How to Be a Millionaire on a Low Salary (BROKE to $3.3 Million!)

Many people want to become millionaires, but most are held back by their income. 

Let’s look at twin brothers Ben and Adam. 

Ben earns over $120,000 every year. 

His career choice allows him to spend lavishly on vacations and splurge on luxury goods. Ben spent money without considering saving his income because he believed his job was secure. 

On the other hand, Adam earns $40,000 every year. He was comfortable with a low-paying career that afforded him time with his family. 

Adam believed in spending as little as possible out of his income. A significant portion of his annual income net of expenses went to a brokerage account. 

Every month, he would invest $600 in an index fund and, on average, the account earned him an annual interest of 10%. 

They are both planning for retirement at the age of 65, Adam began saving early and had over $3.3 million in his account when he retired. 

Ben had not saved like his brother and needed government subsidies to survive after retirement. 

While Adam could provide for his family after his retirement and did not need to work anymore, Ben needed help to maintain his lifestyle. 

Now, there are two major lessons we can learn from this.

It Takes Time

First, building wealth takes time. 

Most people are after get-rich-quick schemes because they simply want the money now. 

However, this rarely works out, which leads to a loss of money. 

People need to realize that sustained wealth takes time to build. 

Overnight success often comes with many days of work before they get to that point. 

People hear of lottery winners and think they can easily get such luck, but the chances of such things happening are very low. 

Another important lesson here would be avoiding lifestyle inflation. 

This describes a situation where a person’s lifestyle choices cause them to spend more as their income grows. 

An example is buying expensive cars, clothes, and jewelry because your salary affords you that luxury, like Ben in the story. 

Those who build sustainable wealth have a particular lifestyle. They are frugal with their money and live below their means. 

If you want to build wealth irrespective of your salary, you must make lifestyle changes that support your plan. 

Having said that, what are some factors that are important when it comes to building wealth?

Create Good Habits

That’s probably the most important factor when it comes to building wealth. 

Even if you know exactly what you should do, it's extremely difficult to actually do it if you don't build good habits. 

For example you know that you shouldn't eat junk food every day and you should have a well-balanced diet of fruit and vegetables, but if you don't get into the habit of going grocery shopping, buying healthy food and cooking for yourself, then you'll never make the right decisions when it comes to your diet. 

The same applies with personal finance and investing, even if you know you should pack your own lunch, stop taking Ubers everywhere and spend less money on luxury items, it can be very hard to break these habits. 

You need to take it one step at a time and find ways to ensure you make the right budgeting decisions in small areas of your life. 

Once you stop wasting small amounts of money on unnecessary things, you'll find it much harder to overspend in general. 

Your new mindset won't allow it. 

Once you're in the habit of investing a small amount of money each month from the money you set aside, you'll kick yourself if you miss one month of investing.

Live Below Your Means

Many of the world's most successful people state that living below their means was a key step to success. 

It's been widely reported that Warren Buffett still lives in the house he bought for $30,000 in 1958, driving an ordinary car and eating McDonald's. 

You don't need to take this to an extreme level, but you can never truly build wealth if you don't have money to invest. 

You need some money left at the end of each month to save or invest, so you can allow it to grow over time and start compounding. 

If you struggle with this, make a spreadsheet which tracks all of your expenses each month, so you can identify where you waste the most money. 

Alternatively, you can use a mobile banking app on your phone which provides a monthly breakdown of your expenses. 

A good rule of thumb is to aim for a maximum of 50% of your income to go towards necessities, such as rent and bills. 

Then aim for saving or investing at least 20% of your income, while the remaining 30% can go towards your fun money where you spend as you wish. 

Living below your means is not as easy as it sounds, but it is worth the sacrifice for your goal of financial freedom.

Invest Your Money

Learning to manage your money implies doubling down on your savings plan to reduce expenses and live below your means. As a byproduct of doing that, spare money will be available to you. 

