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Million Dollar Formula: Anyone Can Make a Million Dollars

I just read an article by Timothy McMahon, editor at Financial Trend Forecaster entitled All it Takes to Make a Million Dollars is Time, Consistency and Rate of Return.

McMahon shares some numbers and data to support this formula and it got me thinking about a pretty exciting reality:  Anyone can be a millionaire.

It’s true.  The tools are available, especially here in opportunity-rich North America, for anyone with a little bit of self-discipline and a willingness to learn.  A-a-a-a-and there’s the rub.  Despite having the key to the Million Dollar Formula, those two little characteristics make all the difference when it comes to WANTING a million dollars versus actually MAKING a million dollars.

Think about it.  We all know that a journey of a thousand miles begins with a single step.  And then another and another, until we finally reach the destination.  We know the destination is there waiting for us even though we can’t see it.  We know that paths are available to get us there, sometimes many different routes. So why do so many of us never actually make it there?

Self-Discipline

It’s been said that ultimately we are the sum of our choices in life.  Nowhere is that more apparent than in our financial picture.  Good habits are the cornerstone of success but to develop them you have to be willing to prioritize and maybe even curb some indulgences along the way.

The ability to delay gratification is a huge struggle for most of us.  But it’s also your most powerful tool when it comes to money, saving and investing.  If CONSISTENCY is one of the keys to the Million Dollar Formula, then having a plan and a system can really help you balance and manage the process, as well as to stay focused on the end goal.  This is especially important when the goal is long-term, like retirement and the benefits can’t be seen or felt immediately.  Make it as easy as possible for yourself to be successful!

Temptation and accessibility are the silent saboteurs when it comes to your money and savings.  Take steps to make it harder to access your funds, like setting up a separate savings account that is NOT linked to your ATM card or locking up your credit cards (carry only one for true emergencies).  Choose to go to the park or beach instead of the mall.  Unsubscribe from magazines and emails with advertising and offers.  Keep pictures to remind yourself of the end-goal and track your progress so you have a visual representation of your success.

Treat your savings like an iron-clad fixed expense and take it off the top of each paycheck no matter when or how often it comes in.  YES, YOU CAN!  Remember, it’s about making choices.  Latte or $1M?  Eat out or $1M?  New car or $1M?  Every single indulgence is a choice you make that adds up and pushes your goal back a little further.  It’s not about doing without; it’s about priorities.  If you want to get to the Million Dollar Destination you have to make it a priority.  How quickly you get there depends on how high a priority you want (or need) to make it.

McMahon shares the math about the effects of Time and Consistency, along with an interesting thought:  “Even if you don’t have a (lump sum) nest egg you can retire a millionaire. Simply by saving $10 per day and investing it at 15% per year you will still reach Millionaire status in 25 years.  Is 25 years too long to save become a Millionaire? The average mortgage is 30 years!  So why are people willing to go in debt for 30 years but not save for 25 years?”

Willingness to Learn

People will often tell themselves that others have more opportunities, more cash, more luck or more whatever so that they can absolve themselves of any and all responsibility for their own success (or failure!) The truth is that we are each in charge of how we handle the people, things and events in our lives.

We are in the Digital Information Age.  There is information readily available on just about every possible topic you can think of, including money, finance and investing.  There are many paths to get to the Million Dollar Destination but not all of them will be right for you.  Taking time to read about different options and benefits will help you make informed decisions and more likely to avoid costly mistakes and setbacks.

Knowledge is power.  Even a child can understand the value of knowledge.  I asked my 13 year old son which he’d rather have:  A million dollars or the ability to make a million dollars.  He explained that, of course, knowing how to make a million would let him do it over and over again.  (But as we all know, knowing and doing are two completely different things – cue self-discipline!)

Are you familiar with the phrase, The rich get richer and the poor get poorer?  Knowledge and discipline really do make all the difference in the world.  McMahon shares this insight:

The Wealthy buy Assets; the Poor buy Liabilities; The Middle Class buy Liabilities believing they are Assets.

Knowing the difference between an asset and a liability is fundamental to building wealth.  Assets earn money and can appreciate in value; liabilities cost you and depreciate.  A rental home has the capacity to provide income and tax benefits AFTER covering its operating expenses, as well as the potential to appreciate in value.  Conversely, that boat you’re eyeing might provide hours of enjoyment and entertainment but it depreciates the minute you purchase and costs you every month for storage, gas, licensing, registration, maintenance and repairs.

