Becoming a millionaire is not an unrealistic dream. If you pace yourself, you could achieve millionaire status by the time youâre ready to retire.
Follow these tips over the course of your career, and you may be surprised at how simple it is to reach seven figures by retirement:
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Compound interest is the phenomenon of earning interest on interest. Over a long period of time, this can make up the bulk of your savings. To really leverage compound interest, start saving early and continue saving throughout your earning years.
Hereâs an example from professional financial planner Gregory De Jong, an adviser with Savant Capital Management. Assume Joe earns average annual returns of 10 percent in stock mutual funds. Starting at age 30, he would need to invest only ÂŁ263 a month to have ÂŁ1 million by age 65. âThatâs less than ÂŁ9 a day,â De Jong says.
But if Joe starts saving five years earlier, at age 25 instead of 30, heâd need to bank just ÂŁ158 a month, or about ÂŁ5.25 a day.
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Those who become millionaires often invest in a tax-advantaged accounts, such as a workplace pension.
You fund these accounts with pretax pounds, thereby lowering the taxes youâll pay that year.
HMRC is âletting that investment grow with taxes deferred until you withdraw the money at retirement,â says David Rosell, president of Rosell Wealth Management, and author of âFailure Is Not an Option: Creating Certainty in the Uncertainty of Retirement.â
Another option: investing in an ISA with earnings that have already been taxed so you can enjoy tax-free compounding and withdrawals.
Be sure to pick funds with low fees. Actively managed mutual funds and exchange-traded funds sport an asset-weighted average expense ratio of 0.63 percent. (âAsset-weightedâ simply means larger, more popular, funds are given more weight in the calculation.) Meanwhile index funds and passive ETFs cost just 0.16 percent, according to investment research firm Morningstar.
âThe difference affects an investorâs return and can make an enormous difference at retirement,â Rosell says.
Check out Moneyfarm if youâd like to get started with investing your savings in a stocks and shares ISA.
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Future millionaires stay the course no matter what. Having made their long-term saving and investing plans, they donât deviate from them.
Of course, stock market ups and downs can test the most determined saverâs resolve. While the stock market has made tremendous strides over the past decade, seasoned investors understand it can correct and even crash. One such trough occurred during the Great Recession, when the Standard & Poorâs 500 index lost more than half of its value.
âDo you have the discipline to stick with your plan?â De Jong asks. âLook at your account once a year, and youâll almost always be happy. Look at it daily or weekly, and youâll add stress to your life â possibly sabotaging your plan.â
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Similarly, when sticking to a long-term plan, it pays to block out the noise. If you listen to doomsayers predicting imminent market havoc, youâll be tempted to react in a way that will be counterproductive to your goals.
âIgnore the business and marketing headlines,â says Jane Bryant Quinn, AARP financial columnist and author of âHow to Make Your Money Last: The Indispensable Retirement Guide.â
âThe market always bounces back and goes higher, and profits people who stay with it,â Quinn says.
âThere has never been a 15-year period when the S&P 500 index has lost money. ⌠The day-to-day noise will always do you harm.â
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Another characteristic of millionaires? They practice conscious spending. Emulate them.
Before buying a costly item, step back and ask yourself several questions. How long have I wanted this item? How long have I seriously considered the purchase? How much joy have similar purchases brought me? If I charge it, will I still be paying for it long after the pleasure is gone?
When considering big-ticket items, enforce a 30-day waiting period before purchasing. This will ensure you spend money on things that you wonât regret buying.
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Spending less than you earn makes it easier to stash money in investments.
âIf your standard of living is such that you canât make it on your income, youâre living in the wrong way. Your bills are too high. Youâre spending too much money. Your house is too expensive. You need to right-size your life by reducing,â Quinn says.
One way to live below your means is to make saving a game. Challenge yourself to go an extra day on the cash in your wallet. Or hunt for coupons that offer the biggest discounts on movies and dining.
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We can learn lessons from earlier generations who knew how to pile up savings. They lived a lifestyle founded on delayed gratification. They reused items, repaired that old car, made do with what they had â and banked cash.
âOur grandparents did have a much better handle on where their money was going every month,â says Pamela Yellen, author of âThe Bank on Yourself Revolution.â âBut they didnât have credit cards, ubiquitous ATMs and constant promotional messages telling them they had to have this or that to be happy, sexy, respected or popular.â
That messaging has made delayed gratification a lost art.
âIf you fail to put aside your investment money first, there will always be something that seems urgent and crowds out your savings,â De Jong says. âThe inducements to buy are nonstop and very effective.â
But those on their way to becoming millionaires know delaying gratification can still be gratifying. Watching your savings grow can be very rewarding, Yellen says. âYou donât feel deprived,â she says. âYour life is actually enriched.â
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Many of the worldâs richest people created their wealth by starting a business.
While you might not attain the net worth of Bill Gates or Jeff Bezos, starting a business or a side job can help you pay off high-interest debt or boost your savings.
âAnybody can start a business,â says Phillip R. Christenson, chartered financial analyst with Phillip James Financial. âTake one of your hobbies or interests and see how you can use it to solve other peopleâs problems. To lower the risk, do it on the side while you continue to work a full-time job. It will take hard work, but entrepreneurship is one of the best ways to become a millionaire. And what could be better than becoming a millionaire doing something you love?â