millionaire

Who Wants to Be a Millionaire? You Shouldn’t

January 29, 2016 By Alexa Mason 2 Comments

A lot of people claim that they would love to be a millionaire. After all, when the economy is shaky and your bank account is looking low, who wouldn’t like a little more financial security? However, becoming a millionaire might not be all you imagine, especially when it comes to your finances. Here are a few reasons you might want to reconsider becoming a millionaire:

Life is not about the money
It’s an arbitrary number
It fails to take into account other life goals
It won’t make you happy
It gives you the wrong focus
It’s a lifestyle trap

Taxes

Becoming a millionaire means that you’re in a different tax bracket, which means that you’ll end up paying more money in taxes. A lot of people don’t factor in the tax amount when they think about becoming a millionaire. Additionally, while the federal government has set tax brackets, the tax brackets for your specific state vary. Recently, many states have been raising the tack brackets for people who earn more than $1 million in a given year.

More Time Without Money

Having more money means spending more money on your finances. You’ll no longer be able to just your bills and balance your checkbook. With millions in the bank, you’ll have to spend more time budgeting your money, figuring out where to save or invest it, or learning how to manage it. With more money comes more responsibility.

Money Management

While having more money means spending more time managing it, it also means that there’s more maintenance required. While most people maintain their bank accounts by balancing their checkbook or depositing into their savings account, becoming a millionaire means having to do a lot more than that. If you don’t have a lot of knowledge about financial management, you’ll have to work with someone to better understand how to manage your money. Your yearly taxes will be more involved than before and you may have to consider how to invest, save, or donate your money.

Overspending

A lot of people who suddenly come into large amounts of money go out and start buying all the items they once coveted. However, doing so can often lead to overspending and before you know it, you’re no longer a millionaire. How many celebrities have you seen who go from having it all to having nothing because they have poor money management skills or buy too many luxury items? It’s easy to want to spend money when you have it, but letting money burn a hole in your pocket can lead you to financial ruin.

Moochers

If you read any story of someone who won the lottery, started a successful company, or hit millions for one reason or another you’ll almost always hear about how they’re inundated with long lost relatives or friends. Even close friends and family might start hitting you up for money, assuming that since you have millions in the bank you can “loan” some to them without any worries. While it may be nice to have that money in the bank, becoming a millionaire also means that you run the risk of being taken advantage of or people only wanting to associate with you because you suddenly have money.

Stress of Having Too Much Money

While living paycheck to paycheck or having no income is definitely more stressful than having millions in the bank, being a millionaire can also be very stressful. Not only do you have to manage your money more carefully, but you also have to figure out if you want to invest it in stocks or assets, whether you want to donate to receive tax write-offs, or how and where you want to save it.

Millionaire Status

People can become millionaires in a lot of different ways, but no matter how you come into the money you always have to figure out how to keep it. For instance, if you earned your money through a company you have to ensure that the company maintains its profits so you don’t lose that income. If you became a millionaire through winning the lottery or a similar means, you have to worry about not spending all of that money and saving some for your future.

Photo: Flickr: Pictures of Money

10 Reasons You’re Not A Millionaire

June 14, 2013 By Jeffrey Strain 28 Comments

There seems to be an impression that the only reason that people aren’t able to become millionaires is because they don’t work hard enough. The truth is that hard work has very little to do with becoming a millionaire. That’s not to say that you don’t have to work hard. You do. But you also need to avoid the many pitfalls and bad financial decisions which end up being the real cause that most people aren’t able to build wealth. The truth is that you don’t have to have a huge salary to gain assets in excess of a million dollars, but you do have to make good financial decisions (and avoid making bad ones).

It’s important to note that a single issue is likely not what’s keeping you from millionaire status, but a combination of several of the actions and decisions you’ve made. And, yes, there are exceptions to the rules, but then there are also people who win the lottery — and would you really bet your retirement on winning the lottery? Here are 10 reason that could very well be a contributing cause of why you’re not currently a millionaire:

You Spend More Than You Make

There are no secrets, and there certainly is nothing magical, when it comes to the basics of personal finance. In order to keep your finances in order, you need to spend less than you earn. If you fail to do this one simple thing, it doesn’t matter how much money you make, you’ll always find that you don’t have enough money to make ends meet. It also goes a step further than this. Spending less than you earn is not enough it itself to build wealth. You have to also actively save and invest a portion of all the money that you make. Most people recommend this amount to be 20% of your income. If you aren’t putting aside 20% of every paycheck you receive and placing it into long-term savings and investments, chances are you aren’t going to become a millionaire.

