Episode 106: How to Become a Millionaire with Ariel Ward
This week I sat down again with Ariel Ward, CFP® to talk about how to become a millionaire and some of the small steps you can be taking now to help you down the road.
Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of this year, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. Ariel is married to a pilot and spends as much time as possible exploring the US with her husband and 2 children. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.
Ariel works virtually out of Charlotte, NC. She enjoys North Carolina’s mountains, beaches and everything in between. In her free time you can catch her walking to one of Charlotte’s excellent breweries, playing Scrabble or building Lego houses with her kids.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
The first thing to do to start growing your net worth
The question I like to ask all of my clients to help judge progress
How being debt conscious can be an important step toward millionaire status
How student loans play into your plan of millionaire status
How critical employer-sponsored retirement savings accounts can be
Leveraging a Roth IRA or a backdoor Roth IRA
If you’re paired up, is maxing out two 401(k)s enough for retirement
A few items millionaires have leveraged to get to that status
Other areas to focus on beyond investments when working to become a millionaire
One of your most valuable assets to help you increase your net worth
How lifestyle inflation can delay your ability to become a millionaire
What a $5,000 raise could do to your net worth over 20 years
A fear small business owners have that could be hurting their millionaire status
Where a budget plays into your millionaire goal
The difference between saving a percentage of income vs. a specific dollar amount
By the time you’re in your 40’s, you probably feel like you’re in a bit more of a stable place with your finances. Debt, like student loans or a mortgage, may still be something you’re dealing with – but it’s less looming than it was in your 20s or 30s. You’ve probably progressed in your career, have started a family, and have been steadily building your wealth for the past decade or so.
All of these things point to financial progress!
Looking for a clear way to check in on how you’re doing? Calculating your net worth, and tracking it semi-regularly, can help you to see whether your efforts to work your wealth are paying off.
Calculating Your Net Worth
Calculating your net worth is easier than you think. You start by pulling together a list of your assets. This is everything from the cash in your bank accounts, to the value of your car or home, to the value of your investments. Once you have your assets listed, you list your liabilities. In your 40s, your liabilities are likely:
Auto loan (unless you paid for your vehicles in cash!)
Now, you take your total assets, subtract your total liabilities, and voila! You’ve just calculated your net worth.
How Often Should You Check Your Net Worth?
Honestly, your net worth isn’t going to fluctuate a ton week-to-week, or even month-to-month. Sometimes you’ll see a big jump after paying down a loan or knocking out a credit card. We’re usually just looking for slow and steady growth as you work to pay off your liabilities and increase the value of your assets. So, checking your net worth yearly, or as often as once a quarter, can help to give you a good idea of your big-picture.
Why Is Your Net Worth Important?
Your net worth doesn’t necessarily define your financial life. It is, after all, just a number. However, watching how your net worth grows or changes can be a pretty good predictor of your financial progress over the years. For example, if you feel like you and your spouse or partner have been making great progress paying off your mortgage, but your net worth is still steadily declining every quarter, that’s a problem. This could mean that you’re not paying as much toward your mortgage each year as you think, or maybe you’re taking on more debt in other areas of your life – even as you pay your mortgage off. Regardless of the reason, you may be fooling yourself about the progress you’re actually making toward your goal of becoming debt-free.
On the other hand, looking at your net worth may give you a bit of a confidence boost! Many people beat themselves up about their financial decisions, or are worried that they’re not doing enough to grow their wealth. When they see that their net worth is solidly positive and climbing year after year, it’s a relief! In these cases, checking your net worth can be a great way to remind yourself that you truly are making a big effort to grow your wealth and pay down debt. Keep it up!
Knowing your net worth is a great way to track where you are, and what financial trends are happening in your life. More than that, though, checking your net worth can help you to decide what you need to do in order to get where you want to be. This is especially true in your 40s! You still have plenty of time before retirement, which makes now the ideal time to look at your net worth, set goals for growth, and put a strategy in place.
What Should Your Net Worth Be At 40?
Everyone’s financial situation is unique, and your net worth is going to reflect that. There’s no one “right” net worth to work toward when you’re in your 40s. Your net worth goals should be based on your lifestyle goals – not just an arbitrary number you want to grow your wealth to.
