15 Mistakes to Avoid if You Want to Be a Millionaire

It's almost mathematically inevitable that you'll become a millionaire, given a sufficient investment rate, growth rate, and time frame. But you can still screw it up -- by making one or more of these mistakes. Learn about each, so you can avoid making it.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

First off, don't invest in what you don't understand. The relatively new world of cryptocurrencies is a fine example: Opinions are mixed on whether it's a promising field for profits, but if you don't understand what cryptocurrencies are and how they get their value, you should steer clear. Similarly, don't jump into trading options or commodities or foreign currencies until you have a solid understanding of how they work, what their risks are, and how you might get burned. Some industries are far more complicated than others, too -- biotechnology versus food companies, for example. Stick with what you understand.

ALSO READ: How 2021 Can Make You a Millionaire

This is a terrible mistake: not taking advantage of retirement accounts. With Roth IRAs, for example, you can contribute up to $6,000 per year (for 2020 and 2021), plus an additional $1,000 for those 50 or older. Invest in growing companies and keep maxing out your contributions each year and you may retire with $200,000, $300,000, or more in your account. With Roth IRAs, all that can be available to you in retirement tax-free. That's a big deal. Traditional IRAs offer up-front tax breaks instead, and traditional and Roth 401(k) plans offer similar terms but feature much fatter maximum contributions. Why pay more in taxes than you have to?

If you don't have a well-stocked emergency fund (stocked with easily accessible money, not actual shares of stock), you probably shouldn't be stepping onto the path to millionairehood yet. Accumulate and sock away enough money to live on for at least a few months -- perhaps even six to nine months -- in case you lose a job, encounter a costly expense, or get financially derailed in some other way. Be sure to have enough to cover all nonoptional expenses, such as housing, food, transportation, taxes, insurance, and so on.

If you're carrying high-interest-rate debt, such as that from credit cards, that's another sign that you're not ready to jump into serious investing. Credit card debt often costs 16% or 20% or even 25% or more annually, which means that a debt burden of, say, $25,000, can be costing you between $4,000 and $6,250 or more -- each year. Get out of debt before investing in the stock market -- because otherwise, you may be forking over 20% each year while earning 10% each year -- a formula for shrinking your net worth, not enhancing it.

ALSO READ: Can You Retire a Millionaire Saving $500 per Month?

The next mistake to avoid on the road to millionairehood is spending too much on housing. This can take several forms. You might be renting a four-bedroom apartment for $2,000, for example, when you could do quite well in a $1,600 three-bedroom one. That difference amounts to $4,800 per year. Many people buy more house than they should, too -- either by getting one that's bigger than it needs to be or one that's simply fancier than it needs to be or is in a high-priced town or neighborhood. Such homes can end up costing you more each year in taxes, insurance, maintenance, and repairs -- not to mention mortgage payments.

When you pay too much for housing, you end up living closer to the edge, less able to withstand reductions in income or occasional major expenses. You also end up with less money to invest in stocks, in order to build a secure retirement.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Another blunder is to have unrealistic expectations regarding your investing. It's easy to see that some stocks average annual growth rates of, say, 20% over long periods, but you should never expect that of any stock. The stock market is a growth engine that's hard to beat over long periods, but its returns are not known in advance or guaranteed. Over many decades, it has averaged overall annual returns close to 10%, though over the 20 or 30 years in which you invest, it might average 7% or 15%. Expect each year to be different, too. Some years the market may advance by 3% or 30%, and in other years, it may fall by 5% or 25%. Over many years, though, it has always gone up.

A mistake many beginning investors make is sinking money into penny stocks. Those are stocks trading for less than about $5 per share, and they're typically tied to very small and risky companies. Penny stocks can often be easily manipulated via pump-and-dump schemes, leaving naive investors wiped out. Don't let yourself get excited about owning thousands of shares of a stock for just a few hundred dollars. A high stock price doesn't mean slow growth: You can make much more money on 10 shares of a $200 stock than you can with a 1,000 shares of a $2 one.

