The Millionaire Mindset
I like writing about personal finance and investing. But what is the goal of all this?
The goal is to build your wealth. One of the ways we measure wealth is by becoming a millionaire. This sounds pretty good to me. So the goal of this article is to discuss how to become a millionaire. Let’s get started with a little background information.
Is it a big deal to be a millionaire? I think it is. And I want to put some facts behind it. I sourced the chart below from the website DQYDJ.
The chart tells us there are 14.8 million households in the United States that have achieved millionaire status. And if you have a million dollars, you have more money than 88.24% of all the households in the United States.
Let’s unpack this information regarding millionaire demographics.
United States Only
First, this is only data for the United States. There are certainly millionaires in other parts of the world. Rolling in the data from around the world, the wealth percentile would probably rise. Because the US is a developed country with more American millionaires in the population than other lesser developed countries.
Furthermore, the data represents households, not individuals. It is impossible to split up a household net worth by the individuals that live in that household.
“We are the 99%” was a popular political slogan. I do not hear about it as much anymore.
The phrase directly refers to the income and wealth inequality in the United States with a concentration of wealth among the top earning 1%. Source: Wikipedia
According to the chart, you would need to accumulate a little more than $10 million dollars to make it into the 1%.
Finally, some people define the 1% based on income. I’m a believer in the phrase, “it’s not what you make, it is what you have”. So I define the 1% based on net worth. Just like the chart shows.
What Is A Millionaire?
Then by that definition, a millionaire is a household with at least a $1 million net worth. Net worth is defined as the sum of the value of all assets minus any debts owed to others.
Some millionaires have most of their net worth tied up in their primary residence. Assets are assets from my perspective. Whether they be held in cash, bonds, stocks or real estate. The downside of having most of one’s million dollars in a primary residence is a lack of liquidity.
If you need cash in an emergency, it’s hard to sell your house. So some millionaires have more access to cash or liquid assets than others. This is what the phrase “asset rich, cash poor” refers to.
Do you think the average millionaire is living an extravagant lifestyle? Jetting around in a private plane and eating dinner out at fancy restaurants every night? I hate to burst your bubble, but they probably are not. If they were, they likely wouldn’t be a millionaire for very long.
As popularized in the classic book The Millionaire Next Door, the lifestyle is pretty mundane. It includes a comfortable home, modest automobiles, family vacations and the like. What millionaires have that others may not is a certain level of financial peace and security.
HOW TO BECOME A MILLIONAIRE
With that background out of the way, let’s get on with the key points on how to become a millionaire. Many of my findings come from a research project I did last year. You can find that series of articles right here: The New Millionaires.
#1 – START MAKING MONEY AT A YOUNG AGE
I may be a little old school on this point. It doesn’t seem like high school kids work side jobs much anymore. I’m not an expert, that’s just my opinion.
Working a side job in high school starts to build work ethic and responsibility at a young age. I’m probably an extreme case. At some point in high school I was delivering newspapers, doing landscape work and waiting tables. It was nice to have cash in my pocket and not be dependent on my parents for spending money.
#2 – INCREASE CAREER OR BUSINESS INCOME
Becoming a millionaire starts with making money. The best way, in my opinion, to make the most money is from your primary career or business.
Get a good education in a marketable field and maximize the earnings potential. Build your skills both on the job and through formal training. Bring value to your employer or business and demand to be compensated for it.
#3 – INCREASE SIDE INCOMES
I’m a little old school on this point too. I’m not a big believer in side hustles. I think they can distract from hunkering down and making the most of your primary hustle. There is that old expression “jack of all trades, master of none”. Let’s be realistic, you probably won’t become a millionaire because you are walking dogs or driving for Uber on the side.
But that is just my opinion. Some people do very well with one or more side hustles. Real estate rentals seem to be a popular choice. Doing consulting or project work on the side is a good way to go if you have skills that are in demand.
