Know the power of compound interest
Compound interest has been called the 8th wonder of the world. "He who understands it, earns it; he who doesn't, pays it," is a quote widely attributed to Albert Einstein.
The longer you save, the more compound interest you earn. To really leverage compound interest, start saving early and continue saving throughout your earning years.
For example, assume Joe earns average annual returns of 10% in stock mutual funds, says CFP professional Gregory De Jong, an adviser with Rockford, Illinois-based Savant Capital Management. Starting at age 30, he would need to invest only $263 a month to have $1 million by age 65. "That's less than $9 a day," De Jong says.
But if Joe starts saving 5 years earlier, at age 25 instead of 30, he'd need to bank just $158 a month, or about $5.25 a day. "The importance of starting early cannot be overemphasized," De Jong says.
Become a conscious spender
One of the most striking differences between millionaires and the rest of the population is that millionaires practice conscious spending. "Madison Avenue invests billions each year mastering the art of manipulating us into (buying) things we neither need nor want," says Pamela Yellen, the Santa Fe, New Mexico-based author of "The Bank on Yourself Revolution."
"Faced with all that advertising, we go on autopilot, unless we take steps to be conscious spenders."
Before buying a costly item, step back and ask yourself several questions, she advises. 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.
If you're really tempted while standing in front of the prospective purchase, flex your bicep and clench your fist, Yellen says. "It is proven to wake you up and stop the spending glands from overproducing," she says.
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Tax and expense impact on nest eggs
Those who become millionaires were quick to learn one of the wisest moves out there: investing in a tax-advantaged retirement account, such as a 401(k), 403(b) or IRA.
You fund these accounts with pretax dollars, thereby lowering the taxes you'll pay that year, says David Rosell, president of Rosell Wealth Management in Bend, Oregon, and author of "Failure Is Not an Option: Creating Certainty in the Uncertainty of Retirement."
"Uncle Sam's letting that investment grow with taxes deferred until you withdraw the money at retirement," he says. "That enables you to rebalance the account and buy and sell individual holdings without prompting a taxable event."
Another option: Invest in a Roth IRA or Roth 401(k) with earnings that have already been taxed so you can enjoy tax-free compounding and withdrawals.
Fees should also be minimized. The average expense ratio of an actively managed stock mutual fund is 1.25%, while index funds cost 0.63%. Passively managed exchange-traded funds, or ETFs, are even cheaper, at 0.47% on average, according to investment research firm Morningstar, located in Chicago. "The difference affects an investor's return and can make an enormous difference at retirement," Rosell says.
Phillip R. Christenson, chartered financial analyst (or, CFA) with Plymouth, Minnesota-based Phillip James Financial, puts it this way: "A dollar that goes to the IRS or investment company can't continue to work for you by growing and compounding over time."
Stay the course in a long-term plan
Becoming a millionaire involves a simple plan that is sometimes hard to maintain, De Jong says. It's in the difficult times that future millionaires display their true colors. Having made their plans, they don't deviate from them.
Of course, stock market ups and downs can test the most determined saver's resolve. One such trough occurred during the Great Recession of 2007 to 2009, when the Standard & Poor's 500 index lost more than half of its value.
For example, if you started saving $158 a month in 2007, you would have put away about $3,800 by 2009, De Jong says. But if those savings had been placed in a fund tracking the market, they would have been worth much less due to market losses.
"Do you have the discipline to stick with your plan?" he asks. "Look at your account once a year, and you'll almost always be happy. Look at it daily or weekly, and you'll add stress to your life -- possibly sabotaging your plan."
If you want to stay the course, shut out the guidance of amateur advisers. "Your friends' advice on whether this is a good time to be putting money in the stock market will almost always be wrong," De Jong says.
Ignore the headlines
Likewise, it's important to tune out the media when you're serious about accumulating money over the long haul.
A time-honored catchphrase in the newspaper industry is, "If it bleeds, it leads." Today, a similar philosophy is routinely practiced by producers of broadcast business reports, where the mantra seems to be, "If it scares, it airs."
After all, how often have you heard the terms "plummeted," "plunged," "nose-dived," "collapsed" or "tumbled" to describe that day's disappointing performance of the major stock indexes?
Probably as often as you've heard terms like "soared," "skyrocketed," "zoomed" and "climbed" to portray positive market moves.
Exaggerated terms like these pump up ratings and get folks tuned in.
"Ignore the business and marketing headlines," says Jane Bryant Quinn, AARP financial columnist and author of "Making the Most of Your Money NOW."
"The market always bounces back and goes higher, and profits people who stay with it," says Quinn.
"There 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."
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Live below your means
Staying the course is easier if you make living below your means a habit. After all, in order to save, you must spend less than you earn.
"I call it 'right-sizing' your life," says Quinn.
"If your standard of living is such that you can't make it on your income, you're living in the wrong way. Your bills are too high. You're spending too much money. Your house is too expensive. You need to right-size your life by reducing," she says.
"I don't mean by just cutting the cable. If you're living too high on the hog, you might need to do a major readjustment of your life."
One way to live below your means is to make saving a game, Quinn says. Challenge yourself to go an extra day on the cash in your wallet, without charging items. Or hunt for coupons that offer the biggest discounts on movies and dining.
Regularly winning these kinds of games could eventually help win you a 7-figure net worth.
Earlier generations of Americans had a fail-safe way of steadily piling up savings. They lived a lifestyle founded on delayed gratification. They reused items, repaired that old car, made do with what they had -- and banked cash.
"Our grandparents did have a much better handle on where their money was going every month," Yellen says. "But they didn't 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."
That messaging has made delayed gratification a lost art.
"If you fail to put aside your investment money first, there will always be something that seems urgent and crowds out your savings," De Jong says. "The inducements to buy are nonstop and very effective. And peer pressure to be frugal seems very out of date. Your aunt was frugal. You're not supposed to be."
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. "You don't feel deprived," she says. "Your life is actually enriched."
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Become an entrepreneur
A recent Forbes study of the 400 richest Americans found that 69% forged their wealth by starting a business, CFA Christenson says. "This means that, despite popular belief, wealth can be created and is not just inherited," he adds.
"Anybody can start a business. Take one of your hobbies or interests and see how you can use it to solve other people's 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?"