Use Discipline to Become a Middle-Class Millionaire

There aren't many shortcuts to becoming wealthy. Regardless of its source, saving and investing properly are still the keys to its longevity. Learn some strategies that create middle-class millionaires.

As much as we might like to believe otherwise, there are not many shortcuts to becoming wealthy (except for winning the lottery and we know that’s not going to happen. The odds of cashing a big Powerball ticket are about 1 in 300 million). No matter how much you earn, it still comes down to this: you have to increase your savings and investments while limiting or reducing expenses.

This article is part of our continuing series on strategies to achieve intergenerational wealth. Last month we guided you on how to keep spending under control. Today we focus on the savings side of the ledger.

Saving is not sexy, but it is effective, especially if you begin at a young age. It’s important that we teach that mentality to our children and grandchildren. Inheriting wealth is not enough; those future generations must have the skills to accumulate and build wealth on their own.

Famed investor Warren Buffett is right when he says “building wealth is a marathon, not a sprint.” He adds that “discipline is the key ingredient,” and many us of know that self-discipline is hard.

Three Steps to Becoming a Middle-Class Millionaire

There are three keys to getting started:

  • Establish your savings goals
  • Set up a budget to track your spending
  • Pay yourself first

You are much more likely to succeed if you have a plan.

Establish Your Saving Goals

The first savings goal at any age is to have an emergency fund that can cover three-to-six months of spending in the case of a health emergency, loss of a job or other major life event. You can avoid the temptation to dip into these funds by putting the money into a separate account that is off-limits to everything except emergencies.

Next is setting up your near-term goals (such as paying down debt or saving for a vacation), medium-term goals (such as saving for college or buying a home), and long-term goals (such as retirement). Each of these is likely to require their own accounts—perhaps a bank savings or money market account for that vacation; a 529 plan for college funds; and a 401(k) or IRA account for retirement.

Few of us get rich through our jobs alone, but many employers offer help beyond the paycheck. For starters, in the spirit of paying yourself first, set up an automatic sweep directly to your retirement account. As an incentive, many companies offer to ‘match’ the contributions you make to a 401(k), up to a certain amount. This opportunity is a no-brainer. It’s free money. Take it. If you don’t take full advantage of this match, you are leaving money on the table. Your contributions are also tax-deferred. After you’ve contributed enough to get that free money, continue to increase your contribution by one or two percentage points of your salary each year until you max out. In 2019, you can contribute up to $19,000; and if you’re over 50, you can contribute an additional $6,000.

This is the easiest way to become a middle-class millionaire. Through the miracle of compound interest and time, relatively small savings can turn into a small fortune, especially if you start young. And don’t forget the impact that dollar-cost averaging can have on your wealth. This simple technique entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. You’re already using this strategy if you have a 401(k) plan.

Set Up a Budget

As for the budget, it’s almost impossible to know how much you can afford to save if you don’t know how much you spend. And if you don’t have a budget to track expenses each month, you’re only guessing, and you might be surprised at how far off those guesses are from reality. No, budgeting is not a lot of fun, but it’s not as dreary as it might sound. Collect receipts for everything you spend and drop them in an envelope. Once a month, go through them to track your spending by category. Make sure to include your credit and debit card expenses. There are several free and easy-to-use budgeting apps and software. Among the more popular ones are Mint, PocketGuard, YNAB (You Need A Budget), and Goodbudget.

There is nothing wrong with spending money on things you enjoy like eating out, traveling, or nice clothes. But like many other things in life, there are limits. Knowing where your money goes puts you in complete control of the situation.

Pay Yourself First

The third key builds on the concept of paying yourself first. To pay yourself first means prioritizing savings and contributing to your savings account before you spend anything on discretionary expenses. The easiest and most effective way to save is to have your employer deduct a certain amount from each paycheck and transfer it directly to a savings account, such as a personal bank account or a brokerage account. This is in addition to the money you are saving for retirement. The idea is to save a certain dollar amount—or better yet, a percentage of your monthly income—as soon as you get it, rather than setting aside whatever’s left over. The reason we prefer a percentage over a dollar amount is because your savings will increase automatically anytime you receive a raise or a bonus.

This strategy puts the money out of sight and out of easy reach. If you prefer, or if you work independently, you can accomplish this by setting up automatic transfers from your checking account to the saving accounts of your choice.

Practice what’s called “conscious spending.” This goes hand-in-hand with the “24-hour rule”: Think over all non-essential purchases for a day or so. This can be especially valuable when shopping online.

As NerdWallet notes: you work hard for your money; it should work hard for you. Being intentional is the best way to save more money each month, and to spend less too.

Read the rest of our series on Managing Intergenerational Family Wealth:

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