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Becoming a millionaire is often thought of as a feat reserved for a select few: persistent entrepreneurs, stock market gurus, trust fund beneficiaries, and lucky game show winners.
But the millionaire’s club may not be as exclusive as we think. With smart planning and disciplined savings, it’s possible to reach your $1 million savings goal over time.
Here are some expert tips to help anyone save $1 million.
Starting early is key
“Doing nothing is often the biggest factor in achieving your financial goals,” says Kari Baer, a financial planner and director of CFA Institute Tampa Bay.
“There are always risks and events that can make you afraid to act or take the leap. The first step in any kind of financial progress is to take action,” she says. “You could spend your whole life on the sidelines and end up costing you a lot of time financially.”
Money sitting in savings and checking accounts that earn little interest is wasting your earning potential every day. It is also likely that purchasing power has declined due to the effects of inflation. Literally, the sooner you realize this, the better.
For example, let’s say you want to save $1,000 a month (about 15% of the average annual household income) until age 60. Assuming a rate of return of 8%, we get:
- If you start saving at age 20, you’ll have $3,241,804.
- If you start saving at age 30, you’ll have $1,417,613.
- If you start saving at age 40, you’ll have $572,660.
As you can see, the sooner you save, the more your money will grow thanks to compound interest.
Compound interest is calculated based on the principal saved and the accumulated interest over previous periods. This will cause your investment to grow exponentially over time. When people say make your money work for you, this is what they mean.
How much should I save?
If you want to achieve millionaire status by a certain age, you can use a calculator to figure out how much you should save each month. Experts recommend putting 15-20% of your income toward savings, investments, and retirement.
This may sound like a significant amount in today’s tense economic environment. With inflationary pressures on the cost of living, student loan payments restarting, and credit card debt reaching record highs, it’s easy to put savings on the back burner.
But let’s assume your number one goal is to save money. In that case, you need to review your budget and distinguish between necessary and discretionary spending, says Vance Barth, certified private wealth advisor and founder of Your Ddedated Fiduciary.
While you focus on saving money, you may need to remove some luxuries from your budget, such as eating out or buying the latest trends.
“This simply means we may need to prioritize cost-cutting measures that many American consumers have forgotten about,” Barth says.
Ideally, your income will increase as you get older and gain more experience in your field. This increases the amount you can save and invest each month, accelerating your path to millionaire status.
Activate your retirement savings
Wealthy people put their money to work through investments as well as savings accounts. Once you have an emergency fund with three to six months worth of living expenses, it’s important to invest your additional savings.
First, focus on leveraging tax-advantaged retirement accounts, such as 401(k)s and IRAs. Employers will often match your contributions up to a certain amount. So it’s basically free.
Experts usually recommend contributing at least enough to your 401(k) to get the maximum match from your employer. He can also continue contributing until he reaches the annual cap of $23,000 in 2024.
Another type of retirement account you can consider is a Roth IRA, which allows for after-tax contributions. This means you can make tax-free withdrawals after you retire. Roth and traditional IRAs allow you to contribute up to $7,000 in 2024.
Although you can contribute to both a 401(k) and a Roth IRA, it’s usually best to prioritize the 401(k) because of its tax benefits. Retirement accounts aren’t the flashiest way to save his million dollars, but their proven reliability makes them a fundamental part of the process.
Build an investment portfolio
Diversification plays an important role in building an investment portfolio. Diversifying your investments across different assets and markets reduces the potential downside risk of a single investment.
For example, even if the general stock market temporarily declines, a diversified portfolio that includes assets such as real estate and bonds may still perform well. Better performing investments can help offset losses and maintain overall portfolio stability.
Attempting to time the market or reacting impulsively to short-term fluctuations can lead to missed opportunities and potentially costly mistakes. By maintaining a long-term perspective and diversifying, you can more effectively navigate market fluctuations and work toward achieving your financial goals.
Unfortunately, there is no perfect recipe for building a million-dollar investment portfolio. Every investor has a unique appetite for risk, which affects their ability to become millionaires. We recommend working with a financial advisor who can recommend the best investment options for you, such as high-yield savings accounts, stocks, bonds, and other investments.
Automate payments
Warren Buffett once told shareholders, “I can’t remember ever in the history of Berkshire that we ever made an emotional decision.”
In the legend’s own words: Emotions and smart financial decisions are not compatible. Investing is a game of discipline and patience, and you can never go too high or too low.
One of the best ways to forget about your emotions and keep your ego in check is to automate your payments. This is why retirement accounts are so effective for everyday investors. In most cases, the money is automatically deducted from your paycheck and you don’t even see it. Automation eliminates the temptation to spend impulsively instead of investing wisely.
Another way to automate payments is dollar-cost averaging. Invest a specific amount every set period of time (biweekly, monthly, etc.). This strategy allows you to buy at any point in the market cycle, removing the emotion of trying to time the market.
There are many apps that can help you automate your investing and stay on track.
conclusion
To save $1 million, “you have to be persistent, take your time, and make smart decisions along the way,” Barth says. In a world where social media promotes instant gratification, this advice is sometimes hard to swallow.
But if becoming a millionaire was easy, everyone would be a millionaire. However, the goal here is not “easy”, but “achievable”. By starting early, investing wisely, and staying dedicated, you could join the millionaire club.
The opinions expressed are the author’s alone and not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any organization included in the post.
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