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Believe it or not, anyone can become a millionaire. It’s actually not even as hard as you might think. It just takes time, patience, and a great plan.
You know the goal: millionaire status.
And you know your starting point: $0 in savings. If you have more than $0, congrats! You’re already ahead of the curve!
But how do you get from your starting point to your goal?
That’s where we come in. We have a plan that will show you exactly how to become a millionaire! And you can even do it on a low salary.
The Wrong Way to Become a Millionaire
Let’s first look at the wrong way to become a millionaire.
You can’t become a millionaire by stashing money under your mattress or hidden in a safe. I mean, you probably can, but it would be unnecessarily difficult. Money stashed around your house doesn’t get to earn interest. So you’d have to save a whole lot more money to reach a million dollars.
Pop quiz: if you want to be a millionaire 40 years from now (which is 480 months away) without earning interest, how much would you need to save each month?
Answer: $2,083 every month ($1,000,000/480 months). You need a pretty high-paying job to make that happen!
The Right Way to Become a Millionaire
The right way to become a millionaire is to save and invest your money in accounts where it can earn compound interest.
Another pop quiz: if you want to be a millionaire 40 years from now, and your investment account averages a 7% compound interest rate, how much would you need to save each month?
Answer: $381 every month. What?!
That’s right. If you invest your money properly, you can save $1,702 less every month and still become a millionaire. Over the years of saving, you can either save $1,000,003 to become a millionaire, or you can just save $182,880 and let compound interest make you a millionaire. Let’s look at a visual of this concept:
See the blue? That’s your total out-of-pocket savings amount. And the pink? That’s earnings from compound interest!
The choice is yours. Do you want to save without interest or take advantage of compound interest?
Yeah, us too 😉
How to Use Compound Interest to Become a Millionaire
So compound interest is your secret weapon in your quest to become a millionaire.
What exactly is compound interest? It’s friggin magic is what it is! Compound interest is making money on the money your money is making!
Wait, what?
Ok, you probably know about earning interest. Interest is the amount the bank pays you for storing your money with them. You stash your money in an account, and every month a tiny amount of money shows up in your account. So your money is making money.
But compound interest takes this to the next level. That interest your money earned is now sitting in your account and able to earn interest of its own. So now you’re making money on the money your money is making.
And now, you can become a millionaire with only $381/month earning 7% interest.
How to Save $400/month
Ok, $381/month is a lot more doable than $2,083, but it’s still a good chunk of change. It’s nearly $400/month, after all.
If you make $40,000/year, $400 per month is 12% of your salary. That’s not a crazy-high percentage. Lots of people save 10-15% of their income.
But if that sounds completely unreasonable to you, or if you’re earning less than $40,000/year, here are some tricks to take $400/month from crazy to doable.
#1: Cut back on your current expenses
Money is like time; we all waste it in ways we don’t even realize. Take stock of where your money is going to find ways you can easily save without over-sacrificing your quality of life. Check out our 35+ ways to save money this month for some ideas.
[bctt tweet=”Money is like time; we all waste it in ways we don’t even realize.” username=”savings_sangria”]#2: Start small and schedule automatic increases
Don’t worry if you can’t save the full $400/month right away. This isn’t an all-or-nothing game. Every little bit helps. Every dollar you save today could be worth over $16 in 480 months with 7% returns. But if you wait 10 years (when you think you’ll be more stable and making more money), each $1 can only grow to about $8 by retirement.
Compound interest is powerful, but it relies on time. It needs time to work its magic. So don’t wait another day to get this working for you!
To see how time affects your investment growth, The $831,751 Reason to Save for Retirement While You’re Young and Broke is a must-read!
You can start by just saving 3% of your pay if that’s all you can spare. Then increase that amount every time you find ways to reduce expenses, get a raise, or make some side-hustle money.
#3: Pay yourself first – automatically
You will always find more things to spend money on! So the trick to savings is to save first, then spend what’s left. Instead of spending what we “need” to, and saving whatever’s left. If you spend first, you’ll find that you almost never have anything left to save.
