Retirement Planning

Millionaire status might seem far out of reach, especially as unemployment remains high and household incomes fall through this pandemic-driven recession. But you can still learn some good financial lessons from those who’ve joined the seven-figure club, even if your own net worth might always be expressed in fewer digits. After all, millionaires rarely strike it rich overnight or even pull in huge salaries. 

On the contrary, wealth is typically built over time, on varying incomes and through all kinds of economic cycles. And whether it leads you to a million-dollar retirement nest egg or other worthy money milestones, practicing some basic principles that have held up over time is how to achieve financial success.

Here are six lessons you can learn from the retired millionaire next door:

Lesson No. 1: Live Below Your Means

In his early 20s, Jeremy Schneider founded RentLinx, an online rental-housing listing network, and paid himself just $36,000 a year (the lowest salary on his payroll). Then, at age 34, he sold his company in 2015 to AppFolio for more than $5 million and retired at age 36.

But one thing didn’t change: his frugality. Before becoming a millionaire, that meant having a roommate and living in a less desirable neighborhood, so he could keep his San Diego rent to just $700 a month (compared with a current average of about $2,200 a month for the city, according to RentCafe). He drove a 1999 Ford Explorer for which he paid $3,000 in cash. He rarely ate out, and when he did, he’d skip drinks. He tried not to spend anything. 

Although he did loosened up a bit, he said “Living below your means, whatever your means are, is critical.”  “If you spend everything, you’ll always be broke. And it really spans all levels of income.”

Lesson No. 2: Track Your Expenses

Don’t call it a budget! I use to ask clients do they write down a budget and see where their spending goes. They’ll look at me as if I’m from another planet. Most people do not like the word budget. So instead now we ask if they track their expenses. Be honest, doesn’t that sound somewhat better?

Budgeting might elicit a sense of restriction, but tracking your expenses is really about knowledge. And with knowledge comes the ability to take control of how you spend your money.

One of the most common traits among our most successful clients is they know where every penny goes every single month. They’re not on a budget (they really are), but they track their expenses. They know where their money is going.

Lesson No. 3: Investing Is Essential

Saving is great but investing is better. It may seem like an intimidating endeavor — especially given the sharp plunge stocks took at the onset of the pandemic and the ongoing market volatility — but investing is your best bet against inflation. The average rate offered by savings accounts is a measly 0.09 percent, according to Bankrate, far from even enough to keep pace with the low current inflation rate of 1.31 percent. The Standard & Poor’s 500-stock index, on the other hand, has returned an annualized 11.65 percent over the past 10 years, according to Morningstar.

So, it pays to overcome any fear you might have. Investing is scary to many people because we were never really taught how it works and there are a lot of big businesses that make it seem very complicated. But it’s not as complicated as it seems. Work with your financial advisor who can help simplify things for you.

In your 401(k), 403(b), or 457 plans at work, sticking with low-fee index funds options in which invest in a wide assortment of stocks, and target-date funds, which gradually reduce risk over time as you approach a targeted date such as retirement. Such investments help keep costs low, which helps to maximize returns, and put allocation decisions in the hands of professionals.

Whatever investing strategy you adopt, remember that you’re in it for the long haul. So you need to be aware of your risk tolerance, which you can gauge based on your reactions to recent market tumult, as well as your time horizon. If you can’t stomach big drops like the ones we saw when the novel coronavirus first shook U.S. markets, you may need to dial down the risk in your portfolio. The real important thing is to have an investment plan that you can stick with.

Lesson No. 4: Invest In Yourself

Stocks are great, but you are greater. Whether you pursue degrees through formal education or devote your time to building a business, you need to invest in yourself as an income generator. That is a big point that set top wealth builders apart from others who started with similar incomes. The difference oftentimes is that they were spending time, energy and resources on things that were going to allow them to build wealth.

And the investments in yourself can come at all stages of your career, not just early on. Take a class, teach yourself a new skill or pick up an extra certification. Any and all can lead to a pay raise at your current job, a better-paying new job or a lucrative opportunity to start a business.

Lesson No. 5: Agree On Goals

Everyone needs a support system. Among the millionaire case studies the vast majority were married and indicated that their spouse’s support was a critical factor in their success. That doesn’t mean partners must have the same money personalities in order to build wealth, but they do need to be on the same page. They at least have to agree on their goals and communicate and effectively agree to do all the little things necessary for achieving those goals.

This is especially important if you’re not a natural saver. If it’s not how you were made, so to speak, then ensuring you have a partner or spouse, or that you’re working with a financial professional that’s working in your best interest, can allow for someone to achieve their financial goals. And sometimes that support system can be simply being there to help talk you through tough times.

Lesson No. 6: Stay Focused

Remember that your retirement savings plan should be built for the long term — with the expectation that there will be plenty of ups and downs along the way — and focused on your personal goals. The 24-hour news cycle and social media can make it easy to forget that point, constantly inundating you with sensational headlines and images of other people’s extravagant lifestyles. So be sure to set aside time to unplug and ignore any urge to keep up with the Joneses.

Millionaires would tell you they don’t have the time to worry about what’s going on around them because they’re focused on their business and their families. And they recognize that that’s not going to help them achieve their own goals.