The Millionaire Formula

Introduction

On automating finances; ”the one step that virtually guarantees that you won’t fail financially…you’ll never be tempted to skip on savings because you won’t even see the money going directly from your paycheck to your savings account” David Bach – Author of “The Automatic Millionaire”.

“If you are serious about getting rich, you need to get your mind focused on income, not on what you can save.” – Grant Cardone

What do you get when you combine the notions from these two quotes? The millionaire formula.

I was recently discussing money and accumulating wealth with a close friend of mine and he is very successful. He commented that a lot of my posts are too focused on savings and frugality as opposed to actually generating more earnings. Now, this is not a new notion to me because I follow several millionaire icons and they stress that you cannot solely save your way to millionaire status; you have to focus on earnings as well. Plenty of very credible personal finance material out there supports this as well. So here is the bottom line…automate and route the money that does come in into various savings / investments accounts and solely focus time and energy on earning more money to become extremely wealthy.

Automate Savings

Automation is key. Basically, automation in terms of personal finance can also be called an automatic savings plan. This is a type of personal savings system in which the plan contributor (you) automatically deposits a fixed amount of funds at specified intervals into their account. I have mentioned its importance in previous posts. It essentially encompasses the notion of “paying yourself first” (please click here to view my post on this concept). The beauty of this side of the equation is its ease and simplicity. In addition, automation is extremely powerful pertaining to savings. Depending on where you are in life and how many expenses you possess will determine how much you can actually automate into savings/investment accounts.

Action Steps:

1. Acquire Personal Capital: Obtaining a software program to track your personal finances is crucial. It blows my mind when I talk to people and they have nothing in place to track their finances. This will enable you to adhere to a budget, track spending, understand your investment performance, and visualize your progress of wealth accumulation. I recommend Personal Capital. Please click here to acquire Personal Capital for free!
2. Cut Unnecessary Spending: Just immediately stop spending money on things you do not need. A good practice to implement is to ask yourself before every purchase, “Do I really need this?” If the answer is no…realize that by not making the purchase the difference can be invested to create money for you while you are sleeping. Please see my post here regarding how to re-think spending your money.
3. Create a Budget: Sit down and review your monthly expenses. Write down all of your expenses in order to create a budget. Once the budget is established, adhere to it. This should include fixed expenses and anticipated variable expenses. Be sure to make debt payments a priority, especially if the debt has a high interest rate; such as credit card debt.
4. Do the Math: Now that your monthly expenses have a dollar amount, simply subtract your expenses from your monthly take home pay. Hopefully, you have a positive number that is a decent margin compared to your expenses. This means you have a positive cash flow; which is required to build wealth. Please click here to review my post on cash flow.
5. Automate the Remaining Amount: Now that the math is done, simply automate the cash surplus (positive cash flow amount) into various investment accounts. The focus here should be long term. This is perhaps the most difficult part of the process because you actually have choices. However, the goal should be to retire as soon as possible, or become financially independent. Therefore, I recommend maxing out retirement accounts such as 401ks and IRAs due to tax incentives. It is important that within these accounts you have selected a diversified portfolio of index funds. Please click here to read my post regarding index funds compared to actively managed funds. With the remaining amount, I recommend investing into a robo-advisor service (Wealthfront or Betterment) or an account that consists of low cost index funds as well. If there is no remaining amount, you need to generate additional cash flow or cut more expenses.

Too many people attempt to focus their time and energy on the returns associated with their savings…don’t do this. I’ve been there. Again, invest the money that does come in into diversified portfolios of index funds and just sit back and accumulate. Keep a long-term focus when it comes to investments. Some of the best finance minds in the world cannot beat the market, so do not attempt to do this.

There are two things to bear in mind when establishing your portfolio: risk exposure and time horizon. Ultimately, the goal here is to become wealthy over the long –term, so in my mind that means investing towards financial freedom / retirement. However, picking a portfolio of various index funds can be stressful. So I would incorporate the following as a general blue print…however, please consult with a financial expert if necessary.

1. Retirement (Financial Independence): A new and general rule of thumb is to take 120 and subtract your age to determine the allocation between stocks and bonds. More specifically, the 120 and subtraction are applicable to the allocation towards the equity portion of your portfolio. Examples:
   1. 20 Year Old: 120 – 20 = 100 % Stocks / 0 % Bonds
   2. 30 Year Old: 120 – 30 = 90 % Stocks / 10 % Bonds
   3. 40 Year Old: 120 – 40 = 80 % Stocks / 20 % Bonds
   4. 50 Year Old: 120 – 50 = 70 % Stocks / 30 % Bonds
   5. 60 Year Old: 120 – 60 = 60 % Stocks / 40 % Bonds
2. Long Term Goals (10+ Years): Invest for growth and income, with a larger allocation towards stocks.
3. Intermediate Term Goals (3 – 10 Years): Invest into a mix of intermediate-term bonds or bond funds and stocks, with a focus on growth and capital preservation.
4. Short Term Goals (1-2 Years): Invest into stable assets such as cash, money-market funds, short-term treasury bonds, or CDs.

