Becoming A Millionaire – Additional Thoughts

So there’s a very interesting blog post over at Generation X Finance blog that lists five rules for becoming a millionaire.  The whole post is worth checking out, but to summarize:

1. Make money
2. Don’t spend all of your money
3. Save some money
4. Invest that money
5. Repeat

Sound advice, obviously.  But as our family’s net worth recently went over $1m, I wanted to add a couple of thoughts.

3a.  Have Insurance

The #1 cause of personal bankruptcy is medical bills.  Get and have insurance.  Have some disability income protection as well, and consider long-term care issues in your financial planning.  Because getting sick doesn’t just mean medical bills, it often means losing your job.  No matter how great your employer, he’s not going to keep someone on the payroll who can’t show up for work.

The thing about insurance is… the premiums suck.  No one wants to pay a large amount of money for nothing — and most of the time, the money is for nothing.  You’re not sick, you didn’t get into an accident, etc. so you’re getting literally nothing for your money.  However, you can afford it.  That is the whole point of insurance — if you can’t pay it, then you won’t have it.  So if you have it, that means you can in fact afford to pay those premiums.

What you can’t afford is catastrophic bills.  You might be able to make that $500 a month payment, even if it crimps your lifestyle.  But you can’t afford the $200,000 bill for the emergency surgery and physical therapy you’ll need.

So get insurance.  Saving money is nice, but not if you lose it all due to an accident or illness.

4a.  Invest in a Home First

I have a few friends who make very very good incomes, have significant stock portfolios, and live in NYC in a beautiful Classic Six… that they rent.   Well, they just threw away most of the gains they made from their stock portfolio by renting.

The single best investment you can make is in a home.  The tax advantages alone equate to a very serious return.  But in addition, you’re building up equity that you could leverage later if you really needed to do so.

It makes little sense to me to invest in IBM or Microsoft or whatever if you don’t own a home, and are paying rent to make someone like me (I have investment properties) rich.  Thanks, but… you really should buy a house.  Move if you have to, or downsize the amount of space, or get a condo, but buy a house.

6.  Have kids early, but not too early

Nothing focuses your mind and prioritizes your life like having a kid.  I honestly don’t think people understand personal finance deeply until they have a child.  Suddenly, all of the calculations are different.  Two incomes?  Maybe, maybe not.  Your lawyer wife might decide she doesn’t want to go back to work — and you’ll have to make adjustments.  The house you have might not be enough, and you’ll need to plan for that as well.  That vacation to Italy might not be the most attractive think you can do with your money.
I think having kids early enough that you can start to adjust to the additional costs involved and the lower income (sometimes) is necessary in order to make long-term plans and stick to them.  Have kids too early, of course, and you’re looking at a pretty tough row to hoe for some time to come.  But have them early enough so that you can have a realistic plan and work towards them.

-TS