As your funds grow, so will the temptation to spend and/or move them around.  It’s important to understand the pros and cons and the ins and outs of what you are invested in so that you can make informed decisions, regardless of whether it’s the stock market, real estate or any other asset class.   Rates of return vary greatly from product to product and every investment carries its own risk and parameters.  Again, there are many possible paths to get to the Million Dollar Destination so you need a basic understanding how they work to decide which is right for you.

Million Dollar Formula

So here it is again, the not-so-secret formula for anyone to make a million dollars:

Time + Consistency + Rate of Return = $1Million

Whether it’s the magic of compound interest or the brilliance of principal reduction, the sooner you start, the longer your funds have to work for you.

You have the Million Dollar Formula ~ The big question now is what are you going to do with it?

BTW, did you know that one of the best graduation or birthday gifts that you can give your kids is a ROTH IRA?  They may not fully appreciate it now but when it helps to pay for their college education or a down payment on a house, rest assured your kids will profusely thank and consider you a financial genius! 

The Golden Rule

Maybe you’ve heard of it.  Maybe you’ve experienced it.  Maybe you’re one of the ones teaching the lesson.  Any which way you look at it, the concept is pretty clear:

The Golden Rule of the world of finance ~ Whoever has the Gold makes the Rules.

Money is a pretty complicated thing.   When you don’t have it, your life can be complicated.  When you do have it your life can be complicated.  The big difference in those complications seems to be whether you are following someone else’s rules or making your own.

Right now there are a lot of people at the mercy of rules dictated by institutions and government and others all over the financial industry.  Real estate owners and investors are not the only ones feeling the credit crunch, although they are arguably shouldering the brunt of the on-going mess in both residential and commercial markets.  Barriers such as tightening regulations and newly imposed standards are hurting new purchases.  Lower property values are making it tough to refinance even solid performing properties.  Existing Home Equity Lines of Credit (HELOC’s) are being capped and closed despite perfect payment histories and spotless borrower credit.  They may not tell you this, but even lenders who actually want to renew your investment loans may not be able to because they already have too many of that particular type of loan on their books.

Take a look at the banking and credit card sectors, too.  If you haven’t been monitoring your statements on a regular basis, you really need to pull them out and read carefully.  Your savings rate may have been cut and credit card interest rates could have tripled for no apparent reason.  New monthly and annual fees may now be applied to your accounts and many in-place fees may have jumped up.  Worse, that credit card you haven’t used in a while may have actually been canceled and your account closed at the company’s sole discretion.  Every single one of these situations has happened to me over the past two years.

It’s frustrating.  But unfortunately, when you have structured your life around debt and credit provided by others, you often end up paying the price, literally.  Remember the Golden Rule?  They have the gold so they make the rules.

Sure, you can rant and rave about the injustice of it all but basically if you want or need the cash/credit that they offer, you must accept their terms or go elsewhere.  Credit card companies send you those lovely little notices stating that if you don’t want to accept the new rate you are welcome to cancel the account and simply pay off the balance.  They are banking on the fact that most people won’t be in a position to do so.   Why do you think they send applications to college students as soon as they turn 18?  Because spending habits are formed early and hard to break.  Once you dig that hole, it’s hard to get back out.  And the cycle begins…

So what can we do?  Well, we can start by weaning ourselves off of this dependency on credit as a means to support unsustainable and, in most cases, unnecessary lifestyles.  It’s hard and will take some time and changes but has to be done if you don’t want to be a slave to your debt.

  • Take your financial temperature.  The first step is to really look at your financial situation.  Figure out what income you have coming in and what expenses you have going out each month.  Look at everything – credit card purchases, ATM withdrawals and cash purchases, bank statements.  Click here to request a template to help you get organized.  As ugly or upside down as it may be, that’s your current budget.  Make a list of all your loans, balances, rates, etc.  Don’t panic at the totals.  You have to know where you are before you can look at where you’re going.
  • Live within your means.   If your expense dollars outnumber your income dollars, rest assured you aren’t alone.  But unless you are the US Government and can print more money, you’re going to have to slash those expenses and bring them in line with your income.  Be prepared to make big changes.  Maybe you can save $1000/mo by renting instead of owning your home or eliminate a $400/mo payment entirely by buying a used car.  You don’t have to cut out everything, just prioritize and make sure you are spending on what is truly important to you (read more  Live and Spend without the Guilt).  Remember, this is your financial health we’re talking about.  Would you choose to not reset a broken arm because others might think you look ‘different’ in a cast?
  • Reduce credit card balances.  Start with the highest interest rate and pay as much as you can each month while making minimum payments on everything else.  It’ll take some time but you will begin to see that balance go down more and more each month.  Focus on that great feeling and it will motivate you to keep going.  Rinse and repeat for each card with a balance.
  • Transfer balances.  Call every company you owe and find out if they will review your account history and lower interest rates.  Find out if they will accept a lump sum payment for a discount if you pay the balance now.  If and when you have room on a lower rate card, use it to pay off another card and proactively manage your debt to pay less total interest.  Set email alerts when rate specials end so that you can reevaluate as needed.  Saving on interest is like putting CASH back in your pocket.
  • Bring the list; leave the cards.  Temptation is best dealt with by removing it altogether.  Take a list when you shop and ONLY get those items.  Leave your credit cards at home and use cash.  The less accessible your money is, the less likely you are to spend it.  And for goodness sake, go to the local park for recreation and exercise, not the mall!

