Want to be a millionaire? Live below your means, invest

How do people achieve financial security? Surprisingly, doing so is not primarily dependent on income level. Above a certain minimum income to meet basic needs, financial security is mainly an attitude or state of mind. It is an approach to personal finances that involves planning, and some sacrifice of immediate pleasure for long-term goals. Each of us would probably have a different definition of financial security. Almost none of us will have so much money that we would never have to worry about what we spent, or enough to insulate us from the possibility of becoming disabled or losing our positions. We will never have enough to protect our family from sickness or injury, or (if they occur) from the effects of war, famine, or the collapse of financial markets.

One reasonable way to define financial security would be as an absence of great concern about having enough income to meet your family’s needs, being wealthy enough to retire in comfort, and being able to protect your family in the event of your premature death. Such security is obtained through management and planning of your financial life. Achieving a good income is helpful, but not sufficient. Such security is rarely achieved. Today, there is instead a pervasive atmosphere of consumerism. We succumb to the highly persuasive marketing and peer pressures that increase our desires to have the latest and best products. The main characteristic of families that achieve wealth is their ability to resist the culture of consumerism. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.

Common Denominators
of the Wealthy

1. Live well below their means
2. Allocate their time, energy, and money productively
3. Chose the right occupation.
4. Believe that financial security is more important than displaying high social status.
5. Were not indulged economically by their parents
6. Can identify and take advantage of market opportunities.

A conscious decision

Very few people become wealthy or financially secure just by having sufficient income. It is rare to have enough income to be able to spend what you want and have enough left over to accumulate a stockpile sufficient to meet future needs. Yes, it is true that the higher your income, the more likely you will reach $1 million of net worth. Millionaires have accumulated their wealth by planning, making a conscious decision to live below their means, and investing their savings. Starting to save while relatively young maximises the likelihood of achieving wealth. The amount you accumulate for retirement is highly dependent on how early you start saving.

Let us compare two savers. The first invests $2,000 annually for 10 years beginning at age 25, and then invests nothing further. The second saver waits until age 35 to begin investing, and invests $2,000 annually to age 65. At age 65, assuming a 10% annual rate of return, the first saver would have accumulated $672,998 whereas the second saver would have amassed $400,276. The savings procrastinator never catches up with the early starter. Insurance is an important part of financial security. You must make sure that your family will not suffer financially if you or your spouse dies or becomes disabled. Adequate life and disability insurance, homeowners insurance, medical insurance, and wills are essential.

Are You Spending Wisely?

How much do we have to spend to meet our basic needs? How much money does it take to live comfortably? Obviously this depends on our requirements and attitudes. Our spending patterns are very complex behaviours that are a function of (1) our motives and values; (2) our relationships with our spouses, children, other family members, coworkers and neighbours; as well as (3) our susceptibility to marketing and sales techniques. We need to assess our personal habits. How much “stuff” do we really need? Is the stuff that we own making our lives better? Wouldn’t life actually be simpler if we owned less stuff? How much of our time is spent maintaining our possessions — purchasing them, caring for them, repairing them, cleaning them? We need also to consider the economic impact of our purchases: How much are we paying in interest on our mortgages, credit cards, and other debts? What is the opportunity lost by our spending? How much would the money have grown to if we had put it to work in investments instead of spending it?

Projected living expenses dramatically affect the capital required for funding retirement and your likelihood of amassing that capital. For example, let’s assume that you are 49 years old, earning $300,000 a year, and spending $200,000 (all of your after-tax income) on living expenses. If you would like to retire at age 65, you will need approximately $5,600,000 to continue your current lifestyle. However, if your annual living expenses were going to be $100,000 you would require only $2,600,00 for retirement. (Continued next week)