Ok, so how to be a millionaire? As I explained in the introduction, the plan is simple: save regularly and invest regularly. But let’s break these down to see exactly what I mean.
Saving as a Future Millionaire
I believe most of the people get this part wrong. In order to be a millionaire you need to think like a (future) millionaire! Most people get their salary, pay their bills, spend on stuff (the more there is on the bank account the more generously), and if at the end of the month there is still some left, they save that. This is a wrong approach as it limits the amount you can save, not the amount you can spend. Instead of this, future millionaires do the following:
You get your salary and immediately pay the first and most important bill: the money you pay to yourself. Of course you need to be realistic (in both ways) about how much does early retirement worth to you. You can’t be too aggressive here, as this might get you in trouble with your regular expenses (you don’t even want to think about getting into such crazy things as accumulating debt on credit cards etc.), and at the same time you still want to enjoy your life on the way to early retirement, don’t you? But you should try to aim the maximum as you can safely put aside, as even a little extra can make a huge difference at the end. Let me demonstrate what I mean with a chart:
Let’s say you want to save the same amount of money each month in order to retire early. The return on your investment is 5% each year and each year you are able to save 3% more than in the previous one (you can call it promotion, inflation adjusted salary increase, the mix of these etc.). So how many years does it take to reach the magic 1 million? Well, calculating with a starting saving of EUR 1,000, after 25 years your balance will be EUR 775,546. Not bad, but you’re not there yet. EUR 1,200 saving won’t make you a millionaire either within 25 years (you would need 26). Nevertheless with EUR 1,400 saving you will reach one million in 24 years. EUR 1,600 takes you there in a year less. With EUR 2,000 it only takes 20 years and with EUR 3,000 you can see six big fat zeros in 16 years.
Of course it is only a very simple calculation but I think it helps to demonstrate the point that every little extra you can put aside could take you years closer to your aim. And here I must point out what most likely you have already noticed: we are talking about a number of years here. Like 15-20-25 years. Of course there are some extreme cases when you can achieve it much earlier, but then you either need a lot more income, or a much more extreme cost saving lifestyle (just check out the blog of this guy as an example; it is also achievable if you really tighten your belt: http://earlyretirementextreme.com/). So generally you still do need to work many years for an early retirement. But the earlier you start saving, the earlier you achieve your goal. You start at 25? The age of 40-45 is a very realistic goal. Starting at 35? You should be able to retire by 50. Just compare it with the official retirement age of your country. For example in the Netherlands, the age of retirement is currently 65 years and in 2021 it’s going to be 67! You can observe the same trends around the globe. Do you really want to work until that age? The way I see it, that’s definitely a no-go!
So how much should you save? It’s easier to calculate than you think. Just check your spending in the last couple of month (you have internet banking, right?) categorize your expenses per month and you will have a nice overview on how much did you spend on what. You might be surprised what you see there… There are also a lot of websites and apps out there that could help tracking your expenses, like www.mint.com, GoodBudget, BillGuard etc.
Now you will have a good idea about your average monthly expense. Add some extra to it, something like 5-10% just to be on the safe side. Deduct it from your net family income and there you have it. This is the amount you should be able to save every month. Not satisfied with it? Well, then you have some homework to do reviewing your expenses. Is there any category you could reduce? Go for it! Remember that every little counts; one or two hundred extra per month could mean years when it comes to early retirement.
Another important factor of saving is to do it in a tax advantageous way. If you want to be a millionaire and retire early, is always better to keep your savings in your own pocket. Give only that much to the taxman as you are legally obliged to. Bear in mind that there is a huge difference between optimizing and avoiding taxes!
Depending on where you live in the world, there are a lot of different options you can chose from. Some countries encourage retirement savings more, some less. As I live in the Netherlands, in the future posts I will talk more about the Dutch system. Nevertheless if you are from the US, like many other readers, I would strongly encourage you to read through the article of retirement basics from poweroverlife.com with a lot of useful information you should consider during your retirement planning.
Are the things described above the only way to save? No, but this is the way we are doing it and this is what we are hoping to take us to our aim. Of course saving only is not enough (you don’t want all that cash under your mattress, do you?), it needs to be invested in order to let it work for you. In part 2 of the “how to be a millionaire” series I am going to explain how we are doing it.
Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.