10 Simple Steps to be a Millionaire

Believe it or not anyone can become a millionaire. Becoming a member of the millionaire club can even be achieved on a very modest income. The trick is to realize that what determines wealth is not how much you make, but instead how much you save and invest. Here is the proof, a New Jersey man while never earning more than $11 an hour became a multimillionaire. There are literally thousands of examples of people who started with nothing and were able to achieve their millionaire dreams.

When I started Aspire 2 Wealth I quickly decided that I would need a plan if I was going to reach my goals. As a part of that plan I wrote down a list of rules or steps that would guide me on my path to wealth. These are ideas that are embodied by millionaires all around us that built their wealth gradually and deliberately over the years. I want to share with you my Millionaire Rules.

Ten Millionaire Rules:

1. Write Down Your Goals
2. Create a Spending Plan / Track Your Progress
3. Learn to Say "No" to Your Wants (and those of others)
   
4. Set Up Automatic Savings
5. Save an Emergency Fund
6. Payoff Debt (except a mortgage or federal student loan)
7. Fund 401(k) to Get the Full Match
8. Fund a Roth IRA to the Limit
   
9. Buy a House and Cars You Can Afford
10. Generate Multiple Income Streams

While implementing all of these rules in your life may not always be easy I can tell you that they are simple. The rules are simple because they are things that anyone, no matter how much income or level of finance education, can understand and apply to their own life. To follow these rules you do not have to clip coupons or live like a monk. It is about making small, practical adjustments to our relationship with money that will allow us to spend less than we make and invest what's left.

Aspire 2 Wealth is all about a shared journey to become wealthy and taking even some of these rules to heart will have a drastic effect on your lifetime wealth. Take some time to read the full article for each rule and decide to put them into practice in your life. It will take years to "get rich" this way but even after only a few months of following my own steps I have started a drastic change in my finances. I have spent less each month and saved more, while still meeting all of my needs and most of my wants. It is worth it. Start Now!

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Millionaire Rule #10

Generate Multiple Income Streams
There are two components to having more money left over in the bank at the end of the month. The first is to reduce expenses and spend less money. The second is to increase your income. While it may sometimes seem impossible to make more money on will power and elbow grease alone, creating multiple income streams is a sure-fire way to bring in extra cash. Branching out from your traditional day job to seek new ways to create income is an integral part to becoming wealthy if you, like most of us, don't pull down the big bucks. This installment of the Millionaire Rules series will explain the importance of having diversified sources of income and some suggestions for how to get started increasing your cash flow.

First off, if we want to become wealthy we must also be willing to do some extra to get ourselves there. If you do the exact same thing as everyone else, how will you "get ahead' in life? At the end of the work day most people go home and use their time for leisure. They watch TV, they go for a beer with the guys, or they read a book. A person who wants to be wealth would use that same time to take a second job, further their education, learn a new marketable skill, or start a home business.

Anyone can find a little extra time to make some extra money. I have a friend who referees a few soccer games every week. He will earn between $15 and $40 per game (90 minutes). It may not seem like a lot, but if he were to do an average of 3 games a week, 9 months out of the year, it would add up to $3500 onto his income each year. That is enough to compound to over a quarter of a million dollars over 25 years. I have another friend who got a room mate to rent out a room in his house for $500 a month. That adds $6,000 a year onto his income. That is more than enough to fund a Roth IRA to the maximum!

Personally, I have jumped into the world of blogging and using eBay to turn unused junk into cash. A little bit of my time has brought in $940 in extra cash over the last two months. I have also found that I really enjoy what I am doing. I found a hobby that earns money rather than costing money! Think about what you are passionate about and find a way to turn it into extra cash. For example, if you love collecting vinyl record why not instead sell records online. If you enjoy arts and crafts, start selling your creations at local craft fairs.

A local business leader in my wife's home town is a great example. When he was a young man color television was a hot new trend. He and his brother scrimped and saved the money they earned doing odd jobs for the neighbors and bought a nice new television. But, instead of putting it in the living room and wasting their evenings watching it, they rented out their TV for a few dollars a week. It wasn't long until they had made back their whole investment. Again the boys took their money and bought another TV, and then another, and then another. That rental business that started with some odd jobs and a single TV set has been built into a $500 million dollar fortune.

Stocks, bonds, and real estate are also a form of income diversification. Rather than make money from a job or by working, you earn income from dividends and interest. Even today with my very modest portfolio there are days that I make more in the market than I do at my job. The market will rack up gains and build my wealth even if my paycheck stops. It is a great feeling to know that my investments will continue making money long after I quit working for my money.

