Made Your First Million? Don’t Make These Money Mistakes
Written by
Angela Mae
Edited by
Amber Barkley
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Making your first million dollars is exciting, and you’ll likely want to celebrate. But a million dollars doesn’t go quite as far as it used to, and you might not be at a point financially where you can just sit back, relax and spend.
It’s OK to celebrate this major milestone in your life. You’ll just want to be smart about what you do next, now that you’ve got a decent amount of cash — ideally allocated across different investments and retirement accounts — to your name.
So, what exactly should you avoid doing and what should you do instead? Here’s what the experts say.
Don’t Stop What You Did Before
Many newly-made millionaires stop doing what they did to get to that point in their lives, something that can quickly lead to losing what they’ve made or stunt their financial growth. Don’t do that.
“This one is very simple,” said Stoy Hall, CFP, CEO and founder at Black Mammoth. “Keep doing what you did to make your first million! If you can keep doing what you have been doing, the next $10 million comes faster and easier.”
Don’t Skip Out on Tax Planning
With money comes a lot of responsibility — and a lot of tax implications that might not have mattered so much to you before. Don’t neglect proper tax planning, or you could face some major tax liabilities.
“Individuals should focus on creating a diversified investment portfolio that balances risk and aligns with long-term financial goals,” said Wes Lewins, chief finance officer at NetWorth. “It’s also crucial to seek advice from financial, tax and legal professionals to optimize wealth management strategies.”
Don’t Increase Your Spending
One of the fastest ways to lose that million dollars is to increase your spending, so don’t do that, either. In fact, you might want to tighten your budget so that you only spend up to the 4% rule — that is, you use no more than 4% of your total investments.
“For those fortunate enough to achieve their first million, my initial recommendation would be to exercise prudence in spending by not exceeding $40,000 in expenses in their first year,” said Robert Finley, a fee-only certified financial planner and portfolio manager with Virtue Asset Management. “This sum aligns with a sustainable withdrawal rate, ensuring that the principal remains stable over the foreseeable future.”
If you spend more than $40,000 a year, you risk cutting into the principal balance and losing out on potential returns or long-term financial security. But if you can’t keep to that budget, find other ways to supplement your monthly income so that you don’t draw more than $40,000 from your original million.
Don’t Fall for Lifestyle Inflation
“What I have noticed is, if an average person receives a million dollars [rather than] earn a million dollars, the first thing that pops into their mind is ‘What can I buy?’ It’s those individuals that are the ones that I find make the worst financial decisions with spending, because they see a large bucket of money, not the sacrifice it took to get there,” said Kevin Chancellor, a leading financial planner/advisor and CEO/founder of Black Lab Financial.
One of the biggest mistakes these people tend to make is that they start spending like they have all the money in the world, even when the reality is quite different. This could mean upsizing to a larger home without realizing that this also means higher property taxes, maintenance and insurance costs. It could also mean buying luxury purchases just because they feel like they can.
“It is OK to reward yourself for reaching this milestone, but remember what it took to get there and don’t go overboard,” said Chancellor. “Even with a million dollars, you can definitely go broke trying to look rich.”
Don’t Take Your Money Out of Investments
Chances are, you made your first million through a combination of smart saving and investing. But if that’s the case, don’t stop investing just because you’ve made it to this point.
“A million dollars usually qualifies a person to be an accredited investor; however, a mistake that I have seen is not keeping your money invested after you have reached your first million,” said Chancellor. “Some people are afraid to drop below that amount, since it took so long to get there, but by not keeping it invested, they essentially reduce their long-term purchasing power, making the achievement of their first million dollars obsolete.”
Don’t Make Any Major Changes
“The absolute biggest mistake new millionaires make is making any changes. A million dollars sounds like a lot, but it’s not quite as much as people might think,” said Erik Smolinski, a seasoned investor and the founder of esInvests. “People who hit that mark and begin changing their lifestyle will almost certainly experience lifestyle creep, which introduces a host of issues.”
You can always make small quality of life changes. But anything that jeopardizes your financial security should be avoided.
“New millionaires should continue their course and carefully assess their current finances and roadmap,” said Smolinski.
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