A million dollars is no longer going to make most of us rich, but before we reach Financial Independence and Retire Early (FIRE), it’s a great milestone for many. The good news is, it can be a reality for most of us. As per our own experience, we have compiled 7 golden steps that will act as a key to unlock the secrets of how to become a millionaire.
How Many Millionaires in the United States?
Chances are, you probably know one. Data shows that over 8% of American adults are millionaires, according to the global wealth report of Credit Suisse. That is 25 million Americans.
We got to $1M in net worth during our 10-year journey towards financial freedom and independence. Why are we telling you this? Because it is vital for everyone to understand that the million-dollar dream can be achieved even by regular, plain folks with just the right money mindset.
Characteristics of Millionaires
According to a national study of 10,000 Millionaires as reported by Dave Ramsey and put together in the incredible book ‘Everyday Millionaires’ by Chris Hogan, most millionaires (including us):
Did NOT win lottery tickets
DID NOT get money from parents or family
Built up wealth over the long term
So How Do You Become a Millionaire? Our 7 Steps
1. Build the Right Money Mindset
First step is to stop thinking of get rich quick schemes. Surveyed millionaires took, on average, 28 years to become one. While this may seem to be a long time, it is just the average. It will depend on your earnings, your capability to save & invest, and the time frame of investment growth.
Change Your Mind Set: Money is not just for spending on things and paying bills. Practice seeing money as a means to construct wealth over time, not instant riches. This is where financial independence starts.
Over time, your investments make the money and you watch your wealth grow exponentially. While it took us just shy of 10 years to hit a net worth north of $2M, it’s ok if it takes you longer.
One crucial thing to keep in mind is that there will never be the right time to start. The bottom line is the longer an individual invests, the higher their net worth.
While you may be low on the income totem pole if you just started your career and still have student loans, time is on your side when it comes to building wealth. Alternatively, you might need to be a little more bold with your savings & investments if you are older and further into your career.
2. Save and Budget for What you Spend
We are frugal with our money. Oddly enough, 94% of millionaires surveyed by Dave Ramsey are also frugal once they become millionaires.
You know, being frugal, beneath our means, smart spending and budgeting — sounds boring huh? Not at all.
It was only after my husband and I got married did we really dive into our finances. We were $200K+ in debt, and our paychecks were getting eaten by servicing the debt.
So then we sat down and went through a fine-tooth comb of all our finances like we never had! We tracked EVERY dollar we spent for 2 months, made budget templates and savings goals.
And that eventually allowed us to see where we wanted to slash our budget or move more cash into. We had an ah ha moment that we were dining out way too much and cut back on some unnecessary spending.
And years later, we continue to hit our goal of saving or investing over 70% of each paycheck and living off the remainder. The other 30% is spent on mortgage, grocery and travel.
And we consider this step to be the most critical step in achieving our financial goals.
Keep an eye on your spending and set goals. Work on paying off debt and saving for wealth-building ventures such as stocks, a 401(k) or home down payment.
Budgeting does not mean you will never live your life. We definitely did not stop socializing or traveling. We traveled to 30+ countries in the last decade. We budgeted our journeys and chose experiences & investments over trying to afford a luxury life. It depends on what matters to you.
3. Get Rid of Debt
The next step on the path to becoming a millionaire is getting out of debt that does not contribute to building wealth – as early as possible – by devising a plan.
Instead of using your money to build wealth, you are simply throwing dollars away every time you give it to someone in exchange for interest and fees on loans. Well, the nice thing is that you can pay off your loans. However, it does require some discipline & planning.
If you find yourself trapped in the student loan death spiral — making minimum monthly payments and hardly seeing the principal drop, we feel your pain.
It (paying just the minimum monthly amount) was going to take us years to pay of our loans, so we decided to start keeping track of our finances. The two of us had 4 different loans with different APRs.
We came up with a payment plan in which we applied the Debt Avalanche method (focus first on high interest payments). I know there are those out there who like the Debt Snowball, but it was not for us.
By cutting out expenses and diverting most of our income to paying off high interest debts, we were able to pay off our student debts in just a couple of years.
4. Invest Consistently
At this point you are now saving and have a plan to pay off your debts. You might even have a little bit of money to spare for investing. It’s time to consistently invest.
A. Automate your work investment plans
Are there any investment plans your employer offers such as 401(k), Roth IRA, Pension Plans, Company Stock plan etc.?
If you do, then the best way for you to invest consistently is by automating contributions to your retirement accounts. That way, a part of your paycheck automatically goes to your investments.
And the next thing you know, your principal and reinvested profits begin to make up a substantial portion of your net worth. For instance, over the past 11 years, more than 40% of our net worth (not counting a house) has been auto-investing and maximizing our available work investment programs.
But we’re apparently in good company — 80% of the 10,000 millionaires surveyed by Dave Ramsey invested in their companies’ 401(K) plans.
B. Open a brokerage account
After maxing out your work investments, open a brokerage account to invest in the stock market.
For example, contribute the maximum into a Roth IRA account which allows your money to grow tax-free.
For those not comfortable with taking risk in picking your own investments, find a professional advisor or start with investing in ETFs rather than individual stocks.
5. Eliminate debt from credit cards
All successful millionaires know that you need credit to make money. Most large purchases necessitate decent credit. You need credit to buy a car, a house, get decent lending rates, etc.
However, the number one rule is – never carry credit card balances month-to-month. Credit card balances can pile up in a hurry, thanks to sky-high interest rates, and they will keep you from becoming a millionaire.
Credit card debt is probably your highest interest debt. Put it at the top of your debt repayment plan and pay off the balance ASAP. It will provide you with more savings and also enhance your credit score.
This becomes a virtuous cycle that you can create for yourself,
We have always paid off our credit cards at the end of the month.
Our credit rating is in the high 840s (of a possible 900). Consequently, the vast majority of reward credit cards are offered to us as ways to save on our travel, food, gas and groceries. We also get the best lending interest rates & large lines of credit for emergencies.
Having good credit is a superpower!
6. Maximize Tax Savings
A major key to increasing your income and investment is using the available tax credits and savings offered by the government. The most effective means to lower your taxes is by decreasing the sum of your taxable income with pre-tax contributions to 401(K) and IRA accounts.
Even better is if your employer provides a matching contribution on some or all of it. Just be sure to consider withdrawal implications and tax consequences. These are generally retirement accounts & will be taxed and potentially penalized if withdrawn early.
7. Diversify to Minimize Risk & Maximize Returns
As your savings and investments grow, it is important to reduce your risk levels and diversify your investments.
We are not stock-pickers. And neither are most of those millionaire next door folks.
Instead we make sure to put our investments into a well-diversified portfolio of Domestic & Global ETFs, Bonds and Funds.
Invest in Real Estate
Though tricky at times but one of the best diversifying investment for your wealth is investing in Real Estate. We have increased our holdings to 3 properties, which give us rental income and appreciation in a growing market. If you can not really afford downpayment or the mortgage payments, try investing in REITs (Real Estate Income Trusts) or some real estate crowdfunding platform which are getting popular.
Earn, Save and Invest to $1M
One can still certainly build a million dollar net worth. We have demonstrated that lottery winnings, inheritances of millions and high initial salaries are rarer than the rarest. A disciplined saving, budgeting and investing approach will make you one of those everyday millionaires.
Disclaimer – AP Digital LLC does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by AP Digital LLC of such content or services. Use your discretion.