The ways to diversify your income are nearly limitless. The effects of broadening your earning potential can be dramatic. Pick something you are passionate about and harness that enthusiasm to create wealth. A couple extra hours, a few days a week, is enough time to drastically improve your financial situation. Lets get started!

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Millioniare Rule #9

Buy a House and Cars You Can Afford
As a part of the Millionaire Rules series it is important to address the two largest purchases most people make in their lives. The choices you make about where you live and what you drive can drastically effect your long term ability to create wealth. If you allocate too much money to these budget items it is almost guaranteed that you will find it difficult to save and invest for the long term. A lifetime of fugal living, epitomized by the "latte factor" is quickly dwarfed by these two massive financial commitments.

I am not sure if these terms are universally used, but where I'm from it was common to hear someone called car-poor or house-poor. Contrary to what you might expect, it is NOT someone who lives in an ugly house or drives an ugly car. Instead, the term refers to someone who has stretched themselves too thin by buying a house or car they truly can not afford. All too often the explanation for a friend's absence at a party or night on the town was because of our friend's car-poor status. Even worse than missing out on the social scene, if your goal is to build wealth, overextending can be a giant mistake.

The purpose of a car is to provide transportation. This is important because so many people try to think of their car as an expression of themselves. If you are an outdoors person you should drive a Jeep, if you are eco-friendly you should drive a hybrid, if you are a macho man you should drive a big truck, and if you are a young professional you should drive a Infinity, BMW, or Mercedes. With no exaggeration, this mindset can ruin your long term hopes at building wealth.

In some locations transportation is best served by avoiding cars all together and using public transportation. I've spent time in several cities where this is by far the best way to get around. In other places, there is no way around owning a car. Unfortunately, I fall into this category myself. However, when I visit New York City or Chicago, you had better believe that I use public transportation whenever possible. It saves money, frustration, and time in most big cities.

If owning a car is a necessity, it is important to know that the value of your car falls rapidly from the moment it is driven off the dealer's lot. Some cars loose 30% of their value in the first year alone. Knowing this, it is often wise to buy a used car where someone else has suffered this massive initial depreciation so it does not hit your bottom line. Another alternative is to buy a new car, and then literally drive the car until it is ready to be sold for scrap. The benefits of this method are to spread the depreciation over the full life and mileage of the car, and it ensures the the car had not been abused or poorly maintained by its previous owner(s).

Now, the million dollar question. How much to spend on your car to begin with? If it isn't a status symbol or personal expression piece, it should be pretty simple to find a safe, reliable car with room for four people and some luggage brand new for around $15,000. If you want to buy a used car, great low mileage cars in good condition can be found for half of that amount. A person striving to become a millionaire has no business driving a car that costs half of their salary or more. If you make $50k do not buy a $25,000 car! If you make $80,000 do not buy a $40,000 car!

A rough rule of thumb is that your car payment should never be more than 5% of you salary on a 48 month loan. Based on a loan at 6% and a 20% down payment this works out to be a $4,375 car for someone who makes $20,000, $10,700 for someone at the median income of $48,200, and $22,200 with an income of $100,000. How do you stack up? This is of course, if you finance the vehicle at all. Alternately, if you are already well on the way to wealth, spending about 1% of your net worth would be an equivalent rule of thumb.

Now to talk about housing. First of all, do not buy a house if it is cheaper to rent an equivalent house. Run some numbers about how much it will really cost to own and make a well informed, educated decision. When dealing with housing it is important to realize you will have to make the payments for 360 months to pay the mortgage in full. Other than marriage, this is the longest commitment most people ever make.

The old rule of thumb was to buy a house that was equal to 2.5x your salary. This rule has been updated somewhat to account for lower interest rates, and now the rule is to spend less than 30% of your gross income on your home. In most cases a mortgage that is 28% of your income fits the bill. To put this in perspective, on the $48,200 median income a person should hold a mortgage of no more than $192,000 assuming a 5.75% interest rate. A sizable down payment of at least 10% is also prudent, to establish a reasonable price ceiling of $213,000 for the purchase of a home.

Next, we should also consider how much space is needed. It is a waste to buy more house than is necessary to live comfortably. A rough approximation of 1,500 sq ft for a family of four and 1,200 sq ft for a couple is what I would recommend. This is about 30% smaller than the median American home but should still meet all of the basic needs. Buying less house frees up money for saving, investing, and building wealth.

