And now for a post on one the most commonly searched topics on the web: how to become a millionaire. How does one become a millionaire? It’s probably one of the most searched questions on the Internet. Countless books and articles have been devoted to the topic and there are all sorts of gimmicks out there that claim to have THE secret.
The truth is that it’s actually quite difficult to achieve, but by no means impossible. Many people have worked their entire lives and never even came close to achieving millionaire status. There’s no question that it takes considerable focus, commitment, discipline and time, but with the right plan it is ultimately achievable. Here’s how:
How To Become a Millionaire
Eliminate All Bad Debt
This includes mortgage debt and stay out of debt. Millionaires tend to only use debt to purchase assets that appreciate in value and not purchase things that will depreciate. It’s no secret that buying and replacing new vehicles every few years is a sure-fire way to squander your wealth. Be smart, buy used vehicles or drive new ones into the ground. The same principle can also be applied to our insatiable need to always have the latest electronic gadgets – you don’t need to replace your iphone 4 with an iphone 5!
If you want to become a millionaire the key is to start saving and investing your money at a young age to harness the power of compound growth. The earlier you start, the more likely you are to succeed. It really is as simple as that. If you find that you simply don’t have any money to save, then you may need to review your lifestyle choices and consider living below your means. That said, if you eliminate a lot of the wasteful and unnecessary spending mentioned above then you should be able to manage some savings without any problems.
Many people find saving difficult because they don’t have a huge amount to start with and they don’t find saving a small amount to be very meaningful. Millionaires understand the power of small amounts when it comes to growing their wealth. I’m a firm believer in the power of automatic savings and its role in growing a person’s net worth.
Nowadays with online banking it is very easy to start siphoning off a small amount from each pay you receive. Start small, like I did, just $25 a pay. The key is to start small and increase the amount over time. As you get pay raises, you can increase your savings. This will help you in the long run because research has found that millionaires save a large proportion of their income. Get in the habit of saving a large proportion of your income early on and you’ll be set.
Invest Your Money
You can even start investing those small amounts that you save in low-cost exchange-traded funds (ETFs) or index mutual funds. If you want to become a millionaire you’ll need to learn how to set up a diversified investment portfolio and learn about investor psychology so you can avoid some of the pitfalls that cause investors to sell low and buy high.
You’ll learn things like how it is less risky to buy stocks after a market crash when fear abounds and doom and gloom prevail, than it is to buy when the market has had a long run-up, is continually making new highs and everyone is jumping onto the stock market bandwagon. Remember Warren Buffett’s most famous quote: “Be fearful when others are greedy and greedy when others are fearful.”
Reinvest Your Investment Income
You can harness the power of compounding and supercharge your investment portfolio by reinvesting your dividend, distribution and interest income. This is getting your money to work for you and will help you reach your goal faster. Run some online calculators to see the difference that reinvesting investment income makes. Over time, you’ll see the difference is huge.
In one scenario that I ran, if a person invested $10,000 at a 5% growth rate and a 4% yield in a non-taxable account (for simplicity), after 10 years, assuming they did not reinvest the investment income, then they would have $16,288.95. By comparison, if the income was reinvested they would have $23,673.64, a 45% increase over not having reinvested the income. If you’re interested in running your own scenarios check out the reinvestment calculator below:
Diversify Your Assets
So many middle-class families have the majority of their net worth tied up in their homes. The trend these days seems to be to buy as much home as you can afford so that you are maxed out with your mortgage payments. While real estate certainly has its place in a person’s total wealth picture, it should never be all of it. If all of your money is going toward making your mortgage payment with nothing left over to invest, than you have more home than you can comfortably afford.
If you look at millionaires and rich people more generally, with few exceptions, the bulk of their net worth is not tied up in any one asset. They tend to spread their wealth around by owning real estate, businesses, stocks, bonds, hedge funds, etc. Their wealth is diversified and so is their income.
Millionaires don’t rely on income from just one source; they tend to have multiple income streams. This allows them to stay rich and gives them financial security because if one of their income streams dries up, they are not at risk of losing everything. It takes time and effort to set up multiple income streams, but it is well worth it.
Maximize Tax Efficiency
One thing that millionaires have in common is that they are masters of tax efficiency. Unfortunately, many middle income earners are not aware that earned income (ie. money made by actually working) is the most heavily taxed of all types of income. In contrast, the income of millionaires is tax efficient so they pay very little tax by comparison. They get investment income in the form of dividends and capital gains, which receive favourable tax treatment.
In many states and provinces, a person can earn $50k-60k a year in dividend income and not pay any taxes on it at all. That’s almost the equivalent of someone earning $100k a year. Millionaires also make use of every tax shelter at their disposal – corporations, registered retirement savings plans (RRSPs), registered education savings plans (RESPs), tax-free savings accounts (TFSAs), trust funds and even whole life insurance plans. These tax shelters help them stay rich and protect their wealth from the taxman.
So there you have it…how to become a millionaire. If you can follow the six principles outlined above than you’ll be well on your way to millionaire status.
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For more information about how to become a millionaire check out these classics on Amazon. They are well worth the read:
George Clason, The Richest Man in Babylon
Napoleon Hill, Think and Grow Rich
Thomas J. Stanley, The Millionaire Next Door
Image credit: Image courtesy of iosphere / FreeDigitalPhotos.net