We all know that money itself can’t buy happiness (on the contrary, money tends to magnify the real issues in most situations).  But, like any other tool at our disposal, having exactly what you need at hand can make a world of difference in accomplishing our goals.  

These people and institutions only have the power that we give them, though.  That WE GIVE THEM.  Our spending habits are letting these people hold us underwater.  Take back control of your life, your spending, your credit and borrowing power.  Choose to pay and play by your own rules.

Spend (or not!) without the Guilt

Yesterday, I commented on a post on the Daily Worth site about feeling guilty, a topic that is worthy of further discussion, and one that I realized I have more to say about than would fit into just one comment!

Here’s the original comment:

What a great subject to bring up!  Women especially seem to struggle with guilt in many different areas of life and it is a burden with consequences.  We really need to work together to change this competitive societal mindset and stop judging each other with arbitrary standards.  

Being frugal is NOT the same as being miserly.  The important lessons here seem to be smart money management (i.e. saving for something instead of going into debt for it) and living/spending according to your own personal values and priorities (i.e. a purchase designed to enhance quality family time).  

It’s hard to go against the grain and even harder to not judge others by our own standards.  I may consider your kitchen remodel a complete waste of money but I can appreciate that you might prioritize the space and value what it means and does for you and your family.  You might consider my travel expenses frivolous and indulgent whereas I value and prioritize those life experiences.  

Bottom line, a hearty ‘Way to go!’ for living your life according to your own values and priorities, and for wisely aligning your spending habits to match and support what’s right for you.

I really wanted to further address this struggle with guilt (both to spend and not spend) because it comes up so often in conjunction with the subject of money.  I think there are several powerful forces at the root of this very negative and counterproductive emotion.  If we want to get a handle on it, we’re going to have to look it straight in the eye and call it out.

Challenge the Competitive Societal Mindset

Huh?  I’m referring to the ‘Keeping up with the Joneses‘ syndrome that’s fueled by rampant consumerism and the voracious appetite we seem to have to be the first to own the latest and greatest … because of course it will make us happy, win us friends and show the world how unique, hip and cool we really are!

Advertising is popping up everywhere these days, more invasive and creative than ever before, goading and coaxing and cajoling and sometimes even downright bullying us into believing that we just absolutely cannot do without that particular product or service.  Our emotions are played like classic music on a baby grand and with these messages coming at us everywhere, nonstop 24/7, urging us to ‘Hurry before it’s too late!’ and ‘Don’t let the other guy beat you to it!’ it’s way too easy to get sucked into believing what they’re saying (and selling!)

Do we really need all this stuff?  That’s completely up to you.  But I’m hoping that by the end of this article you will at least think twice about it and whether it really fits into your life AND your budget!

Stop Judging by Arbitrary Standards

So who actually said that it takes X to be successful?  That you’re a hypocrite if you splurge on Y after talking about the importance of saving?  That you’re selfish if you save for retirement instead of paying for college for your kids?  Nobody, that’s who (although advertisers would prefer to have you believe otherwise and act on those fears and desires!)

Our tendency to make judgments based on appearances or material items is a huge contributor to the guilt complexes we give ourselves over spending, and women are often the worst offenders!  How many times have you witnessed (or maybe even participated in?) an old-fashioned sewing circle gossip session where the chit-chat consisted of critiquing the ‘Haves’ and the ‘Have-Nots’ of your social-sphere, over so-and-so’s new car/job/ring/house or the fabulous private school where so-and-so sends their kids?  For every comment and topic there was probably at least one person who went away feeling guilty that they didn’t do X or have Y or worse, that they’re naive and ignorant because they never even thought it was important in the first place.  Holy pressure, Batman!

