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Most people have probably dreamed of being a millionaire -- but it doesn't have to be a dream. If you really want to become a millionaire, there are ways to achieve that goal. Here are three tips for becoming a millionaire. See how many you can act on, and your portfolio may reward you.
1. Take advantage of Uncle Sam's generosity
Brian Feroldi: The best way I know to become a millionaire is to put the power of compound interest on your side. By giving your money more time to compound and keeping your rate of return as high as possible, you greatly increase your chances of reaching a seven-figure net worth.
Of course, earning a high return on your nest egg is easier said that done, as many factors to create that return are outside of your control. However, all investors do have control over two huge factors that can put a serious drag on long-term returns: investment costs and taxes. If you want to become a millionaire, focus on keeping both as low as possible.
Thankfully, there are a few easy ways to keep your investment tax bill low. If you have access to a 401(k) or 403(b) through work, then any money you contribute to the account can grow tax-deferred, allowing your money to compound more quickly. Opening up a traditional or Roth IRA is another great way to help keep Uncle Sam away from your money, either now or later. There are even ways to minimize your investment tax bill without having to open up a tax-advantaged account. If you hold your investments for at least a year, they will qualify for the much lower long-term capital gains tax rate when you sell them.
A good way to keep your investing costs down is to use a brokerage that charges very little per trade -- and not to trade too frequently. Long-term investors who aim to buy and hold for many years will easily enjoy low costs of investing.
If you want to become a millionaire, you need all the help you can get. Making sure your investment fees and tax bill are as low as possible will go a long way toward helping you achieve your goal.
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2. Make your savings and investments automatic
Brian Stoffel: Automating your savings and investments can help you quickly and seamlessly build wealth without even realizing it. If you are 25, put away just $55 per week and invest it in an all-market exchange-traded fund (ETF) that delivers the average historical return of about 9% per year -- and you'll be a millionaire by age 65.
But there's an important catch that needs to be talked about: Being a millionaire 40 years from now won't mean nearly as much as it does today because of inflation. If we're talking about how much you'll have in today's dollars, the aforementioned plan would yield $570,000. That's not chump change -- but it's certainly not a million dollars. Instead, you'd need to bump your savings up to $100 per week. Do that, and you'll have $1.8 million by the time you're 65 -- or roughly $1 million in today's dollars.
To make your saving and investing more automatic, you may be able to set up automated transfers of set sums from your bank account or paycheck into retirement accounts or other accounts. Increase your investment amounts regularly for even better results.
No matter your age, the takeaway is the same. Do the math, figure out what you can save on a regular basis, and make it automatic. Selena can help you figure out how much to save and invest, below.
3. Be bold
Selena Maranjian: Becoming a millionaire is more attainable than most people think. You just have to be bold, starting to invest as early as you can and doing so in earnest, aggressively. With enough time, you can get there without even averaging impressive annual gains. Below are some examples of what it can take to become a millionaire by age 65, if you start with nothing and if your money is growing at an average annual rate of 8%. (Historically, over very long periods, the stock market's average annual return has been closer to 10%.)
|
Start at |
Years to Invest |
Annual Investment Needed |
|---|---|---|
|
Age 55 |
10 |
$64,000 |
|
Age 45 |
20 |
$21,000 |
|
Age 35 |
30 |
$8,500 |
|
Age 25 |
40 |
$3,600 |
Clearly, if you're already 55 and have few dollars to your name, it won't be easy to find $64,000 to invest each year. (Also, over relatively short time frames such as 10 years, the market can deliver a far-from-average performance, leaving you significantly richer or poorer than you hoped to be.) On the other hand, if you're 35 or 45, an annual investment of, respectively, $8,500 or $21,000 may be possible. It can help if you're partnered. You might, for example, aim to live off the salary of one person in the couple, while socking away the earnings of the other.
You'll need to invest aggressively, too, though that doesn't mean jumping into penny stocks or learning to day trade. It does mean making the most of the stock market (perhaps through simple and inexpensive broad-market index funds) and not favoring low-interest bank accounts or CDs.
Perhaps the hardest part of becoming a millionaire is maintaining the discipline to keep investing, despite occasional temptations and letdowns.