You Try To Meet Other’s Expectations

There is nothing which will keep you from reaching your financial goals faster than trying to live up to other people’s expectations instead of your own. This is more commonly known as trying to “keep up with the Joneses.” The simple fact is that if you’re trying to live like a millionaire before you have the resources of an actual millionaire, it’s not likely that you’re ever going to become a millionaire. Instead, you will simply be building up a lot of debt and wasting money on things to impress people who probably won’t be impressed anyway. Trying to keep up with the Joneses when your salary can’t compete with the Joneses is a sure way to sabotage the chance of building wealth.

You Don’t Pay Yourself First

One of the most fundamental steps that you can take to ensure that you put away money for yourself is to pay yourself before you pay anybody else. If your goal is to save 20% of your income, you need pay yourself that 20% from your paycheck before you pay any other bills or expenses that you may have. If you try to pay yourself after you pay all your other expenses, you’ll inevitably fall short at the end of the month from time to time (if not always), and fail to save as much as you had hoped. By paying yourself first, you make the commitment that wealth creation is an important part of your overall plan, and not something that hopefully gets accomplished after everything else.

You Have Kids

This probably isn’t going to be the most popular item on the list of why you’re not a millionaire, but the hard, cold truth is that children are expensive. Very expensive. The costs associated with kids can be mitigated to some degree if you have already built some wealth and have planned the cost of having children into your budget, but that often isn’t the case for many couples. Having children when you are young with a limited income will greatly affect your ability to build wealth. With compound interest being so important to wealth creation, and a cornerstone of it being that the sooner you begin saving and investing, the better, the fact is that it’s nearly impossible to put money aside when you’re young with children. When this is the case, all the extra money you have inevitably ends up going toward the children’s care instead of being invested for wealth creation.

Your House Is Too Big

Some people assume that purchasing a big house is a good investment. While this can be the case, purchasing more house than you can afford is a good way to make sure that you’re unable to create real wealth. The problem is that when you buy big, your expenses for the house are also bigger. A large house will mean bigger tax payments, more expensive upkeep, more stuff purchased to fill the house, higher insurance payments and all around more expenses than if you purchased a house that actually fits your needs. The real way to build wealth is to purchase a house that fits your needs and budget, and take all the savings that you gain from not buying the large house to invest and create wealth.

You Replace Things Too Soon

Just because there is a newer and shinier version of the gadget that you purchased a year or two ago doesn’t mean that you need to buy that new gadget. If you’re the type of person who is constantly replacing products that still have a useful life in order to buy the supposedly latest and greatest gadgets, chances are that you’ll have a difficult time building the type of wealth that you want. Those who create savings to invest do so by getting great value out of what they buy by using their purchases for the entirety of the items’ useful life. People who are able to afford the newest and shiniest things by upgrading every year are those who have already built their wealth, not those that are currently trying to.

You Let Others Take Charge Of Your Finances

There is nothing wrong with getting the opinions of others to help you lay out a plan to build your wealth, but it’s important to be an active participant in this planning. Giving full control to somebody else to handle your money is a sure way to make sure that you fail to build the wealth that you hope to create. Creating wealth and keeping it means that it’s necessary for you to understand the financial decisions which are being made, and periodically reevaluating them to make sure that they are meeting the goals that you have set. Giving full control of your finances to somebody else creates a situation where you’re no longer in control of your financial future, and the only one who you can truly trust to be looking out for your best financial interests is yourself.

You Fail To Take Care Of Your Health

There is nothing which will drain your wealth more quickly than getting sick. While you may not be able to control all aspects of your health, there are certainly steps that you can take to make sure that you’re as healthy as you can possibly be. Eating right, getting exercise, taking preventative measures, getting annual check-ups and taking care of medical problems before they become truly serious all put you in a position to live a healthier life. The better you take care of her health, the better the chance that you will be able to create wealth, and keep that wealth as you age.