#4 – MILLIONAIRES MANAGE SPENDING & LIVE BELOW THEIR MEANS
Research shows that most millionaires prepare a spending plan and stick to it. This is commonly referred to as budgeting. If they don’t have a written budget, they have a solid understanding of where and what they spend their money on. Most importantly, millionaires spend less money than they make.
#5 – MILLIONAIRES HAVE A PLAN FOR EVERY EXTRA DOLLAR
So now income is on the rise. Expenses are less than income. That creates excess cash. Millionaires are adept at putting this excess cash to work in intelligent ways. Let’s talk about a few of those ways next.
#6 – MAXIMIZE SAVINGS IN TAX ADVANTAGED ACCOUNTS
The first stop for excess cash is usually tax advantaged accounts. You likely know about the ever popular 401k plan and Individual Retirement Account (IRA) in the US and their equivalents in other countries.
Whether it is the tax deduction or the tax deferred investment gains, these plans are popular choices for millionaires. The more money you make and have typically means higher income taxes. Millionaires know this so maximizing these contributions to the legal limit is a big priority.
#7 – MILLIONAIRES MINIMIZE DEBT
Most millionaires carry only two types of debt. Specifically mortgage debt on their primary residence and/or debt related to a business enterprise or other real estate holdings. Once in a while you might find a millionaire with some remaining student loan debt.
Millionaires prioritize debt reduction with their excess cash. They target credit card debt and auto loans first, then student loans. Some will pay off the mortgage on their primary residence. Others will keep their mortgage.
Personally, I am very debt averse. I recommend allocating excess cash to speed up mortgage reduction. I like taking the sure thing. And with the recent changes in US tax law; there is less incentive to carry a mortgage. Not everyone including Certified Financial Planners would agree with me on this. It’s really a personal preference.
#8 – MILLIONAIRES INVEST THE REST IN TAXABLE ACCOUNTS
Now debt has been minimized and contributions to tax advantaged plans have been maximized. Any excess cash gets invested in taxable savings and investment accounts. This is money allocated to savings accounts, certificates of deposit, stocks, bonds, mutual funds and ETFs.
Many millionaires like to handle these investment chores themselves. They are financially savvy and enjoy do it yourself investing. Other millionaires prefer to have an investment professional handle this chore.
Do it yourself investing is lower cost, but more time consuming and requires basic knowledge of investing principles.
#9 – A MILLIONAIRE AUTOMATES MONTHLY SAVINGS AND INVESTMENT
Because most millionaires set and operate against a budget they know how much extra cash they will have each month. This allows for automatic savings and investing taking over.
Savings deductions for tax advantaged accounts are automatically handled by the millionaire’s employer. And the remaining excess cash is swept to other taxable investment vehicles automatically.
No messing around here. Consistency is the key to success. Never miss of month of saving and investing. Do it automatically.
#10 – YOU WON’T BECOME MILLIONAIRE UNLESS YOU IMPROVE
We can boil millionaire habits down to a few key skills and habits
- Making money
- Spending less than what is made
- Personal finance
Through reading, learning and practicing these skills, millionaires learn as much as they can to make more, spend less and manage their money effectively. They have a continuous improvement mindset.
#11 – A MILLIONAIRE HAS A PLAN
Armed with the 10 points discussed above, millionaires develop a personal plan on what they will do in each area. The plan could be in writing or could just be a thoughtful process in the millionaires head. Written plans with action items are a good idea for accountability.
#12 – ENJOY THE JOURNEY
I doubt that a person’s life satisfaction changes the day they reach $1 million in net worth. So it’s important to enjoy the journey, the process and the learning and satisfaction of improving your financial security each and every day.
HOW TO BECOME A MILLIONAIRE RECAP
- Start making money at a young age
- Increase your career or business income
- Increase your side incomes
- Manage spending & live below your means
- Have a plan for every extra dollar
- Maximize savings in tax advantaged accounts
- Minimize debt
- Invest the rest in taxable accounts
- Automate monthly savings and investment
- Improve your knowledge and skills
- Develop a plan
- Enjoy the journey