Are You a Millionaire in the Making?

Are you on your way to becoming a millionaire? …Do you want to be?

For some, the thought of having a million bucks seems ridiculous and impossible, especially without some high-dollar salary. 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 $150,000 a year job will not help you reach a seven-figure savings goal.

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.

The Simple Math to Becoming a Millionaire

Let’s imagine that you were to contribute the maximum amount allowed to your 401(k) each year ($18,000 as of 2017), beginning at age 20. Assume that you then earn 9% on the money, with the balance compounding.

Your balance would easily grow to the $1 million mark before you are 45 (it would only take 22 years and 3 months, to be exact). Add to that a home you buy and live in for a long time, and your net worth would be well over the million dollar mark, long before retirement.

If you increased your 401(k) contributions each year as the limits are raised for 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? Going this route, you would still have $1 million tucked away before you reached 50.

As you can see, the numbers make this sound easy. Here’s a fun millionaire calculator you can use. Try out different scenarios based on where your finances are currently, your realistic contributions, and how much you expect in returns.

Once you’ve charted your path to financial freedom, it’s time to execute on the plan. Here are the five steps you need to follow.

Step 1: 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 real 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 your job 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, of course, 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.

Step 2: Invest 10% (or More) of Your Income

How much you earn is just part of the equation. The bigger factor is actually how much you save and don’t spend.

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, though 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, this may not seem like much at first. But give it time, and it will add up quickly. Before you know it, your investments will be producing more annual income than your job. This is how investing creates millionaires.

Step 3: Avoid Consumer Debt

If you are unable to invest at least 10% of your income, you need to figure out why. Then, you need to find a way to make changes.

For many, you may be unable to set aside that much 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. In fact, those can be great ways to earn free money and rewards with your everyday spending. 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 that one cannot afford.

If you are in debt, your first focus should be paying down and climbing out of consumer debt entirely.

To get started, check out our free debt snowball calculator.

Step 4: 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. This makes saving for retirement (and becoming a millionaire) even easier.

If you invest in taxable accounts, you know just how significant taxes can be. Depending on the tax policy of the federal government, taxes on capital gains could be changing substantially at any given time. 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 — otherwise, you’re just leaving free money on the table.

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.

Step 5: Set Aside All Windfalls

If you’re having trouble saving 10% or more of your income, or maxing out your tax-advantaged retirement savings, reaching millionaire status can take even longer. Or perhaps you want to speed the process along and meet your goal even sooner.

This is where capitalizing on any financial windfalls comes into play.

Does your company give a holiday bonus each year? Perhaps your Great-Uncle Tim passed away and left you a nice little sum. No matter the source, it would be wise to set aside any cash windfalls that come your way, and invest them right away.

This will boost your portfolio substantially, and you won’t even feel the pinch, since that is “extra” money anyway. However, over time, that extra money can make a serious dent in your millionaire goal.

Can Anyone Become a Millionaire?

As I wrote this article, it occurred to me that there really isn’t much to being a millionaire. At the end of the day, it’s all about discipline and just how dedicated you are to the goal.

I kept trying to think of more and more 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, and you do not need sheer luck. You just need to want it badly enough that you put in the effort and sacrifice required.

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.

Millionaire Tool

If you are serious about becoming a millionaire, I highly recommend Personal Capital’s free financial dashboard. This online tool tracks every aspect of your finances. From credit cards to 401ks, Personal Capital provides great insight into your money. It will analyze your investment fees, spending patterns, and asset allocation. It even tracks your net worth.

I use Personal Capital every day to manage our wealth.

Try Personal Capital

Topics: Money Management

10 Responses to “Are You a Millionaire in the Making?”

  1. 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. 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. “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?

  4. 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. 🙂

  5. 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.

  6. 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.

  7. 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

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