Contrary to common wisdom, it is poor financial advice for your home to be your largest "investment." Homes typically appreciate at roughly the same rate as the economy as a whole, where as stocks produce a much larger return. Ideally it will be possible to invest far more money each month than is spent on housing costs. Every dollar you save instead of spending on housing will be able to compound and build much more wealth than if it were tied up in a slowly appreciating house.

If you are willing to make wise purchases for these two large budget items, it will go a long way toward building wealth. It can take a life time of pinching pennies to amount to the benefit derived from a single thrifty choice when buying a home or picking out a car. Be sure to think long and hard before making the type of commitment that has the potential to either take you leaps and bounds toward becoming a millionaire or instead leave you car-poor and struggling.

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Millionaire Rule #8

Fund a Roth IRA to the Limit
The Roth IRA is my second favorite type of account for retirement saving. Because I'm the type of guy that really gets excited about the prospect of have a massive amount of money in retirement, it means that I REALLY love the Roth IRA. If you are curious what my number one favorite type of account is check out Millionaire Rule #7. My goal for this post is for at least half of those who read it to get fired up and open a Roth IRA in less than 24 hours from reading this post. Now, to explain why a Roth is so great.

First, we have the benefit common to all forms of IRAs, tax free compounding. That means from year to year an investor does not have to pay taxes on the income generated within the account. So for example consider the following sequence of events: you use the money in your IRA to buy some stock, the value of the stock goes up, and then you sell it for a profit. In a normal taxable account when you file your taxes the IRS will want its share of your profits (called capital gains) which can range from 15% (shares held more than a year) up to 35% or the top income tax rate (shares held less than a year). The tax man would also stick his hand out for income generated from dividends and interest (at the top tax rate) as well. Obviously these taxes can be a massive drag on your portfolio except that an IRA keeps the money safe from Uncle Sam.

The money stashed in a Roth is after tax dollars which means you can not deduct your contributions from your income when it is contributed; while on the other hand, a Traditional IRA is tax deductible. This may seem like a bad thing, except to make up for it, when money is withdrawn from the Roth it is tax free. Yep, as amazing as it sounds, all of the money you manage to build up (from both contributions and earnings) in your Roth IRA is completely tax free when withdrawn in retirement. Zero taxes in retirement give the Roth IRA a huge advantage in my retirement planning strategy.

The next great thing about an Roth IRA is that it allows you to shelter more money from taxes than a Traditional IRA. The reason is slightly complex, but here it goes. Both accounts have a maximum contribution in 2008 of $5,000. I already explained how a Roth is after tax income and a Traditional IRA is pretax income that is taxed instead at withdraw. So the effective amount of savings in a Roth that are sheltered from taxes is the full $5000 (post tax) based on an investment of $6666 in pretax dollars. The Traditional IRA can take a $5000 pretax contribution but will only be able to ultimately shelter $3750 because that $5000 gets taxed at withdraw in retirement. If that is confusing keep on reading.

Here is an example, we start with the same $5000 investment and assume the 25% tax bracket both now and in retirement. The Traditional IRA will get a contribution of the full $5000 and then compounds until retirement. At retirement the money is withdrawn and the 25% tax is paid. The Roth will get a contribution of $3570 (remember it is after tax so $5000 * 0.75) and then compounds until retirement where it is tax free. In this scenario both types of account wind up with the exact same amount of spendable cash in retirement (take the tax before or after it is all the same). However, if you have $6666 that you are able to save, you can put the full $5000 into a Roth you will end up with more money tax free in retirement. In effect, the Roth is able to shelter 25% more money from taxes than the Traditional IRA (assuming you have the extra money to save).

Tax rates change over time. Many people believe (and history would seem to support) that current tax rates are well below their normal levels. Many people (myself included) also expect to be in a much higher tax bracket in retirement than they are now. Early in a person's career they may have a lower income coupled with tax deductions for mortgage interest, dependents, and student loan interest that will disappear by retirement time. I expect to go from the 25% tax bracket now to the 35% bracket in retirement (I'm ambitious what can I say?). A Roth IRA protects your retirement income from the risk of higher tax rates in the future. That means a Roth IRA effectively adds 10% on to its value relative to other tax sheltered retirement accounts like a 401(k) or Traditional IRA for someone like me.

