Do you want to become a millionaire? The good news is that if you’ve got 30 years, have a reasonable, regular income, and are willing to follow a plan, you can get there. What is a reasonable income? Enough to cover your expenses and have a little left over if you budget just a little. What plan? That’s what you’ll get from today’s article.
So, if you’re ready, lets get straight into the plan.
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Step 1: Pay Yourself First and Put Away $400 per Month
The Pay Yourself First method, where you save and invest before you do anything else, is a great way to put money away without spending a lot of time budgeting or worrying about saving when you’re going through your life. It’s very automatic and easy, but it is also very powerful. Here’s how you would use it to become a millionaire:
- With each paycheck, put away enough to have $400 saved at the end of the month. If you’re paid weekly, this would be $100/paycheck. If you’re paid biweekly, it would be $200 per paycheck. If you work odd jobs, put away the $400 during your first few jobs for the month. You do this first before you spend money on anything else. As soon as you get your check, take out cash from an ATM or get cash back from a store. This first $100 or $200 gets paid to your savings. To start, just get a coffee can or envelope and put the cash inside.
- Pay off the bills that you have due before your next paycheck. (If you have a big bill like rent, you might need to set some cash aside — in a different place than your savings — and then add to it in future checks to cover it.)
- Buy basic needs: Food, basic clothing, gas for your car.
- Whatever is left is for you to spend as you wish. You’ve made your savings goal, paid for your basic needs and paid your critical expenses, so you can spend the rest without worrying about it. Simple!
If you find that you don’t have enough to cover your bills and your basic needs after putting the $400/month away, you can dip into your savings. But make sure that this money is used only for bills and basic needs and limit this as much as possible. If you find you’re needing to dip into savings regularly, see if there are places you can cut back in your expenses or ways you can earn more. For ideas on ways to cut back on expenses without making huge changes in your quality of life, plus if you want to learn how to invest, check out Investing to Win.
If you put away the $400 and paid all of your bills and find you have a lot left over, maybe think about increasing how much you are putting away. Add an extra hundred here and there, or maybe even a few hundred dollars. The more money you’re putting away, the faster you’ll get to your million dollar goal. If you put away twice as much, you’ll get there in half of the time!
The SmallIvy Book of Investing: Book1: Investing to Grow Wealthy
SmallIvy Book of Investing: Book1: Investing to Grow Wealthy
Step 2: Build your Cash into Savings
When you start out, you can just put cash in a drawer, into a can in the pantry, into an envelope under your bed or in a desk drawer, or somewhere else that is relatively safe. You won’t be getting any interest on this money, but while you still have a small amount, this really won’t matter. You’ll be losing a couple of dollars per year.
But if you’re putting $400 away per month, you’ll have $1200 in three months. After a year, you’ll have $4800. This will start to be more money than you want to have sitting in cash. Loss of interest will also start to matter: 1.0 % on $5000 is $50, enough for lunch or dinner for two at many places.
At this point, you’ll want to go ahead and start a bank account if you don’t have one. If you do have one, just put your cash into it. You’ll want a basic savings account, a money market account, or perhaps an interest checking account. Just put your money where ever you can get the best interest rate. You will not be withdrawing your money very often, so as long as you can withdraw a few times per month without a big fee, you should be good.
Check out minimums to make sure you aren’t going to be paying fees for a low balance. Get the best deal you can get. Your account balance should be growing from here, so if you can fees waived with the amount you start with, you should not need to worry about them in the future.
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Once you have a bank account, it will probably be easier to have your work deposit your paycheck into this account or transfer money from the card your employer pays you on into the account directly rather than get cash. Do whatever makes the most sense for you. Just be sure that you continue to put money into this account. You’ll be building this account until you have between $6000 and $10,000 in it, so it will take you about 2 years.
Note that once this accounts builds up a little your financial safety will improve dramatically. If you have a few thousand dollars put away, you’ll be able to take care of unexpected car repairs, a small home repair, and other relatively minor expenses that would have been an emergency before. You’ll find that this will be a side effect of your quest to be a millionaire: You will become more and more financially secure as you go.
Step 3: Start to Invest
Once your savings account grows to about $10,000, you can start to invest some of your money. Open an account through one of the brokerage firms such as Charles Schwab, Vanguard, or Robinhood and transfer $3000 to $5000 into it. Then, pick an index fund or an ETF to buy. Your first purchase should probably be either a large-cap US fund or a total US stock market fund. By buying the first you’ll be buying into large US stocks. Buying the second buys all kinds of stocks in the US.
