Save your way to $1 million

  @Money July 30, 2013: 12:18 PM ET
How to make a million dollars
(Money Magazine)

In this How to Reach $1 Million special report, you'll see how following five cardinal rules of business management can pay off for you personally. You'll discover how a sensible, businesslike approach to your personal finances can speed up the time it takes to get you into the millionaires' club.

This story explains how improving your cash flow can take you to millionaire status.

The Great Recession proved that conserving cash wisely not only helps a business survive difficult times, it can position a company to thrive once things turn up.

In 2008, for instance, Wal-Mart leaders knew they had to continue cutting prices to keep financially strapped customers coming in the door. To do so without hurting the bottom line, top brass suspended a stock buyback program and reduced spending on new supercenters, focusing instead on remodeling existing stores.

The payoff: Wal-Mart revenue kept growing during the financial crisis, and its market share has increased in basic goods, such as groceries.

You may not have the financial muscle that Wal-Mart does. But like any sound business, you know what your spending priorities are and where you have room to cut.

Control cash outflow

Create a life-cycle savings plan. Just as Wal-Mart execs contracted and expanded outlays to fit the company's business cycle, so should you.

Take your savings rate. Conventional wisdom suggests you should save a steady 10% or so a year for retirement throughout your career. Instead, says Maspeth, N.Y., financial planner Michael Terry, you're better off adjusting that rate to fit your financial situation -- pulling back to, maybe, 5%, when your kids are in college and the budget is tight, then ramping up to 10% to 15% after they graduate. Once your mortgage is paid off, Terry says, boost your rate again, say, to 25%.

Odds are good that you'll come out ahead with less pain.

Related: 'How I made $1 million'

Take a typical 50-year-old who earns $70,000 a year, saves at a steady 10% clip, and has $350,000 socked away in his 401(k) -- the target for that age. Assuming standard 2% raises and average annual returns of 5%, he'll amass $916,500 by 65. If instead he lowers his savings rate to 5% until his kids are out of college, bumps up to 15% at 55, and to 25% at 60, he'll have $980,000 by the time he retires.

Lower your operating costs. Another way corporate America improved its cash flow was by reducing its borrowing costs. While it's likely you've missed rock bottom on interest rates, they're still low by historical standards.

"If your debt is three years or older, take a hard look at refinancing before the window of opportunity closes," advises Learn Vest financial planner Tonya Oliver-Boston.

Related: Best advice now for saving and spending

The savings can be substantial, particularly if you shorten the term of your loan. Say you refinance a 30-year $250,000 mortgage that you took out in 2007 when rates were about 6.35%, and roll the remaining debt into a new 15-year loan at 3.25%. You'd have roughly the same monthly nut, but you'd save nearly $160,000 in interest and retire the debt nine years sooner. That would free more cash for savings in the years before retirement.

You can apply the same strategy to other higher-rate debt. Say you're currently shelling out $500 a month to pay down $10,000 in credit card balances at an average 15% rate and $25,000 in college PLUS loans for parents at 7.9%. Refinance that debt with a home-equity line of credit, recently around 5%, and your payments will drop to about $275 a month. True, the rate on a HELOC is variable, but lifetime caps on increases should keep it well below PLUS loans and plastic.

Boost cash inflows

Price yourself right. A business knows how to price what it sells competitively. In your household, your salary is the equivalent of "your price" and nabbing a higher one is a sure path to greater profitability.

Developing a rep as a top performer is critical: Raises for high achievers are averaging 4.6% this year, vs. 2.6% for a typical employee, says Mercer. Make a strong case for yourself in your annual review by quantifying what you've done to boost revenue or cut costs, such as bringing in new clients or switching to lower-cost suppliers.

"Adding more value is about bottom-line impact," says New York City career coach Caroline Ceniza-Levine.

Coming to your boss with a counteroffer from a competitor can also lead to a bump in pay, but it's risky. A less threatening route, says Ceniza-Levine, is to reach out to recruiters to see what salary you could command. Then you can say to your boss, "Recruiters are coming to me with offers that are 20% above where I am, but I like it here. Is there anything we can do?" Framing the situation as a shared problem reinforces that you're still loyal.

Make a leap. "Often, the best way to get a salary jump is to move to another company," says Adam Weiss of Charles River Recruiting in New York City. Executive search firm Salveson Stetson Group has found that since 2010, execs jumping ship got a 16.6% pay hike.

That could be a mighty boost to millionaire status: Getting one such raise can bring in an extra $250,000 in lifetime earnings.

Get paid faster. If you work for yourself, cash flow is often a nagging problem: About 18% of businesses' receivables this spring were past due, reports Cortera, a commercial credit research firm. Many entrepreneurs end up tapping personal funds to cover the shortfall.

To avoid that trap, entice customers to pay you a flat monthly fee, instead of hiring you on a project basis, or require a 50% upfront deposit by discounting your normal rates, says Mark Faust, author of Growth or Bust!

Don't act like a shortsighted CEO by...

...demanding draconian cuts. When the going gets tough, CEOs who want to sound tough often impose across-the-board cuts. Yet be careful when trying to impose this tactic at home.

If you're looking to boost your cash flow through higher wages, for instance, cutting as much from your career development spending as from your vacation fund is counterproductive. Things like "continuing education and networking are worth the money." says financial planner David Blaylock.

More from How to reach $1 million:

Invest your way to $1 million
Want a $1 million? Protect your portfolio
Become a millionaire by seeking growth
Become a millionaire by thinking differently
'How I made $1 million' To top of page

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