How to Become a Millionaire
Before we dive into the steps on how to become a millionaire, we must break down exactly what a millionaire is.
Many people have misconceptions on what a millionaire is & that poses a problem for people who want to become one. This lack of clarity leads many people to lose sight of the plan & eventually the goal.
With that being said, many people think of a millionaire as someone who makes a million dollars per year. However, a millionaire is actually defined as having a net worth of at least $1m dollars. Since net worth equals assets minus liabilities, this means a person’s assets minus their liabilities must be at least $1m to be considered a millionaire.
The first step to financial success is to reduce your spending. Spending includes cash & credit purchases. Just because you put something on a credit card (aka credit), doesn’t mean you’re not spending money. In fact, when you use a credit card to purchase something, it’s possible you end up spending more than the actual item cost you. How you may ask? Well, if you don’t make your credit card payment on time, you may face late fees & interest (which are usually very high).
How can you reduce spending on necessities such as rent, utilities, food & water? For rent, make sure you get the best bang for your buck by finding a place that balances your monthly rent budget with your standard of living. As for utilities, turn the lights off during the day & raise your thermostat temperature by a few degrees. Food is a necessity, but something that many people take way too far out of proportion (especially people on a budget). Many people eat out way too much, so much so that they can’t afford other areas of their life. To remedy this, you could try grocery shopping & cooking yourself, or instead of eating out 2 times a day, eat out once a day. Water is pretty much free, considering you can drink tap water from your faucet sink, provided it’s safe. Alternatively, you can buy very cheap bottled water from the grocery store to last you a month or more.
As for everything you don’t need such as streaming subscriptions & other entertainment, you can choose to go “cold turkey” & stop buying these things, or you can choose to limit your consumption of these items.
Start Saving Early
It never hurts to save money, even if that means only $10 a week because as you continue to save money, you’ll get better & better at it. A good start is 10% of your income. That means if you make $50k per year, you’d aim to save $5,000 a year. Over the course of 5 years, this amounts to $25k saved, considering your annual income or income saving percentage hasn’t changed.
Invest Early, Retire a Millionaire
All of the money you’ve indirectly saved by reducing your spending or directly saved by increasing your savings can be invested to yield you bigger returns than the interest accrued in your savings account.
Let’s take for example the stock market. Within the stock market, there are many ways to go about investing, whether it’s in small or large cap single stocks, ETFs or mutual funds. Arguably, the easiest, most stress-free way to invest in the stock market is via index fund ETFs.
There are many index fund ETFs available on most investing platforms such as Robinhood, Charles Schwab & Fidelity. Popular index fund ETFs include Vanguard 500 Index Fund ETF (VOO) & Vanguard Total Stock Market Index Fund ETF (VTI). These index funds usually track an indexes performance, & each index is comprised of many companies. Meaning, each dollar you invest into one of these ETFs is spread out amongst many companies.
On average, the stock market returns a whopping 10% a year, which is MUCH better than that of the interest accrued in the average bank account. So, for example, if someone made $65k per year & saved 15% of their income, they’d be saving $9,750 a year. Assuming they invested the same amount on a monthly basis, they’d be investing about $812.50 per month. At this rate, accounting for a 10% yearly return, it would take someone about 25 years to become a millionaire.
If you started this saving & investing plan at 22, you’d only be 47 years old & worth more than most 65 year olds, which is pretty sweet in my opinion.
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