A million dollars is a nice round number on your path to financial independence. People tend to think in round numbers (think Dow 16,000) becoming a millionaire has a nice ring to it. J Money over at Budgets Are Sexy has a great club called the millionaire club where you make a pledge and put together a plan to reach a million dollars. There are many different ways you can take to reach that goal, here are six rules if you follow will make that path easier.
1. Understand the true opportunity cost of everything
For many college is an opportunity to improve their life, it’s not meant for everyone. It doesn’t make sense to have $80,000 in student loan debt for a job that pays you $35,000 or worse barely above minimum wage. Culinary and graphic design schools are the worst, they’ll cost you $60-80K so that you can come out and make $12 an hour. You’re better off putting your time in a kitchen and working your way up, it might take a few years longer but it’s a much better deal than in being that kind of debt.
Liberal Arts degrees that cost the same as Mechanical Engineering, which absolutely makes no sense. A few Liberal Arts Majors may make it but ask the majority of Starbucks Baristas how that’s working out for them in this economy. When I partied in college it was always with business and liberal arts majors, the engineers were always busy studying. Having crippling student loan debt means for the next 25 years you’re working for your student loans.
Student loans at 5% really costs you 15% annually, this is your true opportunity cost. (5% for the loan, and 10% which is the market return if you invested that student loan money instead. This is the time value of money and how you should always view your money.
2. Invest in yourself
Investing in yourself doesn’t always mean additional education, it could be upgrading your skills at work. Taking on new projects so that you have different perspectives. You can go to the gym and get in better shape which will improve your appearance and outlook. Work on your soft skills (listening productively, having an open mind, improving your critical thinking) For 80% of people your job is your biggest wealth building asset, by investing in yourself you can build that career to increase your earnings. It’s pure crap when someone says you can’t get rich from working for someone else, tell that to all the millionaire executives in my company. It’s the same person that’s telling you money can’t buy you happiness.
3. Start at 10, Save 20, Maintain 25 savings plan
From your first paycheck you should save 10% when starting out. Within 3-4 years you should save 20%, and maintain at least a 25% savings rate throughout your career. Even if you make $30,000 a year at a 25% savings rate you’ll hit a million dollars in 31 years.
4. Grow your income so taxes become your largest expense, but your lowest expenditure.
I don’t understand how people are excited they didn’t pay retail for items yet willing to pay retail on taxes. I take advantage of every tax write off afforded, when tax season rolls around I read various tax books to lower my liabilities. It’s boring shit, if someone gave you a book to read and you had to recite it back at a rate of $200 bucks an hour for 10 hours would you do it? That’s how much extra in tax savings I earn from reading about the tax law changes and planning for next year.
Some of my tax reduction strategies are maxing out all retirement accounts, using the mortgage interest from my house to fund my Roth IRA (future post on this), having my accountant in SF so I can travel there to do my taxes for my real estate business, getting solar panels and receiving $19,000 in credits, estate planning utilizing trusts to pass my assets tax free, and reaching out to agents and actively looking for rental properties wherever I go on vacation which makes part of the trip tax deductible.
Mitt Romney earns millions a year but pays only 14% because he earns income as investments, which has a lower tax rate than income earned as labor. (As it should be to reward risk taking and investments) This is your incentive to generate income from assets as opposed to working. Every dollar paid to the government is one less dollar working for you, so actively look to legally reduce your tax burden.
5. Invest in great assets at great prices
It’s difficult to spot bubbles and even harder to identify when assets are on sale. If you buy great companies at reasonable prices it doesn’t matter what the market does. I bought Netflix at $73 and watched it go down to $55, it didn’t matter because I believe in the business model and earning prospects. Great companies like Coke and Altria are on sale now, while Twitter and Facebook scares me.
Everyone hates emerging markets, you lost money over the past three years if you had any. Some analysts believe that emerging markets are at a generational low, do you see this as a buying opportunity?
6. Hold assets for the long term.
Building wealth takes time, there is no such thing as get rich quickly. As long as you don’t buy into a bubble you will always make money on great assets even if you buy at the wrong time. The housing market in some areas have surpassed its 2007 peak, even if you’re underwater for 10 years eventually inflation and rising rents will make it profitable. I survived two bear markets that have cost me hundreds of thousands yet earned it all back with interest.
Warren Buffett’s holding period for his stock purchases is forever, yours should be no different. Go over to J’s website, make the pledge, and follow these rules to become a millionaire. You can buy me a beer at the bar after.
What rules do you follow? What is your long term financial plan?