Seriously, becoming a millionaire only takes five very easy steps and luckily Money got their act together and decided to finally, after years in business, write them down in one place and share it with everyone! And today I get the opportunity to share these five ridiculously simple tips with you.
Okay okay, that introductory paragraph was a little facetious but entirely true. In fact, 8.9M U.S. households have a net worth that exceeds one million dollars (not including home equity) and it really does take just a little bit of diligence to join their ranks. (plus you get a little bit of financial trivia)
Step 1. Make saving automatic
Set it then forget it! If it works for a Ronco Rotisserie Chicken machine, it can certainly work for your savings. Just participate in some sort of savings or investment program and before you know it, you’ll have a ton of cash socked away. “Beginning at age 30, if you save $671 each month at an 8% return, you’ll have $1 million by age 60. Begin at age 40, and you need to save $1,698 each month.”
Step 2. Take advantage of Uncle Sam
You get to deduct your contributions to a 401K and Traditional IRAs from your income in the year you make them, definitely want to take advantage of that. If you contribute to a Roth IRA, that contribution isn’t deductible but the principal and earnings are when you retire. Either way, the earnings are growing tax free so taxes won’t slow you down. And the key stat on this one is that “46% of millionaire households own investment real estate.”
Step 3. Make stocks work for you
If you’re starting early, stocks has to be the way to go. Whether it’s investing in actual individual stocks or a fund that does it for you, you have to go with stocks in order to have your investments grow FAST (twice as fast as bonds in fact). And this step’s completely irrelevant factoid is: “Most wealth of millionaires comes from job earnings (32%). Just 16% is inherited.” (but this dovetails into step 4)
Step 4. Boost your earning power
Let’s be honest, if you want to reach a million bucks faster than you are getting there now… you need to make more money. In order to make more money, the first step is to get a high powered MBA or other Master’s degree (if you’re young enough). If that’s not an option, try negotiating your next salary move or consider a job change. And did you know that the “average household income for millionaires is $209,000.”
Step 5. Don’t stop saving
With this step, I think Money has the reasoning for this step correct and the step itself is also correct, but doing this step for that particular reason isn’t entirely “right.” See, you are constantly fighting inflation, which is an erosion in your dollar’s purchasing power, and so Money recommends that you keep saving for that reason. However, what actually fights inflation is the rate of return of your investments, not your savings rate. This is why putting your money into low risk, low yield investments (or even going with a high yield savings account ) is a bad idea unless you’re very close to retirement.
However, just because your investments are beating inflation doesn’t mean that you should stop saving either. Prudent saving and prudent investing got you to seven figures but that doesn’t mean you should abandon either when you make it (you likely won’t though). And our final stat of the series has to do with inflation – “A millionaire in 1976 would need $3.5 million today to have the same buying power.”
Source: Money