How to make your first million, in depth

Editor’s note: This article was first published in June 2012, in the middle of Spain’s economic crisis; its remarks on falling property values, debts from the bubble years and an expected return to a bull market reflect that time.

Let’s start from the premise that a millionaire is someone with 1 million in liquid assets. That way we limit the real number of millionaires, because sometimes people come out as millionaires on paper when all their wealth is added up, including their home.

If you do the sums that way, you can add up all your assets, including homes, vehicles, furniture and so on, at their current valuation, and subtract your debts (car insurance, mortgages, credit cards, etc.) from your net worth.

So, by adding up our assets and subtracting our liabilities, we’d discover there aren’t as many millionaires as it seems. Some of them, rather than being millionaires, I’d say owe more than they have, and now we have to add that property has lost value.

A liquid asset is cash or shares, since a liquid asset is money we can access immediately. See: The difference between liquid and illiquid assets.

With that said, a few figures caught my attention. While in the United States millionaires tend to be entrepreneurs or business owners (people who own their own businesses), in Spain most millionaires are employees working as executives for companies, and yes, business owners too. But when I spoke to an investment management firm, they told me they receive large sums from savers in middle-management positions at medium-sized companies.

In short, some employees have more liquid money than the owner of the company they work for.

Well then, sticking to our realistic approach…

How can we make our first million?

It comes down to choosing one of these two paths:

1. Choose millionaire parents

This may be the easiest path. Take Paris Hilton, for example. She chose her parents, inherited their fortune and is a millionaire. Of course, for some of us it’s a bit late to choose a new family 🙂

2. The other way is to set a course

Set goals and objectives, and define clearly how we want to achieve them.

We’ve already shared some advice from today’s rich in our article The secret of millionaires, told by millionaires. Warren Buffett also gave us his 10 financial keys to success.

Let’s say it again: what we see on television sometimes makes us lose sight of reality, because the way millionaires live has nothing to do with the Hollywood lifestyle.

Millionaires don’t buy palaces, own 200-million yachts or drive 150,000-euro cars. They don’t wear 3,000-euro suits or stay in hotels at 6,000 euros a night.

Why not? Very simple: if they did all that, they wouldn’t be millionaires. Which brings us to the first rule: To become a millionaire, don’t live like a millionaire.

1. A millionaire always lives below their means

They live in modest homes in modest neighbourhoods, they don’t change cars every year and they don’t buy luxuries; instead they haggle and look for bargains. A millionaire is usually what we’d call a tightwad, but that’s how they were able to save. “Once you can afford a 120,000-euro car, that’s when you stop wanting to buy one.”

2. They all have something in common: they’re professionals at what they do

Most of them are very good at what they do, whether that’s running a company, advising a firm on its finances or selling toilets retail. They’re passionate about their work and they enjoy it.

3. The big one: they’re all investors

I don’t think there’s a single self-made millionaire today who hasn’t invested in the stock market or its derivatives. Almost all of them understand finance or have a good financial adviser.

Let’s be clear about this: if you want to build up a large sum of capital and finance doesn’t appeal to you, you’ll almost certainly fail, because for money to work for you, you need to know how money works and how to multiply it. That’s exactly why, just today, I wrote the article on stock market investing myths.

According to figures from some fund managers, the biggest increase in the number of millionaires in Spain came on the back of the stock market rise before the financial crisis.

4. Some curious facts about their university education

In the United States, the vast majority of millionaires don’t have a university degree, but they had experience as entrepreneurs before the age of 25.

See also: Online banking for savers and investors: Self Bank

The same goes for business owners in Spain who have managed to amass 1 million euros in liquid assets: they don’t have degrees. On the other hand, the other millionaires we mentioned, the ones who work for someone else, do have university degrees.

What most of them have in common is that, when it comes to financial products, they could teach some finance professors a thing or two.

The strategy for making your first million

Start a business, or save and invest

I recommend the only 3 ways to achieve financial freedom. Starting a business involves risk. If your business succeeds, you’ll be dancing for joy. If it fails, you’ll have gained experience you can apply to your next business. That’s why it’s best to start as soon as possible.

Another way to do it, of course, is what we explained in the only secrets to getting rich. Basically, it’s about learning some financial education, working, saving, trying not to take on debt, and investing.

Once you’ve done that, keep doing the same thing, but reinvest the returns into the principal. We’ve often talked about the magic of compound interest, but today a simple example will make it much clearer.

The magic of compound interest

Someone gave me an example the other day: if Christopher Columbus had put 1 cent into an account at 6% interest, with instructions to withdraw the interest as it was earned, 513 years later we’d have 31 cents in that account.

If, on the other hand, he had left that cent at 6% in a savings account where the interest is added to the principal, after 513 years the result would be more than 95 billion (95,000 million). Perhaps a maths student could confirm that figure 🙂 Amazing, isn’t it?

Once all this is clear, the essential thing is to set yourself a goal. How long do you want to take to reach a million? How much do I need to save each month to have my first million in that time? Obviously, the shorter the time, the more you’ll need to save.

Define the vehicle that will take you to your goal

Will you do it as an employee? By working and doing overtime? By starting your own business?

See also: Eike Batista: from would-be richest man in the world to fighting for financial survival

Either way, you’ll need to invest your savings wisely, looking for opportunities that give you high returns.

If you live in Spain, the good news is that when the bad news ends we’ll have a bull market on the stock exchange again, so keep saving to make the most of it. We don’t know whether it will be in a few weeks, months or years, but I’m sure we’ll see it.

Did you know that some people find it very hard to imagine saving 1 million for retirement? In this article we showed that to have 1 million at 70, we would only need to save 450 euros a month from the age of 25.

For those who doubt that the stock market can take them to their goal, we also looked at the case of Apple shares, showing that over 12 years, Apple shareholders who invested 20,000 euros made 1,400,000 euros.

Always have an emergency fund covering at least six months

Every millionaire gives this advice: never invest all your money. If something unexpected stops you from earning, whether illness or one of life’s setbacks, and all your money is in shares when you suddenly need cash, your shares may be down at that moment and you’d have to sell at a loss.

Emergencies and investment opportunities also tend to come up, and you’d need cash to take advantage of them without having to dip into an active investment. Always keep savings that would let you get by for at least six months, if your income stopped, without touching your investments.

Beyond that, there’s little more to say. I know many people aren’t starting from zero but from minus ten, having run up huge debts during the excesses of the bubble. In that case, the very first thing is to pay off your debts, from the smallest to the largest, especially personal loans, which are the ones that charge us the most interest.

Featured image: Rijksmuseum, CC0 1.0, via Wikimedia Commons.