The Roth IRA has a few more benefits I just want to quickly address. The contribution maximum is index to inflation so the amount you can save will increase over time. Roth IRAs are given special treatment in the unfortunate even of their owner's death. A non-spouse inheritor can take withdraws from the Roth over the course of their lifetime while maintaining the tax deferral of capital gains and interest. Normally stocks, bonds, or 401(k)s in an estate incur the full tax burden at the time they are inherited (so no continued tax free growth). Lastly, Roth IRAs can be opened with many different banks and brokerages which provide a massive selection of possible investments. Individual stocks, bonds, options, commodities, futures, mutual funds, ETFs, real estate, art and darn near any thing else you can think of can be used an investment in a Roth IRA. This is very different from a 401(k) which is limited to a single management company selected by the employer and only a limited selection of mutual funds in which to invest. Investments in the Roth can cover all asset classes and are completely controlled by the investor.

It may seem like this list could go on and on, but I have one last special benefit of the Roth IRA. Because the contributions to the account are after tax, there are no penalties or taxes from withdrawing your contributions from the account in the event of an emergency. This is very different from a 401(k) where pulling money out before age 59 1/2 would result in paying taxes on the withdraw plus a 10% penalty. The Roth IRA does not have this problem, and it can give you extra piece of mind and a source of cash in a pinch. I really recommend you stay out of your retirement funds if at all possible but at least you know it is there if you need it.

I've covered most of the great benefits of the Roth IRA. In all honesty there aren't many drawbacks. Over 40 years of contributions at the $5,000 and earn an 8% return your account will grow to over $1.4 million. I highly recommend the Roth IRA as Millionaire Rule #8. Check out the rest of the Millionaire Rules and be sure to subscribe to my RSS feed.

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Millionaire Rule #7

Fund 401(k) to Get the Full Match
There is no better way to save for your financial future than to take advantage of a 401(k) which is matched by an employer. It is rare that I will state anything in the personal finance domain with this much certainty. An employer match is free money. No offense intended, but you would have to be an idiot to ignore FREE MONEY!

For those of you who have never heard of a 401(k) or don't really understand them I will give a quick primer. It is named after the section of the tax code which defines the rules of these accounts. A 401(k) is a savings account for the purpose of funding retirement. If you take money out before age 59 1/2 you will owe taxes and a 10% penalty to the IRS (DO NOT DO THIS). Money contributed is completely protected from taxes until you withdraw it. This tax benefit means that you can avoid taxes now. By avoiding taxes you will have more money to save, and each year your savings will continue to grow tax free until retirement.

A 401(k) account is set up by your employer, held at an independent financial services firm, and managed by YOU the investor. You choose how much goes into the account each pay check (call your HR department to set this up) and you pick your investments from a list of choices provided by the servicing firm. Lastly, and most importantly, many employers encourage employees to save by contributing money on the employee's behalf. This is called "matching" because it is normally arranged such that the employer will kick in a certain percentage of what the employee contributes. Common matching arrangements are 50% of every dollar up to a maximum of 3%; in this case an employee would contribute 6% of their gross pay and the employer would add an additional 3% (for a total of 9% of gross pay saved). Some employers are very generous and offer even more free money!

I will give a simple example to show the power of a 401(k). Lets consider Joe, a regular guy making $50,000 a year. Each year he will get a small raise of 3% and his investments return a moderate 8% per year. He is 30 years old and will work until he is 67 year old. The table below shows Joe's results depending on the type of investment account he uses.



I will say again, that not putting in the money necessary to get the full match is leaving free money on the table; don't do it. The best case shown in the table produced a nest egg of over $1.28 million which is roughly double what could have been saved in a taxable retirement account.

Now I realize that not every person has been lucky enough to find a job that offers a 401(k) and that a match is not offered in all 401(k) plans either. Do not loose hope! There are still other retirement saving options that are pretty good. If you want more information on your choices, continue reading the rest of my series Millionaire Rules.

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Millionaire Rule #6

Pay Off Debt (except a mortgage or federal student loan):
"Compound interest is the most powerful force in the universe." This quote is often attributed to Einstein. Whether the famous physicist ever said this or not, the fact remains that the avalanche effect of compound interest produces remarkable financial sums. When a person uses credit to make purchases they are on the loosing end of compound interest; they are trying to swim against a powerful current.

One of the best ways to stay poor (or middle class) is to get onto the debt treadmill. Johnny Carson while hosting the Tonight Show once said, "Scientists have developed a powerful new weapon that destroys people but leaves buildings standing - it's called the 17% interest rate." While he was referring to the staggeringly high rates of the early 1980's on mortgages and other bank loans, rates even higher are found on most credit cards. With a credit card balance of $3,500 and a minimum payment of $50 per month it would take over 28 years to pay off the balance. The total interest paid would amount to approximately $13,500. It nearly quadruples the sticker price of a purchase if a person buys on a credit card and opts to only pay the minimum payment. Would you still buy something if you knew it would ultimately cost 4x as much on credit? Too often credit is used to buy short lived pleasures like clothes, food, or gadgets that will be long gone before you finish paying off the debt.

