How To Become A Millionaire

September 17, 2022

How To Become A Millionaire

There are more than 20 million millionaires in the United States. Because many of them capture the attention of the press or become pop culture sensations, it might seem like becoming a millionaire is impossible for everyday people.

The truth is that you don’t need to develop the next tech unicorn or be a celebrity to become a millionaire. In reality, most millionaires are regular people, not all of whom bring home six- and seven-figure salaries. With a bit of common sense and discipline, you, too, can become a millionaire on an average income.

How You Can Be a Millionaire

The first step to becoming a millionaire is to understand the power of compound returns. When you compare a modest rate of monthly savings with a $1 million goal, the challenge seems overwhelming.

But the key is to realize that the vast majority of wealth comes from compounding. That’s when your early returns lead you to earn greater later returns. Think of it this way: If you earn 10% on $1,000, you’d have $1,100 at the end of the first year, a gain of $100. If you earned that same 10% return on your money the next year, you’d have $1,210, a gain of $110.

What’s great about compound returns is that they are investment gains you see without having to add more of your own money to your investment (though it’s important to regularly contribute more money to maximize your compounding).

Compounding Returns Example

Now, let’s see how compounding can help you become a millionaire. First, we’ll calculate a possible rate of return on our investment. Since 1926, the average annual return on a portfolio with 80% stocks and 20% bonds has been 9.4%. During this same period, inflation has averaged about 2.9%. Based on this historical data, we will assume an inflation-adjusted annual rate of return of 6.5%. By using an after-inflation rate of return, the results of our calculations will show an amount of money in today’s dollars.

How much we need to save each month to become a millionaire depends on how long we’ll save and invest. Here it’s important to understand that the longer we have to save and grow our money, the less we have to save each month to reach our goal.

If we want to become a millionaire in 10 years, we would need to save about $6,000 per month. Obviously this is not realistic for most people. But luckily, most people aren’t trying to become millionaires in a decade.

If they’re saving for retirement, they generally have at least a couple of decades to reach millionaire status. As we extend our investing time period to reflect that, we can begin to see the value of investing early and the power of compounding.

If we save and invest for 20 years, our monthly savings amount drops to $2,075. Still unrealistic for many people, but we are moving in the right direction. Here’s how much we would need to save each month for different time periods.

Time Period  Monthly Savings

30 years         $940

40 years         $465

45 years         $330

50 years         $235

It’s important to take a moment to note a couple of things, like the impact of time and compounding. Each decade you wait to start saving roughly doubles the amount you need to contribute to reach your goal. But by the same token, if you start early enough, you can grow your wealth to great sums with only a few hundred dollars a month.

Your Employer’s Match Can Help Make You a Millionaire

Keep in mind that you aren’t in this retirement savings journey alone. An employer can match an employee’s contribution to a 401(k) or other retirement account, 85% of plans do, according to Fidelity.

Many employers match $0.50 for every $1 contributed by an employee, up to 6% of the employee’s salary. Some offer a $1 matching contribution for every $1 contributed by an employee. A benefit like this can easily add $100 to $200 a month to your total savings, which reduces the amount you need to save on your own to become a millionaire.

For example, let’s assume an individual making $50,000 a year is saving $450 a month to become a millionaire in approximately 40 years. If an employer matches dollar-for-dollar up to 6% of the employee’s salary, this benefit would add $3,000 a year (or $250 a month) to the employee’s retirement account.

If this employee continued to save $450 a month, the extra $250 a month employer match would enable the employee to become a millionaire in about 34 years rather than 40 years. And if they decided to continue working and contributing for 40 years, the employer match would grow their wealth to nearly $1.6 million.

Don’t Let Lifestyle Debt Prevent You from Becoming a Millionaire

If there’s one roadblock on your way to becoming a millionaire, it’s lifestyle debt. This is debt, often charged to a credit card, to purchase everything from vacations to a night out on the town. A reasonable amount of debt that helps us buy something of lasting value, such as an education or a home, can be a smart choice. Going into high interest debt to buy things with no lasting value works against the goal of becoming a millionaire.

Historical Returns Are Not a Promise of Future Success

Our analysis makes a number of key assumptions about the variables that determine how and when you could become a millionaire. These variables will fluctuate over the decades, and some could prevent you from achieving this goal in the time you’ve allotted.

Perhaps the biggest assumption is the after-inflation average rate of return. Over the next several decades, the average rate of return may very well fall short of the benchmark we’ve chosen in this analysis. In addition, how much you can save each month will likely vary over time. And inflation may prove to be more of a headwind than expected.

Financial setbacks are inevitable. The best plans often fall short. While financial planning is important, as Mike Tyson says, everybody’s got a plan until they get punched in the mouth. Sometimes the markets, inflation or personal circumstances punch us in the mouth.

The good news is that even if you fall short of the goal of becoming a millionaire, you can still use the tools and variables we’ve deployed here to meet your other financial goals. If your portfolio grows to “only” $750,000 at retirement, you’d still be far better off than if you had never saved and invested in the first place.

Final Thoughts on How to Become a Millionaire

While the status of millionaire is alluring, aim to achieve financial freedom rather than arbitrarily aiming to reach the two comma club. Financial freedom may require more or less than $1 million, depending on your unique circumstances. Use our guide to figure out how much you may need to save for retirement.

Regardless of the specific financial goals you decide on, your focus should be to save and invest early and consistently while keeping an eye on fees. If you can avoid lifestyle debt at the same time, compound returns will take care of the rest.

------

Source: 

By Rob Berger

Fact Check from Benjamin Curry