Invest Wisely, Retire Early: A Millionaire's Guide To Smart Investing

Investing early and wisely is key to retiring as a millionaire. While it may not be easy, it is simple: start saving early, invest in appreciating assets, and stick to your plan.

The power of compounding means that the earlier you start saving, the more time your money has to grow. This can be achieved by investing in appreciating assets such as the stock market, real estate, or businesses. Diversifying your investments across a wide range of industries and focusing on long-term growth rather than short-term gains can also help.

It is important to be disciplined and stick to your investment plan, even when the market and economy are rocky. Emotional decisions, such as selling to avoid losses or buying when it seems safe, can often be detrimental. Automating your savings and regularly reviewing your spending habits can help you stay on track.

Additionally, maximising your income through side hustles or salary increases, and minimising unnecessary spending, can accelerate your journey to becoming a millionaire.

Save early and often

Saving early and often is a key strategy for retiring as a millionaire. The earlier you start saving, the more time your money has to grow through the power of compounding interest. For example, if you start saving at 20 years old and contribute $6,000 a year to an individual retirement account (IRA) for 40 years, you will have a nest egg of over $1.37 million by the time you're 57, assuming a 7% return.

• Create a savings plan: Review your monthly debts, income, and financial goals to determine how much you can save each month.
• Automate your savings: Set up a direct deposit from your paycheck to a savings account so that a small amount is automatically saved each month.
• Avoid unnecessary spending and debt: Cut back on purchases you don't need, especially if they are made with high-interest credit cards.
• Save at least 15% of your income: Financial planners recommend saving at least 15% of your annual gross income for retirement. If your employer matches contributions to your 401(k) plan, you may be able to save less on your own.
• Increase your income: Consider asking for a pay increase or getting additional training to increase your earnings potential.
• Resist lifestyle inflation: Avoid the temptation to increase your spending as your income grows. Instead, focus on saving and investing more.

By following these strategies and starting to save early, you can significantly increase your chances of retiring as a millionaire.

Avoid debt

While retiring debt-free is ideal, it is not always possible. However, it is important to distinguish between "good debt" and "bad debt". Good debt is debt that creates opportunities, is low-cost, and has tax advantages. For example, mortgages or home equity lines of credit are considered good debt because you are borrowing to own an asset that can appreciate in value over time, and home loans may be tax-deductible. On the other hand, bad debt is high-cost, non-tax-deductible, and is taken to buy an asset that will likely depreciate. Credit card debt and car loans are examples of bad debt.

• Create a budget to understand how much money you can afford to spend monthly, and limit your spending in non-essential categories, such as entertainment, until you have paid off your credit cards.
• Prioritize paying off credit card debt as it is likely to have high interest rates. Make a list of your credit cards and balances, from the highest-interest card to the lowest, and focus on paying off the highest-interest debt first.
• If you have multiple credit card debts, consider consolidating them onto a low-interest card and pay off as much as you can each month.
• Be wary of loan consolidation offers as some may have upfront fees and hidden costs.
• Do not let debt payments derail your savings. Save enough in your retirement accounts to capture the entire employer match, pay off high-interest consumer debt, create an emergency fund, and then focus on saving more for retirement.
• If you have a high-interest mortgage, consider refinancing to a lower, fixed-rate, or a shorter-term loan, which will carry a lower interest rate.
• Make additional annual payments to pay down your mortgage more quickly.

Invest in appreciating assets

Investing in appreciating assets is a great way to build wealth over time. Appreciating assets are those that increase in value as you own them, and they are an important part of any well-balanced investment portfolio. Here are some examples of appreciating assets that you can consider for your investment portfolio:

