While some are chasing get rich quick schemes and failing to get rich, others are practicing a technique that actually works; It’s called get rich slow.
In fact, most millionaires have built their wealth slowly. It doesn’t take an exorbitant amount of income, either.
One of the top groups of self-made millionaires is teachers, so the average American can do this, even those with a modest income.
It’s not so much the income that matters; it’s the behavior, and Chris Hogan said it best:
I’ve talked to a lot of millionaires, and most of them have average jobs with average pay, like teachers or firefighters. It just goes to show that how you spend and invest the money you make matters more than how much you actually bring home.
Contrary to what some may think, you generally don’t get rich by luck or chance; you get there by saving and investing over long periods.
If you really wanna get rich, just do what rich people do! And here’s how to do it.
1. Earn an income
This should go without saying – but in order for these steps to work, you have to earn an income.
Even if your goal is to fund your own retirement through an IRA, you still have to have an income to qualify.
For example, one of the best options for retirement is a Roth IRA. However, you have to have traceable income in order to open a Roth and make contributions to it.
Not only is income necessary for retirement, it’s obviously necessary for living expenses.
An earned income is the foundation upon which all the other steps are possible.
Like Dave Ramsey says,
Your most powerful wealth building tool is your income.
That’s absolutely right!
Before you can do anything, you have to have an income, and that’s certainly true for these steps.
2. Avoid debt
One of the worst things you can do that will prevent you from building true wealth is to get into debt.
The debt that I’m referring to is everything other than a mortgage: car loans, student loans, credit cards, etc.
No millionaire will ever tell you that they borrowed their way into prosperity.
The problem with debt is this: once it gets out of control, it ties up all your income.
Remember, your income is your most powerful wealth building tool.
Debt might also prevent you from being able to make the payment – you have more money going out then you have coming in – so you’re bankrupt.
So it’s best not to play around with debt; just stay away from it.
When you have debt, you have risk. To eliminate risk, you have to eliminate debt.
Besides, any money that you have going towards debt payments is money that could be going towards investing, which is where it needs to go if you are to ever to become wealthy.
Related: Become a Millionaire by 50
3. Live on less than you make
Similar to debt payments, your lifestyle might also be tying up your income.
Some people think that just because they make a dollar, they have to spend it, but that’s a recipe for disaster.
In order to build wealth, you have to cut expenses.
Cut back on expenses
Here are a few expenses that could be cut to free up money:
- Cable TV
- Cell phone service
- Gym memberships
- Eating out
If you are looking for room in your budget to free up some money, start with some of the items above.
Once you cut out the unnecessary bulk, it’s time to make a budget; make a budget that works for you and are willing to stick with.
Live on a budget
Creating a budget is one of the easiest things you can do to assure you are living below your means:
- Write down all your bills (hopefully, you got rid of some at this point).
- Write down how much money you have coming in.
- Subtract your bills from that amount, and that is the money you will have for everything else: living expenses, savings, and retirement.
- Determine how much you need for living expenses (gas, food, and groceries), and that is your budget.
Your budget is the amount you to spend; now you need to make sure you don’t go over budget.
Some people use cash so they know how much they can spend, but there are other ways to go about this as well.
In fact, there are apps that can help you with this, especially if you prefer to use a debit card over cash.
The app I use is called Quick Checkbook:
It allows you to start a ledger each time you get paid – that’s what I do to keep track of my debit card transactions.
For example – if I know I can only spend $300 each paycheck, I start my ledger at $300 and make sure I don’t go over until I get paid again. Then I start over once I get paid.
The amount you need might be different, but the point is to keep track of all your expenses, not to spend more than your budget allows each month.
When done right, this keeps you under budget and living below your means, assuring that you are living on less than you make.
4. Save for emergencies
It’s important to make sure that your budget allows for emergencies, or that you are able to save for emergencies.
I call this: always be saving because emergencies are always going to happen.
When emergencies do happen, you need to be able to use cash to avoid using debt.
To do it right, you really need to have 3-6 months of expenses in savings. This is what most financial experts recommend.
As long as you are saving, you will always have liquid cash to put wherever it needs to go.
You never know when an emergency might happen. But if you have the cash available, it won’t matter.
Whether your extra cash goes towards emergencies or retirement will depend on where you’re at in the process.
5. Invest for retirement
This is, by far, where the magic happens. But it can only happen once the other things are taken care of.
Once you reach this step, you are on your way to becoming a millionaire – really.
Most financial experts recommend investing 15% of your income towards retirement. And if you make $40k a year, 15% equates to $6,000 a year.
What’s interesting is that’s the most you can contribute to a Roth currently – $500 a month.
Hopefully you can see how important it is to free up as much income as possible. You should strive to invest 15% of your income towards retirement and be able to live on the rest.
That requires you to live on a budget – live on less than you make – and not waste your hard-earned money on debt, expensive cars, and frivolous purchases.
However, if you are able to fully fund a Roth, you will be a millionaire in about 26 years. The longer you have to save, the better!
Just think – if you do this over a course of 30-40 years, you will do even better (even if you only make $40k a year).
6. Retire with millions
The S&P 500 is an index used to track the performance of the stock market. It is an index comprised of the top 500 publicly traded companies.
Historically, the 30 year return of the S&P 500 has been about 12%.
That means that it’s quite possible to get a 12% return on investments if done properly.
That said – it’s entirely possible to retire with millions, especially if you invest for long periods of time.
I already mentioned that a fully funded Roth IRA will make you a millionaire in 26 years (and that’s investing $500 a month).
You can use a retirement calculator to see how that works, or you can use it to see how your own numbers might work.
But that’s it!
I hope you can see how these 6 simple steps can make you rich.
Even though it’s a simple process, it’s not necessarily an easy process.
After all – it’s called get rich slow, and that’s not always easy for people.
That’s because it takes a lot of dedication and focus over the long-term – something most people are not willing to do.
Ready to start your own Roth? Find out how: Best Vanguard Funds for Roth IRA.