Why is it that some people become millionaires and others don’t? Is it because they’re the beneficiaries of wealth handed down from older family members who were rich? Surprisingly, no! Surprisingly, a lot of today’s millionaires are self-made and came from humble beginnings not much different than you and me.
Thanks to more economic opportunities than ever, it’s entirely possible for people to change their financial standing if they’ve got the will and discipline to do so. This isn’t so much a matter of how much a person earns as it is about practicing the right financial habits.
Here’s what millionaires do differently from the rest of us, and how you can borrow some of their strategies to grow your own net worth.
1) Get a Financial Education
Rarely does anyone ever acquire wealth by accident. Usually, those who do (such as lottery winners) are quick to lose it due to bad advice and poor money management.
People who are millionaires generally get to that level by having a true passion for understanding the way money works. This can be through a curiosity about a wide spectrum of financial topics such as:
- Which investments are the best (and safest)
- Why bad debt should be avoided
- How the economy plays a role in the outcome of their portfolio
They don’t necessarily have to know every detail about money and have the answers to every question (… there are financial professionals for that). However, at a minimum, they do make an effort to build their knowledge base about money so that it can serve as the foundation for better decision-making.
Anyone who wants to self-educate themselves on money can choose from a wide variety of free resources:
- Educational videos on YouTube
- Blog posts
Don’t feel the pressure to learn too much too soon. Just pick one topic per week using a media of your choice and open yourself up to learning something new each time.
2) Practice Frugality
No one gets rich by frivolously spending the money they’ve made over the years. Despite what you may see on TV or social media, true millionaires are some of the most frugal people you’ll ever meet. According to the well-known book “The Millionaire Next Door” by the late Dr. Thomas Stanley, most millionaires are accustomed to:
- Wearing non-designer clothes
- Driving used vehicles
- Living in smaller homes
- Taking fewer and less luxurious vacations
If you’d like to trim the fat from your budget, then a budgeting app like Buxfer can help you to do this. Buxfer connects to over 20,000 different banks and credit cards, and imports all of your transactions into one convenience report. This allows you to always have a real-time snapshot of the big picture so that you can make adjustments as needed.
3) Save a Large Portion of Your Income
Whereas the grand majority of financial experts will suggest saving somewhere between 10 to 15 percent of your income, a millionaire will likely have a different piece of advice: Save as much as you can!
It’s not uncommon for many people with wealth to say claim got that way by saving 20, 30, or 50 percent of their annual earnings. In fact, lots of people in the FIRE (financially independent, retired early) community, many of whom became millionaires at an early age, achieved this by saving up as much as 75 percent of their income.
No matter how much you’re currently setting aside, always be challenging yourself to do more. Every year, try to squeeze an extra one percent or try diverting your raise towards your savings goals. Again, the more you keep your expenses down, the more surplus in your budget you’ll free up to put into savings.
4) Invest with Simplicity
Despite what many people believe, investing is not as complicated as it seems. Rather than analyzing dozens of companies and attempting to pick a portfolio of winning stocks, lots of investors are having success putting their money into simple index funds that invest across a range of stocks and bonds. This allows them to easily capture the average returns of the entire market while also maintaining some diversity of assets.
Nearly all investment services offer some form of index funds. Compare the expense and performance of these funds against your current holdings, and you might be surprised at much this area of your finances could be simplified.
5) Mind Your Taxes
Aside from unnecessary expenses, nothing erodes your net worth faster than taxes. Taxes can easily subtract thousands of dollars from your bottom line each year if you’re not careful. For this reason, millionaires spend a lot of time educating themselves on strategies for better tax efficiency and implementing them into the way they manage their finances.
A great example of this is investing through a tax-deferred retirement plan like a 401(k) rather than a regular taxable brokerage account. Contributing to a 401(k) will not only reduce your taxable income for the current tax year, but it will also allow your savings to grow tax-deferred for decades to come.
At the same time, they may also contribute to a Roth IRA. A Roth is the opposite of a 401(k) where taxes are paid now, and withdrawals are tax-free in the future. Developing a tax strategy both now and for the future will help ensure that less of your money goes to the IRS and more stays in your bank account.
6) Develop Multiple Streams of Income
Having a good job and doing it well is certainly admirable. However, it’s not the only way to earn money, and millionaires know this secret well. Many of them will make efforts to own income-producing assets such as:
- Rental properties
- Dividend-paying stocks
- Business interests
Even if you don’t have any extra money to invest, you can still diversify your income streams by taking up a side hustle. By doing things such as freelancing, selling products online, or renting out your vehicle, you could be making money on the side that you may use to acquire your own income-producing assets.
7) Ignore What Everyone Else Does
Many of the points we’ve covered seem out of the ordinary for some people or like you’re going against the grain. But ask yourself: Are most people millionaires? No, of course not! So why would you want to do what everyone else is doing anyways?
People who truly want to build long-term, sustainable wealth know that this is a lonely road. Your friends and family probably won’t understand why you’re doing what you’re doing. But don’t give up hope. The longer you stick with your plan and see consistent growth over time, the sooner you’ll know that you’ll become part of the millionaire club.
Featured image credit: Unsplash