At our wealth management firm based in Boston, the majority of our clients are tech employees with equity compensation and net worths of $1 million or more. We get the benefit of seeing our advice in action every single day — so I know it works.
If you want to manage your money like the millionaires we know, you need to turn these 3 actions into lasting habits.
1. Track Your Savings More Than Your Spending
This might sound backward on its face, but the tracking your savings and investment rate as a priority item in your money management (rather than worrying about spending) might be the biggest secret to growing your wealth.
This means you set a particular savings rate and work to achieve that first, before asking questions like “how much can I spend on X?” or “what’s my budget for Y?”
In practice, this means doing the planning and work to:
- Identify what you need to save for the future. The exact amount depends on your specific goals, circumstances, income and expenses, but if you want to grow your wealth, you need to target a minimal annual savings rate between 20 percent and 25 percent of your gross income.
- Set up automated contributions to your retirement and investment accounts to hit that necessary savings rate. Once you have your figure, you need to make sure all your contributions to long-term investments will put you on track to meet that target for the year. Then automate those contributions to your 401(k), IRA, and brokerage accounts. This helps you avoid all-too-human errors like forgetting to make the transfers, or giving in to the temptation to spend that money rather than save it if it’s sitting around in your bank account.
- Build your budget around what’s left after you fill your long-term savings bucket. Once you’ve addressed your savings needs, you can feel more free to use what’s left on whatever you feel is most important or valuable to you. You know you’ve addressed your future needs, so you can use the rest of your cash flow on living well right now.
The most financially-successful people still work to understand and track their expenses. Using a savings-first strategy does not mean you ignore your spending.
But you do flip the order of operations. Save first, figure out spending later.
Doing this tends to lead to flipping the script on other common money questions, too. You’ll find yourself asking “how much more can I save?” rather than “can I spend more here?” when your habit is to address that need first.
Our wealthiest clients tend to be those who have gamified their savings strategy a bit; they see it as a fun challenge to say “I saved 25 percent of my income last year — let’s make it 30 percent this year!”
This mindset and priority focus on savings is one factor that can expotentially accelerate progress toward serious asset growth in shorter periods of time.
2. Use Rules-Based Systems To Manage Variable Aspects Of Your Money
Bonuses or equity compensation like grants of RSUs, NQSOs, or ISOs creates variable income.
You need a systematic way to process that money as it comes to you. Otherwise, it tends to trickle away.
Your dollars need a purpose and a job. And you need a system to organize all the functions your money needs to fulfill.
Automated contributions to savings and investments is one example of a system. Another is how we recommend managing new grants of RSUs.
Our preferred strategy for managing RSUs over time is to:
- sell vested RSU shares as they vest
- set aside a portion of the proceeds to cover your tax liabilities (take your expected marginal tax rate minus 22% to estimate this)
- reinvest the remainder received from the sale of RSU into a taxable investment account for long-term growth
Following this approach gives you a simple way to avoid overexposure to a single stock position. It also supports the need to invest in a globally diversified portfolio.
And prioritizing diversification lowers your overall investment risk and exposure to volatility.
For bonus money, setting up a framework for how that money will flow through based on percentages, rather than dollar amounts, can help you make the most of it.
So before any bonus is received, you could decide:
- 50 percent will go toward your long-term investments to grow your wealth
- 30 percent can be used for spending now
- 20 percent can help fund shorter-term goals
The exact split of that money depends on your specific financial planning needs. The important thing is you establish that system (and follow it) to manage these cash inflows.
3. Plan Proactively For Optimal Positioning
What you earn obviously has a huge impact on your financial trajectory. But what you do with your income can also set you up for massive success — or major missed opportunities.
The clients we work with generally make $500,000 or more per year in household income. They tend to work in tech, biotech, law, or healthcare. They’re usually married with young children and live in cities like Boston, Cambridge, NYC, and DC.
Despite these similarities that would suggest everyone is on equal financial footing here, we’ll see big variations in the rate at which people make progress.
It’s a variation we can predict almost without fail. Those who enjoy the most financial success the fastest are people who do the following — which you can do, too:
- Devote considerable time to understanding core values, identifying priorities, and outlining one or two major life goals (usually 2 short- to mid-term goals, like enjoying more travel now and paying for their children’s college in 10 years or so; and one big long-term goal like financial independence)
- Make adjustments to day-to-day use of money as needed to make room for most important priorities. They identify things they may want to accomplish, and if those items cost more than they can cover in their cash flow, they commit to a savings plan to fund the goal.
- Take time to consider ideas and plans before acting on them. It might take several conversations over weeks or months to finalize a decision on a big home renovation, new car purchase, one-in-a-lifetime family vacation to South America, or taking on a fixed cost that will create a material change in month-to-month spending. They don’t jump into the decision and then ask “so how can I make this work financially?” They consider first, plan it out second, and implement when the time is right. They also take advantage of the fact that they have a personal financial planner, and will actively consult with us before making a big decision to make sure they’re checking all the right boxes and uncovering any blind spots.
- Maintain cash reserves to handle the unexpected. This is a function of their habit of looking first, leaping second. They don’t tap into emergency funds just because they made a rash choice and now need funding for whatever situation they found themselves in.
- Commit to leaving investments invested. On a similar note, the people we see with the fastest, most impressive increases in net worths are the people that simply left their investments invested. Rather than dipping in and out of their taxable investment account whenever an unexpected expense pops up, they treat that money as it should be: left to its own devices so it can compound, uninterrupted.
All of these steps and actions mean that our most successful clients are ones that continually strengthen their financial position. They’re continually expanding on how much freedom and flexibility they have.
On the other hand, we see also clients who chronically miss planning meetings, tell us they’ve made a financial decision and now need to try and figure out how to make it work (versus planning ahead), or gradually chip away at their taxable investment account balance to cover things that should have been saved up for in advance.
The differences in the household net worths of these groups could not be more stark, despite the fact they earn the same amount of money and have so much in common on paper.
To succeed like our wealthiest clients who have reached millionaire status, you should consider:
making carefully considered choices in conjunction with professional advice and guidance. Take your time and make sure that you’re taking deliberate and intention action, versus acting rashly (or from a place of heightened emotion).
maintaining buffer room within your overall financial plan so you can withstand life’s inevitable curveballs and setbacks. Failing to plan for downside risk and uncertainty will leave you in a bad spot. You need various levers to pull and options to pursue when Plan A doesn’t work out.
and letting your money work for you, by leaving it alone! Let your investment portfolio compound without interruption over the long term.
