Editor’s note: This article was first published in August 2010. Its example of a one-year fixed-term deposit at 4% APR reflects Spanish deposit rates around 2010.
Becoming a millionaire isn’t hard if you prepare properly for it (read: The secret of millionaires, told by millionaires). The problem, as we’ve discussed before, is that there are no schools that teach us how to get rich. If, at 18, a millionaire gave us some honest advice on how to build wealth and we followed it to the letter, we would no doubt be rich before turning 30.
The Forbes list ranks the 10 richest people in the world, but there is a study that gathers the steps, advice and ideas that more than 200 millionaires followed to make their fortunes. As soon as you read the points to follow, you’ll see it isn’t that hard. You simply should have known them sooner, although, as the saying goes, it’s never too late to start.
1. Work and saving
You’ll have heard a million times that money should work for you, rather than you working for money. And that’s what millionaires do. But to make money work for you, you first need to have money, and that’s where work comes in.
(Read: How Bill Gates makes 1 million dollars a day without doing anything)
You’ll never get rich from a job, anyone will tell you that, but work will not only give you the capital you need to start putting your money to work for you; it will also give you essential life experience.
If you start from the bottom, one day you’ll better understand the people working under you. That’s one of the reasons why millionaires’ children lose their fortunes once their father dies. They simply had money without effort, so they didn’t understand how it works or how hard it is to earn.
Once you have the job, the next step is saving. You may have heard that many rich people are very stingy, when the truth is that they became rich because they were stingy (they didn’t squander money).
If you look at the society we live in, we are pushed toward consumerism. You could say that rather than getting rich ourselves by saving, we unconsciously prefer to make the owners of department stores and big retailers rich.
We’re pushed to try to look like something we’re not, which is why we drive cars we can barely afford to keep running. You’ll have heard it said that “appearances are everything”, and I agree, but appearances sometimes cost money that we could be using not to look rich, but to be rich.
(Read: This is the main trait that sets the rich apart from everyone else)
2. Financial education and a financial plan
Being a doctor is a profession in which you have to deal with patients and study diseases and treatments. Some people think anyone can be rich or a millionaire, but that’s not the case. Even if you won the lottery, you would probably lose your fortune sooner than you think. I know of a young man who won 15 million euros, and 8 years later the bank repossessed his house.
Another case is that of a man who won 40 million euros. In the first year he got divorced; in the second, one of his sons died of a cocaine overdose; and within 5 years his other son was attending Alcoholics Anonymous alongside his own father, at a centre which, luckily, was paid for by the state, because they had no money left in their accounts. And we still think everyone would know how to be rich.
Being rich is a profession, like being a doctor, in which we need to learn financial terms and study how money works, and your best lesson, of course, is working hard to earn your first capital.
Being a millionaire is not a matter of chance; it’s a choice a person makes at a given moment in their life. Every millionaire alive today decided at some point to become one.
Being rich is like running a company. A company needs a business plan, a financial plan and a cost analysis. To start on your path to wealth, you’ll need to draw up a financial plan detailing the income you earn, and for years set aside an amount of money as if it were just another loan instalment.
You’ll need to get up to speed on safe investment vehicles, such as fixed-term bank deposits, compound-interest savings accounts, and so on.
(Read: It’s easier than ever to get rich today: 6 steps to get there)
The middle class takes out retirement plans. A pension plan only benefits one party, and that party isn’t you: it’s the bank. Before becoming a millionaire, a millionaire already knew that a retirement plan yields far less than any other financial vehicle. It’s a way of parking your money, and for money to make you more money, you have to keep it moving. We illustrate the difference between being rich and being poor with two examples of two real people:
Be careful with banks
There’s one thing that distinguishes a poor or middle-class person from a rich one:
- A poor or middle-class person goes to the bank to get a loan to buy a house or a car.
- A rich person goes to the bank so that their money earns interest.
You need to understand how banks work. A bank is not your friend, it’s not your partner, and it’s never there to help you in hard times. It will only lend you money when you prove you practically don’t need it, or when it can get paid back through some property.
Credit cards don’t give you relief; they strangle you financially. If you start a savings plan and a financial plan, forget about credit cards. Don’t buy anything in instalments if you can pay for it in cash, and don’t buy anything in cash if you don’t really need it.
As the first rule of financial education, try to make every euro or dollar that leaves your pocket come back with a return.
Try to do business with the bank only when the bank is in a position to be your financial slave. Let me explain. Learn the difference between going to a bank and saying something like:
- “Look, I need a loan to renovate my house that I can pay back month by month without much interest.”
In my view, that isn’t what a bank is for. A bank is for:
- “How much will you give me for this money in a fixed-term deposit? Treat me well, or I’ll take it to another branch.”
If you take on debt with the bank, you’re working for the bank and making the bank rich, when the best thing is for the bank to help you generate extra income, turning it into a worker you should get the most out of.
(Read: 10 ways the rich think differently from everyone else)
Invest or start a business
If you plan to get rich, you’ll need to prepare for one of these two options, and probably both. There isn’t a single millionaire who hasn’t made their fortune either with their own business or by investing. There’s no other way to build a great fortune, and anyone who says otherwise is lying.
The great enemy of your savings is taxes. If you have money, no debts, and you don’t move your money, a tick called the taxman latches on to you and can eat up a large part of your small fortune.
You have to move your money: you have to invest. If you invest, even in guaranteed-return investment vehicles, the taxman will only tax part of the gains your money has produced. Otherwise, it takes part of your entire capital.
To become rich or a millionaire, either you learn something about investing or you need to find a professional to advise you, although depending on the amount of capital involved, the cure may cost more than the disease.
Investing is another way to take part in other people’s businesses without starting your own, although once your capital starts growing, you’ll spot business opportunities everywhere and at every turn.
(Read: Andrew Carnegie’s 10 rules for getting rich)
All rich people agree on one thing: the hardest part is making your first million. Once you’ve made your first million, the rest come easily. To give you an idea of how money makes you more money with no risk and with total ease:
If you have a million euros and put it in a one-year fixed-term deposit at 4% APR, at the end of the year you’ll collect your million euros plus €40,000 in interest. And if I remember correctly, €40,000 a year is well above the average salary.
I hope these points help you see what getting rich really involves because, as you’ve seen, it isn’t a matter of luck. It’s a matter of drawing up a plan, disciplining yourself to follow it, and putting into practice a few basic points that we all know but never act on.
Further reading
- The 5 best books on financial education
- Warren Buffett’s 10 keys to financial success
- The young man who planned to retire rich at 27
Featured image: frankieleon, CC BY 2.0, via Flickr.
