Are You a Millionaire in the Making?

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who-wants-to-be-a-millionaireAre you on your way to becoming a millionaire? For some the thought of having a million bucks seems ridiculous. But the fact is that becoming a millionaire is simple, even on a modest income. If you have the discipline, building your net worth up to a million dollars or more takes nothing more than time. If you do not have the discipline, then even a $100,000 job will not help you reach a seven figure goal.

You’ve probably seen the show, Who Wants to be a Millionaire? Believe it or not, it is easier to become a millionaire in “real life” than it is on TV. On the TV show, you have to know a lot of trivia to reach the million dollar mark. Few have the memory or desire to stuff their heads with the information one would need to answer all 20 questions. But in real life, becoming a millionaire is not about how smart you are or whether you have a college education. Becoming a millionaire is about the simple, daily choices we all make. So with that, let’s see whether you are a millionaire in the making.

What it takes to be a millionaire

If you contribute the maximum amount ($17,500 as of 2014) allowed to a 401(k) beginning when you are 20 and earn 9% on the money, your balance will grow to $1 million before you are 45 (22 years 3 months to be exact). Add to that a home you buy and live in a long time, and your net worth would be well over the million dollar mark. And if you increased your 401(k) contributions as the contribution limits increase with inflation, you’d reach the millionaire club even sooner.

If you think contributing the maximum each year to retirement is out of reach, how about $10,000 per year? If so, you would have $1 million before you reached 50. As you can see, the numbers make this sound easy. Here’s a millionaire calculator you can use to try out different scenarios. Once you’ve charted your path to financial freedom, answer the following questions to see if you are well on your way to becoming a millionaire.

Do you earn a reasonable income?

As the calculations above show, you do not have to make 6 figures a year to be a millionaire. Just maxing out your 401k contributions will turn you into a millionaire in about 20 years. But, you do have to make some money. You are never going to build wealth without some motivation to earn a reasonable income.

I hear from many folks that they are just tapped out. That every dime they make goes to the mortgage payment, food, utilities and just getting by. For some that’s true; for others, it may be more perception than reality. But the question is whether you are willing to make some changes either in what you make, what you spend, or both, to improve your finances.

For example, if you job(s) pays you just enough to get by, then figure out a way to make some extra income. One of the things I do to earn extra income is blogging. Just on my blogging income alone, if I saved all of it, I’d be a millionaire in under 20 years. Blogging is not for everyone, but the point is that there are many ways to generate extra income to help fund your retirement. Find one that works for you, and get started today.

Do you invest 10% of your income?

How much you make is just half the equation. The other half is how much you save. Even for those who make a lot of money, if they spend everything they make, they will never build wealth. Sound money management dictates that you invest at least 10% of what you make, and 15 to 20% would be even better.

How to invest your money is the easy part. With the mutual funds available today from companies like Vanguard, finding low cost well diversified investments is really simple to do. But the key is saving at least 10%. Depending on how much you make, it may not seem like much at first. But give it time, and it will add up quickly. And before you know it, your investments will be producing more annual income than your job.

Do you avoid consumer debt?

If you are unable to invest at least 10% of your income, you need to figure out why. For many, it may be because of consumer debt. Consumer debt, whether on credit cards, a home equity loan, or personal loan, is arguably the single biggest cause of financial pain in American households. I’m a big believer in taking advantage of great credit card offers, particularly cash back, travel rewards, and 0% balance transfer offers.

But with the exception of balance transfer cards, you should avoid keeping a balance on credit cards. Credit cards should not be used to fund a lifestyle one cannot afford.

Do you take advantage of 401(k)s and IRAs?

The government has given us some great tools to defer the taxes we must pay on our investments. If you invest in taxable accounts, you know just how significant taxes can be. And depending on the tax policy of the federal government, taxes on capital gains could be going up substantially. So it is important to shelter as much of our investments from tax as we can. Enter 401(k) and IRA retirement accounts.

In addition to the tax deferral, many employers match employee contributions to their 401(k) accounts. If your employer offers a match, it would be very wise to take advantage of it. If the match is in company stock, I would diversify my investments as quickly as company policy allowed. When I worked at a public company, my rule of thumb was never to hold more than 10% of my investments in my company’s stock.