That being said, there are a few ways to determine whether you’re “on track” with your net worth.
Rules of Thumb
There are a few rules of thumb that people follow when setting a net worth goal. The first is a catch-all equation:
Ideal Net Worth = [Your Age – 25] x [⅕ x Annual Gross Income]
Let’s look at an example. Let’s say you’re 43 years old, and you make $100,000 a year. Using the above equation your ideal net worth would be $360,000.
$360,000 = [43-25] x [⅕ x $100,000]
Another common rule of thumb when it comes to net worth goals is to have a net worth of 2x your annual salary by the time you’re 40 years old, and 4x your annual salary by the time you turn 50.
Using our example above, if you’re now 43 and your salary is $100,000, you should have a net worth of almost $300,000.
Looking At Your Net Worth History
Although these rules of thumb can be helpful to give you a target ballpark for what your net worth should be, it can also be helpful to look at your net worth history to set future goals. For example, if your goal has been to pay down your debt over the last decade, you may not have been saving as aggressively.
Now that your debt is close to paid off, you’ll be able to put more toward saving for retirement, or for other big-picture goals. Knowing that your debt has taken up a big chunk of your net worth in the past, you’ll be able to set goals for exponential saving and growth now that debt payments aren’t eating up your monthly cash flow.
What Does it Take to be Above Average?
According to the Financial Samurai, the average net worth for a 40 year old in America is approximately $80,000. The above average 40 year old, on the other hand, has a net worth closer to $660,000. That’s a huge gap!
To move yourself into that financially successful, “above average” demographic, you can do a few things:
Watch your spending. Remember – the goal is to grow your wealth, not burn through any cash you have sitting around.
Prioritize debt repayment. Debt can be a net-worth-killer. Prioritizing debt repayment over the next several years, and then focusing on staying out of debt is key.
Negotiate your salary. The more you earn, the more cash flow you’ll have to grow your savings and pay down your liabilities.
Leverage compound interest. Compound interest acts like a rolling snowball for growing your wealth. You start with a small amount, but as you continue to contribute, and your interest grows your contributions, your wealth will start to multiply exponentially. Take advantage of compound interest by focusing on investing consistently, contributing to your workplace retirement account, and finding high-yield savings vehicles for your money.
Working with an Advisor Can Help
Looking for additional ways to grow your net worth? You might be feeling like your finances are a black hole right now. Figuring out how to continue making progress, and grow your net worth, can be time consuming. The worst part is that, all too often, when you’re going it alone, it’s easy to fall off the bandwagon. Even if you create a well-researched, airtight plan for your family to start growing your wealth, it’s easy to get off track.
Working with an advisor can help. A fee-only financial planner can act as your accountability partner, making sure that you’re always working with a money map that balances saving for the future while enjoying your life in the present. They can also help you to develop a strategy for everything from your daily cash flow to your retirement investments. If you’re ready to find a partner who’s on your side in your fight to grow your net worth, reach out! We’d love to talk to you about how financial planning can help.
Have you ever wondered whether or not you’re doing “okay” financially? One good way to take a health-check of your finances is to review your net worth every once in a while. Although net worth is definitely not the end-all-be-all indicator of financial health, it’s a good baseline to get an idea of where you and your family stand.
How to Calculate Your Net Worth
Your net worth is easier to calculate than you think. Here’s a step-by-step process for calculating your net worth:
1. Total all of your assets. 2. Total all of your liabilities (or debts). 3. Subtract your debts from your assets. 4. That number is your net worth!
There are several calculators out there that can help you pull together the numbers you need, butthis one from Kiplinger is really comprehensive.
In general, the assets you should be totaling up are:
The value of your business
Other property you own (including cars, jewelry, antiques, etc.)
Your liabilities might include:
Let’s Look At the Numbers
Now that you know how to calculate your net worth, we can talk about what your net worth should be by age 30. Keep in mind that your situation is unique to you. Even though these average numbers provide you with a good baseline to estimate your own net worth, or financial health, with, they don’t tell your whole story.
According toListen Money Matters, the average net worth for people in the United States under age 35 is right around $6,676.The Financial Samurai has a similar number – estimating that the average 30-year-old has a net worth of about $7,000.
