Want to be a millionaire?
The first step to becoming a millionaire is to look at your estate, or review your financial plan if you already have one.
A financial plan calls for setting specific goals and ranking them in order of importance: college, a new house, or retirement. Goals should be viewed both short-term and long-term: where you want to be in one year, five years, or 20 years.
Then prepare a personal net worth statement. On this, list your assets, such as house or farm, potential inheritance, corporate 401(k) or pension plans, and stock or mutual-fund investments. Then subtract your liabilities, including credit-card debt and mortgage and car payments. The result will tell you where you stand in relationship to your financial goals.
While some young people assume that only entrepreneurs like Warren Buffett or Bill Gates have to worry about being worth more than $1 million, a survey by the Ernst & Young accounting firm found that 30 percent of today's college students believe they will become millionaires in their 40s. Another 19 percent said they wouldn't hit that milestone until their 50s.
The typical millionaire
In his book The Millionaire Next Door, Thomas J. Stanley reports that millionaires typically work 50 hours a week, drive a car that is at least 3 years old, and have never spent more than $600 for a suit of clothes. All credit much of their success to starting a budget and sticking to it.
In another book, The Millionaire Mind, Stanley makes a solid case that an Ivy League education is not a prerequisite for becoming wealthy. Instead, traits such as discipline, honesty, focus, and leadership are far more important than straight A's at the best schools.
Give it away now
Estate planning is a mix of the emotional and the practical. If you think that now's the time for your daughter to take possession of the family's long-cherished diamond brooch, then by all means give it to her while you can enjoy seeing her wear it.
But there's a more prosaic reason to start passing down your wealth now: federal estate taxes. If by the year 2011 you expect your assets, including house or farm, retirement funds, investments, and life-insurance benefits, to total more than $1 million, then you've got a potential estate-tax bill.
The new law increases the amount you can leave to heirs tax-free--$1 million this year, up from last year's $675,000, and gradually to $3.5 million in 2009. The law then repeals the so-called death tax altogether for one year, before bringing it back at a $1 million ceiling in 2011.
Once you know whether your estate is likely to exceed the estate-tax exclusion, settle on your goals.
If what you care about is making sure your children can buy a house or put their own kids through college, consider making tax-free gifts now. You can give an unlimited number of people up to $11,000 a year each without triggering a federal gift tax; married couples can give up to $22,000 a year.
You can give more tax-free by paying tuition or medical bills, but the gifts must be made directly to the school or medical provider, and not through the person benefiting from the payment.
Do a yearly review
As part of your estate planning, do a yearly review of important personal documents, including IRAs, life insurance, pension plan, mutual funds, and bank accounts.
Over the years, you may forget who you have designated for what. To avoid costly mistakes, make certain these documents reflect your current wishes. By doing so, you will also become up-to-date on where your current finances stand.
Ask yourself: Do I have enough life insurance? Do I put enough away into IRAs and 401(k)s? Are my investments diversified?
These are not just one-time questions, but issues that should be reviewed regularly and updated as needed.
The Consumer Price Index, which measures the cost of living, has risen 479 percent over the past 40 years. This means that $1 million today is the equivalent of $173,000 in 1960. Or, put another way, what $1 million purchased 40 years ago would cost $5.8 million today.
Therefore, getting $1 million and the need for estate planning may not be such an unrealistic dream.