With time, many of us could become millionaires.
The idea of amassing a million dollars may seem like an impossible dream. It can sometimes feel as if most of your energy is tied up in simply putting your best foot forward each day. But it is possible. In fact, the biggest secret about becoming a millionaire is that millions of ordinary people have done it, and millions more are on their way there. And they didn't need wealthy relatives or gigantic salaries to get there.
Here are three millionaire-making secrets:
1. Live below your means
The single best way to build wealth is to spend less than you earn and bank or invest the rest. If you're living paycheck to paycheck, or don't know where the money disappears each month, don't panic. But don't run away from it either. Try to make a plan to either reduce your costs or increase your income.
Start by making a budget. Look at how much you spend each month and what you're spending it on. Try to see your budget as a tool that could help you become a millionaire rather than a chore or something to be scared of. If you're not sure about where to start, try a budgeting app.
Notice what you're spending. There'll be a certain amount that goes on food, utilities, and rent or mortgage payments. But what about the rest? Are there subscription services you can cut or other little luxuries eating into your millionaire potential? Every dollar you can save now will go a long way toward improving your financial future.
Look for extra sources of income. If you can't cut your expenses and are still spending more than you earn, the next step is to consider ways to bring in extra money. When was the last time you asked for a raise at work? Or if that's not an option, can you carve out some time for a side hustle?
2. Don't take on high-interest debt
High-interest debt is one of the biggest enemies of wealth building out there. If this were a movie, credit card debt would be the evil villain cackling and rubbing his or her hands together in a darkened corner.
Becoming a millionaire means investing every spare dollar for the future, not paying it to a credit card company. If you carry a balance on your credit card, you spend money every month on servicing that debt. Let's say you owe $1,000 on a credit card with an APY of 16% (the average credit card APR right now). If you only made a minimum payment each month, it would take you nine years to pay off that debt, and you'd pay almost $800 in interest.
There are several ways to pay off your credit card debt. You might prioritize paying off higher-interest debts first or get the psychological win from paying off the smaller balances. What's crucial is that you prioritize those debt payments and avoid taking on more.
3. Invest a proportion of your income every month
How much of your monthly income goes to savings and investments? Ideally you want this figure to be around 20%. But if you're not there yet, think about how much you can realistically put aside. Once you're in the habit of saving a small amount, you can gradually increase that figure. What's important is to make this a sustainable life-long habit.
If your company has a 401(k) plan, max out your contributions -- not only does it give you tax breaks, but many employers also match what you put in. For many people, it's free money. A Ramsey Solutions survey of millionaire habits showed that 8 out of 10 millionaires contributed to their company's 401(k). Which brings me to another point: three-quarters of millionaires said that they'd built their wealth through consistent investing.
Stock market investments carry more risk than leaving your money in a savings account. As we've seen in recent months, the stock market can fall as well as rise. However, if you invest with a long-term horizon, historically, stock investments have generated a return. On average, the S&P 500 has returned 8% to 12% a year.
It takes time to build wealth -- we're talking over ten, twenty, or even thirty years. This is where compound interest comes into play. Compound interest means you earn interest on your interest. It is like a huge lever that does a lot of the heavy lifting for you.
For example, let's say you put $500 a month into a mutual fund that generates an average return of 7%. Over 40 years, you'd put in $240,000 of your money. But if you keep reinvesting the proceeds, your portfolio could eventually be worth over $1 million dollars. Here's how that 7% return could add up:
| Timescale | Total contribution | Approx. value of investment |
|---|---|---|
| After 10 years | $60,000 | $80,000 |
| After 20 years | $120,000 | $250,000 |
| After 30 years | $180,000 | $570,000 |
| After 40 years | $240,000 | $1,200,000 |
Data source: Author calculations
Bottom line
You may think becoming a millionaire is something that happens to someone else. Or that people become millionaires by inheriting money or getting a lucky break. That's not the case. The secret sauce to becoming a millionaire is to invest part of your income every month, and let compound interest do its work. Every dollar you save by living frugally and avoiding debt is money that can help you build long-term wealth.
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As someone deeply immersed in personal finance and wealth-building strategies, it's evident that the path to becoming a millionaire is both achievable and well-trodden by ordinary individuals. The key lies in adopting proven practices and understanding the underlying principles of financial success.
First and foremost, the article rightly emphasizes the importance of living below your means. Drawing from my expertise, I can affirm that building wealth starts with the fundamental principle of spending less than you earn. The article's advice to create a budget is spot-on. Analyzing monthly expenditures allows you to identify areas where expenses can be reduced, providing an immediate avenue for saving and investing.
Furthermore, the article addresses the menace of high-interest debt, specifically highlighting credit card debt as a significant obstacle to wealth accumulation. From my extensive knowledge, I can attest that carrying a balance on high-interest debt undermines your financial progress. The provided example vividly illustrates the long-term impact of credit card debt on one's financial health, reinforcing the importance of prioritizing debt repayment and avoiding the accumulation of additional debt.
The third millionaire-making secret, investing a proportion of income regularly, aligns with well-established wealth-building practices. Drawing on my expertise, I can emphasize the significance of consistent investing, as evidenced by the Ramsey Solutions survey mentioned in the article. The emphasis on contributing to a 401(k) plan, taking advantage of employer matches, and the historical returns of the stock market reinforces the article's advice on building wealth through strategic investment.
The concept of compound interest, a powerful force in wealth accumulation, is aptly explained in the article. From my knowledge, I can attest to the long-term benefits of compound interest, which allows individuals to earn interest on their interest, creating a snowball effect that significantly contributes to wealth growth over time. The example provided, illustrating the potential growth of a portfolio through regular contributions and compounding returns, reinforces the importance of a patient, long-term approach to investing.
In conclusion, the article presents a comprehensive guide to achieving millionaire status through prudent financial practices. The emphasis on living below your means, managing and eliminating high-interest debt, and consistently investing a portion of income aligns with proven wealth-building strategies. As an expert in the field, I affirm the validity of these concepts and encourage individuals to embrace them as part of their journey towards financial success.
