Do you always spend more than you earn? Do you often look at your bank account and wish you had more money? If so, you need to know how millionaires manage their money. The good news is that by learning from those who have successfully mastered the art of managing their money and investing, you can become wealthy as well.
If you’re seeking wealth, then managing your money is just as important as making it. Just because you have $100 million doesn’t mean you can go out and spend it like there’s no tomorrow. To make it last, you need to manage your money properly. Remember, the thing you want most is always the hardest to attain. With that in mind, let’s take a look at how millionaires manage their money.
What do millionaires do with their money?
When it comes to investment strategies, self-made millionaires were more likely to add equity investments, while those who were born wealthy typically had more real estate investments, according to the study. Diversifying those investments is key among many millionaires.
Millionaires put their money in a variety of places, including their primary residence, mutual funds, stocks and retirement accounts. Millionaires focus on putting their money where it is going to grow. They are careful not to invest large sums into items that will depreciate. A car for everyday driving, for example, will most likely lose value over time.
The key for most millionaires is to save money before spending it. No matter how much their annual salary may be, most millionaires put their money where it will grow, usually in stocks, bonds, and other types of stable investments.
How millionaire spend, save and invest their money
They don’t overspend
If you have more disposable income, it’s easier not to overspend. Yet, it’s worth noting that even millionaires, including some of Daugs’ clients, still have frugal spending habits.
While these clients do enjoy some of life’s finer things, Daugs says they typically do not overspend.
For example, they’ll purchase a certified pre-owned car versus buying a brand new one; they will search for good deals on vacations; they may upgrade to economy plus on an airline but won’t pay for first class; they will keep their cell phones as long as they are working and don’t feel the need to upgrade every time new technology comes out.
They pay themselves first
The habit of paying yourself first — also known as reverse budgeting — means you build a budget based on your savings goals rather than based on your spending and expenses. In doing so, you ensure that every month, money gets allocated to future you.
Daugs’ clients pay themselves first by systematically saving money via direct deposit from their paychecks, or as a recurring transfer from their checking accounts.
“Whether it be into their employer retirement plans, IRAs or general investment accounts, this is money they put away and invest with no intention of using it for day-to-day living,” Daugs says.
By saving first, Daugs’ clients are able to freely spend whatever is leftover, with the comfort of knowing their savings plans — both long- and short-term — are already taken care of.
“They live within these ‘net cash flow’ means and make every effort to keep all savings plans active and increase them on an annual basis,” Daugs says. “They do not dip into these investments for anything other than their intended goal.”
They are strategic about carrying debt
Most of Daugs’ clients try not to carry debt on things like cars or boats to avoid paying years of interest on something that quickly depreciates in value.How you can utilize rewards credit cards, too
However, they may carry a mortgage on their primary home. “This is especially true in this current low interest rate environment,” Daugs says.
He adds that still even now, most of these clients accelerate their mortgage payments to pay it off years ahead of schedule and thus reduce the overall interest they have to pay.
Most millionaires have high incomes, but it hasn’t always been that way
The median annual income of my 100 millionaires was $250k, much higher than what’s been found in broader studies like those detailed in The Millionaire Next Door, The Next Millionaire Next Door, and the upcoming book Everyday Millionaires.
That said, millionaires do earn higher than average incomes in every study I’ve seen.
The main reason millionaires earn more is that they are great at growing their careers. They know that just a bit of extra, focused effort can make a huge difference in how much they earn over time (which is literally millions). As a result, they invest time and energy to grow their careers and the skills needed to get ahead.
Many nay-sayers will object to these findings and thus begin making excuses why they can’t be a millionaire. A common example is something like this: “If some guy/family makes $250k plus a year, that’s a no brainer … I could do that with no investment risk and free cash flow unless I was an idiot” (from my post titled How to Ignore the Basics of Personal Finance and Still Become Rich).
First of all, no, that’s incorrect. A large income alone does not guarantee a high net worth. In fact, there’s no correlation between income and wealth. If it was that simple this site would simply be called EMoney.com.
Second, most readers see an income of $250k and make the assumption that millionaires have been earning this much throughout their careers. This is incorrect as well. In fact, most millionaires started with very modest incomes and advanced over time.
Most have more than one income source
Of the 63 millionaires asked if they have income in addition to their careers (I added the question starting with millionaire #38), 39 had one or more.
As you might imagine, many of them answered with something akin to “I already make $400k a year and am lacking time, so I don’t think I need a side income.” It’s hard to argue with that reasoning.
On the other hand, 62% of them did have at least one extra income source with the most popular being real estate (23 of the 39). Other popular choices were dividends, side businesses, and various investments.
It’s rather common to hear of millionaires investing in real estate. Before these interviews, my assumption was that this is how many made their fortunes.
But generally it works in this way: millionaire makes a ton of money at work and invests a portion of that in real estate. This then increases income even more, which provides even more to invest.
Most millionaires do not have a budget
This was probably the biggest surprise for me. I would have guessed that 75%+ would have had budgets.
In reality 46 of the 63 asked do not have a budget.
While it was not expected, the reasons millionaires don’t need a budget makes sense — they make a lot and have self-control.
Millionaires’ investments are generally simple and low cost
As you might imagine, millionaires have a wide range of investing ideas and plans.
But when it comes to the majority of their investments, they generally buy and hold low cost stock index funds.
Most millionaires became wealthy by simply focusing on the basics over time
The upcoming book Everyday Millionaires lists a couple myths about millionaires as 1) they inherited most of their wealth or 2) they took big risks and got lucky.
I have had one or two interviewees with some sort of fortunate life event (like working for a startup company that made it big and paid stock options), but almost all of them grew their wealth the old-fashioned way: They earned a lot, saved a ton, and invested for a long time.
No, it’s not glamorous and doesn’t make for a compelling story. They just covered the fundamentals and kept at them for a while. Boring stuff, but effective.
All millionaires have made money mistakes but they’ve avoided death blows
From personal experience I know that you don’t have to make 100% right moves to grow your net worth. That’s why I like to post about my mistakes from time to time — to let readers know it’s possible to become wealthy while making a few missteps along the way.
Millionaires are the same. They haven’t made only right moves to get where they are. Which gives us a chance to learn from their mistakes. In fact, sometimes more can be learned from mistakes than from successes.
Conclusion
Do you know the secrets Millionaires use to become wealthy? How about some tips for managing your money? I’m going to reveal a bit of this information in today’s post. I have a few friends that have been retired for a number of years now and they have taught me a lot over the course of the last 5-10 years. And now, because I read a lot of personal finance books, I have an idea of the overall principles that the best financial planners have been teaching for decades now.