Obviously, getting into the habit of buying on credit it can be nearly impossible to build wealth. The same $50 per month could be saved for 5 years and you could pay cash for the $3,500 purchase. Then if the $50 per month savings were invested with an 8% return it would amount to more than $40,000 in the same time it would have taken to pay off the purchase on credit. Which would you rather do, save for 5 years, pay cash, and create $40,000 in wealth by keeping the debt payments, OR make payments for 28 years and have nothing left to show for it at the end. As you can see, credit card debt is a sucker's game.

I make two important exceptions to my rule to avoid debt. In many cases it is beneficial to take out student loans for education spending. Education has an intangible value which comes from learning and personal growth. It is an investment in yourself that will provide rewards through out your life. Education also provides a tangible value by increasing a persons employability and career prospects. Education loans also benefit from special tax treatment and generally lower interest rates that make this type of loan even more financially palatable.

I still have some caveats that need to be taken into account. First, only borrow what MUST be borrowed. Do not take out "education loans" to pay for a Spring Break vacation, bar tabs, or frequent restaurant meals. Also, do not rush off to a pricey private school to be piled up with loans when a local or state institution can serve you equally for a fraction of the cost. Second, do not borrow for a degree that you do not feel passionate about. If you do not know what you want to learn or what career you are studying for, do not take potentially useless classes. Wait until you have more life experience and are sure how education will advance your goals before borrowing to pay for it. Finally, do not borrow more than you can realistically expect to pay back. I see too many people with a passion for art or music borrow tens of thousands of dollars, while their career path will never allow them to pay back. Take out loans that are in-line with the realistic salary you can expect once you graduate. On a $30k per year salary it is a massive handicap to have $100,000 in loans. The same $100,000 is not nearly the same burden if it pays for a professional degree like law school, medical school, or masters degree in business or engineering.

My next exception to the no-debt rule is to take out a mortgage. Buying a home is often a very good wealth building method. A home will still be around long after the debt is retired. A home also goes up in value and will be worth more in the future. Everyone must have a place to live, and owning a home can sometimes greatly outweigh renting. However, it is important to recognize that this is not always the case. In many locations renting is cheaper than buying. Make sure to look at both options and choose the one that is right for you and the current market situation.

Many of the same caveats listed with student loans also apply to paying a mortgage: only borrow what MUST be borrowed, wait until you are sure you will stay in one place and are ready to buy, and do not borrow more than you can realistically expect to pay back. Other rules of thumb which apply only to home buying are: buy a house which is 2-3 times you gross income and no more, if you can't afford to have a down payment you should not buy a house, never let your house be your largest investment, and get a fixed rate mortgage. Do not allow your home purchase to control your life by eating up all of your time and money.

If a person can live their life in a way the lets the power of compound interest work for them rather than against them, they will be well on their way to wealth. Check out the rest of the Millionaire Rules to learn about other basic tenants which can guide you on your path to wealth. Be sure to subscribe to my RSS and check back regularly to follow my progress as I Aspire 2 Wealth.

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Millionaire Rule #5

Save an Emergency Fund
What would you do if you car broke down tomorrow and needed major repairs? How would you pay for it? What if you or a family member got hurt and the insurance company (or worse yet doctor) sent you a bill? Do you have enough to meet your co-pays and deductibles?

Unexpected expenses pop-up every day and it is important to have money set aside to pay for them. Keeping an emergency fund that is large enough to meet these expenses is an absolute necessity. I don't want to sound all gloom and doom, but bad things happen so be prepared.

There is a lot of debate among personal finance writers about how much spare cash should be stored in an emergency fund. There seem to be two primary camps, one advocates a large fund that is equivalent to several months of a families net take home pay. Kathy M. Kristof of the LA Times wrote the article It's Time for an Emergency Fund that says, "Pretend that tomorrow, for whatever reason, you are not going to be able to work for six months and the stock market is down 15%." From here it goes on to suggest keeping at least 3 months worth on income in a savings account.

The other prevailing take on how much to save is to keep a few thousand readily accessible. J.D. at the blog Get Rich Slowly writes in his post How Much in an Emergency Fund?, "there are few catastrophes that would ever require you to come up with more than a couple thousand dollars on short notice. Insurance will mitigate many problems. For everything else, there’s time to obtain capital: to tap into home equity, to sell stocks, etc." Those in this camp would expect to keep $1,000-5,000 in liquid savings and possibly open a home equity line of credit to supplement the savings.

