The 5 Rules That Helped Me Become a Millionaire by 40

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It may sound corny, but I truly believe almost anyone who lives in the United States can become a millionaire. As men and women living in this county, we are afforded opportunities to work hard, educate ourselves and build something from nothing.

I did all the above and became a millionaire before I turned 40. Here are the rules I followed:

1. Invest Every Windfall

When you receive an unexpected windfall such as an inheritance, cash gift or bonus, don't spend it. Invest it. If you weren't expecting the money, you're not depriving yourself of anything by not spending it.

When I was 24, I received a $1,600 inheritance from my grandmother. Although I thought about buying clothes and shoes, I resisted the urge to adorn my body with depreciating assets and shopped for something far more valuable: stock in a publicly traded company. I remember the day I made my first-ever stock purchase. It was Jan. 27, 1993, and I bought 40 shares of Starbucks (SBUX) at $39¾ per share. Looking back, it was risky to put all my eggs in one basket, especially with a company that had only recently gone public and had no trading history. But as you can imagine, I got lucky.
starbucks stock chart
Starbucks.com
Twenty-one years and five stock splits later, those 40 shares that cost me $1,600 would now be worth almost $100,000. I sold the shares long ago because as I matured as an investor, I decided to take modest gains by occasionally selling stocks and using the proceeds to diversify my investments across of wide range of companies.

2. Live Below Your Means

You've heard that advice a million times, haven't you? You keep hearing it because it really works. You can't build wealth if you spend more than you save. In my early 20s, I lived in a small, roach-infested, studio apartment in Washington, D.C. Until I was 27, my salary never exceeded $30,000. I was paying down student loans and generally didn't have a pot to piss in. But I made do.

I figured out early on the difference between needs and wants. The one exception was an expensive gym membership. Technically it was a "want," but for me it was a "need" because had I not had a venue to work off my stress, I would have gone postal.

Do I still live in a studio apartment? No. I'm married and live with my husband and stepdaughter in a three-bedroom townhouse. But I'm still living below my means.

3. Continually Invest Small Amounts of Money

When you live below your means by not upgrading your lifestyle every time you get a raise or promotion, you have more and more money to invest. The secret to not getting whipsawed by the stock market's volatility is to invest small amounts of money at regular intervals. You do this by default when you contribute to your employer's 401(k) or 403(b) plan.

Many people have remarked to me that their 401(k) took a beating during the 2008 stock market crash but recovered fairly quickly. That's because they kept putting in the same amount every paycheck and were able to buy shares of mutual funds on sale. This approach, called dollar-cost averaging, means you'll buy more shares when prices are low and fewer shares when prices are high.

4. Contribute to Retirement Accounts

If your employer offers a retirement plan, participate in it, especially if there is a match. The match is free money, which is essentially a 100 percent return on your investment for just showing up. There are many reasons why you might choose a Roth IRA over a traditional IRA or an IRA over a 401(k). In the grand scheme of things, they're all good.

When you sock away money in a tax-deferred account, you don't have to pay Uncle Sam and his offspring, the states, every year. Your money gets to compound like a snowball for many years until you take it out for retirement. With a Roth IRA, you don't pay any taxes when you take out the money at retirement.

A guy once commented on my Facebook page that I "was not really a millionaire" because more than a third of my wealth was tied up in retirement accounts and I couldn't access it. It's fair to say that most accountants, financial advisers and DailyFinance readers would disagree with that statement, as I surely do.

5. Pay Attention to Your Investments

We've all heard the rule, "buy and hold." I don't agree with that, because it often turns into "buy and ignore." As a financial adviser, I provide complimentary portfolio reviews to prospective clients. I would run out of fingers and toes if I tried to count how many people come to me with account statements showing stocks that once traded at $60 or $70 a share and now trade at $10 or $5 or don't even trade at all.

I'm agnostic on the question of whether you should hire a financial adviser/money manager or manage your money yourself. But if you choose the latter, you need to spend the time to educate yourself (or read my book) and review your portfolio on a regular basis. When I started investing, there was barely an Internet. I spent less time on my hair and makeup in the morning and more time reading the Wall Street Journal. With the plethora of free online resources available to you today, educating yourself is easier and cheaper than ever.

