Maybe you want to save up $1 million but don't know how to do it. While many people want to achieve this milestone, only about 7.6% of Americans do.
Becoming a millionaire is possible, but will require some hard work on your part. Here are four things that can help you do it.
1. Set a goal and make a plan
The road to millionaire status starts with you officially setting the goal. Studies have shown that people who set goals reach them more often than those who do not. Your chances are even better if you create a written plan: In a study done by Dominican University, people who wrote their goals down met them 42% more often than those who didn't.
Aside from specifically stating what your goal is, your plan should include milestones that are measurable. How much money should you save every year? And is it most effective to save it in monthly increments, or will you receive an annual bonus that will let you do it in one lump sum? Making your goal measurable will make seeing whether you've accomplished it or not easier.
Your goal should also be attainable and relevant. Can you feasibly save this amount of money each year when you factor in your income and other expenses? And do you actually need $1 million? Or will your expenses in the future be low enough that you could potentially save less? Your goals should also be timely and take into consideration when you plan on using the money. If it's 30 years from now, then that time frame should be your time horizon.
2. Invest your money
You've determined how much you need each year, but how much will your accounts earn? How much your portfolio is allocated to stocks versus bonds could help shorten the amount of time it takes for you to become a millionaire.
For example, if you invested in a portfolio that held 50% stocks and 50% bonds over the last 93 years, you could've earned an average annual return of 8.6%. If you'd invested $10,000 dollars a year at this rate, you would've become a millionaire in 27 years. If instead you owned 80% stocks and 20% bonds, you would've earned 9.7%, and your portfolio would've grown to over $1 million dollars in 25 years.
3. Don't let emotions control your decisions
How consistently you can meet your goals will play a huge role in how successful you are in becoming a millionaire. If you are someone who has a dramatic reaction any time the stock market drops, leading you to sell out of your investments, you could be making this goal harder to achieve. It may feel like the right choice, but this attempt at market timing could make you miss out on crucial recovery days.
If you'd invested in the S&P 500 in Jan. 2020, you would've seen your accounts drop by 31% by March 23, 2020 when the stock market plummeted. If you sold out of your investments thinking that things would only get worse, you would've been wrong. And that assumption would've cost you. The markets quickly recovered, and investors who endured the downfall were made whole by June 8, 2020. If you sold out at the bottom, you would've just realized a loss.
The more often you do this, the lower your long-term returns could become, and the harder it will be to make it to your goal. This is why ensuring that your risk tolerances are in line with your objectives is important. Taking a quiz can help you determine the ideal asset allocation model to help you stay invested during all market cycles.
4. Monitor your progress
Reaching your goal of becoming a millionaire will require that you monitor your progress. Historical rates of return can differ based on when you're invested and for how long. If the rate of return that you receive is less than you anticipated, you may need larger contributions or a longer time horizon.
You also should rebalance your portfolio as needed. If you own multiple asset classes or different sectors, your holdings can drift as one does better or worse than another. These different types of investments have different levels of risk associated with them, and not reallocating your holdings back to the levels you initially planned can expose you to more risk than you wanted.
An annual portfolio review is a great time to track your progress. If any adjustments are needed, you can make small tweaks and stay on target to meet your goal.
Becoming a millionaire can seem out of reach. But doing it incrementally over time can make this goal more attainable. Even then, achieving this goal will take more than just wanting it -- it will require planning and diligently tracking whether you are meeting your goal regularly.