Watching the Masters last week reminded me that when I started my new company, one of the things I wanted to do was track clients’ net worth. Why? There are many reasons, but the most important reason is because what you put your mind on grows. Everyone I know would like to add a couple hundred thousand to their net worth. By tracking net worth, we learn that making smart financial decisions can grow our wealth faster than if we follow herd consumerism mentality. Albert Einstein said that insanity was “doing the same thing over and over again and expecting different results” If our net worth is not growing as we would like, we need to change our financial habits.
Tracking net worth is not new. Many millionaires already do it without realizing it. T. Harv Ekert, author of Secrets of the Millionaire Mind says you would never hear someone at (Augusta) say “Did you hear Rory’s making $150,000? He sure is doing well.” More than likely they’ll say something like “Whoa! Did you hear? Rory is worth $8 million now”
Knowingly or not, millionaires benefit from the principle that what you put your mind on grows. They also benefit from having an uncanny ability to take smart calculated risks and avoid unnecessary risks. Some of the millionaire wealth building habits we can learn are:
1. Live Below Your Means
In other words, if you make $100,000, you should live off $85,000. This includes your expenses AND taxes. Did you know that according to Thomas J. Stanley, author of The Millionaire Next Door, most millionaires are either meticulous budgeters, or they marry one? In Robert Kiyosaki’s book Rich Kid, Poor Kid, he says that the Rockefeller families made their kids account for every penny of their allowance, hence instilling in them the budgeting habits millionaires are so intimate with. It may not be in us to follow a budget. If that is the case the next best thing is to make sure that you pay yourself first.
2. Pay Yourself First
Why pay the government before you get paid? The government is smart in that they automatically get their cut before you get yours unless you put money in a retirement plan or IRA. Regardless as to how you do it, you can become a millionaire by paying yourself first every time you receive a paycheck. The most successful people automate this process and pay themselves monthly. While volunteering for the NAPFA/Kiplinger’s Retirement Hotline I once spoke with a janitor who made less than $40,000 per year for his entire life that had accumulated $2.5 million by age 72 using the principle of paying himself first.
3. Manage Debt
If you really want to get ahead in life, do not become a debtor. Debt can single handedly keep you in poverty. Some say that Albert Einstein said the most powerful force in the universe was compound interest. Compound interest is when your interest makes interest for you, and your money starts to “work for you.” Think of interest you pay on debt as the opposite of compound interest. You pay interest on interest and all of a sudden a car worth $26,500 financed at 4.99% over 60 months actually costs you (500X60) $30,000. Now $3,500 interest may not seem like much, but if you invested $500 a month and earned 8%, you would pay for the car in less than 4 years.* In 5 years you would have $36,707.
This simple choice would result in a difference in net worth of ($36,707-$26,500) $10,207. Not to mention once they own the car, most millionaires drive them for 15+ years. This principle works exponentially for a house. Dave Ramsey, author of The Total Money Makeover suggest financing houses for 15 years or less and paying them off as soon as possible. This allows you to take a negative return (interest) and exchange it for a positive return (investments) sooner. Just ask anyone without a house payment. With no house payment, you can really grow your net worth.
Regardless as to how you do it, by thinking in terms of net worth and not following conventional herd mentality, you can grow your net worth faster.
*There is no guarantee when investing in the stock market.