There’s a reason almost half of all Americans play the lottery. We all wish we could be millionaires. Sadly, the odds of winning the lottery are only 175 million to 1.
Thankfully, there’s an easier way to go about becoming a millionaire and retiring early. And it’s way more simple than you’d think. It doesn’t even require luck or a secret formula.
Just plain old planning and consistency will get you there. Not sure what that not-so-secret formula is? This post is about to outline the 9 simple steps to become a millionaire and retire early.
Want to know how long it will take to become a millionaire? Visit This Is how Long It Will Take You To Save $1 Million
Contents and Quick Links
Step 1: Track spending
It all starts with this personal finance basic. You need to track your spending. Without a solid understanding of where your money goes, including that $2 you spend every week on your lottery ticket, you have no idea where you are going.
And if you don’t know where you are going financially, you won’t actually get anywhere.
To start your journey to becoming a millionaire, track your finances and learn where you are now and how much you spend. This will help you determine your own unique pathway to saving that first million.
Start with your income then review every single thing you spent over the last three months. If you don’t have a good record of your spending and use cash to make purchases, start keeping track of every dollar over the next three months. Keep a journal, use a spreadsheet or fill in the blanks on my Monthly Expense Tracking Worksheet.
Learn more about tracking finances at How To: Track Your Personal Finances.
Download the Monthly Expense Tracking Worksheet from the FREE Resource Library.
Step 2: Create a budget
Now that you know where your money goes every month, it’s time to set some spending limits by creating a budget.
The cold hard truth is that your journey to $1 million will require saving your money. To do that, you have to not spend it all. This requires an understanding of exactly how much you have to spend, then sticking to just what you need.
Your budget is what keeps you on track.
That what each of us calls our “necessary expenses” will always grow to equal our incomes unless we protest to the contrary.The Richest Man in Babylon
Start with reviewing your common spending categories. Then, using your expense tracking history, get an idea of how much you spend within each category. Start with one category and brainstorm ways to cut back on those expenses. Shave a little off and set your new spending limit for that type of spending.
To learn ways you can cut back on your spending and understand how those little expenses add up, visit The True Cost Of Your Morning Latte.
For example, you determine that if you cut back on eating out and opt to cook at home instead, you will save $200 every month. If by tracking your finances you discover the trend that you spend $1200 every month on food, your new budget will only allow for $1,000 of spending every month.
Make a goal to cut spending in one area every month. Keep working at it until you reach your savings goal.
To learn more about setting up your budget, visit The Beginner’s Guide To Creating a Budget You Can Stick To.
You can also download a FREE Monthly Budget Worksheet from the Resource Library.
Step 3: Save
I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.The Richest Man in Babylon
Now it’s time to introduce the savings rate. Then, save, save, save.
Your savings rate is the amount of money you save every year as a percent of your total income.
Savings Rate = (Money Saved / Total Money Earned) x 100
If I save $50,000 every year and I earn $100,000, then my savings rate is:
($50,000 / $100,000) x 100 = 50%
First off, what does the savings rate of the average millionaire look like? The average American only saves 4% of their income. This is the average savings rate for all Americans that earn 90% of the income. Higher earners, those that earn the top 1-10% of the income save a bit more at 12%. But the top 1% of income earners save an average of 38%, much higher than everyone else.
The people that are making the most money are also the ones that save the most. This is how they became millionaires.
But you don’t need to be in the top 1% to save like a millionaire. What kind of saving rate do you need to achieve financial independence and retire early? That totally depends on what you spend every month.
Start out by calculating your current savings rate. Then work on your budget and start increasing that savings rate every single month. Do this until it hurts. If it doesn’t hurt a bit, you aren’t saving enough.
Here are some additional tips to improve your savings rate: How To: Calculate Your Savings Rate – And Why You Need To
Live below your means, not just within your means
Ask yourself this question: Do you want to be financially free to live your life however you choose, independent of a paycheck? Or do you want to keep up with the Joneses?
There is a quote I love from the BiggerPockets Money Show Podcast along the lines of: “You will probably lose something out of your lifestyle, but it’s not something that’s going to matter to you now or in the long run.”
Luxury isn’t the goal
Remember, buying something is not the problem. The problem comes when we believe, for that moment, that the object we’re buying is going to make us happy.Celso Cukierkorn
What does it mean to you to be a millionaire? You’ll notice I keep equating the goal of being a millionaire with the goal of becoming financially independent and retiring early.
Being financially free is the main goal. Believe it or not, millionaires aren’t driving the flashy sports cars or living in the beautiful big mansions. They live next door to you and drive an old pick up truck. Because living below their means is how they became millionaires.
The people driving the $80,000 car and living in the nicest house in the neighborhood are likely extremely in debt and have no hope of quitting their job if they want to continue paying for their lifestyle.
Automate your savings
A quick way to save more money and stay on track is to automate all of your savings. Every time a paycheck is deposited into your account, give that money a place to go. If it just sits there then that is money in your account begging to be spent (and then never seen again).
Rather than use those extra funds for discretionary spending, decide how you want it to be spent. Pay yourself first by automatically sending a percentage to your savings account.
For tips on how to successfully automate your savings, visit 15 Tips, Tricks and Tools to Automate Your Savings.
Revisit this post later by saving it to your favorite Pinterest board!
