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Anyone Can Do It!

 :: Posted by ifm89408 on 05-07-2011

This is the first subject post of this blog and for good reason as it really forms the basis of what I will be talking about from here on out.  I have never seen a definition of “Rich” (or for that matter “middle class” – ask your politician to define it next time they want to help the middle class) so I am going to give you one right here.

Rich is having all the necessities required to live a fruitful life.  You can define what that is for you.  Believe me, I am sure the requirements to meet that definition are very different for Mother Teresa than they are for Donald Trump.  My point is it’s a personal decision how you define “rich” and one persons wealth may be inconsequential to another.  It is important to understand that dollars are only a financial measure of wealth and while I will address some other aspects of wealth in my posts,  dollars are what I will be concentrating on.

All that said, what I am going to be looking at is making “Millionaires”.  It is still something few people ever reach even though it may not have the pizazz it had when I was a young man.  While I am writing this there are about 10 Million people worldwide who have achieved this level of net worth, about 1 in 700.  In the USA it is about 3 million or roughly 1 in 110 people.  So my feeling is if you can get to that level then you are at least on the correct path.

Required reading for anyone who desires to know exactly how to become a Millionaire is the book “The Millionaire Next Door”.  I am going to give you the “Cliff Notes” here:

1.  Stay Married.

2.  Start a Business.

3.  Be Thrifty (maintain a budget).

4.  Be Practical (no status items like big houses or cars).

5.  Take maximum advantage of investing opportunities such as tax deferred accounts.

6.  Income and wealth are very different things, a high income person often has a low net worth in relation to their income.

7.  While generally conservative, Millionaires invest and take risks they understand.

8.  Most take many years to accumulate wealth.

Of course NONE of these are absolutes, but the authors did extensive research and I can tell you from my experience that in general these are correct.  Now I am going to give you three descriptions of Millionaires that I have know over the years:

1.  Worked as a laborer for 35 years.  Maximized the company 401(k), lived modestly and saved the difference, choosing to buy stock with what was left over.  This person did all of the 8 except working for someone else.  That is OK, that gave solid opportunities to build deferred savings, earn a company retirement to augment those savings, while living thrifty allowed this person to make additional savings.  All of these savings were invested for returns in excess of bank returns (taking risk).  This person learned the stock market, did their own investing and understood those risks.

2.  Small business owner, married with several children (put all through college).  Wealth was split between tax deferred and taxable accounts and several houses that were paid for and rented.  Again, this individual took advantage of the opportunities to save tax deferred, lived a modest lifestyle, budgeted to allow for additional savings, and did their own investing (including the rental houses) learning on their own what they could about the stock markets.

3.   Family farmer, ran an additional business and sold the farm at the peak of the market to lock in generations of wealth.  This is out of the ordinary but this person continues to run a small business, lives modestly, remains married and does all the other things to maintain the level of wealth that was locked in from the sale of the family farm.

My point is that all of these three accomplished their level of wealth slowly over time and while they may not have complied with all of the predominant traits each did really fit many of the criteria.  I have seen enough of this in my lifetime to believe that anyone can get there given enough time.  That last qualifier is VERY important – TIME – is the key.  Notice all of my examples earned wealth over a long period of time and that is what the authors of “Millionaire” found in general.  This is why I am really aiming this blog to younger adults, this is the time in life to learn information like this so it’s application can have it’s largest impact.

All of this actually jelled with me when I was about 20 and looking at these new investment accounts called IRA’s.  It was real simple since there are no tax impacts until you take the money out.  I could just calculate how much an annual deposit of $2,000 would become (that was all that was allowed back then).  When I saw the numbers I was memorized, because this just seemed too easy.  So lets take a look at this so you can see the impact of time for yourself.  We are going to use a person who deposits $4,000/year ($333/month) which is currently a standard IRA deposit.  Those deposits will receive a very reasonable 6% annual return.  We will do this, planning on taking the money at age 70 (when you must start taking IRA distributions).  I am going to do this for a person who is 20, 30, 40, and 50 years old.  I will list how much was invested over the years and what it should be worth with the 6% return at age 70.  Hopefully you will see how urgent it is to start early and just how easy it will be:

Age                      Total Deposits                            Account Value at Age 70

20                         $200,000                                       $1,161,343

30                         $160,000                                         $619,047

40                         $120,000                                         $316,232

50                           $80,000                                         $147,142


I hope you see what turned me on as a young 20 year old.  The difference between starting right away and waiting for 10 years to start saving is essentially DOUBLE.   Yes, you only put away $40,000 of your dollars the first 10 years but it is the 50 years those dollars get to grow that makes the difference.

Putting it this way hopefully you can see why I believe anyone can get there.  You can give all kinds of excuses like:  “$1 Million 50 years from now will be nothing” – they said that over 30 years ago when I started and it is still significant (the only people that say that are too afraid to try or have given up).   Or “I cannot save that much” – I doubt that, it is just not important enough to you to put away $4,000/year.  If you are making $40,000 a year you should be able to save 10% if it is important to you.  Instead of using all your income to live, simply knock your standard of living down a notch and make the savings.  You can continue to make the excuses, and I can continue to tell you how to overcome each excuse.  The bottom line is that no matter what you say, all I hear is that it (becoming a millionaire) is just not as important to you as is the current consumption of your income.  Once you internalize the goal of becoming a Millionaire, or even take the additional step of calculating what “Rich” is to you, it is really only a matter of time, persistence, a bit of deferred gratification, and some hard work.