Are you a millionaire in the making?
Posted
Sep 24 2008, 06:54 AM
by
Karen Datko
Rating:
This post comes from partner blog The Dough Roller.
Are 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 to $1 million 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 correctly answer all of the 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
Did you ever wonder just what it takes to become a millionaire? The truth is, it doesn't take much. 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 (in 22 years and three 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 $15,500 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 six figures a year to be a millionaire. Just maxing out your 401(k) 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 your job(s) pays you just enough to get by, 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 less than 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.”
Here are some other articles that describe how to become a millionaire:
Other articles of interest at The Dough Roller:
90-day interest-free credit card 50 ways to make money blogging
How to buy a refurbished iPhone
