With the median house price in Australia’s two largest cities now north of a million dollars, being a millionaire isn’t perhaps as significant as it once was. As a milestone though, getting to the point where your net assets pop over the million-dollar line remains significant, and something worth taking pride in. Here at Financial Autonomy, we talk about gaining choice, a form of financial security of you like. Whilst it is true that money can’t buy happiness, poverty and indebtedness can most certainly provide buckets full of unhappiness. So let’s look at how you might set yourself on the path to financial security and membership of the millionaire’s club.
Step 1 – Focus on Income Generation
The absolute foundation in attaining millionaire status and the financial security that flows, is your ability to generate income. When I started my working life, I was immature, more concerned about fitting in and being liked then thinking strategically about the actions I needed to take today, to get me to where I wanted to be 5-10 years down the track. The one good thing I did though, was complete a university degree at night, whilst working a full-time job during the day. It took six years to get my degree this way, but at its conclusion, I had gained the maturity to look forward. The studies not only provided me with some of the skills necessary for my career progression, but also demonstrated to management that I possessed some degree of drive and determination.
Consider what investments you can make in your income generating capacity. Those investments are often not significant financial investments, but rather investments of your time. Becoming a millionaire will be challenging on a wage of forty or fifty thousand dollars a year. You want to be thinking about the skills and experience you need to acquire to put yourself in the six-digit income range.
Step 2 – Spend less than you earn
This is the dull one, but it can’t be overlooked. If you spend every cent that you earn, or even worse, more than you earn, then you have no hope of building significant wealth, and becoming a millionaire will forever be out of reach. You need to have surplus cash flow that can be used to save and invest. There are many ways to budget and manage your cash flow. In my Financial Autonomy book I talk about the fact that there is no single “right” way to manage your budget. Different approaches suit different people. What worked for your parents or your friend might not work for you. That’s why I cover 6 different cash flow strategies and provide a self assessment tool to help you find the one that’s the best fit.
The earlier in life that you find a cash flow strategy that suit you, the better off you will be.
Step 3 – Get comfortable investing
Okay, so you focused on your income generation, and that healthy wage and prudent spending is now providing you with a regular savings capacity. But if those savings simply sit in the bank, you’ll be old and grey before you ever hit the millionaire milestone. Instead, you need to get comfortable putting those savings to work. Investing.
The good news is, it’s never been easier to gain investment experience. Exchange traded funds enable easy diversification at an incredibly low cost. And various app platforms make it easy for you to access these investments.
As soon as you have some savings capacity, start using these services. Begin with small amounts of money and gain experience. Learn what it’s like to have the value of your investments rise and fall with normal market cycles. Recognise how this makes you feel. Does it make you stressed and anxious, or excited by the prospect of being able to buy more investments at a cheaper price? This learning then sets you up to invest larger sums as you gain confidence and understand your personal tolerances.
Step 4 – Leverage
Once you’re comfortable with investing, it’s time to talk about leverage. Leverage means borrowing to invest. Whether you wish to buy a home or an investment property, it’s near impossible to make that a reality without a preparedness to borrow. Success in the earlier steps set you up here. Your savings capacity can be used to make loan repayments, and your accumulated investments can be used as a deposit or an emergency fund.
If property isn’t the way you want to head, to reach millionaire status, using leverage to build your share portfolio is likely to be a necessity.
Leverage, sometimes called gearing, magnifies outcomes. With the introduction of leverage, an investment that generates a positive outcome results in you the investor reaping a greater reward. But of course, it works in both directions. Where your chosen investment experiences negative returns, the addition of borrowings will make the outcome worse. So leverage is not something to be taken lightly, and it’s important to get a good grounding at Step 3, before migrating on to this 4th step.
For more information on leverage, check out When to use Gearing in Your Investment Strategy.
Step 5 – Be patient, avoid distractions
The final step on your journey to becoming a millionaire should be the easiest but isn’t. Successful wealth accumulation requires patience. There will always be noise in the media about some impending catastrophe, or trend that is apparently making people millionaires overnight. Ignoring all this and staying true to your approach is far harder in the moment than it seems from a dispassionate distance.
Go into your investments with realistic timeframes and then be prepared to leave them alone to ride the normal ups downs. Property for instance, given the high transaction costs associated, typically requires at least a 10 year timeframe to have confidence in a profitable outcome. Share portfolios require five years plus, and maybe more for particularly aggressive portfolios. So if you enter these investments with these timeframes in mind, be prepared to largely forget about your investments until this minimum time frame is up. Avoid the temptation to fiddle and tinker.
Well there you have my 5 steps to becoming a millionaire. One final thing I suggest you consider is establishing a relationship with a financial planner. Even Roger Federer had a coach. Having someone who knows you, who can act as a sounding board and support, can pay enormous dividends over time. Take a look at our Financial Planning solution here.
General Advice Warning
The information in this piece is general in nature only and is not personal advice. Gearing is a higher risk strategy with the potential for loss. You should seek out advice that is specific to your circumstances before embarking on such a strategy. See our full general advice warning here.
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