How do I become a millionaire? That is the number one question I was asked when I worked as an investment advisor. $1,000,000 is the magic number that most people consider to be symbolic of wealth. When you hit that level, you can officially state that you have joined the ranks of the rich. Becoming a millionaire is the dream of children and adults alike. I have watched a number of people get involved in get rich quick schemes, pyramid schemes, and Ponzi schemes trying to become a millionaire. It may seem elusive but becoming a millionaire is possible through hard work, discipline, and perseverance. Those are the attributes of the millionaire mindset. Today, I want to take the time to detail 10 strategies that will teach you how to become a millionaire.
Ten Steps For How To Become A Millionaire
Number 1: Invest in appreciating assets not depreciating assets.
The best way to wind up broke is by Keeping Up With The Kardashians. Trying to live the life of celebrities will leave you flat broke. Too many wealthy athletes, entertainers, and movie stars have blown through fortunes by spending millions on Louis Vuitton, Gucci, Lamborghinis, Ferraris, mansions, and lavish vacations. Mekhi Phifer, Nicholas Cage, Teri Polo, Willie Nelson, Curt Schilling, and Mike Tyson blew millions by poorly managing their money. The financially prudent millionaire knows that status symbols make you look wealthy but will leave you in the poorhouse. The majority of your money needs to be invested in assets that are increasing your net worth and not decreasing it.
Real estate, stocks, bonds, mutual funds, annuities, certificates of deposit, and Treasuries are income-appreciating assets. Cars, clothes, electronics, shoes, and belts are depreciating assets. Items like iPhones, PlayStation 4’s, Red Bottoms, Ferragamo shoes, and fancy dinners are keeping you from reaching millionaire status. It’s okay to splurge but it must be in moderation. Whenever you buy expensive items that decrease in value, you are making someone else rich. Whenever you purchase assets that increase in value, you are making yourself rich.
Number 2: Make your money work for you by focusing on getting the maximum rate of return for all of your dollars.
Every dollar that you have needs to be working for you earning interest while you work and sleep. This includes your savings and checking accounts. Too many people are comfortable storing their hard earned cash in commercial bank accounts earning little to nothing on their money. Those savings accounts that are paying you 0.09% and 0.10% interest on your savings are robbing you of potential interest income. The millionaire mindset seeks to earn the highest rates of returns on every dollar. All of your savings under $1,000 should be in a high interest savings account. Amounts over $1,000 should be a in a high interest money market account, which pays even greater interest.
Open a high yield money market account today. You can find these high interest accounts at online banks. Some of my personal favorite high interest money market accounts can be found at CIT Bank, Capital One Bank, American Express Savings Bank, Marcus by Goldman Sachs, Synchrony Bank, and Ally Bank. You could currently be earning between 2.00% and 2.50% on your savings money. That is much better than the paltry 0.10% percent that you are probably earning now. Check out Bankrate.com every month to find the banks paying the highest interest rates for your savings dollars. This will help to get you one step closer to millionaire status.
Number 3: Max out your retirement plan.
If your company offers a 401(k) plan with matching contributions, then you need to be taking full advantage of it. Matching contributions typically account for somewhere between 3 and 6 percent of an employee’s annual salary. The matching contribution is free money that your company is offering to you! Millionaires take advantage of opportunities to earn free money and so should you. In order to take advantage of the maximum benefit of matching plan, you need to max out your 401(k) plan. The maximum contribution for an employee for 2019 is $19,000. Employees over 50 can contribute an additional $6,000 per year in contributions due to the catch-up provision offered by the Internal Revenue Service. The maximum contribution that an employer can make is $56,000 per year.
If you do not have access to a 401(k), then you need to open a Roth IRA. A Roth IRA allows you to contribute $6,000 per year towards retirement. The catch-up provision allows adults 50 and older to contribute an additional $1,000 to their retirement plans. A Roth IRA is a good deal for those seeking to build wealth because your money grows income tax free. You give up getting a tax deduction today for your contributions and in return, you never have to pay a dime in taxes on your earnings at 59 ½. If you can take $50,000 and turn it into $500,000; you get to keep the whole $500,000 without worrying about paying Uncle Sam. Having the millionaire mindset means taking advantage of tax advantaged accounts to build wealth.
Number 4: Open your own investment brokerage account outside of your retirement account.
Retirement accounts are a great deal for those looking to get rich by 60. But if you are seeking to multiply your money before nearing 60, you need to open a brokerage account. Retirement plans charge you a penalty if you want to start taking distributions from your earnings before 59 ½. That’s why you need to open up an investment account with a discount broker. TD Ameritrade, E*TRADE, Fidelity, Merrill Edge, and Charles Schwab are examples of discount brokers that enable you to engage in self-directed investing. You can open an account with just a dollar and buy equities, mutual funds, and bonds for prices ranging from $5.99 to $6.99 per purchase. That is low cost investing.
Brokerage accounts offer greater liquidity than retirement accounts. You can cash out and withdraw your earnings on any investment that you have held for a year or more knowing that the maximum tax rate on your capital gain is just 15 percent. Remember to keep it simple when beginning to build your own portfolio by placing index funds, balanced funds, and large cap stocks in your brokerage account. These investments are the anchors of your investment portfolio providing you with stable growth for the long run helping you to reach millionaire status even sooner.
Number 5: Inject some risk in your portfolio.
Once you have built an investment portfolio with solid blue chip stocks like Wal-Mart, JPMorgan Chase, and Nike; you need to pick up some small cap stocks. Do your homework and look for small companies with high rates of growth and low amounts of debt. The goal is to identify small companies that can grow to become the next Amazon, Wal-Mart, Facebook, or Apple. Small cap investing is picking the next big thing. If stock picking is not your cup of tea, pick up a small cap or mid cap index mutual fund. These funds will invest in much riskier companies who can generate returns in the 20 to 30 percent range far surpassing the safety of a balanced fund.
