I believe that most people can become millionaires with ASX shares if they follow just four simple steps.
The steps I’m about to talk about don’t involve taking on a large amount of debt. I’m not going to say “use equity to buy more properties” (except this one mention). The premise of this article is going to be about ASX shares and the power of compound interest.
Step 1: Earn Money
Unless you inherit a lot of money or win the lottery the only way you can put money towards the share market and stay debt-free is by earning it yourself. It takes money to earn money.
Everyone needs a minimum amount of money to pay for the basic necessities and bills, you can’t escape that economic reality. The younger you are the more likely it is that you’ll need a second job or other source of income to earn the amount of money needed to invest.
Australia is one of the best countries in the world, but it’s also one of the most expensive. Property costs a lot, it takes up a lot of a household’s budget. Energy costs a lot. Low wage growth is not helping things either.
Step 2: Spend Less Than You Earn
Once you’re earning the next stage is to not spend it all. Every budget is different, only you know what things can be changed or not. Different cities, kids, pets and so on all change the numbers.
Whatever your numbers are, if you spend everything you earn there won’t be anything left to invest. Credit card debt can make things worse. Previous decisions can cause interest and debt repayments to make it hard to live a financially sustainable lifestyle.
There’s a list as long as Santa’s Christmas list of sports people (who made many millions) declaring bankruptcy. If you don’t pay attention to your finances and don’t control your spending then you’ll never get close to becoming a millionaire.
There are two sides to the equation, you can spend less, earn more or perhaps do both.
Whatever it takes, you need to get your annual expenses below your annual after-tax income. You can start by investing in ASX shares with as little as $500.
Step 3: Invest
Investing is just one of those activities that you just need to get stuck into and learn as you go.
There are lots of different investment styles and different investment options you can go with, but don’t get stuck at this stage.
The simplest way to start investing is with exchange-traded funds (ETFs). The best ETFs are both low-cost and provide excellent diversification of industries and geographies. Preferably you want the ETF’s underlying holdings to generate earnings from across the world which lowers the risk of being too focused on Australia. Two of the best ETFs on the ASX are iShares S&P 500 ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS). Both of them could be good ones that you buy, keep buying and hold until retirement. This method is proving very effective for lots of regular people.
Another option is to invest in listed investment companies (LIC) or trusts (LITs). The job of these companies is just to invest in other shares they think are good value. I think it’s only worth buying LICs that you think can beat the market and/or have sustainable large dividend yields. Three LICs I like at the current prices include WAM Microcap Limited (ASX: WMI), Magellan Global Trust (ASX: MGG) or MFF Capital Investments Ltd (ASX: MFF).
The final investment style is to choose your own portfolio of high-quality shares you think that will beat the market. Some of my favourites include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Altium Limited (ASX: ALU), Webjet Limited (ASX: WEB) and REA Group Limited (ASX: REA).
Step 4: Be patient, occasionally brave and keep going
Becoming a millionaire doesn’t happen in a month, it takes many years of hard work and discipline to reach the goal.
Be aware that recessions occur and share market crashes happen like in the GFC. That’s the best time to buy shares, you just have to stay strong when people are fearful.
If you initially invest $1,000 into ASX shares and then invest $500 a month for 30 years, whilst earning the (historical) average return of 10% a year for those 30 years, you will end up a millionaire. If you can save a bit more, earn a bit more and ultimately invest a bit more than $500 a month then you can reach millionaire status much quicker.
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Motley Fool contributor Tristan Harrison owns shares of Altium, Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, WAM MICRO FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REA Group Limited, Vanguard MSCI Index International Shares ETF, and Webjet Ltd. 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.