The information contained herein is strictly for educational and illustrative purposes, providing commentary, analysis, opinions, and recommendations and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security.

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37 Comments

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yowzaizzy1afil1john1

Mrs. Itkin, way to go! Your article is helpful, informative and can really make a serious difference for Americans who are routinely having money problems in today's vague, weird and turbulent global economy!

September 12 2014 at 7:25 PM Report abuse rate up rate down Reply
rbearland

Laurie Itkin. The 5 Rules....RULE !

This is one of the better articles that have been published on the Daily Finance site lately.

If those of us who are not mental giants and who can follow the simple rules, then we have a pretty fair chance for achieving the higher levels of net worth. It takes dedication, determination, hard work, learning from our mistakes, and development of wisdom along the way.

As they say though, "No pain... no gain." So, it'll probably be more easier for many of us to just borrow, pee away most of the $$ on short term stuff, and allow more bankers and business owners to become the millionaires at our expense.

September 08 2014 at 6:11 AM Report abuse rate up rate down Reply
1 reply to rbearland's comment
Laurie Itkin

Thank you for the nice feedback, rbearland. Glad you enjoyed the article.

September 08 2014 at 12:06 PM Report abuse rate up rate down Reply
Annika

Aside from investing, buying a house at some point with what you have invested is a good idea, because what is the point of investing money every month if you have to pay $1000, $2000 or even more money (depending on where you live) in rent every year? And by buying I mean buying it without a mortgage, which also means living well below your means at first, but at least it's not a roach-infested apartment.

September 08 2014 at 12:36 AM Report abuse +1 rate up rate down Reply
njenel

that and A LOT OF LUCK !!

September 07 2014 at 8:42 AM Report abuse +1 rate up rate down Reply
kenbushway

Sorry but I will disagree with you until the end of time (despite your success) that buy and hold is hold and ignore. It boils down to the investor, someone who say follows the Graham-Dodd approach of buy and hold doesn't fit into your category. Anyone who followed their buy and hold advice did quite well (and I mean beyond Warren Buffet, they made hundreds of wealthy individuals). See its all about mentality, psychological health (which you barely mentioned but is a significant matter in investment). You say don't buy and hold yet your first example is the best kind of example of what happened if someone had bought and hold. Someone who buys and holds shouldn't think of their investment as a stock purchase but ownership in that business (which is what the stock represents - not the value of the company alone). Your other thing about being worried about putting all your eggs in one basket ended in failure, your fear led you out of a good return. Its okay to put all your eggs in one basket in the beginning, when you end up managing large sums is when that is a bad thing. Over diversification can be a bad thing as well, concentrating your efforts in one area doesn't necessarily mean a bad return or risk. Its all about your goals, what you need from your investments. Appreciate? Growth? Income? Do you have the ability to last through the all to common downturns? Can you resist the urge to sell during times of quick optimism? For tax purposes one should buy and hold, at least for a year. Don't get me wrong I realize this is a how I became a millionaire by 40 article. I respect your return but I don't wish to have it. I can buy and hold and far before 40 I can be a millionaire far quicker, I will be a millionaire by the time I am 35(I am 22). Hey if you read this we should come together in 13 years and lets compare returns. I am teaching myself investing and you had okay advice until number 5 then you entered an area to which your knowledge, however deep, fails you.

September 06 2014 at 10:40 PM Report abuse +2 rate up rate down Reply
2 replies to kenbushway's comment
Laurie Itkin

I think it is awesome that at 22 you are reading this article and are very knowledgeable about different investment strategies. Yes, I'd say there is a good chance you will become a millionaire before you are 35. Keep it up!

September 07 2014 at 2:33 AM Report abuse +1 rate up rate down Reply
chzyrider

We all have our own priorities. At one time in my life yonder years ago, I actually had a "spare" thousand dollars to invest. I put that amount into Harley-Davidson stock and sat on it, and almost forgetting about it for about 6 years, until I decided I really wanted a new HD motorcycle. So I cashed-out and the profit from that paid for about half of a new bike, so I considered it as I got my bike at half-price for using my money during that time. That same thousand dollars would never have gained me the same just sitting in a bank savings account for that period. This was my only venture into the big financial world as I've never really had "spare" money to afford investing again after that, but I still have that same Harley 16yrs later.

