how to become a millionaire Archives

I’ve been officially old (big 4-0) for a few months now. It occurred to me that 40 year-olds have around 20 years of work experience (depending on high school, college, graduate school degrees).

The other reason I picked 20 years for this article is that the numbers work out. This clip from Something About Mary explains why 20 years is the perfect number:

At first glance 20-years seems like a long time. No one wants to wait 20 years for something right?

I thought the same thing until I realized that Summertime by The Fresh Prince and DJ Jazzy Jeff is 25 years old. We’re not even going back to Parents Just Don’t Understand. Time can sneak up on you.

So how do you get to a million dollars in 20 years? I decided to work backwards with two assumptions that I considered safe:

You are going to save some amount of money each year and invest it.
The investment is going to earn 7% a year. While that number will vary, this 7% is generally accepted as a rate of return when investing in stock indexes.

What’s the magic number you need to save and invest each year? Let’s see if you can spot it:

(It’s my first time publishing a Google Sheets document on the web, so hopefully this is a link where you can view the sheet and calculations. If anyone sees anything wrong or has any tips on how I can do this better in the future, please leave a comment below.)

Yep, it’s $23,000. By the end of the 20 years you’ll have invested “only” $460,000. (We’ll get to the “only” in a bit). The investment gains will be $540,000**.

When I did the math, the $23,000 number surprised me. Why? The maximum amount a person can contribute to a 401k plan is $18,000. The maximum a person can (typically) contribute to a Roth IRA is $5,500. If you were to max out both, you’d be saving and investing $23,500.

To all the conspiracy theorists out there, doesn’t it appear that the government set these numbers because they want you to become a millionaire in 20 years?

How Can I Save $23,000 a Year?

Saving $23,000 a year can be easy for those with big incomes or an enormous challenge for those with small incomes. There’s no one “right” way to get that money to save. I think it’s best to work with a blended approach.

The first thing I’d do is track your finances through Personal Capital. Many people are surprised to find out that their restaurant spending is several thousand dollars a year. You might be able to save a couple thousand dollars at restaurants with these tips.

I would try to put as much money as I can in a 401k. Why? Because it’s pre-tax money, you won’t notice as big a hit in your paycheck. (Yes, you’ll pay taxes later**, but psychologically, you’ll get a big boost from the big number in the 401k.)

Next, I’d sign up with ~~Digit~~ Dobot. This free service takes a small amount of money out of your banking account and “hides” it in another FDIC insured account. The idea is that you won’t miss the money the money you don’t see. You can read my Dobot review here. I’ve saved more than $1000 dollars and I didn’t even notice.

By now you are probably seeing that you may be able to save a few thousand here and there. It really depends on what you are already spending and what you are earning. Over 20 years you’ll probably need to buy a new car. You may be able to get a car that is cheaper and save yourself a hundred or two a month, which really adds up.

Does saving $23,000 still sound like too much money? Get a spouse and you can cut the savings goal in half. Some may consider it cheating, but I think most people would consider a great joint accomplishment. When I got married I found that many expenses, rent, utilities, cable, were cut in half as I had someone sharing them.

Looking for more ways to become a millionaire? Here’s a lighthearted look at How to Become a Millionaire. Here’s the story of how one person became a millionaire in ten years.

* When I was 23, I was introduced to a 27 year-old woman. I flat-out called her “old”. Perspective is a strange thing.

** I’m glossing over a few details such as:

Investment Expenses – These can be minimized with index investing.
Inflation – A million in 20 years is likely going to buy less than it does today. On the flip side, it should be easier to save $23,000 in year 18 than in year 1.
Taxes – This is a big one. I’m going to do what everyone else tends to do and suggest that this is in a retirement account and that there are no taxes when they are really just deferred. I think most people with a million dollars in their retirement accounts would call themselves a millionaire. Am I wrong?

Who hasn’t played the “if I had a million dollars” game? If you are a fan of Office Space, it probably comes as no surprise that I’d take the Peter Gibbons attitude (see the name of the site). Actually doing nothing would get boring after awhile I imagine.

