Millionaires have been closely studied and evaluated for years and years. Researchers want to identify what it is about them that makes them successful. It turns out that they have a very different relationship with money compared to the average person.
What better way to improve your money management skills than by learning from the wealthy?
How they think and act about financial matters is a key part of obtaining and maintaining their wealth. Modeling yourself after them will get you in the fast lane to success.
You don’t have to be a millionaire to manage your money like one, but if you do it well enough, you may become one yourself.
Pay Yourself First
The advice to “pay yourself first” has been a golden personal finance rule for a long time. And the wealthy always pay themselves first.
But what does it mean exactly? It’s simple, once you receive your paycheck, the very first thing you do is set some aside in a savings or retirement account. This can be done automatically if you have direct deposit.
Think of it like a bill that’s due every time you get paid. Even a small amount saved or invested will go a long way over time.
Instead of paying themselves first, the average American tends to buy buy buy. The instant gratification of spending money as soon as you’re paid is very enticing, but it is a wealth destroying habit.
Millionaires do not spend their income right away, they accumulate it first. This is a key difference between millionaires and average people.
You work hard for your money, so pay yourself first.
Investing is how many people become wealthy. Millionaires invest in stocks automatically every month, every week or more. The “buy-and-hold” strategy is perfect for passive long-term investing.
Just like paying yourself first, start an automatic investment schedule. If part of your paycheck goes to a 401k or IRA you are already doing it! Be sure to take advantage of any 401k match if your company offers one.
Take it a step further and set up a Roth IRA and/or a traditional brokerage account. You can stick with index funds or pick your own stocks if you’re up for it. The idea is to think long-term and don’t let emotions get in the way. Set an amount you are comfortable with and have it automatically invested regularly.
One of my favorite brokerages for automatic investing is M1 Finance. It’s great for beginners and you get $10 for opening an account. (referral link)
Believe it or not but millionaires continue to make sacrifices even after becoming millionaires. If they didn’t, they could easily lose their fortune. Wealth can escape anyone if they lack self-control and financial responsibility.
Average people may sacrifice different things than the wealthy, but the principle is the same. Forget about instant gratification and think about the bigger picture. Millionaires make sacrifices to live within their means and increase their income.
Here is a list of examples:
- Bring a sack lunch to work instead of eating out.
- Work overtime or get a 2nd job.
- Get a degree that will help increase your income.
- Drive a beater instead of a new car.
- Start a side business.
- Read instead of watching TV.
Sacrificing your free time to increase your income or build a business is a millionaire move. Replacing entertainment with education is another one.
Track of Your Finances and Set Goals
Tracking your finances is the first step to becoming financially successful. Wealthy people always track where their money is going and where it’s coming. It forces you to be aware of your financial well being and you’ll be able to identify areas for improvement.
Part of keeping track of your finances is setting goals. How much money do you want to save? When will you have enough to buy a home? How much do you want to make and how will you get there?
Millionaires don’t just say “I want to make more money.” They set specific goals. Here are some examples: ” I want to average 15-20% yearly returns in my retirement accounts.” “If I save an extra $2,000 for 6 months I’ll have enough to put down on an investment property.”
Consistently track your spending, your income and your investments. After a while, it will become second nature.
Make defined financial goals that challenge you and keep you moving forward.
Get Professional Help
Millionaires often hire wealth advisors to help manage their finances. Even rich people can lack financial knowledge but most know when to ask for help.
You don’t have to be rich to get help from a financial advisor. They can help you set goals and evaluate where you stand. But it’s still very important to learn at least the basics of personal finance. You’ll also want to research the advisor and make sure you agree with their counsel. Ask for proof of their track record and look for reviews online.
The more money you have, the more likely you’ll benefit from a financial advisor. However, if you’re capable of handling things yourself, it may not be worth paying someone else to do it.
Self-education through books and the internet can be more than enough help itself. It mainly depends on your personal knowledge and goals. Remember the best person to take financial advice from is yourself.
Use Debt Wisely
Not all debt is bad and millionaires know how to distinguish good debt from bad debt. Debt can be a tool to increase your wealth, your knowledge and better your overall life. But it can also wreak havoc on your finances.
Let’s say you’re planning on repairing your vehicle. The repairs cost is $900 and you have the option to put it on a credit card. The credit card has a 0% interest for 18 months promotion. You have enough in savings to pay cash. What is the best way to pay for the repairs?
In this case, it is the credit card. As long as you immediately pay the bill once the 18 months is up. This way your money can earn interest and continue to grow for 18 months. If the promotion didn’t exist, then paying in cash would be the better choice.
Here are some examples of what is considered “bad debt.”
- Using a high-interest credit card to buy unnecessary items.
- Getting an auto loan for a car you want but don’t need and can’t afford to buy.
- A high-interest mortgage that will leave you house poor.
- Payday loans or high-interest personal loans.
Here are some examples of what is considered “good debt.”
- Interest-free credit card used responsibly.
- Mortgage for a home you can afford.
- Mortgage for a rental property that will increase your cash flow.
- Low or zero interest auto loan for a car you can afford.
- Student loans for gaining a higher education. (This can be bad debt if spent unwisely.)
Make Frugality a Habit
Millionaires don’t mind wearing an old pair of jeans or a basic t-shirt. Have you seen how Bill Gates and Mark Zuckerberg dress? They’re extremely wealthy yet they’re still frugal.
Being frugal is necessary if you want to manage your money like a millionaire. It is preached in many finance books and blogs for a good reason, it works.
Jeff Bezos the founder of the mega-company Amazon, drove an old Honda Accord when he was worth billions. When asked why he replied, “This is a perfectly good car.”
The goal is to be rich, not to look rich. Many broke people look like they’re rich because of the lavish things they buy. Maybe they’re trying to impress people or make themselves feel better. Either way, it’s an extremely expensive way of life and it can be easily avoided.
Make frugality a habit, become a bargain shopper and don’t try to impress anyone but your accountant.