Does that seem low to you? The truth is that most 30-year-olds are still working to pay off a mountain of student loan debt. On top of that, they may be dealing with a mortgage, auto loans, and consumer debt (like credit cards). The more debt you carry, the lower your total net worth is going to be.
A better indicator of financial health at this age is likely how much you have in savings. By the time you’re 30, you can shoot for having between half of your annual salary, to a full year’s salary saved. That’s not to say that all of your savings needs to be in one place! You can contribute to your workplace retirement account, a Roth IRA, a cash savings account, a money market account, or a traditional investment account to keep growing your savings.
Factors That Are Negatively Impacting Your Net Worth
Your net worth is negatively impacted by two different things:
1. Your debt. 2. Your lack of saving.
If you’re swimming in student loans (and paying the minimum balance), and are only saving a little bit each month, the likelihood that your net worth will improve is pretty low. The best things that you can do to boost your net worth are to knock out your debt and to start saving more.
What You Can Do To Improve Your Net Worth
Ready to really level up your net worth? At age 30, you’ve got a lot going on in your life. You might be getting married, starting a family, growing your career, buying a home – the list goes on and on. The good news is that your 30s are an exciting financial time. You’re likely starting to break out of the constantly-grinding, Ramen-for-dinner phase of your life, and you get to start enjoying your wealth a little bit more as it grows. However, in order to get to that point, you have to start actively working to improve your net worth.
The higher your net worth is, the more opportunities you open up for yourself and your family – financially and otherwise. With less debt to weigh you down, and more savings to protect you against expensive emergencies, you’re able to set up the lifestyle you’ve always envisioned for yourself.
If you’re ready to buckle down and startgrowing your wealth (and your net worth!), here are a few ways you can get started.
A lot of people feel nervous to start investing. When you’re working hard to pay down your debt, you don’t always have a lot of extra cash flow to start investing with. Luckily,getting started with investing isn’t as intimidating as you might think! When you’re a new investor, define your “why” for investing, and start small. For example, if you want to start investing to build your retirement nest egg, you might start looking for target date funds within your company 401(k) that line up with your retirement timeline.
Investing is as easy (or as complicated) as you want to make it. You don’t have to be a stock picker, hunched over your laptop at all hours of the day, to get started! Looking at your workplace retirement accounts, orIndividual Retirement Accounts (IRAs) are both great places to start.
1. Savings (I’m a big fan of separate savings accounts for separate goals). 2. Debt repayment. 3. Everything else.
A few general percentages I like to use are: saving 20% of your after-tax income, using 30% to pay down your debt, and 50% to cover everything else. This general budget system can help you to prioritize savings without feeling overwhelmed by tracking every last penny that you and your family spend each month.
The debt snowball strategy says that you start by paying down your smallest-balance debt first. Then, once that debt is paid off, you roll the monthly payment to your next-biggest debt.
The debt avalanche strategy focuses on interest rate instead of debt balance. You’d start by paying off your highest-interest debt first, then roll the payment from that debt into the debt with the next-lowest interest rate.
Some people like the debt snowball strategy because it’s easier to get momentum on the front-end of your debt repayment. Others prefer the debt avalanche because it saves them money in the long-run by paying off high-interest debt first. Find a system that works best for you and your family, then stick to it!
Set Goals – and Save For Them
A big part of growing your wealth issetting smart and specific goals, then saving for them. That means every time you have a big purchase coming up, whether it’s an expensive vacation or a new-to-you car, that purchase becomes a goal. You set aside money each month until you can afford it – that’s it. The purpose of this exercise is simple: you’re growing your savings, and staying out of debt. This can be tough, especially in today’s instant-gratification world. But the longer you’re able to stay out of consumer debt, the more you’ll be able to grow your net worth!
Ready to Boost Your Net Worth?
Having a clear-cut financial plan can help to put you and your family on the right track. Getting started early while you’re in your 30’s gives you a lot of time to grow your savings, and to use your wealth in a way that supports your values and the lifestyle you want. Your financial plan sets you up for success, not just during retirement – but right now, too! Ready to get started?Reach out!