ALSO READ: 3 Stocks to Buy and Hold for Decades

Trading too frequently is another mistake, because it means you haven't bought stocks in which you have a lot of conviction and you're not committed to letting them take the time they need to grow. It can also mean that you're letting your head get turned by appealing stocks too often and are jumping in and out of stocks too frequently. Studies have shown that frequent traders tend to do less well than patient investors. Also, short-term gains are taxed at your income tax rate, which is typically higher than the long-term capital gains tax rate.

Does your portfolio feature only three stocks? That's risky: If one of them implodes, it's likely to shrink your net worth significantly. If your money is distributed across 10 to 20 stocks instead, you'll be more able to absorb a few big losses -- which will ideally be offset by bigger gains. Don't put too many of your hard-earned eggs in too few baskets.

Another common investing mistake is acting on emotions -- and, often, following the crowd. If the stock market suddenly tanks, many people will sell (sending shares down more) -- and you may feel an urge to sell, too. Don't. Market crashes actually can be great buying opportunities, as lots of great stocks are on sale. Meanwhile, if the market has been surging, and lots of people are jumping into stocks that seem quite overvalued, don't follow them. Do your own thinking, and aim to only buy undervalued stocks of great and growing companies, with the intent to hang on to them for a long time, through ups and downs.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

When seeking investments for your portfolio, don't get overly attracted to those stocks or mutual funds that have grown phenomenally over the past year. Looking in the rearview mirror isn't that helpful here. Zoom Video Communications (NASDAQ: ZM), for example, was recently up 425% in 2020. That's amazing, and while it could happen in 2021 as well, it's not likely to. It's more likely that the stock has gotten ahead of itself and may retract for a while -- especially once the pandemic is behind us. It's better to look for companies that seem undervalued, as they may be more likely to advance in the coming year or so. Similarly, a mutual fund that grows by 50% in one year is very unlikely to repeat that. Such investments could serve you well, but you should only invest after digging deeply and becoming very confident in their likely future growth. Never act on just one or two measures, such as past performance.

ALSO READ: Where to Invest $5,000 Right Now

As the securities you own grow over time, aim to rebalance your portfolio every year or few years, as needed. Rebalancing a portfolio involves selling off some portions and adding to others, in order to get back to the asset mix you want. So if you start off with 75% of your portfolio in stocks and 25% in bonds, over time the stocks might grow faster, leaving you with a mix that's 90% in stocks and 10% in bonds. If so, you can sell and buy in order to get back to the mix you want.

For best results in your portfolio, it's smart to include some dividend-paying stocks. They're not always the fastest growers, but while fast growers will often take a breather and even retract a bit when the market stalls or falls, dividends from healthy and growing companies will keep arriving, dependably. Better still, healthy and growing companies tend to increase their dividends over time, and the share prices of such stocks will likely grow over time as well -- for a nice one-two punch.

If you fail to evaluate your portfolio's performance regularly, you may not realize if it's doing poorly. Sure, maybe it grew by 10% and 12% in the past two years, but perhaps the overall stock market grew by 15% and 22%, respectively, in those years. If so, you've been underperforming the market -- and you'd have done better simply parking your money in a low-fee, broad-market index fund. If you see that you've been underperforming, you can reassess your strategy and see if there are promising ways to change it, or just go for those index funds -- there's no shame in them, and they have outperformed actively managed mutual funds handily over long periods.

ALSO READ: 3 Index Funds Perfect for Achieving FIRE

A last mistake to avoid is not an investing one -- it's a spending one. Clearly, you'll want to rein in your spending at least to some degree, in order to have plenty of money to invest for the long run, to achieve millionairehood. You may want to take on a side job for a while, too, to generate additional investing money. One way to rein in your spending, though, is to stop thinking of shopping as entertainment. When we're not locked down due to a pandemic, many Americans like to hit the mall just for fun, or out of boredom. Similarly, even during a pandemic, we might spend hours on the couch, shopping online. Find less costly ways to amuse or distract yourself, and you may free up significant sums for investments.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Don't think you can't become a millionaire -- or that at a minimum, you can't amass a big, meaningful sum for your retirement. It might take some aggressive saving and some work on the side, but as long as you have some years before you retire, you can probably build a better future for yourself -- especially if you can avoid these errors.

Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.