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.
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.
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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.