Getting to have $1 million might seem like it’s an impossible task. There are currently over 11 million people in the US that are officially “millionaires”. A lot of them followed the same investing and behavioral techniques to get to where they are.
Accumulating $1 million over the course of your lifetime is much more attainable than you might think, especially for dual-income households or for those employees living in metropolitan areas where the cost of living is higher.
Here are five simple but under-utilized techniques that can help you get to your first $1,000,000.
1. Embrace the Markets
While there are many opportunities to invest directly into particular local businesses, deals, restaurants, and others, the stock market offers you the ability to invest in companies that are already established and growing. Chances are that you’re already doing this in your Thrift Savings Plan (TSP) account.
Utilize the TSP
The TSP is comprised of funds that you can pick in order to allocate your investments. The F, C, S, and I Funds are each an index, which means that they are allocated and designed to replicate the risk and return of its benchmark index.
The G Fund is U.S. Treasuries backed by the full faith and credit of the U.S. Government and thus not considered investing in the broad market.
The L Funds are a combination of each of the funds each based on a specific level of risk and time horizon.
The idea behind investing is that federal employees are able to take advantage of earning interest on their principal amounts, and not only just that, but earning interest on their interest! This term is called compounding interest.
Albert Einstein said that compound interest is the 8th wonder of our world and claimed it to be the most powerful force on the planet. In short, this is when 1 becomes 2, 2 becomes 4, 4 becomes 16, 16 becomes 256, and so forth. As you can see, not only is the base number growing, but the speed at which it’s growing is also increasing.
This is the simplest example of compounding growth. It’s especially powerful when you have many years for the number, or in this case, your TSP account value, to be compounding.
It’s very difficult to accumulate $1 million by simply saving money, unless you earn an enormous amount of income every year, or perhaps you sell a business. By investing and using the power of compounding interest, the employee is able to have their money working for them constantly.
Other Investment Accounts
There are many other types of investment accounts like your TSP that you can utilize to invest and grow your wealth.
You can open individual accounts, joint accounts, Trusts, Individual Retirement Accounts (IRAs), and so forth, and in those accounts purchase small pieces of big companies called “shares”. By buying this share of a company, the value of your equity position will grow as the company grows as well.
You’re able to invest in many different companies with both equity and bond investments, thus diversifying your investment portfolio in order to reduce the risk of being too concentrated in one single investment. Doing so helps reduce the risk of your total value drastically dropping if one investment happens to drop in value.
Picking the proper TSP allocation or selecting investments in your other accounts is different for everyone. Remember that risk and volatility are two different things.
Risk vs. Volatility
Volatility is the price we pay for long-term growth. If the money you are investing is for your long-term future, does the volatility it’s experiencing right now really matter?
Maybe it does if you can’t sleep at night because of how much the account moves. Maybe it does if you can’t seem to stay invested throughout those volatile times. Maybe it also means that you’re not properly balanced in your account. Figuring out the right balance of investments for you requires a personal solution, not one that is off the shelf.
Take a look at the picture below. You might have seen this image or one similar, but it does a nice job of depicting investor emotions throughout different portions of market cycles. It’s very relevant in today’s markets, as COVID-19 has accelerated this bear market and caused great uncertainty and panic in the marketplace.
2. Maximize Your TSP
As a part of your federal benefits package, many of you have been contributing to your TSP account. Your agency will also match up to 5% of your contributions. This effectively doubles your investment – free money.
As your income grows, you can put in as much as $19,500 a year if you’re under 50 or up to $26,000 per year if you’re over 50 years old (2020 limits). This really adds up, and the growth on that money compounds even more over time, not to mention, any TSP contributions are considered tax-deductible, which means if you made $100,000 in a year and put $15,000 into your TSP, the IRS will only tax you on $85,000.
Above and beyond this, an employee may also open an Individual Retirement Account, or IRA for short. The contribution limits are much lower, but the taxation is very similar to the TSP. There aren’t TSP funds in IRAs, but you have much more flexibility in what to invest, including investing in indexes similar to what the TSP does if you choose.
If you are a former fed who is now a business owner and have really started to have excess cashflow, establishing a 401K (private sector version of TSP) for your business as an owner can allow you to shovel away hundreds of thousands of tax-deferred dollars, reducing your taxes greatly and increasing your pot of wealth. I won’t get into detail on that for this column, but just remember that a 401K can be a tremendous wealth growing tool for business owners.
