- Personal Finance
The Key To Your First Million Dollars
Asking The Right Question
Believe it or not, many of us have seen a million dollars already pass through our fingers or at least we will by the end of our lifetime. Asking ourselves, what do I have to do to earn a million dollars is rarely the right thing to ask.
I profess not to have a million dollars but I believe I do have some ideas that I can put forward in order to obtain that goal. The first question we should properly ask is "What can I do to hold on to the money that I have that will END up being a million dollars?"
From this question, we can discern that we have incoming money and that we need to close the "out" valve in order to build up our savings. For some, there is a mortgage involved which builds up the equity of our home. For those that rent, there is outgoing money which is lost with no return on investment. Zero. Nada.
This is not to say that renting is bad. It just means that if buying a home is not an option that there has to be other areas to look into to cut down the outward flow of money. If we put the mortgages aside for a moment, let's look at what keeps people from being rich:
1) Cars/SUV/Trucks - Your vehicle more often than not, is a losing value situation. Assuming that you finance, the value of your car almost never gets ahead of what you owe the bank in terms of your car loan. Factor in the fuel, repairs, upkeep, and license/registration and that window of getting ahead even gets smaller. Buying or leasing new is expensive on your buying power. Let's say your car loan is $455 per month. That is $27000 over a five year period. Many people buy new again and trade in and figure they will keep the same monthly payment with an updated car. Before you know it that is another $30,000 and the cycle becomes endless. If all things were consistent after buying five new cars, you could be looking at a total of close to $200,000 when all is said and done. Of course the more expensive you buy, the more the total goes up.
2) Eating Out For financial advisers, this is a favorite topic to bring up because there really is a lot of money that gets sunk into this area. The average price for eating out at lunch these days is $12-$15. That price goes up with the more posh restaurants you visit. Many folks out there find it easy to eat out three times a week. That comes close to $50 per week, $200 per month and $2400 per year. Over a ten year period - YIKES! $24,000 Of course I am not factoring anything here including inflation..
3) Loans and Extensions - we all know that when we take out a loan, the amount that we owed must be paid back. What we do not consider is the compound interest rate means and that we are actually paying back a lot more the longer we take. I am not a guru here nor am I savvy enough to go through interest rates and hypothetical numbers. What I can say that putting something like an amount to be paid off to a much later date means that you will be seeing a reduction in your spending power. If you are considering taking that loan, is for something that will have at least some value to represent what you are spending it on?
4) Other Luxuries - We often take for granted the many luxuries that we afford ourselves. Once we get so used to them, they become perceived as actual necessities. For example, (hypothetically) how about that great cable package that costs $175 per month when the basic one costs about $85? How about the cell phone that costs another $175 instead of $95. If these two services were downgraded, there would be a savings of $170 per month. That is $2040 per year. Again, over a ten year period, that would amount to $20,000 plus in savings.
Of course, not everyone is lavishly spending in these areas. The main point of this article is to take a look at where your after-tax dollars are going. Often, there are tiny little expenditures that amount to a much larger sum when calculated over the longer term. The harder things to when saving is to look at and recognize the areas that need cutting back. Let's face it, everyone wishes that somewhere down the line, there is going to be a huge influx of money. However, if that is unlikely to happen, it's better to have a backup plan that involves limiting your outflow of money to maintain your personal wealth.