While a million dollars isn’t what it used to be, it is a great start towards financial freedom. Most people don’t know how to become a millionaire. I believe it is an attainable goal if you follow these 5 easy steps:

5. Find the elusive money-growing tree and hoard it all to yourself (But first call me and let me in on the royalties since I gave you the idea.)

4. Find yourself a sugar daddy/mama and marry them ASAP.

3. Spend all your time and energy on making your life as ridiculous as possible. Then get an equally ridiculous television station to pick up your life as their newest reality show. (It worked for Jon and Kate… not so much for the balloon boy)

2. Con your friends into playing Monopoly with real money, build hotels on Boardwark and Park Place, and rig the game so that you continually land on the “Free Parking” space and collect the loot from the middle. (That is assuming you play with the rules that Free Parking actually earns you money.)

You don’t like those options? Good, you shouldn’t. The chances of you securing your future and becoming a millionaire through those first four steps are about as good as Michael Jordan becoming a star in NFL now (remembers his baseball career?). Give me one more chance at proving you a path to financial freedom.

1. Read the rest of this article.

The beauty of the prestigious millionaire club is that there is room for all of us at the table. Everyone has power over their financial status if they focus on a few small things. Here are several simple steps that could change your life forever and help you in becoming a millionaire.

Don’t spend more than you make – That sound easy enough, but for most it’s easier said than done. For many, today’s cashless society makes it easy to swipe the credit card and plan on paying it off later. Others, like my wife, just tend to spend whatever cash they have on hand, because it’s a quick transaction (not having to sign anything). We tend to buy now and think later, rather than the other way around.
Get out of the “Now” mindset – Many young couples get married, buy their first home, and expect to immediately have all of the ‘luxury’ items that it took their parents thirty years of working to obtain. I wish I could get them to change their thinking… realize that building your dream home, owning the perfect car, and being able to take extravagant vacations will not happen overnight, nor in 5 years. It takes time to achieve it, just as their parents did. In the same way, realize that it is almost impossible to become a millionaire overnight. What you can do is implement the basic financial principles today that will increase your chances of becoming a millionaire in the next 20 years…
Save Money – In the immortal words of Al Bundy, “Save hard, save now, save silent, save deep…. the key word here is: SAVE!” (Actually, Al used the word “run” instead of “save”, but it is one of my favorite lines and it fits.)
The easiest way to effectively change your saving habits and make a monumental difference is to save at the beginning of your month, rather than at the end. Too many people trick themselves into thinking they are saving by just transferring what is left each month to their savings account. Sure they are saving, but they are not saving intentionally. If you don’t tell your money where to go, you’ll get to the end of the month and question where it went. Decide what you will save each month (after making a monthly budget) and take that straight to your savings account the day you get paid. Don’t allow yourself to touch it, not even for an emergency. Have a separate emergency fund of $1,000 so your savings can be safe. If you are married, try to live off of one income and save the second. This is difficult, but very doable by cutting certain expenses.
Attack debt now – Step #2 doesn’t apply here – when it comes to debt get in the “Now” mindset. Though I’m not really a fan of Dave Ramsey he I do agree with his approach of attacking debt with “gazelle intensity.” (Don’t confuse this with Tony Little’s Gazelle which will get nowhere.) Go after your debt rather than letting it control you. Work on your highest interest loan first, and once you have paid it off, take the amount of that monthly payment and add it on to your next loan’s monthly amount. Many people make the mistake of paying off one debt and then taking that money they would’ve been spending and simply increasing their standard of living. Instead, wait to get out of debt completely and then celebrate with something small.
Invest your savings – Be careful with this step. Don’t go after the get-rich-quick schemes. Look into the mutual funds and other financial vehicles that have historically been shown to appreciate in value. Your savings is not something to gamble with. Don’t make the first four steps obsolete by a reckless decision in the final step.

Whatever you do, make sure that your path to becoming a millionaire is focused on doing something that you absolutely love. Find your passion and follow it. When you do, those long hours and the stressful days becomes a lot more fun.