September 08 2014 at 1:25 AM Report abuse rate up rate down Reply
1 reply to chzyrider's comment
Laurie Itkin

I love that idea! Women who like shopping for clothes could so the same thing with stocks of clothing companies. They could lose money on the stock but they would spend the money anyway on the clothes!

September 08 2014 at 12:06 PM Report abuse rate up rate down
Mike

She is a financial advisor and now she is a millonaire. That is the best reson NOT to use a financial advisor. Read John Bogle's book, The Little Book of Common Sense Investing.

September 06 2014 at 11:19 AM Report abuse +1 rate up rate down Reply
1 reply to Mike's comment
rbearland

That man has made millions off that book.

September 08 2014 at 6:27 AM Report abuse rate up rate down Reply
alfredschrader

If you save your money to become a millionaire, you'll only be able to live like a millionaire.
You could save your money and become a billionaire, but then you'll only be able to live like a billionaire which limits you to what you can buy, which after you have cars, houses, swimming pools, and a yacht, it aint much. Which leaves art, some of which sells for hundreds of millions.
After you have a room full of art you can sit there and look at it. It takes me about 3 minutes to get bored with that.
So I built a laboratory and now I have stuff nobody owns. I set up the lab with equipment that will make almost anything I can imagine.

September 06 2014 at 6:24 AM Report abuse rate up rate down Reply
1 reply to alfredschrader's comment
joe

Can it make something that will help you write a comment that makes sense?

Saturday at 10:32 AM Report abuse rate up rate down Reply
kimooi

I don't know anything about stocks and have little interest in it. This guy just happened to get lucky but in the event of a big crash, he wouldn't be able to pull his money out fast enough before it all disappeared. I'm a militaria enthusiast and I know of a medal whose value has appreciated 172% in 9 years. My golden rule is if you buy something that is rare, prestigious and beautiful, it is worth paying whatever it takes to secure the item today because however high a price you paid today, you can guarantee that in a few years it will be worth much more and unlike the stock market, the value of a rare and prestigious collectible can never go down.

September 05 2014 at 8:23 PM Report abuse -2 rate up rate down Reply
2 replies to kimooi's comment
Valerie

@ kimooi --- It's pretty obvious that you don't know much about about collectibles, either.

As a former antique dealer of many years, I can personally tell you that there is no such thing as a "guaranteed investment" of collectible items. (For the record, "collectible" does not mean the same thing as "antique".) However, many people think their collectible items are worth big bucks. (They are not.)

Whatever price you pay, today, to own something you think is rare and beautiful is nothing but a gamble. You HOPE that the price will increase. In reality, there is an equal chance that the perceived "value" will decrease. The market for all collectibles fluctuates wildly, and it's not consistent. Do some research. Your area of collecting is NOT flameproof. It is as subject to crashes in value as any other collectible area is.

Also, it is not "worth" paying any price to acquire something for your personal collection, UNLESS you are looking at an extremely rare and authenticated one-of-a-kind item. The most obvious example of this would be an authenticated original painting by a well-known old master of that art.

Objects of this type would not be available to you, however, because they are sold at highly publicized auction events and sell for millions (and sometimes) billions of dollars. It is not often discussed, but there is also a BIG black market where these one of a kind items are quietly and secretly bought and sold for staggering amounts of money.

The label of "rare" means there are others of its' kind that were made. It is NOT the same thing as one of a kind. Feel free to keep your illusion that the "value" of a rare item can never go down. That belief means you have a real banjo lesson forthcoming in your future when you learn just how wrong your faith in "collectible value" was.

The best advice you will ever get about your collecting hobby: Buy the things you think are rare and beautiful IF you want to enjoy owning them for their beauty and fine workmanship. But, don't fall into the trap of thinking you are sitting on a gold mine of collectibles. That isn't true. The same phrase that is used for buying stocks applies to buying collectibles. "Past performance is no guarantee of future value."