Now that you've saved the money, you need to actually invest it. 

We've all heard about the cost of living crisis running rampant in many countries all over the world. This is caused by inflation. 

Inflation is the increasing cost of everyday goods and services which happens over time. This means that the same amount of money will buy you less in the future than it does right now, as your buying power gets reduced by inflation. 

This is why it's important not just to save, but to invest. 

No matter how much money you save each month, if you don't invest it, then it will decrease in terms of real spending power. 

You need to convert your money into something which increases in value rather than decreases. 

While there are no surefire ways to guarantee returns on investments, it is important to know that risk and return come hand in hand.

Low Cost Index Fund

It is generally agreed by finance experts that the most sensible option for most people is to simply invest in a low-cost index fund. 

I have previously made a whole video on this, which you can watch right here. 

But these essentially allow you to invest in an overall market index such as the S&P 500, which consists of the 500 biggest U.S listed companies without having to buy and sell individual stocks yourself. 

According to Investopedia, the average annual return for the S&P 500 since 1957 has been 11.88%. This is in spite of wars, the dot com bubble, the 2009 financial crisis, and the latest recession following on from the Covid pandemic. 

As you read at the beginning of this article, even a 10% annual return can make an average person a millionaire given enough time, provided they are committed to saving and investing that money each and every month. 

Build Your Net Worth 

One of the biggest milestones on your path to building your net worth and finding financial freedom is getting that first 100,000 dollars invested. 

Many people, including Charlie Munger, cite the first 100,000 dollars as being not only the hardest to achieve but the most important. 

This is because before you reach this point, the compounding effect isn't working as much for you. And most of this will come from your own hard work and from living inexpensively and saving as much money as possible. 

This can be really tough and it's a huge reason why so many people fail on this path. 

Once you achieve this though, compound interest will be much more noticeable year on year and it won't take long before you earn more from your investments compared to your day job. 

In order to get here though, it's important to take your personal finances seriously and make some difficult decisions when it comes to your spending and your priorities. 

If you can cut back on costs and live well below your means, you can work your way to the first $100,000 quicker than most people. 

Once you get there, you can take your foot off the gas a little and enjoy spending more of your income while your investments do the work for you.

Diversify

After learning how to manage your money effectively, the next step is to find ways to grow the money. 

One of the best ways to do that is by diversifying your income. Diversifying your income implies investing in multiple ventures. 

Almost all millionaires have multiple streams of income. 

The benefits of diversifying your income include stability since it protects you against income loss due to illness, disability, job layoffs, and bad investments. 

You can't always rely on your job for a guaranteed stable source of income. 

So it's important to protect yourself so that if the time comes when you find yourself out of work, you can support yourself while trying to find a new job or even build one of your hobbies or sources of side income into a full-time income stream. 

Furthermore, diversifying income is an excellent way to build passive income. 

You don’t have to work around the clock to earn it. It continuously  pays you even while you sleep.

Manage Your Own Money

At some point during this journey, you plan on becoming rich, well, at least you plan on becoming fairly wealthy or having a lot of money invested. 

So it's important to know how to manage your own money. 

One of the biggest ways in which people waste money, including wealthy people, when it comes to personal finance is paying so-called experts to manage their finances for them. 

As we've already mentioned, passive index fund investing is often quoted as being the best choice for the majority of people and this can be done online by yourself using a single brokerage account. 

So why would you waste money paying a financial advisor to manage your investments for you? 

You need to learn how to manage your money and what to do when buying or selling your assets. 

This information is widely available for free online. Spending some time learning this for free could save you tens of thousands in fees throughout your life. 

It also feels really good to not need to rely on anybody when it comes to personal finance! 

Now take this information and think about what you can do in your daily life to help create good habits and build wealth. 

What habits can you create which will help you move further towards your financial goals? 

It's important to focus on doing a little bit better each day and don't constantly judge yourself against your long-term goals, as this can be demoralizing when they seem so far away.

- Ivan