MENU

4 simple steps to become a millionaire

The status of being a millionaire is highly idolised – it has its own word! Many people might think that achieving a seven digit wealth is almost impossible, but if you have time and determination you can definitely make it happen with hard work.

But, just because the process to get there is simple doesn’t mean it will be quick or easy:

Step 1: Spend less than you earn

This is an extremely important part that many people struggle with. Whether you earn minimum wage, $60,000 or $200,000 it’s imperative there is a gap between your after-tax income and your expenses.

Every budget is different. It may be a case of reducing discretionary spending, avoiding expensive phones or eating as much home-cooked food as possible. The income side could be boosted with a side hustle or a well-researched pay rise request.

Step 2: Save the difference

Surplus cash month to month must be actively saved towards your long-term wealth. As Mr Buffett once said: “Do not save what is left after spending; instead spend what is left after saving.”

Cash can only be put towards your long-term wealth if it’s genuinely there for your future, not just delayed spending. At least put it in a separate high interest savings account where you won’t touch it. The more you save the more you can put towards investing.

Step 3: Invest

Now that you have some savings it’s imperative you put it to work. Earning 3% interest from the bank is barely keeping up with inflation, I think shares are the way to go with a long-term growth rate of around 10% per annum.

You could take a really hands-off approach and just invest in an exchange-traded fund (ETF) like iShares S&P 500 ETF (ASX: IVV) or Vanguard MSCI Index International Shares ETF (ASX: VGS). This would mean decent returns, minimal costs and little effort.

Perhaps you’d like to try to beat the indexes over the long-term and invest in quality shares like Challenger Ltd (ASX: CGF) or Costa Group Holdings Ltd (ASX: CGC). Better returns should mean you become a millionaire quicker.

Or maybe you would want to invest in property. I personally don’t think that’s a great place to be right now. But, just make sure you’re investing in something that is creating cashflow profit and has long-term growth potential.

Step 4: Be patient

Compounding is your greatest ally to achieve millionaire status. It takes years to become truly effective, so you just have to be patient to let it happen. Growing your wealth by $200,000 a year would still take five years to become a millionaire.

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.

Many people panic when markets dip – don’t panic! The idea is to buy low and perhaps hold forever, not buy high and sell low. The long-term 10% returns of shares is an average, sometimes there are down years and sometimes good ones.

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. Arguably, the earning and not-spending part of the equation is easier than investing.

Want to compound your money even faster? You should look at this top stock as a growth idea.

The best dividend stock to buy in September

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended Challenger Limited and COSTA GRP FPO. The Motley Fool Australia has recommended 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.