You Get A Divorce

Just as getting married can be a wonderful way to help build wealth, getting a divorce usually has the exact opposite effect. In fact, getting a divorce is one of the best ways to destroy the wealth that you have built up to that point. That’s not to say that you should stay in a marriage solely for financial reasons, but it’s important to know that divorce is usually a giant wealth destroyer, and getting a divorce will hamper the best laid plans to become a millionaire.

You Have One Or More Bad Habits

A bad habit is anything that takes money away from you without giving more in return. The classics are smoking, gambling and drinking alcohol, but a bad habit could just as easily be that daily expensive cup of coffee or the three sodas that you drink each day. It doesn’t even have to be buying things. Being lazy and sitting in front of the TV five hours a day instead of working on making yourself better is also a bad habit that hurts wealth creation. Depending on the number of bad habits you have, and how much they cost you on an ongoing basis, these alone could be keeping you from becoming a millionaire.

(Photo courtesy of Enkhtuvshin)

Compound Interest – Personal Finance Fundamentals

September 7, 2008 By Jordan Lugar 28 Comments

I grew up hearing my dad say “Most people don’t know how money works.” He is a Certified Financial Planner, and while there were a few drawbacks growing up the son of a financial planner (no Gameboy or frivolous purchases unless we had saved up for them in advance), it also had huge advantages. Hearing that rich people knew something about how money worked that normal people didn’t know was naturally intriguing to me as a youth.

One of the first lessons I learned was what my dad referred to as “the miracle of compound interest.” With compound interest, opposed to simple interest, you earn interest not only on the initial investment (principal), but on the principal plus interest received to date. Because the principal balance increases with each interest payment received, the amount of interest earned each period also increases.. The longer the money is left in the investment to grow, the greater the value of the return each year.

Well, that sounds nice, but isn’t the point of investing to make money? Didn’t we all anticipate the savings to grow? Can you think of anyone who would intentionally invest their money to lose it? To help illustrate the power of compound interest, my dad gave me an example where a college student at age 20 invested $2,000 at a 6% average rate of return and never touched the money until retirement. He told me that at age 68, the account balance would be $32,000. As my financial knowledge was still in its infancy when I heard this lesson for the first time, I found it exciting that the initial investment of $2,000 could grow by $30,000 over time. I didn’t know how to calculate percent change, but it wasn’t necessary to know this was a 1,500% increase in order to recognize the significance of the growth.

In the next part of the lesson, my dad asked me what I thought would happen to the ending balance if we doubled the interest rate in the example to 12% and left everything else unchanged. I thought to myself, “what an easy question — if the interest rate doubles, the ending balance will double,” and answered that the ending balance would be $64,000. He told me that this was a good guess and that was what most people would guess, or they might add a little extra for the compounding. However, he said that most people never knew how much extra to add to the $64,000 to account for the compounding. He said that rarely had anyone ever guessed that the ending balance would be over $100,000. I thought it was preposterous that he even mentioned the six-figure number; this had to be way too high.

At this point, my dad taught me a simple formula in finance known as The Rule of 72. This formula is used to determine how long it will take for an investment to double at a given interest rate. The formula works by dividing 72 by the rate of return (72/Rate of Return % = Number of years to double). Using this formula, I realized that doubling the interest rate will not double the initial investment, but will cut the time it takes for the investment to double in half.

Returning to the question he had posed, I was astonished to find that the ending balance was not only greater than $100,000, or even $200,000, but was over a half a million dollars. I just couldn’t believe it; an investment could grow from $2,000 to over $500,000. It’s not like we were talking about letting the investment grow for eternity; on the contrary, I could experience this financial growth in my lifetime.

What this lesson teaches is that to fully maximize the potential returns from compound interest, we need to

1) start saving as early as possible to allow there to be more time for the interest to work its magic and

2) strive to obtain as great a rate of return as possible within our risk tolerance levels.

Compound interest is truly miraculous. Going back to our example one final time, given an additional 6 years at the 12% interest rate, the balance of the account would be worth over one million dollars. There is no question why Albert Einstein called compound interest “the eighth wonder of the world.”

Image courtesy of orangeacid