"Millionaire" can feel like a huge, unobtainable word, but becoming one is actually more realistic than you might think.
These days, being a millionaire isn't necessarily about butlers, private jets, and luxury. Instead, it can mean guaranteeing yourself a comfortable (or early) retirement. It can give you the career freedom to pursue a passion instead of being tied to a paycheck. The public perception of "millionaires" may be rooted in consumerism, but that doesn't have to be your goal.
Just how easy is it to become a millionaire? Well, "easy" isn't the right word—it requires a lot of intentionality, discipline, and patience. The better term is "simple." By studying the common practices of millionaires, we can identify patterns and follow in their steps to become a millionaire.
Let's dive into how to become a millionaire the simple way!
1. Develop a millionaire's mindset
Don't worry, I won't tell you to make a vision board (unless you want to). But more than anything, wealth is a mental game. If you're not starting with a solid money mindset, you may struggle to adopt the habits and practices of millionaires that you need.
Some mindset characteristics that will help you are:
- Planning ahead—thinking ahead about your short-term, medium-term, and long-term financial plan, and what you'll do in case of emergencies.
- Determination—knowing that you'll face challenges but being prepared to overcome them.
- Patience and delayed gratification—being willing to delay present wants for future goals.
- Confidence—having faith in yourself that you can pay off that debt that seems insurmountable, reach that next number in your savings account, or launch the business you've been dreaming about. If you start with the mindset that you can't, you probably won't.
- Openness—being willing to learn, make mistakes or even fail sometimes, and then learn even more. Seek knowledge and surround yourself with positive influences.
Of course, not all millionaires share these traits, but I'm not talking about lottery winners, celebrities, or trust-fund inheritors. I'm talking about regular people who decided they were going to build wealth, and went ahead and did it. They're not that different from you!
2. Carefully watch your expenses (big and small)
One of the quickest ways to hamstring your financial progress is to buy too much house or too much car. You may have heard the term "house poor," and this is what it means. Too many people get caught up in the trap of having overly expensive mortgages and car loans that take up the bulk of their income, leaving them with little or nothing to put towards their savings.
While big purchase decisions only come around once in a while, your financial plan should also account for small expenses. These can be "death by a thousand cuts" to your savings goals. Look for opportunities to reduce costs like your cell phone bill, cable or subscription services, eating out, shopping for non-necessities, and so on.
A great goal is to see if you can live on just half of your income and save the other half. Try it as an experiment for a year and keep it going if you can! This will get you to your million dollars a lot faster.
3. Try to max out retirement investment accounts
The two most common types of retirement accounts are IRAs, which are personal accounts, and 401(k)s, which are usually offered through work. You can have both kinds, and they both allow you to invest in the stock market while saving money on taxes. Learn more about types of retirement accounts.
If you contribute as much as you possibly can to these accounts, it's like the fast-track of how to become a millionaire. 2019 brought an all-time high of both "401(k) millionaires" and "IRA millionaires," meaning that people become millionaires just by investing in these accounts.
This is encouraging because the contribution limits are the same for everyone. For 2020, you can contribute a maximum of $19,500 to a 401(k) and $6,000 to an IRA, according to the IRS. The conclusion here is that those "IRA millionaires" didn't get there because they were already rich and could contribute hundreds of thousands of dollars all at once. It means they got there through slow and steady investing and growth.
- If you max out only your IRA by contributing $500 a month, it would take you about 29 years to become a millionaire.
- If you max out only your 401(k) by contributing $1625 a month, it would take you about 19 years.
- If you maxed out both accounts for a total of $2125 a month, you could speed that up to just 16 years.
Like I said before: simple, not necessarily easy!
Of course, no one knows what the stock market will do in upcoming years. It could have years with a negative return before recovering and growing again. But if you stop yourself from investing out of fear of a crash, you might just find yourself missing out on years of incredible growth.
4. Seize any opportunity to increase your income
If you're staring at those numbers above and thinking "Yeah okay, like I have an extra two grand a month"—I'm with you! Even if you've pared down your expenses as far as they'll go, sometimes there's just no more wiggle room.
That's when it's time to look at the other side of the equation: increasing income.
This can come in several forms. For instance, you could:
- Ask your boss at your current job about opportunities for career growth and promotions.
- Job hunt to see if you can get a higher salary offer for a similar role at a new company.
- Learn new skills to increase your marketability and make a full career change to a more well-paid industry.
- Do side gigs or take on a second job, like these work-from-home jobs.
- Start a business and work to scale it.
Clever Girl founder Bola is a great example of income scaling. She saved $100,000 in 3.5 years by living frugally and starting a wedding photography business alongside her full-time job. Then, she launched this blog and grew it into a full-time business.
Evaluate your skills, interests, and strengths, and brainstorm how to monetize them. The more you earn, the more you'll be able to save and invest.
5. Use your money to make money
Most wealthy people don't just sit on a hoard of gold like a dragon—they put their money to work for them. Using your money to make money with little active effort is called "passive income."
The easiest way to generate passive income is by investing in stocks or keeping your savings in high-interest bank accounts. If you manage to max out your retirement accounts for the year, you can continue investing money in a brokerage account or an HSA for health expenses.
Many millionaires attribute their success to real estate investing, which can be active or passive income depending on your method. Learn more about real estate investing options for beginners here. There are also some unique ways to make passive income, like purchasing an ATM and earning through fees, or owning a vending machine in a well-placed location.
6. Avoid "lifestyle creep"
As you scale your income, it becomes tempting to scale your lifestyle too. Lifestyle creep happens when items you once considered luxuries are now part of your new normal. This can be as small as buying expensive coffee every morning, or as big as buying a beach house or a boat.
Another common trap people fall into is "keeping up with the Joneses." If your neighbors, friends, and family members are buying nice cars, eating out every day, and upgrading their houses, it's normal for a little jealousy to creep in.
But remember, the average American is about $38,000 in debt, not including their mortgages. You don't want to keep up with the Joneses, because the Joneses are stressing about how they're going to pay off that BMW.
It might sound a little strange, but to become a millionaire, live like you're the opposite of one.
Books on How to Become a Millionaire
These books help show you how easy it is to become a millionaire, thanks to the many insights from those who have done it before.
The Millionaire Next Door by Thomas Stanley
This book digs deeper into the principle of living simply to build wealth. It shows that millionaires can be your Toyota-driving neighbors, and emphasizes why showing off with status symbols is worth so much less than financial independence and security.
The Simple Path to Wealth by J L Collins
The holy grail of many in the FI (financial independence) community, and for a good reason. It's clear but comprehensive, and highly actionable no matter what stage you're in of your financial journey.
The Automatic Millionaire by David Bach
This has a similar lesson as the Simple Path to Wealth, focusing on maximizing your investments and living below your means. It's a good option for beginners who are looking for a "set it and forget it" process for how to become a millionaire.
Becoming a millionaire won't happen overnight, but with hard work, dedication, and time, it's totally within your grasp. Keep in mind, there are so many lessons to learn from millionaires that can act as a roadmap. Your challenge now is to go off and build the mindset and habits you need to create meaningful wealth and a 7-figure future.