How to become a millionaire in 4 simple steps

Growing your wealth to seven figures is not easy, but it can be done in very simple steps. There isn’t a quick way to do it, this article isn’t about ‘get rich quick’ schemes.

Like my title says, it’s a simple process but it’s not easy:

Step 1: Spend less than you earn

Everyone earns different amounts of money. It doesn’t matter if you earn $10,000 a year, $100,000 or $1 million a year, the main thing is that you don’t spend some of it.

Person A could earn $100,000 less than person B, but if person B spends all their earnings and person A doesn’t then person A will be wealthier.

Step 2: Save the difference

Not spending the money is one thing, but it’s important to actually save the money. You don’t become wealthy just by delaying your spending by a few weeks or months.

Any not-spent money needs to be saved to go towards your wealth in some way.

Step 3: Invest

I think the best way to increase long-term wealth is to invest in shares, but property or bonds are also popular choices. Long-term average returns of 10% per annum are hard to argue against, plus at some point your investments can pay for the delayed gratification just from the investment income.

Index funds are popular choices like Vanguard MSCI Index International Shares ETF (ASX: VGS), listed investment companies like Australian Foundation Investment Co. Ltd. (ASX: AFI) and WAM Research Limited (ASX: WAX) are also good options.

Investors looking to beat the market might want to choose shares that have long growth runways like Challenger Ltd (ASX: CGF) and Ramsay Health Care Limited (ASX: RHC).

Step 4: Be patient

Compounding is the most powerful force in the investment universe. It takes a while for this to have a meaningful effect, one year isn’t long enough to let it happen.

Moneysmart has a great compound interest calculator to work out how much you can have after a few decades. This is where the $1 million figure comes in.

If you start with $1,000 and add $500 per month ($6,000 a year) and can achieve an average return per annum of 10% – which is what the stock market has done over many decades – in 30 years you’d have just over $1 million.

Using those same numbers, if you added $1,000 per month instead of $500 you would have almost $2 million after 30 years.

It’s a fun calculator to play around with and see how much you could potentially have in a few decades.

Foolish takeaway

If you can stick to a disciplined saving strategy and regularly invest throughout your whole life then it’s relatively simple to reach seven figures.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, Ramsay Health Care Limited, and WAM Research Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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