These are both stock funds that are relatively stable compared to other sorts of stock funds (although they will still move up or down 10-30% in a year). You will want to buy these index funds and forget you have them. If you do this, you should see returns in the 7-12% over long periods of time (like, decades). If you get scared after a decline and sell stock, or if you try to sell high and buy back in low to time the market, you’ll probably get much lower returns. Your plan should therefore be to buy in, add to it over time, and not sell any shares for a long time. This is most likely to give you the best returns for your investment.
You can start sending in the money you were putting into savings into your stock account regularly through direct deposit or you can just save up a few thousand and then send it into your stock account. If the markets decline, you’ll be able to buy more shares cheaper, increasing your return over time. If stocks are up, they can still go up, so you should still be buying more shares. Because you’ll be buying more shares when they are low than when they are up, you’ll be getting a good price on average.
Before you can start investing, you need money to invest. Check out FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early. You’ll learn how to control your cash flow so that you’ll have money to invest and grow wealth.
Step 4: Up your Investing Game
Once you’ve gotten your large-cap fund well established with maybe $5000 to $10,000 or so in it, you should add a small-cap fund. Invest everything you’re investing into that small-cap fund until it is about half the size of the large-cap fund. Then add a non-US large-cap fund that invests in large companies outside of the US. Build that fund up until it is of the same size as your US large-cap fund. Note that this is just one way to allocate your money in your portfolio. You can adjust this based on your personal risk tolerance and other factors. For examples of ways to allocate your money and to learn more about portfolio design, check out Sample Mutual Fund Portfolios .
What you’re doing here is diversifying your investments into different areas of the markets. Different areas will do well at different times, so you want to own it all and always have something going up. On average over long periods of time, your large-caps, both US and non-US, will return about 10% APR where your small-caps may return about 12%. Small-caps will be a bit more wild than the large-caps, but as long as you hold them and just buy more during dips, they should recover and you should have a positive return around the numbers mentioned.
If you started with a total US stock market fund, you’ll already own large and small-cap stocks. You can therefore simply add a non-US total stock market fund and divide money between the two funds. Adding a small-cap fund as well will let you tilt more of your money towards small-caps if you wish. You can also add a REIT fund, which will invest in real-estate and a bond fund.
Realize that there are better investment portfolios than others, but the difference in returns won’t be very large compared with investing or not investing at all. Simply by putting money into the markets and leaving it there, not moving money around very often, and investing regularly you’ll get a good return over long periods of time. Leaving things alone and diversifying are the most important actions you can take. If you let your emotions get the best of you and you start moving things around, or you sell out entirely, you will likely make a much smaller return than you will if you just buy and hold through any difficult periods. The direction of the economy over long periods of time is always up, so if you just hold, your investments will rise.
Fund expenses can be important. If you buy a fund that is charging 2% per year instead of one that is charging 0.50%, you will likely make a return of 1.5% less per year on average. Index funds, which have very little management and therefore very low fees, are good choices. ETFs of index funds, which trade like a stock but invest like index funds, can provide even lower fees. Index funds also stay invested in the same stocks unless the stock index is changed, so you won’t have a manager buying and selling inside of the fund, trying to time the markets. Again, the most important thing is to be invested and stay invested.
(If you’d like to learn more about how to decide how much you should put in different types of assets, Sample Mutual Fund Portfolios gives lots of information and examples of how to make allocations for all sorts of different goals, including retirement.)
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Step 5: Rinse and Repeat
From that point, you’re on the road to a million dollars and beyond. Just keep adding money to your savings to replace any you end up spending and to your investments when your savings account is full. If you need some money for an important expense like replacing a car, you can use some of the money from your stock fund, but in general just keep adding. It won’t happen fast, but keep going and you’ll see your account values grow. As you make more at your job, increase the amount you save and invest.
When it does happen, it will happen suddenly. At first it will seem like your account will never grow. Then you will suddenly see your investment accounts going up so fast that you’ll be making as much there as you do in your job. At that point you really won’t need to add any more from your job because your investments will be compounding so fast your contributions really won’t make a big difference. And then your investment accounts will provide more money many years than you make in your job. At that point, you will have achieved financial independence. Again, this will be somewhere like 20 to 30 years down the road.
Want to learn the secrets to investing and really turbocharge your returns? Check out the second book in The Small Investor series, Investing to Win. This book presents 40 years of investing experience. Someone starting with zero knowledge of investing and the stock market could take this book and learn all that they needed to invest and do well. It would also be useful to someone who has invested and traded stocks for a while but who is really not getting the kind of returns desired.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
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