Do you need to have money to make money? Not necessarily. With dedication, consistency and time, it's possible to start from scratch and end up at least in the top 10 percent of wealthiest Americans by the time you retire.
According to researcher Spectrem Group, the number of U.S. households worth $1 million or more in 2010 stood at 8.4 million, up from 7.8 million a year earlier. Here are a few tips to help you reach that milestone even on a modest salary:
The power of the 401(k)
Some experts say that since the average person has $60,000 in a 401(k) plan, it points to an overall failure of these retirement accounts. But it could be a failure to commit. Smart Money recently wrote that a small percentage of savers managed to sock away more than $1 million in their 401(k) accounts by retirement. The single biggest factor in accomplishing this feat even on a modest salary is the fact that the savers contributed the highest amount they could -- consistently -- over the course of their careers.
There are some factors, like high fees, that will erode returns, so it's important to seek lower-cost options and to diversify because you can never predict which asset classes will perform at any given time. The younger you are, the more assets you should have in stocks because they've been proven to deliver higher returns over time.
If your company has a 401(k) plan, contribute the maximum allowed. The company match gives you "free money" that you didn't have to earn, but go beyond the match to the maximum allowed by the IRS. You're still getting the tax-deferral benefits of the retirement plan and that will help you grow wealth until you reach 59 1/2 and can withdraw the money penalty-free.
Investigate index mutual funds with low minimums or commission-free exchange-traded funds (ETFs) and begin an investment plan outside your company retirement plan. If you find two or three funds or ETFs that invest in a variety of sectors and countries, you'll have a low-cost, diversified investment portfolio. Make sure you take into account your retirement account investment mix so you won't be overweighted in any one sector.
Freedom from debt
Delayed gratification is an important element of this long-term plan to retire a millionaire. Debt will only carve into potential savings, so it's vital to avoid it as much as possible. Consumer spending is up, yet wages haven't increased, leading economists to believe it's the result of consumers raiding their savings accounts. They estimate that the national savings rate dropped from 5.1 percent to 3.5 percent in the last quarter of 2011.
While it's been difficult to recover from the investment carnage of the recession and housing values haven't yet begun to climb back to pre-recession levels, stick to your long-term plan and be rewarded with a comfortable retirement.
Do you have a consistent savings plan?
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