3. Pay Yourself First
One thing that millionaires did to get themselves to the position that they’re in is to pay themselves first.
What exactly does that mean? This is where the behavioral portion comes in.
One of the major factors in whether an employee can become a “millionaire”, and stays one, is their spending habits. It means setting aside money from your monthly income to invest and grow.
As a matter of fact, many millionaires have “investing” as a line item within their monthly budget sheets. That’s right; they essentially make it an “expense”, so that they always put money towards investing every time they receive a paycheck, much like payroll deductions into your TSP account. By doing this, they’re paying themselves first before anything else. One might even say that they are paying their future selves.
It’s too easy to push investing off to the next month or next year, so millionaires know that they must force themselves to allocate money each pay period toward investing, just like they do for their monthly bills, so that it happens automatically. This can be in the form of payroll deduction into the TSP, and then into other investment accounts once you have maxed out your annual TSP contributions.
Once you get into the habit of this, you’ll find that it becomes easier every time and you’ll enjoy watching your accounts grow over the long term.
4. Cut the Extra Costs
While we’re talking about expenses, let’s talk about that plastic card(s) in your wallet: the credit card.
Millionaires all know how to keep a budget. That’s right; I’m talking about putting together a list of recurring expenses that you have so you can see where you stand with your cashflow.
It’s so easy to miss how quickly you’re spending down your wealth. I’m sure you’ve all heard about the many professional athletes that went bankrupt only 10 short years after retiring and went straight from the Wall of Fame into the Wall of Shame (lame joke, I know).
In today’s subscription-based world, it’s really easy for companies to keep charging your credit card every month for services you might not even use.
Consider renegotiating your cell phone and cable bill. You can also call your car insurance company and ask them to re-price your rate, or even call other companies and see if they are more competitively priced.
Do you really need access to ALL of the LA Fitness gym locations on the east coast, or is access to the one right by your house or office sufficient? Maybe you can start cooking 3 nights a week instead of eating out all 7 nights. Maybe you purchase a coffee maker (Nespresso is great in my opinion) instead of buying a $5 latte every day.
All of these small things can really add up and you can save $300+ per month: that’s $3,600 a year. If you invest that every year and earn a hypothetical average annualized return of 7%, you’ll have nearly $400,000 after 30 years. That doesn’t even count your TSP or other investments. But it all starts with creating a budget, finding out where you can cut costs, and sticking to it. Remember: you can’t improve what you don’t measure.
5. Use Intelligent Money Management
So you’re maxing out your TSP, you’re keeping to your budget and investing the rest; now what?
The money that you are putting to work needs to be properly invested. You should regularly check your TSP allocation while monitoring the markets to ensure that it’s still properly allocated according to your goals.
A well-diversified portfolio may help reduce the risk and volatility of your accounts, but is that enough? You should also be stress-testing your portfolios to see how they behave in different market conditions.
You may also consider working with an advisor that knows your personal goals and can help you invest properly to make those goals into a reality. I would encourage that federal employees work with an advisor that is trained and well-versed in the federal compensation package.
Be careful of snake-oil – I’ve spoken to some feds that have been harmed by advisors claiming they know your benefits and think that it’s similar to the private sector ones. You, of course, know better than this. Your myriad benefits change many things about your financial plan and your advisor should be specialized in this.
Are you considering other aspects of your financial life such as how much house you should purchase, how different types of insurance can help build your wealth, or how to reduce your taxes now and in the future to keep more of what you earn?
You should ensure you have the basic elements of financial planning such as proper investments, cash flow management, debt management, cash reserves, being properly insured, and estate planning – your wealth can continue beyond you as a legacy.
All of these elements are small pieces of your overall financial picture, and there are many changes in life that can harm your economic well-being or change your trajectory away from your goals. Consider these elements your financial bloodwork – if one of them is out of balance, it can begin to affect other aspects of your financial life too.
These techniques have been tested over time by countless successful investors. Many of them are simple but not easy. If executed properly they can give you the highest chance of reaching your first $1 million!
There are risks involved with investing, including possible loss of principal. Investments will fluctuate and may be worth more or less than when originally purchased.