Step 4: Educate
An investment in knowledge pays the best interestBenjamin Franklin
A commonality across the board of people saving to retire early is education. If you think you know everything you need to know, you won’t go anywhere further than where you are right now.
Learn from the people that have already been successful. Read, listen to podcasts, explore this blog and others like it.
Formal education will make you a living; financial education will make you a fortune.Jim Rohn
My favorite educational resources:
You can read my full review of this book at: Book Review: The Richest Man In Babylon
The Simple Path to Wealth: Your road map to financial independence and a rich, free life
Set for Life: Dominate Life, Money, and the American Dream.
Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Fully Revised and Updated for 2018
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
And my favorite podcasts:
Step 5: Understand your why
Will power is but the unflinching purpose to carry the task you set for yourself to fulfillment.The Richest Man in Babylon
The key to making progress, in anything you do, is to have a purpose. Saving money for the sake of it won’t get you very far. But saving money because you have a clear vision of how you want to live your life will.
Understand why your dreams and goals are important to you. Otherwise, you simply won’t make the sacrifices necessary to make meaningful progress.
Step 6: Invest
A part of all you earn is yours to keep.
Let it be not less than one-tenth and lay it by.
Make it your slave. Make its children and its children’s children work for you.The Richest Man in Babylon
Now that you are saving money, it’s time to watch it grow. This is where your savings starts working for you while you sit back and watch compound interest pick up speed and your wealth begin to grow.
There are a number of ways to begin investing, but all require Step 4. You need to do your research, learn about your options and find the right method of investing that meets your goals and your comfort level.
I recommend starting with an online high interest savings account until you have an emergency fund of 3-6 months expenses built up. Once you have that, start moving the extra into an investment fund. Vanguard ETFs is a low cost, mainly passive and diversified way to go.
When you’re ready for a more hands on approach, or want to accelerate your wealth building, I highly, highly recommend real estate investing (REI).
Here’s why: Real Estate Investing: 6 Pivotal Reasons To Get Started Today
To read more about the power of investing and compounding interest, visit: Pay Yourself First – The #1 Wealth Building Secret.
Step 7: Set goals
A goal properly set is halfway reached.Zig Ziglar
Determining your why and clearly defining your goals gives you a plan. A plan is what sets you on the path to success. Once you are on that path, all you need to do is follow it. That is half the battle. A clearly defined path gets you halfway to achieving your success.
Because without that plan you’re just wandering aimlessly with nowhere to go.
If you aim for nothing, you’ll hit it every time.Unknown
Once you define your goals and start following your plan for success, know that it’s okay for your plans to evolve and change. But your why is what keeps you making progress and moving forward. Goals will be reached and replaced by even bigger ones. As you grow, so too will your wealth.
For goal setting tips and tricks, see the Stepping Stones to Goal Setting Success.
Step 8: Get a raise or start a side hustle
There are two sides to the savings rate equation. You can increase your savings rate by lowering your expenses or you can earn more money. When you do both, low expenses plus a high income, you get to fast track your progress.
Many interviews I listen to or read by individuals that have either achieved FI or are well on their way to early retirement have this in common, they either have high paying careers or they started a side business that they have built up to earn extra income.
A quick note for those with a lower income
Wondering how you can become a millionaire or retire early on a low income?
It is still quite possible to retire early on a low income! You simply need to maintain low monthly expenses.
Example: If you earn $30,000/year and you only need to spend $15,000, you have a savings rate of 50%. Every two years, you are able to save one year of salary. How long will it take to retire? You need 25 times your living expenses to safely withdraw 4% of your savings. (See How To: Calculate Your Savings Rate – And Why You Need To.) $15,000 x 25 = $375,000. You don’t need to be a millionaire to retire early!
If your annual expenses are low, you only need a fraction of that million dollars to live off of. How long will it take to save $375,000? Just under 14 years. If you start saving when you are 25 years old, you can retire at the ripe old age of 39. You can see how I did the math by reading DQYDJ post What’s The Ideal Savings Rate For Retirement or Financial Independence.
Step 9: Consistency
It does not matter how slowly you go as long as you do not stop.Confucius
A river cuts through a rock not because of its power but its persistence.“Unknown
Regardless of setbacks, be they market ups and downs, unexpected expenses or life events, if you keep going, you will get there.
Past mistakes and setbacks don’t determine your financial future. You can make progress regardless of your starting finances and age. You simply have to be persistent and keep going.
The path to wealth is not fast. But it isn’t difficult. It simply takes a plan. And that plan includes tracking your finances, saving a large portion of your income and being consistent. One foot in front of the other, so long as you keep moving forward, you will get there.
- This one is easy, the steps are laid out for you already!
- Track your finances: Visit How To: Track Your Personal Finances.
- Set your monthly budget: Visit The Beginner’s Guide To Creating A Budget You Can Stick To.
- Stick to that budget. Every month, try to cut spending in one category. Save more every month. Remember, if it doesn’t feel uncomfortable, you aren’t saving enough!
- Build up your emergency fund of 3-6 months living expenses.
- Once you have your emergency fund, begin investing with your additional savings.
- Establish your financial plan and determine how long it will take to achieve it.
- If you want to speed up your timeline, find a way to either earn more or start a side hustle to add additional income.
- Be consistent.
MARY CAROLE FORTNEY says
Great article, Dawn!
I think Jon read The Millionaire Next Door many years ago.