What it takes to become a millionaire is quite simple, but sadly, it is not easy to achieve. While there are millions of millionaires in the USA, there are also millions more living paycheck to paycheck. Keep reading as this financial planner shares eight common mistakes that will keep you from achieving financial freedom or becoming a millionaire.
REASON #1: You Aren’t Investing
Without the growth to your net worth from the magic of compound interest, it will be hard for the average American to save enough to come anywhere close to becoming a millionaire. While the perceived safety of stashing all of your life savings in a bank may be appealing, most people will need to do at least some investing to reach financial freedom and achieve millionaire status.
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Examples Of How To Become A Millionaire
CASE STUDY 1*: Let’s say you wanted to accumulate $1 million by the time you reach age 70.
· Option 1: Start at age 22 and earn 1% (after any taxes and fees). You would need to save $1,354 per month to become a millionaire. That monthly amount will be challenging for most people, especially with an entry-level job.
· Option 2: With the help of compounding interest, if you could earn 10% (after taxes and fees), you would need to invest just $71 per month. That is less than $2.50 per day. You could probably still keep your daily Starbucks
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This is a simple example of the magic of compounding interest. You end up with the same net worth at age 70, but you can get away with saving a whopping 95% less! If you wanted to become a multi-millionaire, invested $1,354 monthly from age 22 to 70, and earned 10%, you would have accumulated over $19 million.
REASON #2: You Don’t Save Enough
Even if you start early, and have the perfect investment portfolio, if you don’t save enough, the account won’t make you a millionaire. After all, it is not what you make but what you keep. We all probably know someone with a sky-high income who always seems to be living paycheck to paycheck.
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The saying is true; a penny saved is worth more than a penny earned. For high-income earning folks here in California, that tax savings could be as high as 50.3 cents for every dollar saved.
CASE STUDY 2*: You are 40 and want to become a millionaire by 70.
· If you earned 1% net of fees and taxes, you would need to save $2383 monthly to become a millionaire. That is $28,596 per year.
· Assuming a 10% net return, you would only need to save $442 monthly to become a millionaire. This is probably less than most of your car payments.
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GET STARTED NOW! No matter your age, the sooner you start, the better off you will be.
REASON #3: You Are Spending Too Much Money
Somehow spending beyond your means has become part of the American dream. Many people use credit cards and other types of debt to fund their lifestyles. Others are just living lifestyles that keep them from ever building a meaningful net worth. Who wants to have to work forever? Pay yourself first and start your trek towards becoming a millionaire.
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REASON #4: Wasting Money On The High Cost Of Debt
Interest rates have jumped recently, making almost all new debt more expensive. Some of you are likely being crushed under the high cost of your debts, from student loans, car payments, mortgages, and cards.
While some debt, like a reasonable mortgage or arguably student loans, can help you build wealth over time. The high interest of consumer debt is a huge hurdle, making it harder or impossible for you to achieve financial freedom.
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REASON #5: You Ignore Small Expenses
Ten bucks here and twenty bucks there may not seem like a big deal, but they can add up, especially for those with credit card debt. Check your autopayments, and if you have subscriptions you aren’t using, cancel them.
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REASON #6: Unhealthy Choices Are Bad For Your Finances
A US Trust study found that 98% of millionaires consider good health their most important personal asset. While money can help you lead a healthier lifestyle, no amount of money can buy back your good health.
Take the time and spend the money to ensure you get all the necessary screening and physical exams that your doctors recommend. If you don’t have a primary care physician, get one. Look to exercise (more) and increase the health value of the food you consume. I am aware that nutritious food will cost more than junk food, but this is the one area I almost always advocate for people to spend more.
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REASON #7: Budgeting Sucks
Budgeting sucks: I get it; this stuff isn’t always fun. I try to operate with a spending plan.
First, take account of your major expenses that easily fit within your income. Secondly, your spending plan will pave the way for bigger splurge purchases – like a bucket list vacation, a new car, etc.
If you do not have a spending plan, you will most likely keep spending whatever is in your bank account on any given day. This likely means you never have the money necessary when the big-ticket bill comes due. Alternatively, even worse, you will run up sky-high credit card bills that you can’t fully pay off each month.
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Without a spending plan, you will probably keep paying out whatever is in your bank account and never have money when big ticket items (or college tuition for your kids, for that matter) jump onto your wish list. Or worse, these will end up on your credit card, accumulating disastrous amounts of interest.
REASON #8: Ignoring Tax Planning
As I mentioned earlier in this post, it’s not what you make but what you keep. Many people love to get big tax refunds; it’s like free money, right? No! The reality is if you get a big tax refund, you have just given the government an interest-free loan. All this while you suffer the consequences of paying sky-high credit card interest for the privilege.
For those lucky enough to get a substantial tax refund each year, consider adjusting the amount of taxes you have withheld from your paychecks. This could help free up cash to pay down your credit cards faster. Even better, this could be the money you invest each month to get on track to become a millionaire.
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Proactive tax planning is an essential part of becoming a millionaire. Lowering your yearly taxes frees up more money to be invested toward building your net worth.
You don’t have to do this all alone. Work with a fiduciary financial planner to get your financial house in order. From there, it will be easy to develop a financial roadmap to get you on track for financial freedom and to become a millionaire someday.
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