Three Tips from a Millionaire’s Financial Advisor
Everyone wants to know the secret: What does it take to become a millionaire? The good news is, it’s not rocket science. But the truth is, most people don’t have the discipline to follow a few simple rules consistently.
Having worked with many successful high net-worth clients in my career, I can tell you that financial success and the path to becoming a millionaire lies in just three simple steps:
- Always live below your means.
- Save and invest consistently.
- Avoid emotional money mistakes.
This may sound simple enough, but in our culture, this means doing the opposite of what most people do. You need to spend very carefully. You need to avoid the trap of immediate gratification when it comes to money. And you need to maintain your discipline.
While it’s not difficult, as a financial advisor, I see people struggling with this all the time. Temptations are everywhere, and people seem to spend on auto-pilot, not considering that each daily decision they make around money puts them farther away from their financial goals, not closer.
This is where financial planning and coaching can make a difference. Most of us make better decisions when we have a plan and a clear roadmap. And it can be especially helpful when we have a professional coach on our side to keep us accountable to our own goals.
I share these same tips with my clients. When you adapt these principals, they have a significant impact on your future – and get you closer to being a millionaire. But the key is to start today. The earlier you start, the sooner you can benefit.
So, let’s break these tips down one-by-one:
1. Living Below Your Means
The secret to creating wealth is actually quite simple: We need to spend less than we earn. This can be difficult when we live in a consumer-driven economy. Advertising is everywhere; it is hard to escape. Most of our social lives are centered on activities that cost money: Going shopping, dining out and meeting for happy hour.
With that said, it’s important to practice some financial self-defense. Choosing to spend less is a whole lot easier than depriving ourselves and “cutting back.”
Practice mindful spending. For example, let’s say you see something you’d like to buy – maybe a new pair of shoes, a jacket or a gadget. Next time this happens, try these steps:
- When you feel the urge to buy something, pause.
- Stop what you are doing and take a couple deep breaths.
- Without judging it as good or bad, ask yourself why you want this particular thing. Is it really about that “thing” or have you been working hard and feel you deserve a reward? Think about it.
- Ask yourself if buying this item will really make you feel better overall or if it will just make you feel good for a short time. Also consider if you really need it. If you don’t, don’t buy it.
Very often, you’ll find that by following these steps, you’ll automatically choose not to spend, not deprive yourself from something. If you still want the item in a few days, reconsider buying it. But usually, you’ll have forgotten about it.
This fact might also help: Do you realize that corporations spend more than $180 billion per year to make us think we really need a lot of stuff? Don’t fall for these tactics. Every time you feel the urge to buy something new, think about what you want more: That particular “thing” or financial security and peace of mind. This simple technique can snap you out of the allure of advertising and back to reality, fast.
2. Save and Invest Consistently
Investing in your future is a huge endeavor. Fortunately, we get help along the way from special tax-advantaged retirement accounts. These accounts help us minimize or defer income taxes on money we save for retirement. This way we can “turbo-charge” our savings. But in order to benefit from these accounts, we should strive to contribute the maximum each year.
Of course, that always sounds easier than it actually is. But there is one easy way to increase your tax-advantaged savings: Anytime you get a raise or bonus, increase your automatic contribution accordingly. You’ll never even notice. And by putting the money away sooner than later, you’ll take advantage of time.
Remember, when you’re young, you want to embrace the concept of “compound interest” – when you lend money, you get paid interest; when you buy stocks, you get paid dividends, which work a lot like interest. Interest can be “simple” or “compound,” depending on what you do with it.
If you spend the interest or dividends you get, you get simple interest. Your money grows, but it grows slowly. With compound interest, you don’t spend the earnings. Instead, you reinvest it all. This way, you make interest on your interest as well as your original investment!
Albert Einstein said it best: “Compound interest is the eighth wonder of the world.”
Compounding allows you to take a little bit of money, and when invested, turn it into a whole lot of money down the road. In essence, it does the “heavy lifting” for you – as long as you start now and not later.
When you combine compound interest with an investment that historically has returned the highest amount over time (stocks), you have a formula for a great future. But again, the key is you have to start now. Putting it off causes you to lose valuable time. It’s not as much about the amount you put away as the fact that you start now and contribute regularly.
A lot of people think they need to contribute large amounts every month and so they hold off on investing until they can make those big deposits. But that’s a big mistake! If you invest about $3 per day, think about what you will have at age 65 (assuming 8 percent annual average returns).
And how hard is it to save $3 per day?
- Order a plain small coffee instead of a giant latte.
- Bring soft drinks and snacks from home instead of buying them on the run.
- Bring your lunch to work a few days per week.
- Skip dessert at dinner.
Your retirement account is the first place to make these small contributions, because you get the additional tax benefits.
If you’re already contributing to your retirement account, don’t stop there! While that is a good start, your contributions are limited. If you haven’t started an investment portfolio outside of your retirement plan, it’s time to do that. The earlier you start, the more time you can take advantage of to help you build wealth.
“Investment portfolio” and “the stock market” tend to scare some people, but historically, stocks have out-performed other investments over the long term. The key words here are the long term. Over shorter periods of time, stocks can lose value. But even with all the crazy ups and downs of the stock market, per Wharton professor Jeremy Siegel in his book “Stocks for the Long Run,” stocks have returned an average of 6.5 to 7 percent per year after inflation in the last 200 years.
While there are no guarantees, that’s a pretty compelling long-term track record.
3. Avoid Emotional Money Mistakes
Investing can seem very easy, even effortless, during bull markets. Whatever you buy, everything just goes up. It’s a joy to check your account balances! But the problem is, the stock market is cyclical. Just as winter follows summer and fall, an up market will be followed by a period of falling stock prices.
Most people don’t know what to do when stocks go through their normal bear markets, which is the term for times of falling stock prices. But this is actually by far the best time to buy and invest more. A lot of people stop investing at these times and even take money out, which is extremely damaging to their retirement savings.
Unfortunately, all of us as humans are biologically wired to be lousy investors – we can’t help it! We naturally feel safest buying after things have gone up, and feel like selling only after the investments drop. But in reality, by following our natural instincts, we are actually buying and selling at exactly the wrong times.
Investing can be psychologically demanding since we literally need to fight human nature. That is the benefit of getting professional help with your investments. You get an expert who understands these behavioral tendencies and helps you make better decisions. With an advisor’s help, you can avoid taking on too much risk and buying or selling at the wrong times.
You can do it yourself, but it is vital that you commit the necessary time to education. Since your future quality of life is riding on it, you want to be sure you’re doing it right.
Putting It All Together
Honestly, these three simple steps are all about changing your mindset; those who have built sustainable wealth look at money differently. They want every dollar they have to work as hard as possible for them.
Sadly, most people don’t follow these guidelines and instead spend on auto-pilot. That’s why so many people continually struggle with debt and end up not having the freedom to travel, change careers or retire fully or even part-time later in life.
If you already have a financial advisor, be sure to walk through the financial planning process to make sure you are on track for the future you want. If you don’t, consider talking with a firm that has expertise in helping busy people set themselves up to become millionaires faster.
ARQ Wealth Advisors is one of these firms. A new kind of wealth management firm, ARQ Wealth Advisors is dedicated to helping busy professionals and entrepreneurs, as well as young people who want to start investing now. If you’d like to learn more, contact us and schedule a free, no-strings-attached review of your current financial situation.