Both approaches seem equally valid, but which you choose should reflect your own situation. I feel very secure in the stability of my employment. I also have insurance that covers short term disability. Because of these two facts, I plan to have a lean emergency fund that is enough to cover my insurance deductibles and little else. My maximum out of pocket expenses for my health insurance is $4,000 per year so I will use that as my benchmark for a major catastrophe. Over the next couple of years, part of my financial goals will be to save a little bit each month until I reach this level.

The next major decision is where the money should be kept. Most importantly, the money must be readily accessible when it is needed. It would be counter productive to tie your emergency fund cash up in a Certificate of Deposit (CD) which keeps it locked up for months at a time. It is also important that the money is able to keep pace with inflation or it will quickly lose buying power. Local banks and credit unions rarely pay a high enough interest rate to keep pace with inflation. Another consideration for emergency funds is that they should not be invested in stocks or other volatile investments. The last thing you want is for the value of your account to have plunged right when you need it the most.

Based on these considerations, it seems that money market funds and high interest online accounts seem to be the best savings options. I selected one of these high interest online banks for my emergency fund because it has the added security of FDIC insurance on the deposit which a money market does not. Rates are currently competitive with short term CD's and the money can be transfered into my checking account in no more than 3 days.

The important thing to take away from Millionaire Rule #5 is that bad things happen when we least expect. An emergency fund is the best way to make sure you are always prepared for whatever may come your way. This post is the fifth installment in my series Ten Simple Rules to Build Wealth. If you Aspire 2 Wealth like me be sure to read the rest of the rules and subscribe to my RSS feed.

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Millionaire Rule #4

Set Up Automatic Savings
No matter how great your will power, spending money is the easiest thing I know. Saving it is hard. Plain and simple, if a person has money they will spend it. If you make it hard to access your money you will spend less and save more. The solution is to effectively 'hide' money from yourself.

The biggest reason people fail to save money is that they only save what is left at the end of the month. This approach indirectly declares that saving money is your absolute lowest priority. All your savings account gets each month is the crumbs that are left over. Instead you must treat your savings as a top priority so the money is shepherded to safety first before any spending can take place. You must treat saving as an expense, the same as any other bill you receive. In this manner you can ensure that every month you meet your savings goals.

There are four ways to save automatically that I use and highly recommend:

First, if your employer uses automatic deposit to pay you directly into a bank account, use it to make saving automatic. To do this, you can request that a payment is sent to both your savings and checking accounts instead of a single one into your checking. Money arrives on each payday automatically in your savings account without you having to lift a finger.

Second, use your bank's online bill payment feature or the brokerage's automatic debit system to automatically send a check to your brokerage or investment company. This way you can fund your IRA a little bit each payday without any action needed.

Third, start a change (or even better $5 bill) jar or piggy bank. At the end of each day empty your pockets into the jar. If you take the $5 bill route then each evening if you have any bills with Abe Lincoln's face on the front, tuck them into the jar too. You will be amazed how much cash you have at the end of a year or two. Use this money to make a special purchase or for a vacation that you wouldn't otherwise be able to afford.

Finally and most importantly, enroll in your employer's 401(k) plan. There are great tax advantages and many employers offer a matching program for money that is hidden away in a 401(k). Saving is automatic, and the money is also protected (from frivolous spending) by strong incentives that encourage you keep your hands off the cash until retirement.

The final automatic savings method I would like to address is purchasing your home. Many people have built a great deal of wealth through home ownership. Owning a home has features similar to other savings methods. That's right, it is a savings method NOT an investment. It entails mandatory payments (principle paid on a mortgage) and builds up equity that is difficult to spend. This money is hidden from the saver because, in the past at least, selling the house and then relocating to a less costly place to live was necessary to get access to the cash. In other words, owning a home does not inherently make one more wealthy, instead it creates a 'forced savings' where principle payments build up over time.

In recent years this mechanism, that worked so well for our grandparents, has broken down with the ease with which you can obtain a Home Equity Line of Credit (HELCO) or second mortgage. An even worse tactic is to hold a negative amortization (also known as an option , differed interest, or graduated payment mortgage) in which you literally loose wealth every month holding this loan as you pay less than the interest owed. In order to reap the benefits of home ownership a person must recognize that the only true wealth created is the forced savings of paying principle and building equity. Buy a house, utilize forced savings, and create wealth.

