When we hear the word "millionaire," we tend to conjure up images of the elite few who jet around town in limousines and come home every night to gated mansions. In reality, nearly 7 million U.S. households have investable assets that exceed the $1 million mark. Not only that, but 29% of Americans today think they'll join the millionaires club at some point, according to data from GOBankingRates. If that's the sort of goal you'd like to set for yourself, here's how to achieve it.
1. Start saving as early as possible
When it comes to building wealth, compounding will be a major weapon in your arsenal -- so take advantage of it early on. Compounding, in its simplest form, means earning interest on top of interest, and it's what allows savers to turn smaller amounts of money into larger sums over time.
The following table illustrates how compounding can work to your advantage:
If You Start Saving $500 a Month at Age:
Here's Roughly What You'll Have by Age 65 (Assumes a 7% Average Annual Return):
Now here's the cool part: Saving $500 a month over a 40-year period means forking over $240,000 in out-of-pocket contributions and winding up with roughly five times that amount when we apply a 7% average annual return (more on that in a minute). How do we get there? By investing our gains year after year and continuing to save at a consistent rate. But, as stated above, the longer your compounding window, the more wealth you stand to accumulate. Case in point: Cutting your savings window by only five years shrinks your gains from about $960,000 down to $619,000 -- still impressive but nowhere close to the former.
2. Invest wisely
The higher your return on investment year after year, the more wealth you stand to accumulate. If you're looking to fuel your savings' growth, you'll need to get somewhat aggressive in your approach to investing. This means putting a sizable chunk of your assets into stocks, which have historically delivered much higher returns than bonds.
In the example above, we applied a 7% average yearly return to our investments. Well, that's the sort of return you can expect with a stock-heavy portfolio. In fact, that 7% is actually a couple of percentage points below the stock market's historical average. On the other hand, if you were to go heavy on bonds, you'd probably wind up with something closer to a 3% average annual return. And here's what the above table would look like as a result:
If You Start Saving $500 a Month at Age:
Here's Roughly What You'll Have by Age 65 (Assumes a 3% Average Annual Return):
As you can see, passing up those higher returns means losing out on a boatload of growth. And that's why if you want to be a millionaire, you can't play it too safe.
3. Make smart choices with how you spend your money
In order to accumulate wealth, you need to have cash to save and invest in the first place. And that generally boils down to being smart about keeping your expenses manageable. In both examples above, our calculations work with a $500 monthly savings target, but if you spend down each paycheck you receive, you won't get anywhere close. On the other hand, if you make a point of living well below your means, you'll have an easier time setting money aside on a regular basis.
If you're not sure whether you're spending too much, create a budget and see where your money is really going. If you are struggling to save, having that budget in place will help you pick up on wasteful habits that could ultimately derail your chances of ever hitting millionaire status.
Becoming a millionaire might seem impossible, but it can be done -- even if you're an average earner. And the sooner you commit to that goal, the greater your chances of realizing it in your lifetime.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.