As I wrote this article, it occurred to me that there really isn’t much to it. I kept trying to think of things to add to the article, but the fact is, becoming a millionaire requires only diligence and self-control. You do not need to make a ton of money; you do not need to be an investing guru; you do not need luck. Perhaps Paul Clitheroe put it best:

The amount of money you have has got nothing to do with what you earn.. people earning a million dollars a year can have no money and.. People earning $35,000 a year can be quite well off. It’s not what you earn, it’s what you spend.

Published or Updated: August 9, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. JB says:

    It’s not how much you make, it’s how much you keep. These are all important steps. You should strive to save as much as you can, but even if you can only save a little – something is better than nothing.

    Keep piling that money up in those 401K and Roth IRA’s. The number will take care of itself.

  2. Patrick says:

    Great tips. I agree that the process for becoming a millionaire is not very difficult when one takes the time to step back and look at it in a methodical manner. Spend less than you earn, save and invest the difference, and repeat the process. The biggest factor after that is adding time and compound growth.

  3. Mo Money says:

    Very good post. You must be disciplined in order to save money. Then all you need is time and compound growth just like Patrick said.

  4. jeflin says:

    “Its not what you earn, its what you spend.

    I like your last point. Indeed, the first step to financial freedom is to save money. If you consistently spend more than you earn, you are forever in debts, not to mention making the first million dollars.

    Only when you manage your own finances well, can you be a good investor. If your own balance sheet don’t tally, how can you judge other companies whether they are good or bad?

    http://jeflin.net

  5. Jake says:

    Good post DR. It’s definitely not as hard as it used to be.

  6. hank says:

    The mentality of ” I don’t have enough to start investing and am tapped out” is just that, a mentality. Even if you’re donating a few bucks a week/month, it is about a habit. Getting into it will really help you out. If you don’t have the money, you won’t spend the money is a good mentality to have. Deposit into your 401k each month via direct deposit right off your check if you can, you won’t miss it if you don’t see it. :)

  7. fern says:

    You say, “If you contribute the maximum amount ($15,500) allowed to a 401(k) beginning when you are 20 and earn 9% on the money, your balance will grow to $1 million before you are 45.”

    there’s a fairly important flaw in your thinking here. And that is (correct me if I’m wrong) that you can contribute 15% of your gross pay to your 401k, up to a maximum of $15,500, but you can’t contribute the maximum unless it represents 15% of your pay. To do that, you’d need to be grossing $100,000, hardly a common salary for a a 20-year-old.

    So if, say, you make $70,000, you can only contribute 15%, which is $10,500. If you make $50,000, then 15% would be $7,500. you couldn’t contribute $15,500.

  8. DR says:

    This article was featured in the 171st edition of the carnival of personal finance, which you can check out here: http://www.soundmoneymatters.com/carnival-personal-finance/

  9. Ray says:

    I always cringe when I hear people “it’s not how much you earn/make, it’s how much you (don’t) spend”.

    Becoming a millionaire is as much about how much you save/invest as it is about how much you make/earn. Especially if HOW LONG it takes you to become a millionaire matters to you.

  10. think the ultimate way to become a millionaire is to EARN MORE and DESIRE LESS. Earning more increases your income i.e. (taking a second job, investing your money, buying assets that provide passive income, etc.) while desiring less lessens your spending (i.e. budgeting, frugality, etc.)

    Make it a habit and definitely, you would become a millionaire someday

  11. Earn side income~
    Easier money.

    I earn money the old fashion way by staying at home and doing random surfing and it doesn’t hurt at all.I must say that when I first went to the Swagbucks website, I was a little confused and somewhat skeptical. It mentioned things like being a “premier rewards site” and a leading online search engine. But if they were a search engine, then how does one generate the rewards from? And why have I never heard of them? Well, it turns out that Swagbucks is indeed pretty legit.

    It’s amazingly simple. You just sign up and you can either go to their website each time you want to gain points for surfing the web, or you can just download the Swagbucks toolbar and do your searches from there.

    Then each time you do a search using the Swagbucks search engine, you gain Swag Bucks which are good towards a wide variety of prizes, including everything from GPS systems to memorabilia to gift cards to actual cash via PayPal.

    During the writing of this review, I installed the Swagbucks toolbar on my computer at home. At the completion of this review, I had already gained 410 Swag Bucks! Now, I’ve only got 40 to go before I can get a $5 Amazon gift card!

    Use this referal link to get a bonus of swagbucks for signing up!
    http://www.swagbucks.com/refer/tannguyen1

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