• Stocks: Shares of stocks represent partial ownership of a company that trades publicly on the stock market. When chosen strategically, stocks can appreciate significantly. For instance, investing in reputable companies with a proven track record of providing high returns can lead to major gains. Growth stocks, particularly in the tech sector, have offered significant growth potential in recent years.
• Real Estate: Real estate investments, such as single-family homes, multi-family homes, commercial properties, land, or farmland, can be a great way to build wealth. Historically, real estate values tend to increase over time, and they can provide a functional investment. For example, as your home increases in value, you continue to have a place to live.
• Fine Art: Contemporary art has outperformed the S&P 500 by 136% over the last 27 years and has also outpaced real estate and gold during inflationary periods. Investing in art can be done through platforms like Masterworks, which allow you to buy shares in artwork.
• Crowdfunded Real Estate Platforms: These platforms allow multiple investors to pool smaller amounts of money to own a proportional stake in a property, mortgage, or portfolio. Investors receive dividends and benefit from the property's appreciation when sold. Fundrise is a well-known platform in this space.
• Real Estate Investment Trusts (REITs): REITs are companies that own and operate income-producing real estate investments, and they typically trade like public stocks. You can invest in REITs through stock brokers or platforms like SoFi Invest.
• Commodities: Commodities such as metals (e.g., gold, silver), energy, agricultural products, and fine wine can be strong appreciating assets. Wine, for example, often increases in quality and value as it ages, and rare wines benefit from supply and demand dynamics. Platforms like Vint offer wine investing opportunities.
• Private Equity: Private equity involves investing in and taking an ownership stake in a private business, typically a startup. This type of investment usually requires a large amount of capital and carries a higher risk, but it can provide massive returns. Crowdfunding platforms like Kickstarter, IndieGoGo, and AngelList offer opportunities in this space.
• Exchange Traded Funds (ETFs): ETFs are a type of security that offers ownership in a basket of assets, providing diversification and appreciation at a low cost. They typically have lower fees than mutual funds and can provide exposure to multiple assets.
• Certificates of Deposit (CDs): CDs are low-risk investments offered by banks, where you deposit money for a fixed period and earn a fixed interest rate. They are FDIC-insured, providing extra protection for your investment.
• Savings Accounts: While savings accounts may offer low interest rates, they are still considered appreciating assets. High-yield savings accounts can offer more attractive interest rates, typically in the 1-3% range.

It is important to note that investing in appreciating assets carries risks, and there is no guarantee that these assets will always increase in value. Conduct thorough research, diversify your investments, and consider seeking advice from a qualified financial advisor before making any investment decisions.

Automate your finances

Automating your finances is a great way to build wealth without having to constantly think about it. Here are some ways to do it:

Start with Your Paycheck

One of the simplest ways to automatically build wealth is to contribute to your retirement portfolio through payroll deductions. Opt into your company's retirement plan, if they have one. A portion of each paycheck will then go into a tax-advantaged retirement account designed to help you grow your wealth. If your company offers to match your contributions, try to get the maximum match.

If your company doesn't offer a retirement plan, you can still deduct money from your paycheck and send it to an IRA that you open yourself. Most companies will send a portion of your paycheck to an outside retirement account if they don't provide a plan.

Set up Automatic Increases

Some employers allow their employees to automatically increase their retirement contributions each year. If this is an option for you, consider increasing your contributions by 1% every year. This small increase won't be too noticeable in your paycheck but can make a big difference over time.

Use Automatic Transfers

Set up different investment and savings accounts for various goals. Then use automatic transfers and investment plans to create a system where you're saving without thinking about it. For example, if you're growing a home down payment fund, open a high-yield account and then set up an automatic transfer from your checking account on the same day each month.

Review Your Finances Regularly

Even when you're automating, it's important to review your finances regularly. Make sure your automatic transfers are adequate to meet your goals and increase your automatic contributions as your financial situation improves.

Personal Finance Software

Stay on top of your finances by using personal finance software. Some software makes it possible to schedule transactions ahead of time so you can see where you stand. This can help to prevent a large expense from triggering an overdraft.

Know your expenses

Knowing your expenses is a crucial part of your journey to retiring as a millionaire. Here are some detailed and direct instructions to help you understand and manage your expenses effectively:

Firstly, it is important to distinguish between needs and wants. Before making any purchase, ask yourself if it is something you truly need. Differentiate between what you need and what you are spending money on for entertainment or to impress others. Every dollar spent on something unnecessary is a dollar less that could be working for you and generating returns.

For example, if you cut out $25 of unnecessary spending from your weekly budget and invest it for 40 years, you will end up with $277,693. So, look for areas where you can cut back, such as morning coffees, lunches out, or subscription services you may have forgotten about. Small expenses can quickly add up, so be mindful of where your money is going.

Next, create a budget and stick to it. This will help you stay disciplined and ensure your spending aligns with your financial goals. Take a close look at your monthly debts, income, and financial goals, and create a realistic budget that allows you to save a significant portion of your income.

Additionally, it is important to prepare for unexpected expenses. Life is unpredictable, and emergencies can derail your savings plan if you're not careful. Always maintain an emergency fund to cover unforeseen costs, such as car repairs or medical bills. This will help you avoid dipping into your retirement funds or accumulating credit card debt.

Another important aspect of managing your expenses is to live below your means. This may involve making some sacrifices and cutting back on discretionary spending. Consider downsizing to a more affordable home, choosing a less expensive car, or cutting back on vacations. These choices will enable you to maximize your savings and reach your financial goals faster.

Lastly, regularly review and adjust your spending. As your income increases over time, make sure to increase the amount you save as well. This will help you reach your goal sooner. It's also a good idea to review your expenses annually and make adjustments as needed to ensure you're on track.

Remember, becoming a millionaire requires discipline and a long-term commitment to your financial plan. By understanding and managing your expenses effectively, you'll be well on your way to achieving your retirement goals.

Frequently asked questions