweekly, you save yourself interest as well as break your mortgage down into even more affordable payments, which could come out of biweekly paychecks. That extra 13th payment could be applied solely to the principal balance, also allowing you to pay down your mortgage years earlier.
I currently pay half of my mortgage biweekly and my mortgage company saves the 13th payment and applies it to the principal at the end of each year. However, not all mortgage companies will allow you to make biweekly payments. Sometimes they hold your payment until the other half is paid.
If your mortgage company does this, save the 13th payment on your own. You can break it down into 12 monthly installments and put that money aside each month in a separate account. At the end of the year, make an extra mortgage payment using the funds saved.
There are also third-party companies like Auto Pay Plus that will do the saving for you. However, they do charge a fee for their service that normally comes out of your 13th payment for the year. For me, making 12 mortgage payments plus one principal-only payment each year is shaving four years off my mortgage.
Shrink Your Loan
The third option is to get a 15-year mortgage instead of a 30-year mortgage. Most people don’t realize that a 15-year mortgage loan is sometimes only a couple of hundred dollars more a month. However, it saves you thousands in interest. See the difference in the interest paid on a $250,000 home.
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With a 15 year mortgage, you save almost $97,000. Plus, if you paid off your mortgage and started to invest that $1,849 every month, with a return of seven percent in the market, in 15 years your portfolio could grow to $557,563.
That’s more than you paid for your house and it’s half a million dollars! Use this investment calculator to find out how much you could earn if you paid off your mortgage.
Step 5: Reach Millionaire Status
Saving for retirement and paying off your home are great ways to build wealth. The keys are to push yourself to save the max each year and pay down your house debt as quickly as possible. In addition, be sure to check your retirement account contributions annually.
The IRS sometimes increases contribution limits and you want to make sure you increase what you save, too. Paying down your home requires discipline and under such a savings plan refinancing is not allowed. With a solid budget, retirement savings and a paid-in-full home, you can sit back and enjoy being a millionaire.
Are you on your way to millionaire status? What tips and tricks are you using to get there? Leave us a comment and share it with the community.