Want to be a millionaire? If you've always aspired for this but believed it was impossible, it might be more attainable than you think.
Saving $1 million is a lofty goal, but if you have time on your side, the right investments, and consistency, you can do it. Here's how.
Image Source: Getty Images.
1. Set your time horizon
The first thing you should do if you plan on saving $1 million is figure out how long you have. With a properly set time horizon, you can determine how much money you need to save every year with the rate of return you expect you'll earn on your investments. The more time you have, the less money you will need each year and the more possible it could become.
For example, if you earn an average rate of return of 8% and have 20 years, you can save $1.01 million if you can add $20,500 to your accounts every year. If your time horizon increases to 25 years, you can save just about the same amount with $12,750 each year. And if you have 30 years, earning the same rate, you can reach this goal with $8,250 each year.
When setting your time horizon, you should think about what the money will be used for. If you're like most people, it will supplement your life in retirement and your time span can be aligned with when you stop working. If this isn't enough time, you can either adjust your goal or the date when you plan on using it and make it more feasible.
2. Determine risk tolerance and asset allocation model
If you earn 10% on average every year, you can reach this goal with even less money each year: $5,600 if you have 30 years, $9,250 if you have 25 years, and $15,900 if you have 20 years. But any rate of return that you use in your projections is an average rate of return that includes positive years of stock market growth as well as negative ones. And while staying invested during the good years may be a breeze, your true appetite for risk is often tested during a stock market correction.
Between the years 1926 and 2020, earning 10% on average every year would've required owning 100% stock. But over this same time span, your best year would've earned you a 54% rate of return while your worst year would've lost 43% of your wealth. If you'd gotten the lower rate of return of 8% on average, you could've done it with a portfolio of 40% stocks and 60% bonds. Your best year would've earned you 36% while you only lost 18% in the worst year.
That's why the mix of stocks and bonds that you own shouldn't be arbitrarily picked based on how much time you have and the rate of return reaching your goal will take. Instead, determining your risk tolerances will involve taking a look at how you feel about volatility. If you barely blink when the stock market is crashing, you may have a higher tolerance. But if seeing your accounts lose money makes you feel skittish, you may need more conservative investments in your asset allocation model.
3. Be consistent
The rate of return and asset allocation model that you choose is important because they could factor into how consistent you are, which could determine how likely you are to meet your goal. If you take on too much risk, you may earn these high rates of return during bull markets, but find yourself selling out of your investments during bear markets. This could result in you realizing your losses and missing out on crucial recovery days. The more this type of market timing happens, the more it could lower your average rate of return, putting you further away from reaching your goal.
Consistency with your contributions matters as well, and the more you miss your mark, the less accurate these projections will be. That's why you should aim for an annual amount that you can easily commit to. And if you have more money you can add in a greater amount and potentially reach your goal sooner.
You may think that making a lot of money is the only way you can become a millionaire. But being able to invest money and take part in stock market appreciation has made this goal much more possible for the average person. And with enough dedication and time on your side, you can achieve it.
