Saving $1 million is a huge accomplishment, but having that much money could make it more likely that you live the life you want in retirement without making too many sacrifices.
But it's not easy. And these four pitfalls could make the journey to becoming a millionaire a bumpier ride.
1. You don't have a plan
Sure, you may have the goal of becoming a millionaire. But do you know how you'll do it? Studies show that having a written plan can make meeting your goal about 42% more likely than if you don't.
Your plan should start by evaluating whether or not saving $1 million is possible. Can you actually meet this goal, and how can you best do it? Having a plan should also take into consideration how much time you have and how much money it will take each year to get there.
2. You don't save enough
Anything you save will go toward your goals and help you grow your accounts. But are you saving enough for your $1 million goal? Even missing your savings goal by a little could impact how well you do, or push out how long getting there will take.
If you can earn 7% each year on average and have 30 years in which to do it, saving $10,000 each year could make you a millionaire. But if you can only save $8,000 each year and earn the same rate of return, the amount you could have in 30 years drops to $809,000.
If you can't save the amount you need in the time you have, it doesn't mean you should abandon your goal. But your plan could need altering. Increasing the amount of time you give yourself or changing the structure of your investments so that you earn a higher rate of return each year could help keep it attainable.
3. You don't invest correctly
How you invest plays a major role in meeting your goal. Just saving the money without investing it will require that you add lofty amounts, which may not be feasible. Investing can give your accounts a boost from stock market growth.
Typically, the more stock exposure that you have, the higher rate of return you should receive over the long term. For example, a portfolio with 20% stocks and 80% bonds has earned around 7.2% on average between 1929 and 2019, while a portfolio with 50% stocks and 50% bonds has earned 8.7%. Earning that 1.5% extra each year on average could amount to an additional $305,000 in savings at the end of 30 years, which helps you reach $1 million sooner.
While more stock exposure can provide you with higher returns, it also adds more volatility. And if you invest too aggressively, you may have a hard time stomaching the ups and downs of the stock market, which could make staying consistently invested harder.
That's why your investments should take into account more than how soon you plan on using your money. Determining your asset allocation model means finding out the best mix of stocks, bonds, and cash for your accounts, and it can best be done by taking a simple quiz that assesses how comfortable you are with risk.
4. You spend too much
If you are having a hard time coming up with money to save, it could be because you are spending too much. You may think that becoming a millionaire is mostly driven by your income, but whether or not your expenses are in check also matters.
If you have the goal of saving $1 million in 30 years and you earn 8% annually, but can only save $6,000 a year, your accounts would only grow to about $734,000 in 30 years.
But making up for this $266,000 gap may not be as hard as you think if you have 30 years to do it -- it would only require an additional $2,500 each year.
Coming up with this extra amount may seem like a lot, but you could find ways of saving more by cutting expenses. The best way is by creating a budget that details your monthly spending so you are aware of where you're money goes. Discovering small expenses that can be cut -- like subscription services or frequent dining out -- makes a huge difference in helping you save more.
Accumulating $1 million is a big goal, but it can be done if you give yourself enough time and a proper plan. And tracking how you're spending, saving, and investing your money goes a long way to making your dream of becoming a millionaire a reality.