I was thinking about the ways you can become a millionaire recently and thought I would put a list together. I must admit I am not a millionaire yet but I am working on it. When I say millionaire I mean someone who has a million net worth. There net worth is their total assets minus their total liabilities. There are lots of ways of becoming a millionaire but not all of them will allow you to do it in your life time.
Now that we have started to get our finances on track it is time to start looking at what we can do with any cash we have after paying all our bills and paying money into our retirement fund.
One of the things we want to look at doing is paying extra payments into our house as a minimum we really want to be paying off at least one extra monthly payment a year but if you can afford to pay off more it will mean that your house will be paid for that much quicker and you will be able to become totally debt free. By doing this you not only own your house, but you also save a lot of money on interest payments that you no longer have to make.
I have recently been reminded about a video by Ray Dalio that explains how the economy works and watched it again. It explains in easy to understand language how the economy works and was put together a few years ago to explain what happen to the economy during the last recession.
Ray Dalio is an Hedge Fund manager and founder of the investment firm Bridgewater he is one of the wealthiest people in the world and therefore he is a person who should be listened to. People have a look at the video and let me know what you think.
As promised I have started to look at how your net worth should change depending upon you age. Also as the Millionaire Next Door formula was quite crude I have looked around the internet to see if there are any other ideas for how your net worth can be calculated and I came across this interesting way of calculating net worth from The Simple Dollar blog, it has a slight tweak compared to the Millionaire Next Door. The target Net Worth formula is (age -27) x Annual Pre-tax income / 5 compared against the Millionaire next door formula of age x Annual Pre-tax income/10.
Just realised the first thing I should explain is how do you work out your net worth. I have already given you the target formula out of the Millionaire Next Door but I did not confirm how you work out your current net worth.
Really your net worth is the value of all of your assets minus all of your liabilities or what you own minus what you owe.
I have recently been reading an American book called the Millionaire Next Door it was released in 1996 and was written by Thomas J. Stanley and William D. Danko. The book is based on research carried out by the two authors over several years. It looked at how millionaires became millionaires and what they did to accumulate this wealth. It also looked at deciding how you can identify if a person has a high net worth compared to their current wages. I though we would look at deciding if we have a high net worth and at a later date I will look and doing some more posts.
With auto enrolment in to a pension scheme now being available for most employees in the UK I thought it was time we looked at what this potential pot of money could become and will it give you enough money to live in retirement.
The UK scheme initially had a minimum contribution rate of 2% this was shared between the employer and employee at 1% each this was effective until April 2018. From April 2018 – April 2019 the minimum contribution rate is 5% with 2% from the employer and 3% from the employee. From April 2019 the final increase will take the minimum contribution rate to 8% with an employer contribution of 3% and an employee contribution of 5%.
Now that we are debt free, have our emergency fund set up and have saved a good deposit for a house it is now time to start saving for the long term. For many of us the first port of call will be our employer’s pension scheme. If you are self employed then it may be wise to look at what pension options are available. This may be via a private person pension scheme, self invested pension, 401k or some other form of pension product.
Now that we have our emergency fund set up so if those inevitable problems happen it is now time to start setting ourselves up for the long term. For people who do not own a property for themselves this is the stage at which we start saving for a property to live in.
Really we want to save a large deposit so that we do not have to take on a big mortgage, most mortgage companies will be looking for a deposit of at least 15-25% so that you can access the lowest possible mortgage rates.
Now that you are free of all debt apart from any mortgage that you may have it is now time to super charge your emergency fund so that you have 3-6 months of expenses saved. This money again should be placed in a saving instant access account so that in an emergency you can withdraw the money if required without any penalty. Again this money should not be used unless it is a genuine emergency. You should not invest this money in any type of investment as we are really not concerned about this money making you money it is purely to be used for its purpose.