If a person takes advantage of these Automatic Savings techniques it is nearly assured that they will become an millionaire even if they have a moderate income. Check out the rest of the Millionaire Rules from my post Ten Simple Rules to Build Wealth.

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Millioniare Rule #3

Learn to Say "No" to Your Wants (and those of others)
To be come a millionaire a person must be able to differentiate between what one NEEDS and what one WANTS. This is the third installment of my series Ten Simple Rules to Build Wealth. This rule is what enables a person to spend less than they earn and begin to save, invest, and create wealth. This is all much easier said than done. The easiest way to differentiate between what we need and what we want is to first identify a simple list of needs and then every thing else a 'want'.

List of Needs:
1. The Basics - Food, Shelter, & Clothing
2. Health/Welfare
3. Career/Employability
4. Ethics/Compassion
5. Social Connections - Friends, Family, & Community

Each of these five categories contributes to the ability of a person to survive AND thrive. Thomas Jefferson most famously coined the phrase, "Life, liberty, and the pursuit of happiness" in the United States Declaration of Independence and NEEDS are those things which are required to achieve Jefferson's vision. This might include nutritious food, comfortable shelter, seasonally (and socially) appropriate clothing, reliable transportation, education or vocational training, religious expression, medical treatment, and family gatherings.

Notable absences from that list are flat screen televisions, satellite television, alcohol, tobacco, and drugs. Trendy clothes, McMansions, fast cars, and gourmet meals are NOT included in the list of needs. I admit that I suffer from terrible gadget lust when I see a new Apple Computer commercial or 300 horse power BMW. The point is to realize that a used Toyota or Chevy will provide you with reliable transportation for a fraction of the cost.

I've read it a dozen places that it is not important how much money a person makes, but instead it is how much money a person spends. When you feel the impulse to spend money take a minute to consider the role your purchase will serve. Spend your money wisely on the things you need and then save what is left. However, just because something falls into the 'want' category does not mean that it is always bad. Periodically rewarding yourself with a special purchase will contribute to your happiness as long as everything is kept in balance. What is important is that the value of purchases is analyzed, and a rational decision is made.

A final note needs to be included to address the risks that other people present to the topic of needs vs. wants. A great example I have seen in the past is the first time parent. I have not had children yet, but several of my family members have recently become parents. Everything must be perfect for their priceless child (and no expense spared). They immediately went out to pick the perfect nursery colors, perfect nursery furniture, and perfect new born baby clothes. My mother and mother-in-law are both quick to point out (due to their plentiful experience) that a baby does not care what brand of bassinet it sleeps in nor will a toddler even faintly remember the wall color of his or her new born nursery. The new parents forget that the pile Baby Gap clothes they put on their credit card will be peed and pooped on daily and outgrown in a matter of weeks. Of course, new parents often don't see how what a baby needs if far different from the perfect nursery in the magazine. This same phenomenon causes us to complete with the neighbors to have the most green lawn and drive massive SUVs for one person to commute to their deskjob. Always remember how peer pressure and "keeping up with the Joneses" can cloud your idea of what is a 'need' and what is a 'want'.

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Millionaire Rule #2

Create a Spending Plan / Track Your Progress

The concept of personal finance is interchangeable in most people's minds with a single, dreaded, and much maligned word: budget. First of all budgeting is NOT the only component of personal finance, check out my article on Ten Simple Rules to Build Wealth for explanations of my other key tenants of personal finance. Secondly, the reason people hate budgeting so much is that for most people a budget is a rigid set of rules which tell a person how to spend their money. This sets a person up for failure because life is not rigid, it ebbs and flows; it has booms and busts. From one month to the next it can be impossible to know for sure what unexpected events may change your priorities, force your hand, or break your rules. The other unintended consequence of rules is that when they are broken we often feel guilt, depression, or anger with ourselves or others we blame for our perceived failure.

Through personal experimentation and by incorporating the advice of great blogs (Get Rich Slowly), articles (Making a Money-Smart Spending Plan), and books (Total Money Makeover Workbook) I have replaced the budget with a more flexible system to combat some of the negatives outlined above and still accomplish the important goal of planning and tracking spending.

The system I have adopted to help guide my finances is called a spending plan. To create a spending plan, first you need to assemble some basic financial information such as a pay stub, monthly bills, debt balances, and bank statements. You need to have a broad view of where you stand today, which is a simple way of saying your 'balance sheet'.

