Everybody should have financial goals in place. They can help you plan properly so you're equipped in your later years for retirement. They also give you something to work toward and can act as milestones.
One savings goal many people dream about reaching is the $1 million mark. While it's no walk in the park, building a million-dollar portfolio can be much more straightforward than many investors may envision. It can all come down to a few steps.
Image source: Getty Images.
1. Start as early as possible
A common mistake people make is thinking they need a certain amount of money to begin investing. It stops a lot of people from simply taking that first step. Money may have been a barrier in the past, but thanks to fractional shares, you can now invest on most platforms with as little as $1. That means there should be virtually no excuse for starting, regardless of age.
Time is your best friend in investing, often rewarding consistency over lump sums and late starts. It does so by the power of compound earnings. Compound earnings occur when returns on an investment are reinvested, and those earnings go on to generate their own returns.
Most people can't hit the million-dollar mark via saving alone, but it's much more attainable with time and compound earnings. Even if you can save $40,000 annually -- which most people can't, considering the median U.S. household income is just over $70,000 -- you'd need 25 years to do so. That's a tough ask.
Time is to investing what practice is to mastery: the more, the better. How much time you give yourself dictates how "easy" it is to hit the million-dollar mark. Delaying your start makes the following steps a bit harder.
2. Prioritize consistency regardless of market conditions
No matter how much it's preached, staying consistent in investing through the ups and downs is much easier said than done. Anyone can be consistent during the ups because they're seeing their investments consistently rise. But during the downs? It gets much harder when you're seemingly "losing" money as you go.
A great trick I've found to remain consistent is using dollar-cost averaging. When you dollar-cost average, you decide on a set amount to invest, decide on set times to make your investments, and then stick to that schedule regardless of stock prices.
In some instances, you'll invest when prices are overvalued; in other cases, you'll invest when they're undervalued. The more important point is that dollar-cost averaging helps investors approach stocks with a long-term mindset.
In the short term, stock price fluctuations don't matter because you'll be investing no matter what if you're sticking to your schedule. What matters is that your investments have provided consistent growth and value over the long haul.
The S&P 500 has historically returned around 10% annually over the long run. Past results don't guarantee future performance, but if we assume that trend continues, here's roughly how long it would take you to accumulate $1 million at different monthly contributions:
| Monthly Contributions | Years Until $1 Million | Personally Contributed |
|---|---|---|
| $500 | 31 | $186,000 |
| $750 | 27 | $243,000 |
| $1,000 | 24 | $288,000 |
| $1,500 | 20 | $360,000 |
| $2,500 | 18 | $432,000 |
Source: Author calculations. Rounded to the nearest whole year.
3. Use tax-advantaged accounts
Gifts from Uncle Sam can be few and far between, so when you have the chance, it's best to take advantage. One of the best accounts you can use is an IRA. There are two types of IRAs: traditional and Roth.
Traditional IRAs allow you to deduct your contributions from your taxable income, depending on your income, tax filing status, and whether you're covered by a retirement plan at work. It's a way to save money on your tax bill upfront. Roth IRA contributions are made with after-tax money, but you get to take tax-free withdrawals in retirement, securing your benefit on the back end.
One of the best things about IRAs is that you can invest in any stock or exchange-traded fund that you can in a regular brokerage account. If you're going to be investing -- which you'll likely need to do if you plan to hit the million-dollar mark -- you might as well get tax breaks along the way and save money.
In our above table, the person who contributed $500 monthly (just below the 2023 IRA contribution limit of $6,500 for people below age 50) would've had around $814,000 in capital gains by the time they hit $1 million. Depending on their capital gains rate, making those investments in a Roth IRA could be the difference between saving around $122,000 to $162,000.
It's one thing to hit $1 million; it's a whole different story to keep most of those gains for yourself. The latter should be the goal.
