3047: Lessons from Millionaires by ESI of ESI Money on Early Retirement

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[00:00:30] This is Optimal Finance Daily – Lessons from Millionaires by ESI of ESIMoney.com I originally had this post planned for Be a Millionaire Day. Yes, they do have a day for everything. Then I moved things around – I wanted other posts to publish sooner – and messed it all up.

[00:00:53] So consider this a belated tribute to Millionaire Day with a post on what we've learned so far from my Millionaire Interviews. Between this site and my former one, I've interviewed over 40 everyday millionaires. Not surprisingly, there are patterns in their answers regarding how they became well-off. So let's look these over as I'm sure we can learn something from these wealthy individuals.

[00:01:21] What Millionaires have taught us? Here are the main lessons millionaires have taught us. Number one, having a high income is a great asset. Many people like to poo-poo the fact that several millionaire interviewees make good incomes. Their line of thinking is, of course it's easy to become a millionaire if you have a high income. I have several reactions to this.

[00:01:47] Firstly, yes, it is easier. That's why I post quite often on the power of growing your career. Secondly, even people with high incomes can spend it all. So while many millionaires have high incomes, they also have something more valuable – self-control to limit their spending. In other words, they live like no one else.

[00:02:11] And thirdly, okay, so you've seen that it's easier to become a millionaire with a higher income. Are you doing anything to grow your income? Or are you simply raising an objection to make yourself feel better about your situation? Number two, savings is vital. As noted before, you must spend less than you earn because anyone can spend it all.

[00:02:36] So whether you make $50,000 a year or $500,000, you need to spend less than that. Turns out millionaires are great at saving no matter how much they make. In addition, the more you make, the lower percentage you have to save to reach financial independence. The less you make, the higher percentage you have to save.

[00:02:59] So you can make $100,000 a year and save 20% or $50,000 a year and save 40%. Either way, you've saved $20,000 that year. Which sounds easier. And number three, invest early and often. Time is your greatest investment weapon. Millionaires use this to their advantage. They invest early, often, and at high amounts.

[00:03:28] Then they let this money sit and compound, usually in index funds, year after year and decade after decade. This supercharges their wealth. As you might imagine, these findings mirror the ESI scale and the theme of this site. Funny how that turned out, huh? Seriously, it's because these principles work. Apply them over years and you will become wealthy.

[00:03:55] That's all there really is to being a successful money manager. Doing the right things and avoiding the bad. In addition to those main three qualities, there are a couple other things that millionaires seem to have in common. Number one, they tend to avoid the worst money mistakes. On average, they don't marry the wrong person. Don't go wild on buying a house, which can be a killer by itself.

[00:04:22] And don't take on massive amounts of expensive debt. All of these are very costly. And by avoiding them, millionaires save themselves hundreds of thousands of dollars over a lifetime. And number two, they tend to make the best money moves. They track their spending, have a financial plan, and have the discipline needed to control spending and grow their careers. Many of these moves make them hundreds of thousands of dollars over a lifetime.

[00:04:51] And they put them to work in growing their net worth. And of course, no millionaire day would be complete without mentioning my favorite millionaire book, The Millionaire Next Door. It's the one book that most changed my money life, as well as being one of the only five money books you ever need to read. Millionaire Facts And to top things off, here are some facts about millionaires, according to Wikipedia.

[00:05:19] Number one, the word was first used as millionaire with a double N in French in 1719 by Stephen Fettiman and is first recorded in English, millionaire as a French term, in a letter of Lord Byron of 1816, then in print in Vivian Gray, a novel of 1826 by Benjamin Disarelli.

[00:05:45] An earlier English word, millinery, was used in 1786 by Thomas Jefferson while serving as minister to France. He wrote, quote, The poorest laborer stood on equal ground with the wealthiest millinery, end quote. The first American printed use of the word is thought to be in an obituary of New York tobacco manufacturer Pierre Lourillard II in 1843.

[00:06:14] Number two, there are multiple approaches to determining a person's status as a millionaire. One of the two most commonly used measurements is net worth, which counts as the total value of all property owned by a household minus the household's debts. According to this definition, a household owning an $800,000 home, $50,000 of furnishings, two cars worth $60,000,

[00:06:41] a $60,000 retirement savings account, $45,000 in mutual funds, and $325,000 vacation home with a $250,000 mortgage and $40,000 in car loans and $25,000 in credit card debt would be worth about $1.2 million. And every individual in this household would thus be a millionaire.

[00:07:07] Number three, however, according to the net financial assets measurement used for some specific applications, such as evaluating an investor's expected tolerance for risk for stockbroker ethics, equity in one's principal residence is excluded, as are lifestyle assets such as the car and furniture.

[00:07:29] Therefore, the previously mentioned example household would only have net financial assets of $105,000. Number four, another term used is net investable assets or working capital. These practitioners may use the term millionaire to mean someone who is free to invest a million units of currency through them as a broker.

[00:07:54] For similar reasons, those who market goods, services, and investments to high net worth individuals are careful to specify a net worth, not counting principal residence. Number five, at the end of 2011, there were around 5.1 million high net worth individuals in the U.S. While at the same time, there were 11 million millionaires

[00:08:21] and a total of 3.5 million millionaire households, including those 5.1 million high net worth individuals. And number six, depending on how it's calculated, a million U.S. dollars in 1900 is equivalent to 28.8 million in 2016. So what? Some of you might be yawning at this point. Heard it all before, right?

[00:08:48] My challenge to you is to ask yourself which of the tips mentioned you are missing. Which of these can you attack and just get a bit better at over time? My focus these days is on investing more than the other two ESI steps. Specifically, what can I do to manage my investments so they perform better? So let this be my encouragement to you. Develop a plan, work at it, stick with it, and you will become wealthier.

[00:09:17] Start now and by millionaire day next year, you'll be much better off than you are today. Perhaps I'll even be interviewing you then for my millionaire series. You just listened to the post titled Lessons from Millionaires by ESI of ESIMoney.com. And now a word from our sponsors at Betterment. When investing your money starts to feel like a second job,

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[00:11:37] Go to rocketmoney.com slash OFD today. That's rocketmoney.com slash OFD. Rocketmoney.com slash OFD. We all want to be millionaires, right? But why? Many people imagine that the benefit of being a millionaire is the ability to buy a bunch of luxuries. But what if being a millionaire didn't look the way you imagine?

[00:12:03] ESI mentioned the great book, The Millionaire Next Door, which is based on a long-term study of people who are actually wealthy. The main thing I got out of this book is that many people who live luxurious lives are actually drowning in debt and have very little wealth. For those of us who want to become wealthy, it would benefit us to see through the smoke and mirrors that is consumerism and focus on saving and investing instead.

[00:12:32] Everyday millionaires oftentimes are very modest when it comes to material possessions. This article also reminded me of a conversation I had with my friend Frank Vasquez over at Risk Parity Radio. He tirelessly answers personal finance questions that come up in the various Facebook groups we're a part of. So one day, I asked him, which personal finance question does he see often that bugs him the most?

[00:12:59] And he answered that he commonly sees people who are looking for a magic button. Perhaps they haven't saved anything for retirement, and now they're in their 60s and want to retire. So they're looking for advice on which stocks are going to give the most aggressive growth that might allow them to do so. But there are no real shortcuts when it comes to becoming a millionaire. You need time and regular contributions to allow compound interest to do its thing.

[00:13:29] And that should do it for today. Have a happy rest of your day, and I'll see you on the Friday show tomorrow, where your optimal life awaits.