So pay yourself before you pay your bills!
And let’s take this one step further: let’s automate the process so we never even have to think about it! You can set up auto-transfers from your checking account to your investment account, so your savings amount is automatically moved from checking to your investment account right after payday. You never get the chance to spend it because it doesn’t stay in your account long enough to get used. You’re forced to save and invest, which is kinda brilliant.
#4: Find ways to make more money
If you’re already watching your expenses, but you’re still struggling to make ends meet and have any money to save, you really only have one other option: make more money.
Easier said than done, right?
The good news is that we’re living in an age of side-hustles. It’s easier than ever before to create some income on the side. We have several ideas to help you get started:
- Side-hustle your way to an extra $500/month
- 25 ways to make money this weekend
- Weird ways to make money in your spare time
How to Invest Your Savings to Become a Millionaire
Now the big question: How do I invest to make sure I’m taking advantage of compound interest and can become a millionaire?
Step 1: Open a retirement account
If you don’t already have a retirement account, open one asap!
Employer-sponsored accounts, like 401(k)s and 403(b)s, are the best place to start. If you don’t have access to an employer-sponsored account, you’ll want to open an IRA or a ROTH IRA.
Step 2: Invest your retirement savings in Index Funds
Once your retirement account is open, you get to decide how the money in that account will be invested. And your best bet for long-term returns is Index Funds.
Index funds are like sampler baskets of a bunch of different investments, which is cool because that means you’re putting your eggs in hundreds of different baskets without manually selecting each basket.
Index funds are passively managed to keep pace with the market; they don’t try to outperform it. The crazy thing is, over the long-term, these passive funds usually perform better than actively managed funds (like mutual funds). And when you consider the difference in fees (a very low .11% average for index funds, compared to .84% for mutual funds), you’re very-nearly always better off in the end with index funds.
Of course there’s some risk with any investment fund. Luckily, you can control some of the risk by investing in different index funds. Some are only made up of bonds, so they’re safer than those made up of stocks. You can invest in a couple different index funds, some of just bonds and some of just stocks to diversify your portfolio further. Stock-based funds are more likely to grow your money faster and larger, but they’re also riskier. Bond-based funds are safer, but won’t get you the big returns.
As a general rule, the further you are from retirement, the more risk you can take because you have time for the market to correct itself after any downturns. As you get closer to retirement, you can move more of your money into the more conservative bond-based funds.
Learn more about Index Funds.
Step 3: Set up your auto-transfers
Now that your account is open and your investments selected, you can set up your auto-transfers to automatically move your money from your paycheck to your retirement account.
If you’re using an employer-sponsored account, your employer takes care of this for you! They will automatically move your money to your retirement account before issuing your paycheck. You don’t have to do anything.
You can even check a box to automatically increase your savings amount every year. It’s perfect if you’re starting with a small percentage of your pay and looking to increase it over time!
If you’re using an IRA or ROTH IRA, you just need to create an auto-transfer from your checking account right after payday to your retirement account.
Step 4: Enjoy your life knowing that you’re on you’re going to become a millionaire.
And now that the system is automated, you don’t even need to think about it, really. You just check on your funds once a year as part of your annual financial check-up. Aside from that, you can go about your life, not worrying about your financial future.
Rest assured that you can become a millionaire on this plan!
Ways to Become a Millionaire Faster
Don’t want to wait until retirement to become a millionaire? There are several things you can do to make this happen faster.
- Start saving as soon as possible – the best time to start saving is yesterday, and the second best is today.
- Save more – of course the more you save, the faster you’ll accumulate your million.
- Enjoy better returns – the 7% estimate we’ve used in this post is conservative. The S&P 500 Index, for example, has averaged annual returns of about 11.69% from 1973 – 2016. That’s why you want to check on your investments once/year to see how their returns compare to other, similar investments.
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Having read this, do you think this is a realistically doable plan for you in your unique circumstances? If not, what’s holding you back?
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