When meeting with prospects for an initial consultation and with clients for their first meeting, I tend to get the question of “how do we compare to your other clients?” Most people have an image in mind of where they think they stand with their finances. It’s either bad, reallllyy bad, okay, good or great. Ultimately though, it’s hard to have a sense of confidence about where you stand without first doing the work to figure out, well… where you are standing. I wish I could tell you that it won’t be as bad as you think or it will be as great as you imagine, but honestly, we won’t know until you take the time to evaluate where you stand and figure out what kind of moves you need to make to get to (or stay) where you need to be. If you’re looking to take stock and see which boxes you have “checked off,” here are some important, self-evaluating questions to ask yourself to assess the current state of your finances:
Do you have a fully funded emergency fund?
If you’re a single income home, you should aim to have 6 month of “must have” expenses set aside into an easily accessible and liquid (i.e. cash / savings) account. If you’re a dual income family, you can likely get a way with 3 months, but 6 is better. Life is unpredictable and unexpected things happen all the time. It’s not a question of if things will happen, but a question of when and your finances will be in a much better state if you have the cash set aside to handle those unplanned moments than if you need to rely on credit cards and dig yourself into debt.
Is your credit score in the “excellent” range?
Aim for a credit score to be 720 or higher. Your credit score is your financial report card, except there’s no getting rid of it after college. This number will save or cost you money over your life. The higher your score, the lower the interest rates you receive and the more money you save when it comes to taking out a mortgage or car loan. Your credit score simply indicates your creditworthiness and tells a lender how reliable and timely you will be in repaying a loan. Having a strong credit score is invaluable to always provide you the best financing options. Related article: What Millennials Need to Know about Their Credit Scores
Are you saving at least 10% for retirement?
If you’re in your 20s, you should aim to save 10% of your income for retirement. If you’re in your 30s, aim for 15%. The earlier you start saving, the better and when it comes to determining how much you should save, it’s important to think through the future you want. Take the time to consider what it is you would love to do in retirement and when you think you’d want to retire.
Are you able to meet everyday expenses?
If you’re relying on credit cards and debt to get by, chances are it’s time for a financial change. Often times the reason people feel like they’re living paycheck to paycheck isn’t because they don’t have enough money. It’s that they aren’t wisely spending the money they do have. When this is the case, it can be a fairly straight forward exercise to get your cash flow in order so that you can meet everyday expenses with ease. It’s important to first understand your current spending habits by tracking your spending. Once you know where your money is going, you can determine which expenses you can eliminate altogether and other spending habits that could be altered to more easily cover your fixed expenses and align the rest of your money in the areas you care about the most. (Note, if getting out of debt is necessary – I recommend freeing up money to go towards a debt pay down plan).
Do you feel well compensated for your job?
Remember that when it comes to compensation, it doesn’t have to only be about the salary. You can also consider benefits, bonus structure, employee stock options, flexible vacation policies and work from home arrangements. If the income and benefits you earn for the work you do doesn’t feel good, it might be time for a change. Don’t be unwilling to negotiate a pay raise, especially after successfully completing an important project. If you’re working hard and doing great work, ask to be compensated for that. If your current employer isn’t able or willing to pay you what you’d like, are you ready to consider a move to another company or start a side hustle? Forbes reports that employees who stay in companies longer than two years get paid 50% less. If you don’t feel well compensated right now, know that you have options if you’re willing to take action.
Is your net worth growing?
Your net worth is your total financial worth – measured in dollars and is something I consider a measure of your financial health. After you take all your assets and subtract all your liabilities, what you’re left with is your total net worth. As the years progress, what you want to see happen is that your assets grow and your liabilities decrease. Start with where you are today – know your number – and keep track every 6-12 months to see if your assets are, in fact, increasing over time. If your net worth is stagnant or in decline, you’ll want to know what is causing the lack of growth so that you can tackle any issues getting in the way of your financial health.
Do you have a debt pay down plan in place?
If you have debt, you’ll definitely want to have a pay down plan in place. There are many ways to get out of debt, but the two most effective ways are the debt snowball and the debt avalanche. Both plans involve aggressively paying down one balance while making the minimum payments on the rest. The difference lies in what order you tackle the debts. With the debt snowball method, you pay off your debt from the smallest to the largest balance so that you establish good habits and roll more and more money into the next debt. With the debt avalanche method, you pay debts down from the highest interest rate to the lowest interest rate so that you pay as little in interest as you can and roll that savings into the next debt. The most important thing is to have a plan in place on how YOU are going to pay down your debt and stick to it.
