This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
There are many things that can keep you from becoming a millionaire, like not having enough disposable income or an adequate amount of time. But if you have money that you can spare, the right time horizon, and the risk tolerance for stocks, it can be done -- and with less money than you probably think you need every year.
In your quest, just make sure you avoid these three things.
Not having a plan
Making a plan can help you become a millionaire and it starts with actually setting the goal of accumulating $1 million. Then you can evaluate where you are now, and make a roadmap for how you will reach your goal. This will include things like how much you will save each year, the rate of return that you will receive, and for how long you will do it. For example, if you plan on saving your money for retirement in 30 years and can invest $5,000 each year, you will need a rate of return on average of 10.72% each year. And you could've reached it by investing in the S&P 500 between January 1991 and December 2020.
If you could invest more every year, you could reach your goal in less time or with a more conservative rate of return. If you can invest $7,000 a year for 27 years, you could reach $1 million at this same rate of return. Or if you invested $7,500 annually, you would only need an 8.5% rate of return on average -- which you could've gotten by taking a lot less risk with a portfolio of 50% stocks and 50% bonds.
Lack of consistency
Part of growing your accounts to $1 million involves consistency. Some things you can't do anything about, like market conditions. But you can control how consistently you stay invested. And missing just one of the best years of stock market performance could drag your average rate of return down. If instead of beginning in January 1991, you had invested in the S&P 500 from January 1992 until the end of December 2020, your average rate of return would've been 10.1% because you would've missed a positive return of 31% in 1991. And this difference in your average rate of return would've resulted in $125,000 less over 30 years.
Not saving as much or missing years of saving could also impact your overall growth. If you'd only saved for 25 years instead of 30, your investment would've grown by $400,000 less. And if you could've only invested $4,000 a year for the 30 years you would've ended up with almost $200,000 less.
Not tracking progress
As much as you hope that your plan will go off without a hitch, it's possible that not everything will go the way you want it to. Maybe you miss a year of saving or can't save as much as you intended. Or maybe you sold out of your investments in a panic and the rate of return that you received on average was a lot lower than expected.
You can't go back in time and change these actions, and obsessing over it won't help you reach your endpoint any faster. Instead, regularly tracking your progress along the way can help you course-correct. If you discover that the original plan you put in place will no longer get you where you want, it's possible that you won't reach your goal. But if you catch it soon enough, small adjustments like saving more or increasing your time horizon may help you get back on track.
There are a lot of things that can get in the way of you becoming a millionaire. But there are also some things that you can control, like having a plan, being consistent, and reviewing your plan along the way. And even if you don't make it to millionaire status, developing these investing habits can still help you grow your wealth considerably.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
