If you’re hoping to become a millionaire one day, then you may be surprised to learn that it’s not nearly as complicated as you may think. Every year, more and more people are figuring out that the path to building their net worth is actually quite straightforward. But the only way you can get there is if you’re willing and disciplined enough to follow it without falling victim to short-term spending.
Do you think you’ve got what it takes? If so, then here are 10 simple ways you can reach millionaire status and achieve what most other people only dream of accomplishing.
1- Pay Less Tax and Keep More For Yourself
One of the best ways to become a millionaire is to take the money that you would have normally paid to the tax-man and pay it to yourself instead.
How does someone do that? Easy – by contributing to your tax-deferred retirement plan and NOT paying taxes up-front on the money you’re saving.
In the U.S., the most popular types of retirement plans are an IRA (Individual Retirement Account) and employer-sponsored plans like a 401(k) or 403(b). With each type of plan, your contributions are made before the taxes are taken out. That means compared to the “normal way” of saving with after-tax money from your paycheck, you’re effectively saving a lot more upfront.
Consider someone in the 24% marginal tax bracket who contributes the maximum amount to their 401(k) plan. By doing this, they would pay $4,680 less taxes for the year – just for being smart about how they are saving their money!
2- Take Advantage of the Power of Compounding Returns
Saving your money in a retirement plan like a 401(k) or IRA isn’t like using a bank. Your savings are invested, and that enables you to take advantage of a very powerful force: Compounding returns.
Compounding returns are when money grows on top of the contributions you’ve made plus any earnings you’ve accumulated previously. In fact, with most investment models, it only takes 10-15 years for your earnings to grow beyond your contributions. Given enough time, this can lead to your net worth becoming multiplied several times over.
3- Capture the Average Return of the Market
If you really want to maximize the growth of your net worth towards millionaire status, then you need to pick the right investments to optimize the risk versus reward. But with so many thousands of fund options out there, how do you know which one is the right one to pick?
Simple … Always choose the index fund. An index fund is a collection of stocks that simply tracks a common market index such as the S&P 500 (the top performing 500 large companies in the U.S.).
Investment guru Jack Bogle has been quoted as saying that index funds will beat as much as 90% of the actively managed funds available in the market. The key to its success is simplicity. By tracking the top-performing companies as opposed to speculating which ones will be the winners, you end up with a fool-proof strategy that takes all the guess-work out of investing.
4- Pay Less for Your Investments
Another incredibly useful benefit of investing in an index fund is that it’s often one of the cheapest options available. This is because most other funds usually have a fund manager and team of financial professionals that they have to pay to manage and maintain the fund. However, with an index fund, since it’s just tracking an already established market index, it doesn’t require as much overhead, and that means they can offer it at a cheaper price.
Though it may not seem like the expenses associated with investing would impact your ability to build up a net worth of a million dollars, over time they definitely will. According to an article from The Balance, the typical large-cap stock fund has an expense ratio of 1.25% while the average index fund is just 0.15%. If you invested $10,000 per year over 30 years with 7% average annualized returns, you’d stand to lose $181,963 – just because of the fees! That’s quite the impact.
5- Get Your Full 401(k) Employer Match
There’s no easier way to grow your nest egg than to continuously add free money to it. And that’s exactly what you’ll be doing if you make sure you’re getting your full 401(k) employer match.
Employer matching is when the company you work for adds to your 401(k) every time you contribute. On average, most employers in the U.S. added an average of 4.3% of the employee’s salary. That means that if your annual salary is $60,000, you could be receiving an extra $2,580 per year.
6- Start Saving Yesterday
Given enough time, the power of compounding returns can turn even a relatively small amount of money into a million dollars (or more).
For example, a teenager who starts working a summer job and invests $2,000 per year for the next 10 years could let their savings sit and do nothing, and it would grow to one million dollars by the time they are 70 years old. This again is thanks to the simple power of compounding returns.
7- Start a Side Hustle
If you’re eager to ramp up your savings rate, one of the quickest ways to do so will be to earn more money – beyond what you’re already making at your current job. For this, you’re going to want to start a side hustle. Even blogger and author Grant Sabatier from Millennial Money has been quoted as saying he wouldn’t have been able to reach financial independence by the age of 30 if it hadn’t been for all the money he made from side hustling.
Side hustles can literally be any range of activities including such things as odd jobs, tutoring, freelancing, blogging, driving for ride-share companies, and many others. The trick is to find something flexible that’s worth your time and fun for you to do. And who knows – if you really enjoy it, then your side hustle might even end up being the activity you choose to do full-time after you’ve finally achieved financial freedom.
8- Open a SEP IRA
Speaking of side hustles, if you’re doing good financially with them and owe additional taxes to the IRS, you can reduce your tax burden using something called a SEP IRA.
A SEP IRA is short for “simplified employee pension IRA” and is similar to a regular IRA. However, by contributing to one, it reduces the amount of income that the IRS sees as taxable. That means less money going to the taxman and instead finds its way back to your pocket.
9- Practice Frugality
No matter how much money you save and what strategies you use to grow your net worth, absolutely none of it will matter if you let your money slip out from underneath you. To protect yourself, you’ve got to be doing what many experts refer to as the golden rule of personal finance: Spend less than you earn.
The best way to stay within your budget is to practice frugality at all times. Every time you’re about to make a purchase, ask yourself if you truly need to or if it’s just an impulse. Even if it is something you need, challenge yourself to find the best price possible or see if you can get it for a discount.
10- Maintain the Course
Despite what the Internet and television have led many people to believe, most people who are millionaires didn’t get to be that way overnight. It took a lot of time, patience, and above all – sticking to the plan.
When you first get going with saving and investing, it will be frustrating. The earnings will be small and your efforts will just feel like a small drop in the bucket. But then as you keep at it and more time passes, the compounding returns will start to accumulate and snowball bigger and bigger.
The trick is to always keep your eyes on the prize. Don’t let short-term wants and desires distract you from your ultimate long-term goal. Before you know it, you’ll be alongside the fortunate few who have earned their way to becoming a millionaire.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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