The Simple Strategy That Could Make You a Millionaire
Imagine an investment strategy so simple that a child could understand it. It takes only 15 minutes of your time each year, and over the long run, it can outperform 90% of finance professionals. Best of all, it can make you a millionaire by the time you retire.
Sound too good to be true? It’s not. Here’s how it works:
- Start Early: Begin saving 15% of your salary by the age of 25.
- Invest Wisely: Divide your savings equally into three different types of mutual funds:
- A U.S. total stock market index fund
- An international total stock market index fund
- A U.S. total bond market index fund
- Rebalance Annually: Each year, adjust your investments so that the amounts in each fund remain equal.
That’s it! If you can follow this simple recipe throughout your working career, you’re almost guaranteed to accumulate enough savings to retire comfortably. And yes, you’ll likely beat most professional investors along the way.
Why Many Will Struggle to Follow This Simple Plan
However, there’s a catch, and it’s a big one. Saving 15% of your income and sticking to this plan is a lot like maintaining a healthy diet or exercise routine. The concept is simple, but actually doing it? Not so much.
In previous generations, traditional pension plans did the hard work for you. They automatically saved and invested on your behalf. But those days are mostly gone, leaving you to shoulder the responsibility. Without discipline, your retirement options could range from relying on your kids to support you or facing poverty.
Here are five hurdles that might trip you up—and how to overcome them.
Hurdle #1: The Temptation to Spend
Saving money is hard, especially when life is full of tempting ways to spend it. A latte here, a vacation there, or that shiny new gadget can all eat into your savings.
But here’s the harsh reality: Life without these little luxuries may seem tough, but it’s nothing compared to being old and broke. To put it bluntly, living with a roommate in your 20s might feel like a sacrifice, but it’s better than eating cat food at 70.
Action Step: Review your monthly expenses and identify small cuts you can make. Redirect that money into your savings instead. Your future self will thank you.
How to beat lifestyle inflation and save more for your future
Hurdle #2: Financial Literacy
Investing isn’t rocket science, but it does require some basic knowledge. Without it, you’re flying blind. The good news? You don’t need an MBA. With a little reading and research, you can learn the essentials.
Action Step: Start with foundational books like The Millionaire Next Door and Common Sense on Mutual Funds. These will give you a solid understanding of financial principles without overwhelming you.
The Basics Everyone should know before investing
Hurdle #3: Understanding Market History
The stock market can be a wild ride, with ups and downs that can shake even seasoned investors. But here’s a secret: History tends to repeat itself, and understanding past market behaviors can help you stay calm during turbulent times.
Action Step: Familiarize yourself with financial history. Books like Devil Take the Hindmost and The Great Depression: A Diary can help you see patterns and stay grounded when the market gets rocky.
Learning from the past: Why financial history matters for investors
Hurdle #4: Your Own Worst Enemy—You
The biggest threat to your financial success? Your own emotions. Humans are wired to react to short-term risks, like the sudden drop in the stock market. But investing is about the long game.
Action Step: Recognize that investing is a marathon, not a sprint. Stay disciplined, and don’t let short-term market fluctuations drive you to make rash decisions.
The Importance of emotional discipline in Investing
Hurdle #5: The Financial Industry’s Hidden Agenda
Finally, be aware that many financial professionals don’t have your best interests at heart. They might seem knowledgeable, but their primary goal is often to make money off you, not for you.
Action Step: Stick to low-cost index funds and avoid high-fee investment products. Vanguard and Fidelity’s Spartan funds are great options. Remember, every dollar you save in fees is a dollar you keep for yourself.
Protect yourself from bad financial advice
Start Now, Stay the Course
The path to a comfortable retirement isn’t glamorous, but it’s achievable. Start saving, keep learning, and stay the course. The sooner you start, the easier it will be, and the more secure your future will become.
Remember, it’s not about getting rich quick—it’s about getting rich slowly, steadily, and surely.
Hat Tip: This article draws on the insights and wisdom from William J. Bernstein’s short booklet, “If You Can: How Millennials Can Get Rich Slowly” (2014). Bernstein’s straightforward advice is as relevant today as ever, guiding readers toward a secure and comfortable retirement.