Wondering how to become a millionaire? It may sound impossible to some people, but it doesn't have to be an out-of-reach pipe dream. With careful planning, patience, and smart savings, it's possible to make a million dollars.
- If you want to become a millionaire, the most important thing you can do is to start early so you can take advantage of compounding.
- Keep your spending in check. You'll have more money to save and invest—and you'll reach your goal faster.
- Max out your retirement accounts whenever possible.
How to Become a Millionaire
You don't need a six-figure job or family money to become a millionaire. Instead, you need to start saving early and be mindful of every dollar you spend. Here are some tips for building that million you need to retire in style—or to retire early.
1. Start Saving Early
The easiest way to build your savings is to start early. Doing so lets you take advantage of the power of compounding. Say you're 20 years old. If you contribute $6,000 to an IRA every year ($500 a month) for 40 years, your total investment would be $240,000.
But because of the power of compounding, your investment would grow to more than $1.37 million, assuming a 7% return. And you'd be a millionaire by age 57, just by saving $500 a month.
2. Avoid unnecessary spending and debt
Stop buying things you don't need. Before you tap your card, ask yourself, "Is this something I really need? Do I have something similar already? Do I want this more than I want to become a millionaire?"
Every dollar you spend on something you don't need is one less dollar you can invest. Here's a reality check. If you invest an extra $25 a week for those same 40 years, you would end up with an additional $277,693.
Can you cut $25 of unnecessary spending out of your weekly budget? Maybe, maybe not. But if you can, it will go a long way toward helping you reach your $1 million goal.
One of the best ways to sabotage a financial goal is to spend money on things you don't need. Be mindful of where every dollar goes.
3. Save 15% of Your Income—or More
The personal savings rate is the percentage of income left over after people spend money and pay taxes. That rate reached 8.3% in Sept. 2019, according to data from the U.S. Bureau of Economic Analysis. According to experts, that's not enough to save for retirement—or for most people to become a millionaire.
Exactly how much should you save? Although there's no correct answer here, most financial planners say that, depending on your age, you should save around 15% to 20% of your annual gross income. This figure may sound unattainable for many, but suppose your employer matches contributions of up to 6% of your salary—now you need to save only 9%.
4. Make More Money
Granted, this is easier said than done. But if you don't make enough to stash 15% of your income, it will be difficult to become a millionaire. You have a few options here:
- Ask for a pay increase (if you think you're due for one)
- Work extra hours
- Get a second job
- Get training to increase your earnings potential
Additional training pays off the most in the long run. Say you're a Licensed Practical Nurse (LPN). The median income is $46,240 per year. Registered nurses (RNs), on the other hand, earn about $71,730 a year—$25,490 more. Of course, it takes one to three years longer to become an RN. But that extra $25,000 a year can really help you reach your financial goals.
5. Don't Give In to Lifestyle Inflation
Lifestyle inflation happens when you spend more money just because you have more to spend. Say you live in a comfortable apartment in a great location for $1,000 a month. You get a raise at work and move to a "better" apartment that costs $1,500 a month. Did you really need to move?
If you want to become a millionaire, resist the urge to give in to lifestyle inflation. Instead of spending more—just because you can—save and invest more. You'll reach your financial goals a lot faster.
6. Get Help if You Need It
A recent study found that 70% of people who work with a financial professional are on track (or ahead) for retirement. That figure drops to 33% for those who don't use a pro. Unless you're a financial rock star, it's worth the money to work with a qualified financial advisor.
An advisor can help you choose investments, set up a budget, and make plans to reach your goals. And once you're ready to start spending some of that money, they can help you make it last.
Here's a quick look at how your retirement savings account can help you reach your goals:
401(k), 403(b), and Other Employer-Sponsored Retirement Plans
These are perhaps the best savings vehicles for most workers. It's a good idea to take advantage of your company plan if one is available—especially if there's an employer match.
You can deduct your contributions, and the earnings in the account grow tax-deferred. For 2019, the elective deferral limit is $19,000, or $25,000 if you're age 50 or older. For 2020, the limit jumps up to $19,500 and $26,000, respectively.
Traditional and Roth IRAs
Most people with earned income can contribute to a traditional or Roth IRA. The major difference between the two IRAs is when you pay taxes. With traditional IRAs, you can deduct your contributions the year you make them. You pay taxes when you withdraw the money in retirement.
Roth IRAs work differently. You don't get the upfront tax break. But qualified withdrawals in retirement are tax-free. Those are made when you're age 59 1/2 or older and it's been at least five years since you first contributed to a Roth.
No matter what type of IRA you have, the contribution limit is the same. For 2019 and 2020, you can contribute up to $6,000, or $7,000 if you're age 50 or older.
Simplified Employee Pension (SEP) and SIMPLE IRAs
The SIMPLE IRA is a tax-favored retirement plan that certain small employers (including the self-employed) can set up for the benefit of themselves and their employees.
SEP IRAs can be established by the self-employed and those who have a few employees in a small business. The SEP lets you make contributions to an IRA on behalf of yourself and your employees. Both SEP and SIMPLE IRAs are popular because they're simple to set up, require little paperwork, and allow investment earnings to grow tax-deferred.
For 2019, you can put away as much as $56,000 in your SEP IRA account and up to $13,000 in a SIMPLE IRA. For 2020, the limits increase to $57,000 and $13,500, respectively.
Taxable Brokerage Accounts
Taxable brokerage accounts provide a way to invest additional funds after you max out your retirement accounts. Be aware that you need to pay taxes on the income generated in these accounts in the year that you receive it.
How to Make a Million Dollars
If you start early and save regularly, you can make a million dollars by contributing to your retirement savings accounts. To take full advantage, try to contribute the maximum limit.
Let's take a look at how an average person, let's call him Joe, can reach this million-dollar goal by the time he retires at age 67. Let's assume Joe:
- Is single and age 33
- Makes $50,000 year
- Has a 401(k) plan with a 5% employer match
- Saves $4,000 a year in a Roth IRA
We'll assume his investments have a 7% return, (average rates of return range from 5% to 10%, as of 2019).
Joe takes full advantage of the employer match and defers 5%, or $2,500, of his salary each year. His employer contributes $2,500 each year as the match. For the purposes of this example, we'll assume Joe's salary remains the same until retirement. Of course, in real life, he'd likely get a raise and his nest egg would grow even more. Here's the breakdown of his savings over the 34 years.
|Rate of Return||7% for 34 years||7% for 34 years|
|Balance at Retirement||$686,184||$548,948|
That's a grand total of $1,235,132. Welcome to the Millionaire Club! If Joe had started his plan at a different age, here's what his results would look like:
|Starting Age||Annual Investment||Annual Return||Value at age 67|
The Bottom Line
Of course, how much you actually earn depends on how well your investments do. At younger ages, you have the time to be a little more risky with your investments and seek out choices that have the potential to get you that 7% return or even more—the average is 10%, as of Feb. 2019.
That means not putting much of your money in low-earning certificates of deposit (CDs) and money-market investments. Instead, you should consider choices like equities to achieve returns that can outpace inflation—and grow your savings
The key is to start while you're young, stay disciplined, and make and keep a long-term financial plan. The ride may be slow, but you'll be pleased with the long-term results. Making your first million won't be easy—but it doesn't need to be impossible.