Did you ever see the show ‘Who wants to be a millionaire?’ It hooked audiences in for almost 20 years, with the promise to make a contestant a millionaire if they could successfully answer 14 questions. Watching at home, we all tested our knowledge and dreamt of becoming millionaires. After all, who doesn’t want to be a millionaire?
A million dollars does not go as far as it did even a decade ago, but it is still a key step for most of us to achieve FIRE – Financial Independence and Retire Early. The good news is that it’s an achievable dream! Based on our own experience, we have consolidated the 7 key steps that will end your search on how to become a millionaire.
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How Many Millionaires are there in the US?
Chances are, someone you know is already one. According to the Global Wealth Report by Credit Suisse, more than 8% of adults in the USA are millionaires. That’s about 25 million Americans.
We accumulated $1 Million dollars in net worth about halfway through our journey to be financially free in 10 years. Why are we telling you this? Because it’s important to realize that the million-dollar dream is achievable by normal, everyday, hard-working people with the correct money mindset.
The importance of saving and investing cannot be understated. It’s never too late to start building wealth! Every additional day and year can have a compound impact on your future.
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What are the Characteristics of Millionaires?
As found in a national study of 10,000 millionaires by Dave Ramsey & as compiled in the awesome book ‘Everyday Millionaires’ by Chris Hogan, the majority of millionaires (us included) had the following in common:
- Did NOT win lottery tickets
- Did NOT inherit money from parents or family
- Accumulated wealth over the long term
- Had the right money mindset and followed the steps below
How to Become a Millionaire, you ask? Here are our 7 Steps to Build a Million Dollar Net Worth
1. Build the Right Money Mindset
Building wealth overnight is not a realistic goal. The idea is to think of wealth-building as a process.
It took an average number of 28 years for surveyed millionaires to hit the $1M mark. This may seem like a long time, but this is just the average. How long it takes depends on your income, savings discipline & investment growth timeframe. With time, your investments compound and your wealth can grow exponentially. It took us just under 10 years to build a $2M joint net worth – it’s not impossible for anyone.
It’s important to realize that it’s always the right time to start the process. In general, the longer your investment timeframe, the higher the net worth.
If you are just starting out in your career, your income is likely low & you may have loans to pay off, but you have lots of time to grow your wealth. On the other hand, if you are at an advanced stage of your career, you may be able to get more aggressive with your savings & investments.
GET AGGRESSIVE: Don’t take your investment advice from reddit groups. We trust industry experts and you should too!
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Take a look at our average net worth by age post to determine how your current net worth compares with the rest of Americans.
Adjust your mindset to stop thinking of money as a way to buy objects and pay expenses. Start thinking of money as a tool to build lasting wealth over a reasonable amount of time. This is the starting point to achieving financial independence.
2. Spend Smartly and Budget for Expenses
We are frugal with our money. In fact, 94% of millionaires surveyed by Dave Ramsey are careful with their spending even after becoming millionaires.
Being frugal, living below our means, spending smartly and budgeting – sounds boring right? Not at all.
After we got married, we took a hard look at our finances. We were $200K+ in debt, we had no idea where our paycheck was going (besides debt payments). We wanted to travel and buy a home, but we did not know if we could afford it. Sounds familiar?
We sat down and really got to know our finances like we never did before. For 2 months, we tracked each and every dollar we were spending, made budget templates and set savings goals.
This eventually enabled us to realize where we wanted to cut spending or divert more money to. We suddenly realized that we were eating out too much & cut down on some frivolous expenses.
To this day, we regularly achieve our set goal to divert at least 70% of our paychecks to wealth-building investments and live off the rest. The remaining 30% covers our mortgage, grocery and travel expenses.
We credit this step as the single most important step to realizing our financial goals.
Track your expenses and set your goals. Try to prioritize debt payments and save for wealth-building investments like stocks, 401(K) and home down payments.
At the same time, budgeting does not mean that you can not live your best life. We certainly did not stop socializing or traveling. In fact, we have traveled to 30+ countries over the last decade. We planned for our travel expenses and prioritized experiences & wealth building over living a luxurious life. It is up to you to decide what is important to you.
3. Get Rid of Debt
On your path to becoming a millionaire, the next step is to plan and get rid of debt that does not contribute to building wealth.
Each dollar you pay in interest and fees on loans is a dollar that can instead be put towards growing your wealth. The good news is that it’s possible to pay off your loans. It does take some discipline & planning though.
As a couple who graduated with over $200,000 in debt, we feel your pain if you’re stuck in the loan death spiral – making minimum monthly payments and barely making a dent in the loan amount.
When we started consciously tracking our finances, we realized that paying the minimum monthly amount will take us decades to pay off our loans. Between us, we had 4 separate loans at varying interest rates.
We created a debt repayment plan and used the Debt Avalanche technique – targeting high-interest payments first. Some people may prefer the Debt Snowball technique, but it was not for us.