The next step is to look at your goals and your balance sheet and determine your priorities. For me, my first priority is to provide for the needs of my wife and our household. That means that buying a modern, spacious house and maintaining it in top condition is my first priority. A close second place in my priority list is to invest for retirement. For comparison, one expense category that I place near the bottom of my priority list is to wear mall bought, name brand clothes. Each person will have a different set of priorities for their money. I realize that spending less on my home would free up money to save more for retirement, but a spending plan needs to reflect your values or it will be impossible to follow.

The next step is to assign rough dollar amounts to each priority in your list. Expenses should be identified as fixed, flexible, and discretionary. Fixed expenses are the bills that must be paid every month like a car payment or mortgage. Flexible expenses are the bills that can be changed by behavior such as food, gasoline, and telephone bills. These expenses will always exist and can not be reduced to zero; however, a person does have a great deal of control over how much is spent each month (think canned veggies and tuna vs. steak and wine). Discretionary expenses are those which are entirely optional such as gifts and recreation. It can be helpful to identify variable expenses which change drastically from month to month and find the range of the bill. Heating oil, for those who use it, is a widely variable cost that needs to be specified in this way. The minimum payment on revolving debt should also be specified at this stage. Finally, add up these rough expenses to get a sense for how much money is spent each month and where it goes.

The last step to creating a spending plan is to revise your goals and your spending to make sure they are in line with your priorities. If your top priorities are being neglected for the sake of lower priorities take that to heart and create a goal that will seek to realign spending. If a single priority such as saving too much or buying too much gasoline is throwing the spending plan out of balance you can create a goal that will seek balance.

Now that you have created a spending plan it is important to recognize that this statement is a living document about how you wish to spend your money. It is equally important to the success of the plan for your progress to be tracked. This is an affirmative process in which you focus on the goals that have been achieved and create new goals in line with your priorities. I use online tools to trace my net worth, my debt, and my investment portfolio. A monthly review gives me positive reinforcement. Of course setbacks and changes will happen as a part of life. A spending plan embraces these changes and adapts.

A spending plan can help you reconcile spending with your priorities. It allows you to plan and track spending without the strict rules of a budget. Goals which are created as a part of a spending plan provide milestones for those who Aspire 2 Wealth like me. Check out the rest of the Millionaire Rules for more rules to grow wealthy.

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Millionaire Rule #1

Write Down Your Goals

There are only two differences between a dream and a goal: 1) a goal is written down and 2) a goal is assigned a deadline. Based on that distinction, a goal is a concrete, measurable representation of your dreams. Writing down your thoughts forces you to, in effect, confront your dreams and make a contract with yourself to follow through on them.

I personally dream of owning a house with a dedicated home theater. The process of changing that dream into a goal is the essence of Millionaire Rule #1. First I recognized that a great deal of time, money, and effort will be required to attain my dream. Next, I assigned a realistic time frame in which to achieve my goal (in this case at age 40). Finally, I put my goal in writing and review it regularly.

Putting these thoughts in writing force you to be accountable for working toward that dream. Putting your goals on paper allows you to look back daily, weekly, or monthly to remind yourself why you are working so hard.

Placing a date on each goal you set is also very important. Time frames that reflect the size of the dream must be given to each goal. Having distant long term goals keeps you from feeling overwhelmed to achieve too much in a short time. Having small short term goals keeps you focused on immediate successes. In this manner a series of small goals, even day-to-day goals embodied by a to-do list, can build up to reach large goals.

Return to the rest of the Millionaire Rules.

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Ten Simple Rules to Build Wealth

The last few days I have been working on the next installment in the Acquiring Wealth series of articles I started. I asked my wife to read what I had written and she told me, "It sounds like a really lame text book." I looked back and she's right. Now, I'm going to try another approach to deliver the same information called Millionaire Rules. Over the next couple of weeks I am going to write a post for each rule explaining it in detail. These will be the rules that I will live by in my path to wealth and I'd like to share them with others that may benefit as well.


Ten Millionaire Rules:

1. Write Down Your Goals
2. Create a Spending Plan / Track Your Progress
3. Learn to Say "No" to Your Wants (and those of others)
   
4. Set Up Automatic Savings
5. Save an Emergency Fund
6. Payoff Debt (except a mortgage or federal student loan)
7. Fund 401(k) to Get the Full Match
8. Fund a Roth IRA to the Limit
   
9. Buy a House and Cars You Can Afford
10. Generate Multiple Income Streams

To some extent I already practice some of my rules and others will need more work. Subscribe to my RSS and keep an eye out for the full articles for each rule.

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