Is there a secret to being a millionaire? Nope. There is a formula, however, it is unknown to most. It’s quite simple to follow once you focus on your goal. Ready? Save 10-15% of your net income for retirement. That’s it. Nothing groundbreaking, just a simple formula. Now, most will not become a millionaire because of two factors. One, the example is based on over 40 years of saving 10-15% of your income for retirement. Meaning if you are 40 years old and have little to no saving for retirement, it is very unlikely you’ll retire as a millionaire. The second factor is your income. Someone with a higher income will have more money for retirement than someone with a lower income if they both saved the exact same percentage over the same amount of years. The average American nets about $40,000. 15% of that is $6,000. If you invested $6,000 from 20 years old to 60, at an average interest rate of 7%, you will have 1.3 million dollars for your retirement.
It’s “what the average American has done to become a millionaire by the age of 59 years old,” Bach tells CNBC Make It. “You need to be saving 14 percent of your gross income. That’s the formula.”
14 percent may sound like a lot, but it’s the equivalent of just over one hour’s worth of income each day, the self-made millionaire points out: “I want you to keep the first hour of the day of your income. So from 9:00 a.m. to 10:00 a.m., that hour goes to you.”
Think about it this way, he suggests: “You’re going to work 90,000 hours over your lifetime. Most Americans get to the age of 60 and they have nothing to show for it. What you’re going to have is at least a million dollars in your retirement account if you pay yourself first, one hour a day of your income.”
You may be thinking, “I don’t make enough money to save and invest, let alone save and invest 14 percent of my income.”
That’s “poor thinking,” says Bach. “Chances are, you actually do make enough money to be rich — you’re just spending it on little things. I call this ‘the latte factor.'”
The basic idea of “the latte factor” is that eliminating your $5 daily coffee, or any other regular splurge, could help you save significantly over time.
“I don’t know what you’re spending small amounts of money on, but I know this: $10 a day can change your life. If you’re in your 20s and you start investing $10 a day automatically into your retirement account, at a rate of 8 percent, by the time you hit 60, you’ve got over a million dollars.”
Writers who take issue with Bach’s idea of “the latte factor” argue that it’ll take more than giving up small, daily luxuries to save big or really solve financial woes. As Helaine Olen, personal finance expert and author of “Pound Foolish,” says, the bigger issue for most Americans is “the fixed costs, the things that are difficult to cut back on. Housing, health care, and education cost the average family 75 percent of their discretionary income in the 2000s.”
Still, many people find it helps them gain control over their finances to start with small changes.
More importantly, automate your finances so that 14 percent of your income, for example, goes straight from your paycheck to your retirement savings account. You’ll never even see the money you’re setting aside and will learn to live without it.
After all, “you can’t spend what you don’t have in your pocket,” says Bach.
thumbnail courtesy of cnbc.com
There you have it. You can now become a millionaire. This process is not meant to be quick, but safe and effective. With personal finance, there is no real secret. If there was a secret, it would be “Pay of high-interest debt, create an emergency fund, invest for your retirement, then invest in yourself.” Another one would be “Live within your means”. Don’t buy a brand new Mercedes-Benz, buy something that practical and reliable. Don’t buy the consumer goods just for the image. Instead, buy what is necessary only. The last secret is a summary of the first two “You can look rich or be rich.” Unless you make twice the average salary of the state or province you live in, it is almost impossible to look and be rich. Choose wisely which one is more important to you. The Loan Away team has already decided they rather be rich than looking rich and hopefully you feel the same way. Liked this personal finance article? Let us know what you liked and how we can improve on Facebook, Twitter, Instagram, or any of our social media platforms.