Twenty Steps to Seven Figures

1. Twenty Steps to Seven Figures

2. Know Any Millionaires? • What do you know about them? • What type of job do/did they have? • How did they become wealthy? “If you want to become really wealthy, you must have your money work for you. The amount that you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money.” Source: Quote from John D. Rockefeller in The Wealthy Barber by David Chilton

3. Ways to Become Wealthy • Inherit money • Marry a wealthy person • Receive a settlement • Win a big prize • Invent a product or deliver a service of great value • Spend < earnings and “Pay Yourself First”

4. The Millionaire Quiz

5. Wealth Accumulation Takes Time • Average age of millionaires: late 50s to 60 • Compound interest over time, especially in tax-deferred or tax-exempt investments • One study: millionaires have been investing for 30 years • First million is the hardest (Rule of 72)

6. Step1: Set Measurable Financial Goals • Without goals, investing is hard to sustain • Have a “why” to invest (whatever it is) • A goal should be personally meaningful • Break a big goal into “mini” goals: • $1 million by age 65 • $500,000 by age 57 • $250,000 by age 50

7. Step 2: Start “Paying Yourself First” - Starting Today • Time is an investor’s biggest ally • Compound interest is awesome • To accumulate $1 million: • 20 year olds must invest $67/month • 30 year olds must invest $202/month • 40 year olds must invest $629/month • 50 year olds must invest $2,180/month • For every decade an investor delays, the required investment triples

8. Step 3: Diversify Your Investment Portfolio • Diversification reduces- but does not eliminate- investment risk • Select different asset classes and different investments within each class (e.g., stock) • Mutual funds and unit investment trusts (UITs) are already diversified • Keep investing: up or down markets

9. Step 4: Invest Regularly by Dollar-Cost Averaging • Takes the emotion out of investing: forces you to buy during market dips • Make regular deposits at regular intervals, regardless of market levels • Buy more shares when market is down • Buy fewer shares when market is high • Invest what you can afford (e.g., $100 per month)

10. Step 5: Buy & Hold Stock For the Long Term • Carlson survey: 75% of millionaires surveyed held stock for more than 5 years • Frequent trading is expensive: commissions, short-term capital gains & reinvestment risk • There aren’t that many good ideas: financial markets are efficient (i.e., stock prices reflect company value)

11. Step 6: Take Prudent Investment Risks • Prudent risks are risks that have real potential to increase your return (e.g., quality blue-chip stocks) • Biggest risk: avoiding risk (100% cash and/or bonds) • Low-maintenance strategy: “Buy the market” with index funds or exchange traded funds (e.g., i-shares)

12. Step 7: Choose Quality Stocks • Better to get steady12% to 15% average return per year than very volatile returns • 12% -15% returns double money every 5 to 6 years (Rule of 72) • “Singles” sometimes produce “home runs” • Quality companies dominate their industries and have consistent profits

13. Step 8: Minimize Investment Expenses • Use DRIPs and “no-load stocks” (DPPs) to bypass brokers (watch their fees) • About 1,100 companies allow investors to buy stock directly (28 of 30 in DJIA) • Maximize payroll deductions (no cost) • Use no-load mutual funds without an up-front sales fee • Avoid mutual funds with 12(b)1 fees • Consider low-cost index funds

14. Step 9: Take Advantage of Tax Breaks • Research: millionaires maximize tax breaks, including: • Long-term capital gains rate on stocks held for 12 months or more • 401(k) & 403(b) plan contributions with pretax dollars (no federal tax): $2,000 contribution actually costs $1,440 (28% marginal tax bracket investor) • Roth IRAs

15. Step 10: Invest Cash Windfalls • Income tax refunds • Retroactive pay • Bonuses • Prizes, awards, & gambling proceeds • Inheritances & gifts • Divorce & insurance settlements • Other

16. Step 11: Live Below Your Means and Invest the Difference • Spend less than you earn • Distinguish needs from wants • “Step Down Principle” (i.e., different spending levels for the same item) • Buy cars “new-used” • “Toys & trinkets” versus lost wealth • Automate investments so money is not spent

17. Step 12: Develop a Spending Plan • Track income and expenses for 1 or more months • List fixed, variable, & periodic expenses • Calculate savings required to fund goals • Create a spending plan Expenses + Savings = Income

18. Step 13: Work Hard • Organize your life with the future in mind • Set realistic life goals and steps to achieve them • Expect “seasons of hard work” • Follow your passions • Take calculated risks • Search out opportunities & network

19. Step 14: Increase Human Capital • Education and income strongly related • Greatest return on early years of education • Learn skills that are in demand by employers • Networking expands opportunities • Never consider your education finished

20. Step 15: Grow Your Net Worth • Increase assets • Reduce debts • Aim for a 5% annual increase (e.g., $200,000 net worth x .05 =$10,000) • 10% (or more) is even better • Calculate net worth annually to measure progress

21. Step 16: Practice Stability • Interruptions = wealth loss (rob portfolio of time and compound interest) • Divorce • Job hopping (e.g., reduced pension vesting, 401(k) delays, lump sums) • Frequent moves • Carlson research: millionaire investors had three different jobs during career

22. Step 17: Take Care of Yourself • Health care costs are another financial “shock” • Exercise, eat right, get enough rest,and reduce stress • Healthy people are more productive, likely to get promoted, and earn more • Make sure health insurance is adequate • Longer life: better return on $ (SS)

23. Step 18: Believe in Yourself • Develop qualities like discipline & focus • Identify & address investing obstacles • Maintain a positive attitude • Shed common myths: • “You need a lot of money to invest” • “Investing is complicated” • “You can get rich day trading” • “It’s too late to start”

24. Step 19: Pass the “Wealth Test” • Multiply age by realized pre-tax income (excluding inheritances) • Divide by 10 • Result is what net worth should be for age and income • Example: age 35 with $40,000 income • 35 x $40,000 = $1,400,000 • $1,400,000/10 = $140,000 minimum net worth

25. Step 20: Be Patient • Ordinary people do become millionaires • Accumulating $1 million could take several decades • Like the Who Wants To Be a Millionaire? game show, greatest gains are at the end (e.g., $250,000 to $500,000 to $1,000,000) • Get started today: compound interest is not retroactive!

26. My Millionaire Path • Employer stability and hard work: “Leaning In” (Sandberg) • Small business/book author • Good education • Frugal spending habits and low debt • Marriage stability • “Pay Yourself First” habit • Maxed out 403(b) plan savings • Lucky investment decision • A belief that I control my destiny • Patience and financial literacy

27. Millionaire Video https://www.youtube.com/watch?v=Jjpo-6xY9JE