Debt Free

Just how do you become a millionaire, anyway? On this day after the Forbes list of the world's richest people came out, it seems appropriate to discuss just how you could become one of them. In the first place, being a mere millionaire these days is no indicator of great wealth, although it's still the term thrown about the most when people (those that aren't, anyway) discuss being rich.

In fact, I remember an interview that was done a few years ago about retirement savings in which a young girl expressed amazement when the interviewer asked about saving a million dollars for retirement. She was of the mistaken opinion that she'd never need to save even close to that amount to comfortably fund her retirement. Apparently she'd either forgotten about the effects of inflation, was independently wealthy, or was planning on marrying up. Maybe she just loved the whole mountain tent decor and would be comfortable living that way.

In any case for many that have aspirations of attaining wealth becoming a millionaire is merely the first step in the process. Given that first step or not, one must get there at some point in the process, just how do you become a millionaire?

Besides winning it, or being given your million dollars, there are two basic paths you can take toward millionaire status. You can work for someone else and invest a portion of your income, or you can work for yourself and invest a portion of your income. Either way has it's advantages and disadvantages. In addition, there are countless combinations you can use to reach you goals within these two very broad avenues. To become exceedingly (is that even possible??) wealthy, you'll have to either:

A) Start your own successful business, then plan and execute an exit strategy that would include taking the business public or selling it for a substantial amount of money.

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B) Work for a company in the early phases of its existence and be given a portion of the business that will be worth a substantial amount of money. This method worked well for many people in Sunnyvale, Redmond, Austin, Mountain View, and Cupertino. You can then invest the substantial windfall to become quite wealthy.

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C) Get one of the few extremely high paying jobs with a salary and bonus structure such that you have a substantial amount of money left over to invest. You must then invest at a rate of return that will result in your extreme wealth. Not only must you land such employment and make the appropriate investments, but if you take this route, you must live fairly frugally in the wealth generation phase. It is hard for many to resist the pull to plunk down their new found money on a 8,000 square foot golf course home, a Bentley, and trips to Monaco for the Grand Prix every year. In many of these types of jobs, your peers will live with the trappings of wealth, and it can be easy to emulate their behavior.

Of those younger billionaires on the Forbes billionaire list, 68% of those under 40 years old made their money starting with nothing, so take heart, it can be done. Getting the mindset to actually achieve that level of wealth may be almost as difficult as getting that rich itself.

What about just becoming a plain old, garden variety millionaire? Thankfully, that is much easier, and doesn't really require too much beyond some basic financial planning and discipline. You need to make some good decisions about the direction of your life along the way. If you take the work for someone else approach, rather than starting your own business, you'll need to plan and execute a career path that affords you enough income to invest for retirement such that you'll reach a million dollars in assets, not including the equity in your primary residence. This can be easily done, and in fact, according to the most recent Merrill Lynch wealth report there about 9.5 million such people in the world.

For example, say you play around a bit in college, change you major a time or two, and don't graduate until you're 25 years old. Upon graduation, you get a decent, but not very high paying job, earning $35,000 per year with good benefits. If you plan to get only a 3% annual raise (less than the cost of living), put away 10% of your salary toward retirement (assuming no company matching, so it's not too great of job), and earn an 8% rate of return on your investments, you could easily become a millionaire. In fact you'll retire at age 65 with a nest egg of about $1.2 million. On this you can live with 97% of your last year's salary of $110,000 per year until you die at 90, and leave a $1.3 million nest egg to your heirs. You could even retire at 63 and just manage to eat up your retirement savings by the time you reach 90.