Again, the above is just a general guideline. Please reach out to a financial professional for clarification and comfort. The financial professional will be able to clarify where you are and will assess a personal plan for you. He/she may determine a plan between investing for the long-term and investing for the short-term in order to purchase other alternate assets; such as real estate. Personal Capital, as mentioned above, is a great resource to use in this area. The software program runs simulations regarding your asset allocations and a financial advisor is appointed to you to use at your disposal.

Now…that is all the easy part. Your savings are on autopilot. Congratulations! Now you can spend all of your time and energy on earning knowing that your savings are invested and generating money for you while you sleep…which is such a great feeling!

Focus on Earning

Why don’t people focus on earning more? Because it is hard. The former in this equation to building wealth and becoming a millionaire is easy (in my opinion). With the former (automate savings) all you have to do is route money that comes into your bank account into savings vehicles. You don’t have to worry about trying to make money with the proceeds that you save because all of this is automated. The more complicated and difficult part of the equation is the latter: focusing on earning.

But I’ll tell you this…it’s never been easier to make money and generate value than it is today. Technology and social media have leveled the playing field as far as providing potential value to large markets of individuals. Everyone possesses various talents. The key is to find out what talents you possess in order to bring the most amount of value to the most amount of individuals. This is where real earning can be created. Now of course, you can always get a side job that pays an hourly wage or a salary similar to your main source of income (typical day job). However, this will be taxing on your time and therefore may hinder your ability to exponentially grow your total earned income.

Basic Earned Income

I define basic earned income as an income source in which you trade your time and labor for an earned wage. So, your current job would usually fall under this category. Grant Cardone stresses that you should not abandon your 9-5 paycheck in order to seek additional income streams. He recommends to find ways to build on it and then seek alternate income sources elsewhere.

It is obviously prudent to possess a strong 9-5 earned income, however you may want to make sure that your earned income from an alternative source does not have a ceiling or cap. What do I mean by this? In certain positions, you are limited as to your earning potential. For example, if you were to take on a side job as an Uber driver, laborer, or assistant you would be limiting your income ability as to the number of hours worked. Again, although some of these jobs can be lucrative, you will have two jobs and your time will become extremely scarce. This will limit your energy to use your mind to grow your earning potential. This may be a good place to start, but make sure you do not work yourself to exhaustion.

Exponential Earned Income

I define exponential earned income as an income source in which you trade your time and labor for an earned wage BUT your income has the chance to multiply exponentially. Examples of this could be becoming a real estate agent, starting a blog, or becoming a wedding planner. In all of these roles, you can exponentially grow your target market / audience and as a result multiply your potential earned income. There is no ceiling regarding your earning potential within these roles.

As a result, you can bring value to an unlimited amount of people. This is key because I have read through numerous sources that if you want to create wealth, you need to create value initially. Therefore, the more and greater the value you create that is accessible to a large target market, the greater your potential of earned income.

Passive Income

Now…I bring up passive income because if one is truly going to understand how to build wealth, one must understand the three income types (please click here to read my post on the different types of income): earned, passive, and portfolio. You already have the portfolio portion covered with automating your current earned income as reviewed above. Passive income can be utilized through the use of other assets such as real estate. Real estate can be an extremely lucrative asset class to possess. Although complicated and cash intensive, if enough capital is generated, purchasing a property with intentions on acquiring renters (as a result you becoming a landlord) can be extremely rewarding. In addition, there is no shortage as to how much money you can earn and how many real estate properties you can possess. This is key. Again, just be careful and make sure you get into the right deals. With real estate, money is made on the purchase, not the sale.

Avenues to Take to Earn More

Obviously, there are multiple ways in order to make more earned income. The key is to do your research and start talking to your significant other and successful people about your intentions. I’m going to keep this section short because frankly, it is on you to do the research and to execute. Start by googling successful money icon individuals and their ideas on how to generate more money (such as Grant Cardone). I highly recommend Grant’s book, “The Millionaire Booklet”. This is key because he focuses heavily on EARNING. He breaks his wealth creation formula into eight steps:

1. Millionaire Decision
2. Millionaire Math
3. Increase Income
4. Who’s Got My Money?
5. Stay Broke
6. Save to Invest
7. Multiple Income Flows
8. Repeat, Reinforce and Hyperfocus

I am steering you towards this because obviously Grant knows how to make A LOT of money. In addition, start talking with people you know who are successful and who make a lot of money. If possible, find a mentor to talk to about your intentions. Remember, it’s more about commitment than capability. If you are committed, you will find a way.

Conclusion

The bottom line here is…automate your savings (the surplus in cash flow that does come in) and focus on earning more money. As you accumulate more earnings, be sure to increase your savings / automation to coincide with the generated amount.

The key here is to make more money. Seek tax shelters and build wealth the real deal way. Attempt to max out all financial instruments available to you by law. Retirement accounts, insurance policies, real estate assets…anything and everything. Taxes are a huge component regarding your ability to build wealth. Take advantage of tax shelters and then take advantage of tax efficient instruments.

The Millionaire Formula: Automate Savings (automatic) + Focus on Earning (time and effort) = Massive Wealth

Redefine.

-James