Small cap stocks outperform the market and offer great rates of return during economic booms. Conversely, they underperform the market during recessionary periods. You can also add riskier stocks like biopharmaceutical and technological stocks to supercharge your returns. My portfolio has benefitted from tech companies like Shopify and Mercadolibre who have added 600 percent in gains over the last 3 years.
Number 6: Start generating passive income.
If you want to learn how to get rich, then start seeking to produce income outside of your job. I am going to say something your employer will not tell you. Your 9 to 5 job will not make your rich! You need multiple streams of income. Your job produces active income. This is income that you are working for, expending energy for, continually investing time and effort for. The paycheck that you receive based on being actively involved in an endeavor is your active income. Active income comes from an employer and has limits because it requires your presence and activity. This is why you need to start generating passive income. Passive income comes from businesses and enterprises that you are not actively involved in on a day-to-day basis.
Rental income and limited partnerships are the typical sources of passive income mentioned but there are plenty of others. You can make money online by starting a website, blogging, creating an eBook, selling products, and information. You could become an affiliate marketer who earns a commission by promoting products that people are selling on Amazon, eBay, and other online sites. You can also generate passive income by engaging in multilevel marketing programs in which others sell products and you receive income from their sales. The advantage of passive income is that it produces a perpetual residual income stream. I have created blogs and written books that created a passive income stream, which paid me for years after they were launched. Generating passive income is like receiving Social security before retirement age. You pay your dues early on by investing time and energy in the beginning to receive checks for years to come in the future.
Number 7: Add fixed income investments.
Fixed income investments provide you with a consistent income stream that you can use to fund further investment endeavors and help get you closer to an early retirement. Fixed income investments can come in the form of real estate investment trusts, annuities, and dividend stocks. Real estate investment trusts are closed end investment companies that own real estate assets like buildings, land, and commercial properties. REIT’s are required to distribute 90 percent of their earnings back to investors in the form of dividends. REIT’s can be purchased through discount brokers. Annuities are insurance products, which pay out a fixed income stream over the life of the annuity. Annuities are purchased from insurance companies. Dividend stocks are companies that distribute a share of the earnings back to investors in the form of a cash payment. A good dividend stock pays a yield of 3 percent or more.
The most popular type of fixed income investment is a bond. Corporate bonds are a great way of getting a dependable income stream. Companies like AT&T, Verizon, and Proctor and Gamble sell bonds to the public in order to fund expansion and operations. Corporate bonds typically have terms of 5,10, 20, or 30 years. Corporate bonds pay interest on a semiannual basis (every six months) and return the original principal investment back to the investor at the maturity date. Corporate bonds are sold in $1,000 denominations and can be purchased from a broker. You can also purchase a bond fund. which contains an eclectic mixture of bonds bundled together for you. Stick with bonds with AAA ratings as they provide a higher degree of safety. Bonds with ratings beneath the A levels are known as junk bonds because they are more speculative investments which carry a much greater risk of default. The millionaire mindset knows that you are never too young or too old to own fixed income investments.
Number 8: Minimize your debt levels.
Maximizing your income is only one part of the wealth building equation. The second part is to keep your debts to a manageable level. I have found that it is best to keep your debts to no more than 50 percent of your total income. Most lenders require a debt to income rate of 36 to 43 percent for a home loan but most borrowers rapidly soar past this level after closing on a home. Many Americans live with debt levels equivalent to their income level. They are barely able to keep their finances afloat living a paycheck-to-paycheck existence.
I have found that a 50 percent debt level is acceptable and leaves enough money to invest and build a comfortable savings cushion. The 50 percent level means that if you make $5,000 per months, then your debts cannot exceed $2,500 per month. If your debt level is greater than this; your focus must become paying down your debts. The best way to pay off your debts is to take the debt with the highest interest rate and double up on the minimum payment until it is paid off. After you have paid this debt off, move to the next highest interest rate and pay it off. The lower that your debt level decreases, the higher that your net worth increases.
Number 9: Develop a financial plan.
Nobody lucks up into becoming a millionaire. Becoming a millionaire requires intentional planning. You need a detailed financial plan to hit seven figures. Your financial plan should list all of your financial goals and objectives. Your financial plan should tell you exactly how much money you need to save in order to reach your goal of becoming a millionaire.
If you need help constructing a plan, hire a fee only financial advisor. You pay a small one-time fee for the construction of a financial plan with target dates, amounts, goals, and suggestions. You can also construct your own financial plan using financial websites and investment calculators. Be sure that you are realistic about your financial goals and that you adjust the plan as your income increases. Track and measure your plan progress consistently.
Number 10: Fund your kid’s 529 plan.
A lot of adults find themselves working longer than they ever planned because they are stuck paying off their kid’s college education. Direct PLUS loans also known as Parent Plus loans are non-transferrable and keep parents loaded with debt twenty years after their child’s education. The best way to become debt free is avoiding taking on debt in the first place. The best time to start saving for your kid’s college education is right now.
A 529 plan is a tax advantaged plan that will pay for your kid’s college education keeping both you and your child from taking out costly student loans. Open up a 529 plan now and start socking money away for your child’s schooling. Then on your kid’s eighteenth birthday, you wont find yourself going into debt for junior’s education. Instead you will be glad you planned in advance when you are sitting on a beach in Maui sipping a Pinna Colada retired early.
Do you have any other steps that you think would be useful to becoming a millionaire?