September 07 2014 at 8:44 PM Report abuse rate up rate down Reply
kimooi

Valerie, I have been collecting medals since 1987 so when it comes to this field I do know what I'm talking about. Take the Victoria Cross for example, in the early 1900s you could buy one for a couple of pounds, when Lord Ashcroft started his collection I believe he was able to get one for about £100. This medal is now worth about £300,000 on average and I personally cannot see any time in the future when the value could possibly crash - the status of this medal both as the highest award in the Commonwealth and as the premier reward for bravery and all the exciting battle stories that it represents will ensure that the price keeps going up and up.

Similarly, the medal I was talking about in my comment above is the Order of Merit. This is an extremely prestigious award, given for outstanding achievements in the fields of art, literature and science. Past recipients have included such notable figures as Winston Churchill, Mother Theresa and Nelson Mandela and in the 112 years since its institution, only 192 have been awarded. Made of solid gold and beautifully enamelled, one sold for about £7,000 back in 2004, since then only 2 have appeared on the market, the latest one selling for nearly £20,000 last year.

Although our fields are similar, you have absolutely no idea how much pretigious medals are changing hands for in the auction rooms of London. Of course, the value of medals COULD go down in theory but in practice this is highly unlikely to happen. Why? Because they are historical relics and supply is limited. Many prestigious medals are either still with the families of the recipients or in museums so the number available to private collectors is limited and gets smaller every day.

September 08 2014 at 12:15 AM Report abuse rate up rate down Reply
alfredschrader

Put all of it in the bank, not as an investment, but so you or others wont spend it.

September 05 2014 at 3:51 PM Report abuse -2 rate up rate down Reply
2 replies to alfredschrader's comment
classof68gto

$ do not grow in the bank. Invest, invest and Invest and of course save so you can invest.

September 05 2014 at 4:15 PM Report abuse +2 rate up rate down Reply
kenbushway

Yeah if you don't think the Bank itself invests your money, you don't know your bank well.

September 06 2014 at 10:43 PM Report abuse +1 rate up rate down Reply
Valerie

This writer's advice is generally correct. She recommends being frugal, keeping your living expenses low, saving and investing as much as you can, and living below your income. All of this is true if you want to have a life that doesn't consist of living from one paycheck to the next one.

The method for having money success is simple. But, it's not easy. You need strong self-discipline, regular investing habits, and a committed mindset and strong personal goals to avoid unnecessary impulse spending on "fun stuff" and entertainment.

Unfortunately, there is not one person in a thousand, who has the determination to live this way. It's just too easy to go along with the crowd and do all the same things your friends are doing. Your buddies and pals will be envious of your success, call you names like "cheapskate" and "tightwad" and pressure you to live from check to check the same way they are. (Misery loves company.)

The financial reward is great, if you don't follow the crowd. But --- it's going to be tough to do.

September 05 2014 at 1:31 PM Report abuse +2 rate up rate down Reply
1 reply to Valerie's comment
Laurie Itkin

Valerie, thanks for you post. You are right that the rules are simple, but many people won't have the discipline to follow through. We need to encourage people to stay strong.

September 05 2014 at 11:26 PM Report abuse +2 rate up rate down Reply
1 reply to Laurie Itkin's comment
Valerie

@ Laurie -- Thanks for your kind words.

One other thing I should have mentioned and it's important. If you are enjoying financial investing success, keep your mouth shut about it. Maintain a very low profile about this.

Why??? Because, often, the people you think would be happy for your financial well-being (relatives and friends) are the same ones that will react with snarky remarks, envy, and resentment because you have not spent your investment cash on THEM and the things they want.

They are still "stuck" in their comfort zone of spending every dollar they have. Spending is all they know. Investing is foreigh territory. They are also unwilling to do the hard work required to be a successful investor, and they often resent the fact that you have done it.

It's okay to talk with a spouse (IF they share your financial mindset) or other investors with the same long-term goal. Otherwise, advertising your success is not a good idea.

September 07 2014 at 9:09 PM Report abuse rate up rate down