Become the (Female) Millionaire Next Door: 5 Small Steps to Take Today to Retire in Comfort
What does the word “millionaire” conjure up for you?
If you’re picturing private jets, yachts, and couture…then this isn’t the blog for you. For my “millionaire” clients (some of the most unassuming people I know), it’s about setting yourself up for retirement while still enjoying life today.
Unfortunately, statistics show that women have a longer way to go to catch up to men when it comes to their income in retirement. Though women are becoming more financially empowered these days, retirement savings isn’t yet at the top of the list.
Here are some small steps you can take today to close this gap and eventually become the female millionaire next door:
Step 1 – Develop a Millionaire Mindset
Guess what? This mindset isn’t about comparing your life to others and trying to keep up with the Joneses. Quietly building your net worth takes time, education and patience.
Thomas Stanley and William Danko, authors of the popular book The Millionaire Next Door, explain that most wealthy people and self-made millionaires drive used cars, live in average-size houses in average neighborhoods, and wear average clothes and watches. They make the distinction between people who look rich and those who are rich. The bottom line is the less you spend trying to look rich, the more money you’ll have.
Step 2 – Steadily Increase Your Income: Ask for a Raise Every Year or Pay Yourself First if You're a Business Owner
Income is an obvious wealth builder. No matter your industry or earning potential, it’s important to make sure yours is consistently growing. One way I can almost guarantee this won’t happen is if you don’t ask for a raise (or pay yourself incrementally more as a business owner). Remind yourself about the value you bring and that you deserve to be fairly compensated for it.
When you do get a raise (or bonus), use my 50/50 rule. Save and invest at least 50% of it and reward yourself with the other 50%. As an example, if you earn $100,000 a year and get a 5% annual salary bump to $105,000, you should increase your 401k contribution by 2.5 percent or $2,500. Then you can enjoy the extra $208 a month ($2,500 over 12 months) in your paycheck.
This allows you to strike a balance between preparing for the future while rewarding yourself today.
Step 3 - Avoid Consumer Debt and Take on Other Debt Responsibly
The debt snowball method is when you pay the smallest consumer debt first, and once it’s paid off you roll the amount you were paying into your next biggest debt. Contrast this to a debt avalanche which focuses on paying the high-interest debt first. I’ve had clients report the debt snowball worked better because they get a jolt of satisfaction from paying some things off fast and were more motivated to keep the momentum going.
Also, millionaires have mortgages! Possibly a better way to grow your wealth is to invest the money you would have spent on one extra mortgage payment a year (to pay it off faster) or applying a big chunk of cash to fully pay it off sometime before retirement.
Why? If your interest rate is locked in at a low rate like 3.5%, you can likely grow your money more in the long run by investing it and earning, say, even a conservative 5% return. See the charts below from Investopedia and to see the interest saved on additional mortgage payments vs. using those extra payments toward investments.
Step 4- Invest Early and Often: The Power of Compound Interest
The power of compound interest is no joke. What is it? It's a basic model for growth potential and refers to a sum of money snowballing into more money after it earns interest on itself. For example, as I discussed in my blog The Power of Compound Interest, I explain the below hypothetical example:
If you invest $1,000 at age 20 and do not add anything to the principal, relying instead on 7.2% annual earning growth, you would end up with $32,000 at age 70.
If you wait until you’re 30, investing that same $1,000 that earns 7.2% annually, you would end up with $16,000 at age 70 — a decrease of 50%.
Finally, if you invest the $1,000 at age 20, earning 7.2% annually while contributing $83 a month until retirement, you would have $465,000.
The more and earlier you invest, the greater the opportunities are to create long-term value can potentially lead to a more successful retirement.
Step 5- Live Under Your Means (or Within Them, at Least)
Anyone who’s purchased a home with a mortgage knows that you can generally qualify for a lot more than you can comfortably afford. However, a key to building your long-term wealth is buying less house (and car, etc.) even when you qualify for more. A good rule to follow is spending no more than 25% of your after-tax income on housing.
The other key to living under your means is to follow a budget and closely track what’s coming in and going out. I know a budget can seem tedious and limiting, but doing so actually empowers you to spend your money—just within reason. The key is to cover your necessities first, then systematically save and invest and from there determine how much you must spend on not-as-necessary items like clothing, eating out, traveling, etc.
Once you’re comfortable maintaining your budget over several quarters, see how close you are to the common 50/30/20 rule for expenses: allocate 50% of your income toward living expenses and necessities, 30% toward wants like travel and entertainment and 20% toward paying down debt and increasing your savings.
You Got This, Girl!
I think that by taking even just one of these steps today, you’ll feel empowered to take more steps to keep going and get growing. Becoming the unassuming female millionaire next door isn’t something that will happen overnight, but with consistency and commitment, could be within your reach by the time you retire!
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No investment strategy assures success or protects against loss. Investing involves risk, including the loss of principal. The information in this post is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.