4. Invest Consistently
So you’ve started saving and have a plan to pay off your debts. You may even have some excess cash left over for investments. To become a millionaire, it’s critical to be consistent with your investment plan. There are many ways to invest, but here are the two basic categories:
A. Maximize your work investment plans – set it and forget it
- Does your employer offer any investment plans like 401(k), Roth IRA, Pension Plans, Company Stock plans?
- If so, the best way to consistently invest is to set automatic deposits toward your work plans. This way, a portion of your paycheck is automatically directed to your investments.
- Before you know it, your contributions and reinvested gains grow into a sizable chunk of your net worth. As an example, more than 40% of our overall net worth has come from auto-investing and maximizing our work investment plans over the last 11 years.
- We’re in good company too – 80% of 10,000 millionaires surveyed by Dave Ramsey invested in their company’s 401(K) plans.
B. Open a brokerage account
- If you have maximized your work investments, open a brokerage account to invest in the stock market.
- Start by maximizing a Roth IRA account, where savings are allowed to grow tax-free – 2021 limit for Roth IRA contribution is up to $6,000 (for income less than $140K).
- If you are new to investing, it’s a good idea to seek professional investment advice and start with ETFs instead of individual stocks to spread out your risk across the whole market or specific market segments.
START TODAY: Don’t take your investment advice from reddit groups. We trust industry experts and you should too!
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5. Pay Off Credit Cards and Build Credit
Ask any successful millionaire – having access to credit is essential to building wealth. Almost all major purchases in life require good credit. Here’s our guide on how to build good credit for more details.
However, carrying monthly credit card balances has to be avoided like the plague. With sky-high interest rates, credit card balances can rack up really quickly and will prevent you from becoming a millionaire.
If you have credit card debt, it is likely that it is your highest interest debt. Prioritize this in your debt repayment plan and pay off the balance in full as fast as possible. This will enable you to increase your savings and will also increase your credit rating.
Once you have good credit, you can actually use credit cards to save money and build wealth. In fact, credit cards are an important part of our wealth-building strategy.
We almost never use cash!
Consider this rewarding cycle that you can build for yourself:
- We have never carried a monthly credit card balance.
- In turn, our credit rating is in the high 840s (out of a maximum 900).
- So we get offered the best reward credit cards that help us to save money on travel, food, gas and groceries.
- We get the lowest mortgage interest rates & access to a large line of credit for emergencies.
P.S. It’s important not to overdo it. Stick to a maximum of 1 or 2 credit cards to maintain your rating and manage your expenses.
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6. Maximize Tax Savings
A big pillar to maximizing your income and investments is to correctly utilize the allowable tax credits and savings that the government offers.
The best way to pay less taxes is to reduce your taxable income with pre-tax contributions to accounts like 401(K) and traditional IRA.
- The maximum allowable contribution to 401(K) in 2021 is $19,500 (same as 2020).
- The maximum contribution to a traditional IRA in 2021 is $6000 (same as 2020).
- If your employer matches some or all of your contributions, that’s even better.
- It’s important to keep withdrawal restrictions and tax impacts in mind.
- In general, these accounts are intended to save for retirement & will incur taxes & possible penalties, if withdrawn earlier.
7. Diversify Investments to Minimize Risk & Maximize Returns
As your savings and investments grow, it is important to reduce your exposure to risk and diversify your investments.
During COVID, the rise of the retail investor has been well documented. These are regular people who have taken to investing in the stock market by the millions during the pandemic. You have likely been hearing about tons of people who have made millions by investing in meme stocks like AMC, GameStop, DogeCoin, etc.
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Should You Invest in Meme Stocks?
For us, the answer is NO. Picking stocks and putting all your eggs in one basket is extremely risky. If the performance of a stock hits all-time highs and lows based on a famous person’s tweets, it is too volatile unless you have the stomach to lose all of your money.
For each person who may have made a million dollars investing in GameStop, thousands of others were left holding the bag when the stock crashed.
We have never been stock pickers. Neither are the majority of everyday millionaires.
Instead, we ensure to diversify our investments in a well-balanced portfolio of Domestic & Global ETFs, Bonds and Funds.
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Invest in Real Estate
Investing in Real Estate is another great way to diversify and grow your wealth. We have grown our portfolio to 3 properties, which provides us with rental income and appreciation in a growing market. If you can’t afford down payment or mortgage payments just yet, consider investing in REITs (Real Estate Income Trusts) or real estate crowdfunding platforms, which are growing in popularity.
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Earn, Save and Invest to $1M
In conclusion, building a million dollar net worth is definitely still possible. We have been able to prove that lottery winnings, inherited millions and high starting salaries are the exception to the rule. Disciplined saving, budgeting and investing are the key to joining the ranks of everyday millionaires.
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