I LIKE LEARNING from successful people. If you want to be good at something, why not hear from somebody who’s actually done it?
Back when it was first published, I read The Millionaire Next Door and became fascinated with these folks. Over the next couple of decades, I applied the book’s teachings and eventually reached millionaire status myself.
Along the way, I started writing about personal finance, combining my interest in millionaires with my passion for learning from experts. I have now interviewed more than 30 millionaires to see how they accumulated their wealth. Here’s what most of them have in common:
1. They earned good incomes. You can become wealthy with a moderate and even a low income, but those instances are rare. Many millionaires select high-paying careers and then work to grow their careers and income, including owning their own businesses.
Earning more not only allows millionaires to accumulate wealth faster, but also provides a higher standard of living along the way. In addition, a high income covers a multitude of financial sins, providing an extra cushion when the inevitable emergency arises or they want to splurge a bit.
2. They saved a high percentage. Millionaires save a good amount of their high incomes. Some save as little as 20%—yes, as “little” as 20%—while others are much more aggressive. Savings rates among millionaires seem to average more than 30%, with some at 50% or higher.
The variation is mostly dictated by when they want to retire. Those who want to reach financial independence faster save a much higher percentage. Those who are more moderate take longer, but get to spend more along the way. Still, the common thread is an unwavering dedication to saving.
My savings rate was just over 36% for most of my working career. A high income allowed this, without sacrificing my standard or living or the donations I like to make to charity.
While a high income is great, saving is vital. You can make $50,000 a year, save 20% and make more financial progress than someone who makes $500,000 and spends $500,000. No matter what you make, you need to save. Millionaires know this and limit their spending accordingly.
3. They invested early and often. Very few people can become wealthy by saving alone. It just takes too long. To reach millionaire status in a reasonable period of time, you need your savings to be working hard for you.
Millionaires have different ways of doing this, but many choose to invest in low-cost stock index funds. This is my investment of choice as well. Index funds all but ensure that, after expenses, you outperform most other investors. Yes, it’s a boring way to invest, but millionaires don’t care. They value results over style.
Millionaires also take advantage of what’s been called the eighth wonder of the world: compounding. By investing from a young age and leaving their money to grow, they have compounding working in their favor for years and even decades.
Using the three steps above—earning, saving and investing, or ESI—there are many paths to millionaire status. I call this “working the ESI scale.” One millionaire might make a huge income and save 20%. Another might make an average salary, but save 60%. Very few are Warren Buffetts, so almost no one becomes a millionaire through investing prowess alone.
Becoming a millionaire isn’t rocket science. The concepts are quite simple—and yet it’s still rare to become a millionaire. Why don’t more folks succeed? There’s one additional ingredient you need, but many people lack: You also have to have great discipline.
John Danger is a pseudonym. He’s an early retiree who achieved financial independence and now shares what has worked for him at ESI Money.com. To learn more about his philosophy, check out his free ebook, Three Steps to Financial Independence.