The pursuit of wealth should be motivated by a desire for financial security, not by a desire for status or a luxurious lifestyle. If you start young and develop the right financial habits, a seven-figure net worth is an achievable goal.
In his work with wealthy clients, Jason Flurry, CFP, founder and president of Legacy Partners Financial Group in Woodstock, Georgia, has found that those he calls “real millionaires,” people who accumulate and maintain wealth, see the role of money in their live very differently from those who focus on what money can buy.
“Having money for the sake of having money or ‘being rich’ never makes someone feel satisfied,” he says. “Ironically, it can actually lead to another set of problems that most people haven’t thought much about in their search for more.”
With the help of financial experts, we have come up with seven tips to become a millionaire. The advice is very simple, but achieving the goal is a challenge.
1. Develop a written financial plan
Saying you want to be rich won’t get you there. You have to come up with a workable plan to get rich, put it on paper and then execute it.
“The written plan forces you to do something; calculate what you need to earn and how to invest,” says Stewart Welch, founder of The Welch Group, a wealth management firm in Birmingham, Alabama.
“The plan isn’t just the goal: it’s the whole thing,” says Welch. “The dream, the goals, the options.”
The options require “scenario planning” — thinking of all the ways you can achieve that goal, such as opening a Roth IRA or contributing to a 401(k), Welch says. Bankrate’s investment calculator can show you how much you need to contribute and earn over time to reach your goal.
2. Make it a habit to save
“Saving money really means putting your own personal finances first,” says Mark Hamrick, senior economic analyst at Bankrate. “So think of saving as a way to pay yourself first. By making saving money a priority, you increase the likelihood that your financial future will be stronger than your financial present or past.”
Start by building an emergency fund in a savings account so that you don’t have to raid the rest of your savings and investments when a major expense arises unexpectedly.
Make it a point to save at least half of every raise. Explore high-yield savings account options to ensure you get the best return on your money.
Moreover, benefit from your pension fund. Max out your 401(k) and put any extra money into a traditional IRA or Roth IRA.
Diversifying your savings is crucial to getting the most out of what you put into it. If you have a long time horizon before you plan to retire, look for growth investments like stocks to grow your savings over time.
“Don’t be among the many Americans whose biggest financial regret is the inability to save, either for emergencies or for retirement,” Hamrick says.
3. Live below your means
Buying a big house or driving a very expensive car is too high a price if it reduces the amount of money you can save and invest.
“This is honestly one of my favorite financial mantras,” says Hamrick. “Too many individuals, or consumers, have been conditioned to think – or allow themselves to think – that their self-worth is somehow tied to their personal possessions.”
Hamrick offers an alternative way of thinking.
“But wouldn’t we really want others to admire our ingenuity and wealth building, rather than our spending?” he says. “Financial success will largely be determined by how we manage our money, not by overspending.”
People who are serious about becoming millionaires because of financial security are less likely to waste money on expensive cars and lavish vacations.
And they’re not going to buy a house that stretches their budget. Use Bankrate’s home calculator to determine how much house you can really afford.
4. Stay out of debt
Paying yourself is better than paying at a bank or credit card company. Debt is your enemy.
“If you are in debt, it is very difficult to make progress in securing your financial future because you have to pay your taxes and debts before you can use your money for yourself,” says Flurry of Legacy Partners.
Flurry says to avoid what he calls “dumb debt,” such as credit cards, car loans and most student loans.
If you have a pile of credit card bills, pay them off and only keep one or two. Try not to put anything on your cards that you can’t pay off within two or three months.
“Debt holds people back,” says Flurry. “They’re buying debt, and they’re making those payments forever.”
5. Invest in ways that work for you
You don’t need a lot of money to start investing. Open an account with a mutual fund with no-load funds and low expense ratios.
You can also invest your money in the stock market by using an online broker such as TD Ameritrade or E-Trade, which charges zero commissions for online stock trading.
If you have the money to buy real estate, consider investing in real estate. You can create an additional income stream by leasing a rental property and taking advantage of the property’s appreciation.
It is best not to invest all your money in one thing. Diversification, or owning many different types of investments, is less risky and will smooth the ride.
“Stick to the basics (a mix of stocks, bonds, cash and real estate) and not what your friends are doing. Everyone’s situation is different,” says Dana Twight, CFP, founder of Twight Financial Education in Seattle.
“Your employer’s retirement plan is often a good place to start,” says Twight. “It has automatic contributions, so you can invest without worrying about today’s news.”
If you’re looking to increase or further diversify your investments, look into passive income options such as rental properties or peer-to-peer lending.
“Investing across asset classes can help you weather all the storms, floods and calm moments in between,” says Twight.
Build a diversified stock portfolio and you can reasonably expect to earn 10 percent annually on your stock investments over the long term.
6. Start your own business
In their book “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy,” authors Thomas Stanley and William Danko say that two-thirds of millionaires are self-employed, and entrepreneurs represent the majority of that group.
The authors note that most millionaires have worked long hours, lived on less than they earned, saved money and made smart investments.
Entrepreneurs create most of the country’s wealth. In 1984, less than half of the people on the Forbes 400 list of richest Americans were self-made millionaires, but in 2018, Americans who had built their own fortunes made up 67 percent of the list.
7. Get professional advice
A good financial advisor can guide you to the right investments and strategies and help you build and preserve wealth.
But don’t sit back and let your advisor do all the thinking. Take an active interest in where your money is invested and why.
“We are all lifelong learners when it comes to personal finance,” says Twight. “Be willing to update your knowledge periodically and relate it to what is happening in the world, but keep your eye on the prize.”
If you can’t afford to have a financial planner manage your money, find one who will review your portfolio and make recommendations for a one-time fee.
Bankrate’s Save a Million Dollar Calculator can show you how long it will take to reach your goal.
In short
If you’re going to work toward a seven-figure net worth, you’ll need to take a long look. Think about the importance of securing your financial future.
“Of course, having enough money to enjoy fun things and creating memorable experiences for yourself and the people you care about most are wonderful options to have, but having lasting financial security is much more valuable,” says Flurry.
“When you don’t have to worry about money to meet your needs or support your lifestyle, you are free to think bigger and focus on the things in life that matter most.”