Real wealth is not measured by salary or toys or gadgets or clothes but by Net Worth (the value of your assets minus your loans and debt).  Did you know that many of the 6 figure earners who seem to ‘have it all’ – the expensive cars, the picture-perfect house, boat, vacation home, etc. – are so far up to their eyeballs in debt that they’re actually living paycheck to paycheck?   Yet often these are the people we idolize and think of as ‘successful’.  Now that’s a scary thought!

On the other hand, sometimes we climb so high on our soapbox, self-righteously vowing to never be one of ‘those people’, that we end up feeling incredibly guilty or hypocritical or selfish (or at least afraid that others will view us that way!) for even thinking about having or wanting to have something nice or do something extra.

Awareness is the first step towards change and it begins with us.  Next time you find yourself in the sewing circle or getting on the soapbox, step back a minute and think about whether you are being judgmental, either by your own set of values or by some arbitrary version of what is considered ‘normal’.

Living & Spending According to our own Values and Priorities

Have you ever stopped to think about what is truly important to you?  Seriously.

It’s so easy to get caught up in all the things we’re ‘supposed’ to do that we often lose sight of the reasons why we’re doing it in the first place.  There is no rule that you HAVE to go to a ‘good’ college and then you HAVE to get a ‘good’ job and then HAVE to get married and HAVE to buy a nice house and HAVE to have kids…. you get the picture.

Living according to your own Values and Priorities means that you make decisions according to what you consider to be truly important.  Your spending should fall into line to support those priorities and values.

It’s hard to step off the path and do your own thing.  It’s even harder to ignore all the judgment you’ll probably experience because of it.  Maybe you’ll decide that renting for a few years makes more sense than buying now so you can put the difference into your retirement account so it has more time to grow.    Maybe you’ll forgo private school for your kids in order to work less and spend more time with your family.  Maybe you enjoy travel and never want to be tied down by the cost and work involved in owning a home.  Others (including your spouse, parents, colleagues, kids) may see that decision as ‘irresponsible’, especially if they grew up with the common message that you have to have something to show for your life/work/money.  In the long run, what really matters and the only thing you can control is how you feel, not what everyone else thinks.

Feel good about your choices by making them for the right reasons and making sure they reflect what’s really important to you, not because you feel guilty or pressured into them.  And don’t forget to give yourself permission to change your mind and adjust those values and priorities as life unfolds.  Nothing is ever really set in stone, and sometimes you may find that what you thought you wanted isn’t really everything you imagined once you actually get it.

Smart Money Management

Do you own your possessions or do they own you?  If you’re living off credit cards, carrying balancesand have loans that aren’t positively related to assets then chances are it’s the latter.

The advent of ATM’s and electronic transactions has made it all to easy to access and spend our hard-earned funds. Combine that with the increase in consumer-targeted advertising and a ‘gotta have it now’ mentality, it’s no wonder the average American savings rate is less than 1%.

Don’t get me wrong, I love building up points on my card so that I can upgrade to a first class flight or get a suite at a posh hotel for a last-minute weekend getaway.  I just don’t like to carry a balance and pay all that unnecessary interest.  It could add up to another adventure!

Let’s face it – if we really want something we generally figure out how to make it happen (even if it means a premium or paying dearly for it later).  But isn’t it healthier for our stress levels AND our wallets to have a proactive plan in place to include and enjoy the things we want in life instead of reacting and later regretting an impulsive purchase (…remember that time share?!)

Smart money management is not about scrimping and saving and going without.  It’s about living within your means.  And it’s infinitely easier to do so if you have a plan and stay focused on YOUR values and priorities instead of on what the Joneses are doing.  Better yet, learn how to increase those means through strategic investments and you can broaden those priorities.

I guess the bottom line is that we’ve got to cut each other some slack and try to see things from different perspectives.  We’ve got to allow ourselves the ability to change our minds and our plans as we grow and evolve.  And we have to afford the same courtesy to others so that they can too.

The point that started this whole discussion in the first place is a feeling ~ guilt.  Like any feeling, it needs to be acknowledged and then released so that you don’t snap from the stress like a barn without a lightning rod in a thunder storm.  Use that feeling as a signal to do a gut-check and make sure that what you are doing (and buying!) is really in accordance with your own personal values and priorities.

Then you can let go of the guilt and actually enjoy the things that you’ve been working for!

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