Who wants to be a millionaire? Everyone, right?!
I'm here to tell you that it's a real possibility for most people. The requirement isn't brains, rich parents, unparalleled skill or even being a business major — no, the only requirement is sound financial planning and the ability to delay gratification, both harder than they sound.
True or False: Most millionaires inherited money or had some form of a trust given to them. False!
Actually, only around 19 percent of millionaires inherited money. That is very encouraging; it means that 81 percent of millionaires are self-made.
Another amazing fact about millionaires: they live within their means. More millionaires have a Sears credit card than an American Express credit card. More millionaires drive a Ford than a Cadillac. Most millionaires work in mundane businesses such as plumbing, cosmetics, construction — not high-tech firms or Fortune 500 jobs. Eighty percent of millionaires have a bachelor's degree or higher. Seeing a trend here?
The majority of millionaires are everyday people working everyday jobs, yet they are different than the average person. What is it about millionaires that separates them from the masses?
That question is exactly what DeVon Yoho, the director of the Center for Economic Education and associate professor of economics, and I are tackling. Over the past year, we have been researching financial literacy and putting together lesson plans for teachers. Because the state of Indiana has mandated that teachers incorporate financial literacy into classes across all levels of education, we are providing them with the materials. Those millionaire facts came from one of the resources we're using, "Financial Fitness for Life."
What about you though? You won't benefit from teachers making an effort to increase your financial literacy and most of you probably won't have to take FIN 101, Ball State's new personal finance class for all incoming students. But, I can recommend a few resources and shortly explain a few key ideas to create wealth.
The first idea to understand is compounding and the time value of money. A dollar today is always worth more than a dollar tomorrow. Why? Because I could invest the dollar today and earn interest on it. I used the following example in a presentation a few years ago: A single dollar invested in the year 1 A.D at three percent interest compounded annually would be worth more today than the entire market value of every asset on earth!
A more realistic example: Say you graduate at the age of 22, invest $2,000 annually in a 401k and retire at the age of 65. Assume your 401k grows at 8 percent, roughly the long-term real return on the stock market. Nominal dollars invested over that time period would be $86,000. At retirement, the account would be worth about $712,000. That is the power of compounding. Do you see now how anyone can become a millionaire? Even the poorest of poor people should be able save $2,000 a year. It's just irresponsible not to.
Really, the only other main idea to understand about personal finance is understanding debt. Debt is borrowed money. It's very simple. It would be OK to borrow money to invest in yourself (i.e. pay for college) or buy a house. It's also OK to borrow for a car. Don't think of the car as an asset (it loses value every year), but it has a use — transportation. Don't borrow to buy things you can't afford. Don't run up credit cards. Live within your means. It really is that simple.
I'll end this column with a few resources that I think are important. The single best introductory personal finance (and really life help) book is "Rich Dad, Poor Dad." The book has been out for many years and there are many variations, but I like the original best. Robert Kiyosaki paints a simple picture of the path to wealth. To sum up the message of his book: Buy assets, not liabilities. Assets make you money, liabilities cost you money.
Personal finance is a choice. It is by no means difficult. Becoming a millionaire is within the grasp of almost anyone given the luck of being born in America or a similar country.
I'll end with my favorite millionaire fact: Over two-thirds of millionaires work between 45-55 hours a week. How many do you work or plan to work? Are you willing to put forth the effort? Ninety-five percent of Americans will not.
Write to Derek at dawilson2@bsu.edu.
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