3 Signs You’re Closer to Becoming a Millionaire Than You Realize

Millionaires aren’t all lucky lotto winners, TV stars, and trust fund babies. In fact, most of them hit seven-figure status doing something that many Americans do every day: investing. And you could be on your way to joining them. You don’t need a genius IQ, a Ph.D. in finance, or a fortune to get started. In fact, if you’re doing one or more of the things below, you’re probably closer to your goal than you realize.

1. You regularly contribute funds to your retirement account

Most people who achieve millionaire status do so through their retirement accounts, and regular contributions are key to making that happen. A savings habit prevents you from accidentally spending all your money on other things, and investing small amounts starting earlier can make you more money compared to investing larger lump sums later.

Image source: Getty Images.

Why? Because if you’re investing in stocks or mutual funds or exchange-traded funds (ETFs) composed of stocks, you’re purchasing shares of a company. When that company does well, share prices go up. The difference between your purchase price and the price you sell the stock for later is your earnings, and the longer you hold your stocks, the greater the earning potential, assuming you’ve invested in stable, well-performing companies.

Consider two workers saving for retirement. Both are the same age and plan to retire at the same time. The first saves $500 a month every year for 30 years and earns a 7% average annual rate of return. They end up with close to $585,000.

The second person puts $1,000 away for retirement every month and earns the same average annual rate of return, but they don’t start saving until 10 years after the first worker, so their money only has 20 years to grow before retirement. As a result, they only end up with a little over $507,000, despite contributing $60,000 more of their own money than the first worker.

As the example above illustrates, when you begin contributing to your retirement account matters as does the amount you put away. Neither worker in the example above saved enough over a long enough period of time to become a millionaire from this alone, but that doesn’t mean saving seven figures with your retirement account isn’t possible.

If the worker saving $1,000 per month had saved for 30 years instead of 20, again earning the same average annual rate of return, they would easily surpass their goal, ending up with nearly $1.17 million.

2. You claim your full employer match

If you have a 401(k) that includes an employer match, you don’t have to save for retirement on your own. When you contribute money to your account, your employer will also put money toward your future, though how much depends on your salary and the company’s matching formula. This money is invested the same as the money you contribute yourself, so it can also grow over time.

Someone who makes $50,000 per year and has a 3% dollar-for-dollar employer match qualifies for essentially another $1,500 annual bonus as long as they contribute at least $1,500 of their own money to their 401(k).

If you claimed that bonus every year for 30 years, you’d end up with over $146,000 just from your employer matches if they earned a 7% average annual rate of return. And that’s assuming your salary never increased. If it did or your investments performed better than expected, you could end up with even more.

3. You keep your investment fees low

Fees are the enemy of profit. You can’t avoid them entirely while investing, especially with a 401(k), because many of the fees are determined by your company and the plan it chooses. But you still have control over your investment fees, like the expense ratio on mutual funds. That’s an annual fee you pay the fund manager so they can afford to do all the buying and selling necessary to keep the fund going and make you money.

A simple way to reduce your fees is to move your money to passively managed funds, like index funds. These are designed to mimic a market index and the investments in them don’t change as often as the investments in actively managed funds, which are chosen by a fund manager trying to beat the market. Less investment turnover means less work for the fund manager and lower costs for you.

Some actively managed mutual funds have expense ratios in excess of 1% of your assets per year while you can find some index funds with expense ratios under 0.5%. If you have a $1 million portfolio, that’s the difference between losing $10,000 or more every year to fees versus $5,000 or less.

If you don’t have a 401(k) or yours doesn’t offer a match or decent investment options, you can always put your money in an IRA instead. IRAs give you complete control over how you invest and that can go a long way toward reducing your annual fees. Staying alert to changes in your investment and brokerage fees and avoiding too much buying and selling can also help you keep your costs down and your profits high.

Realizing the dream

There’s no single path to becoming a millionaire. Yours will involve different investments, challenges, and timelines than your neighbor’s, but you can get there if you follow the tips above.

Don’t fall into the habit of looking at $1 million as the end goal, though. For most people, that’s not enough to cover the full cost of retirement anymore, especially for those who want to retire early and those who want to travel a lot. Take some time to estimate how much you actually need for the lifestyle you want and make that the goal you pursue.

10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 2/1/20

The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts