How to Become a Millionaire
You become a millionaire when the total value of your assets minus the total amount of your debts is equal to or more than one million dollars.
What is the simplest way of becoming a millionaire?
According to David Bach, author of The Automatic Millionaire, the simplest way is to automate your finances!
As clinical psychologists, we agree with this philosophy. Automating means less energy your brain needs to weigh out options that may be influenced by situations or emotions.
As mentioned in an earlier post on decision overload, too many decisions are not good for us. The more decisions we have to make, the more mentally tired we become. This decision fatigue causes stress and leads us to make reckless decisions.
Pay Yourself First
David Bach and Robert Kiyosaki are all about “paying yourself first.” In Rich Dad Poor Dad, Kiyosaki states that rich people save their money and spend what is left, while poor people spend their money and save what is left. By paying yourself first, you force yourself to save and then use your energy and attention to decide how you want to spend the rest of what is available.
It may seem simple but even basic decisions such as deciding how much you want to save each month can produce a lot of anxiety. Most of us tend to avoid the things that make us anxious or uncomfortable. Therefore, automating is a process that eliminates the ability to have your emotions influence your decisions.
If you have not already done so, we recommend reading Rich Dad Poor Dad and The Automatic Millionaire. Both books are very influential, they have allowed us to shift our mindset and behavior into wealth-achieving actions. If your goal is to achieve wealth and become financially independent, these two books are a must read!
Rich Dad Poor Dad will allow you to understand the difference between assets and liabilities and how this difference is important to achieving wealth. It will also allow you to understand the differences between how the rich and the poor think and behave in a way that will influence you to become aware of your own beliefs and behavior.
Your retirement savings should be an amount that is automatically withdrawn from your paycheck into an investment account. Ideally, these retirement savings should consist of a 401k and a Roth IRA. The reason to have both is because contributions into a 401k are pre-tax, meaning you only pay taxes later in retirement. The downfall of this is that over time income increases and the amount we get taxed on depends on which income bracket we fall in.
The higher the income, the more taxes we pay. On the other hand, a Roth IRA is post-tax which means we pay taxes on the amounts we contribute now. Having both means paying less taxes during retirement. There are, however, contribution limits to a Roth IRA. A single individual (or married filing separately) is not eligible to contribute if their annual gross income is more than $116,000 or more than $184,000 gross income for those married and filing jointly.
Contribution amounts are also a lot smaller than a 401k, currently they are $5,500 for those under 50, and $6,500 for those over 50. Unlike a 401k, IRA’s are also not tax-deductible since you already paid taxes on those contributions.
After retirement savings, personal savings such as for an emergency fund or future expense should also be automatically deposited. This will force you to save a set amount every time you get paid and spend only what is left over after all expenses are paid off. By paying bills and expenses first and then saving what is left you are much less likely to keep putting it off and saving less consistently.
According to David Bach, the rich save 15-20% of their gross income, the upper middle class 10-15%, the middle class 5-10%, the poor keep putting it off and spending everything they make while the dead poor spend more than they make and borrow money they can’t afford to pay off.
Many people feel they don’t have or make enough money to invest but don’t realize that by saving money on the things they are already spending money on such as on coffee, restaurants, subscriptions, manicures, etc, they can build huge amount of wealth over time.
Have you ever heard of the “latte factor?” David Bach coined this term to explain how investing small amounts of money on things we are already spending money on, such as coffee, can lead to large amounts of wealth over time due to the power of compounding interest. You can calculate these expenses on David’s site.
Another great tool for small change investing is Acorns, which allows you to gain wealth by investing small amounts of change from your purchases.
Do not wait, automate!
Despite how well intentioned people are, most are not disciplined enough to stick to their budgeting and savings plans. This is why automating is so important to achieving wealth! Throughout the day our brains make constant decisions, many of these decisions are influenced by our emotions and our emotions tend to fluctuate depending on the current situation or current thoughts we are having. An automatic process removes the possibility of making poor financial decisions and increases the likelihood of developing wealth faster.
In an earlier post we discussed why most people delay saving for retirement. The main reasons for this are not having a clear and specific goal, prioritizing other more immediate financial goals, not understanding the power of compound interest, and being optimistic about how much money they will be able to save in the future.
Automating retirement and savings goals will eliminate these roadblocks. If your goal is to become a millionaire, do not delay, start today! The longer you wait, the more likely you are to keep putting it off.