The above calculations assume you'll get a big, fat Zero for Social Security, because face it, for anyone under 35 now that could easily be the case. It also assumes a 3.1% annual inflation rate. Just how nice would an employer matching contribution be in the above scenario? If you were a bit more ambitious and received on average a 5% annual raise, you would retire with a $1.56 million nest egg at 65, so you would be a millionaire times 1-1/2. It may not seem like much, just increasing your retirement nest egg by such an amount, but in fact it's extremely powerful. Such an increase would allow you spend $150,000 per year in retirement, instead of only $107,000. Even spending almost 50% more, your retirement savings would still continue to grow, such that when you took your last breath at 90, you'd be everyone's favorite uncle, because you'd leave your heirs a $5.2 million present.

What if you didn't want to wait until you were in your 60's to become a millionaire? The majority of people would rather get there when they were a bit younger so they could enjoy the fruits of the labor. You better count on earning some great money and having a solid investment plan. If you start at the same $35,000 level, contribute 12% to your retirement plan, and can increase your income 10% per year, you can amass a $1.3 million fortune at age 55. The effects of increasing your income 10% annually are intoxicating. By age 55, you'll be pulling down $555,000 per year.

Can't wait until age 55? You will probably have to start your own successful business, be an extremely astute investor, or substantially up your retirement percentage. There are some keys to becoming a millionaire, to wit:

Do the following to become a millionaire:

1. Spend less money than you make. Frugality is paramount, unless your income is in pretty rarefied strata.

2. Invest what you don't spend. The power of compounding is the single most powerful fiscal tool at your disposal. Compound interest will make you a millionaire if you give it time to work, which segues nicely into the next key to becoming a millionaire...

3. Start investing early. Even if you don't put away much, start contributing something as early as possible. Use the tips from your high school restaurant job. Even a small bit of money invested as a teenager will have grown to a substantial amount later in life, and how much do you really need $100 now anyway? If you earned and stashed away only $100 a month starting at age 15, got a robust 10% return on your investments, and did nothing else to contribute toward your retirement, you'd reach millionaire status at age 60! That's on a simple $100 a month, but you have to start early. If you moved that 5 years to age 20, you would still reach $1 million at age 65. Starting at 15 however would have you at $1.75 million by 65.

4. Stay as close to debt free as possible. Debt carries interest. Unfortunately, debt has the kind of interest you pay to others, not the interest others pay to you. With the exception of your mortgage and car payments, you should strive to carry as little consumer debt as possible.(Debt Free, remember?) Paying interest on depreciating assets (basically all consumer goods are depreciating assets) carries with it a double whammy. You are essentially paying twice; the depreciation and the interest. You may also use debt to finance your education. Remember the value of your education is not only the higher paying career you'll likely receive, it's the relationships and the social network you build while in college. Your friends will go on to become captains of industry, politicians, judges, investors, statesmen(women), and journalists. Don't lose touch.

5. Buy a home. That is not always the smartest move in every market, but statistics don't lie. On the average nationwide, homeowners have a much high net worth than do renters. It's not even close. The average homeowner with an income in the range of $50,000 to $79,999 has a net worth of $195,000, while renters with the same income average only about $25K. In the income range of $30 to $50K, the homeowner has an even greater advantage percentage wise. Their net worth is 12 times higher; $126,000 to only $10,000. These stats courtesy of the Federal Reserve Board.
   

Don't do the following to become a millionaire:

1. Gamble

2. Spend more than you make

3. Amass large amounts of consumer debt

4. Skip college – There are a tremendous number of very successful people who never even attended college, much less graduated. You can have a great, and very profitable career in sales, own your own business, or a number of other avenues. The statistics are however, that college graduates earn far more than those who don't have a degree. Don't forget the networking aspects, as noted above.

5. Smoke – Not only will the health issues cost you money, time with family, and make you miss work, cigarettes are very expensive. If your smokes are $6 a pack, and you smoke 2 packs a day you spend $12 a day, 7 days a week. You opportunity cost by not investing the $360 a month is staggering. If you start smoking at 17, and die when you're 67 you lost plenty. That same $360 a month, invested at only 8%, would be worth $2.9 million! So, instead of watching that new BMW drive by while you're hanging outside the office on your smoke break, put it out and invest the money. That 535 could have been yours!