Are your taxes under control – did you owe or receive a refund?
Ideally, you want to break even at tax time, otherwise you’re giving an interest free loan to the government if you get a refund (or you feel kind of annoyed if you owe). Zero is the goal! If you owed a lot for taxes or you received a sizeable tax refund, something went awry this year. The way to make sure you don’t owe again next year is to understand your tax liability and adjust your withholdings accordingly. Perhaps reach out to your human resources department to update your W-4 or adjust your quarterly payments if you’re self-employed and business is growing.
Do you have the right kinds of insurance in place?
Insurance is a tricky topic, but at a minimum you should ensure you have some sort of health insurance and disability insurance in place. In addition, you’ll need life insurance if there are others who are dependent on your income. Property and casualty insurance (such as auto, home, umbrella and renters insurance) are also important to have in place. Always work with your broker or agent to confirm you have the appropriate level of coverage needed for your situation. Don’t just guess at it!
Are your investments appropriately diversified?
If you’re saving for retirement and your investments are sitting in cash, chances are the answer to this question is “no.” Your investments should be allocated based upon the time frame until you’re needing the funds. There’s debate between when to invest or not invest for short to mid-term goals, but if you need the funds in less than 5 years, a CD is going to be your safest bet. If you’re investing for the long run, ensure you have a mix of equities and fixed income, small and large firms and domestic and international. Leverage mutual funds and exchange-traded funds, which will help you to diversify when starting out with smaller sums of money. How many of the above did you answer “yes” to? If you’re 10 for 10, then chances are you’re on a solid financial track! If there are any questions that left you wondering or thinking you might need a change, there’s no better time than now to make some adjustments. The best thing you can do is be aware of how you’re doing and keep track of your financial health year after year.
Your Net Worth is your total financial worth – measured in dollars and is something I consider a measure of your financial health. Your net worth represents all of your assets minus any financial liabilities or debt. It’s important because maintaining a positive net worth not only keeps you on a positive financial course, but it can help you qualify for loans and more attractive credit terms – saving you a lot of money over the long run. One of the first steps on your path to workable wealth is to calculate your net worth. This will give you a starting point to look back on over the coming months and years.
Crunching the Numbers
When crunching numbers for your net worth, take the following steps:
1st: Tally your assets. To calculate your net worth, begin by adding up the current market value of your assets including your home, cash, savings accounts, stocks or mutual funds, retirement savings, valuable possessions such as jewelry or collectibles, and cars. If you need assistance determining the value of your home, you may want to check out Zillow, which will provide you with an estimate.
2nd: Tally your liabilities. The next step involves itemizing all of your financial liabilities — or money that you owe. This includes mortgage balances, auto loans, credit cards, student loans and any other outstanding debt. As you total your liabilities, examine how much debt you’re carrying now. While low debt levels are manageable, higher amounts may impact your long-term plans. Consider how paying down debt could increase your ability to reach your goals.
3rd: Subtract your total liabilities from your total assets. This is your Net Worth.
Track your Progress
Remember to treat your net worth just like your physical health. If your doctor announced some tests need to be run because something is showing up as “abnormal,” you’d likely insist on finding out as many details about the problem as possible and determine a way to fix it. The same should go with your finances. If your Net Worth is in the red, the time to address it is now. Remember, determining your net worth is more than coming up with a number. It’s also a benchmark for gauging whether or not your assets are increasing over time. If you’re moving in a positive direction, great. However, if your net worth is only holding steady or declining, you’ll want to identify the causes and take action. To streamline the process for yourself, set up an excel spreadsheet or use a website such as Mint to link up your accounts. Repeating this exercise every 6-12 months can help you compare the figure with the previous year’s calculations and measure progress. Keeping tabs on your financial health is essential to help in meeting your goals and taking the time to figure out your net worth is sort of like doing a personal inventory. You’ll have all the facts, good and bad right there in front of you. You’ll see what needs to be paid down, where you can save more and may possibly learn that you may need to reign in your spending. Like what you read? Sign up for the Workable Wealth community for more tips and resources and receive 9 Steps to Workable Wealth, a free guide to help you kick start your financial journey.
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