A quick internet search will yield hundreds of recommendations on how to become a millionaire next week. There will always be people peddling questionable methods to reach millionaire status in no time, with very little — if any — work to get there. The reality, however, is that most people who follow the trending fads often do more to lose themselves money than anything else. There are tried and true ways to become a millionaire, and if you happen to get lucky by winning the lottery, then that'll be nothing more than a fortunate bonus.
Here, we'll take a look at the core behaviors that can help you retire — and help you stay — a millionaire.
1. Actively earn an income
While most of us have heard of the dream of passive income, you'll need to actively earn an income to develop a capital base, first. Living off of your investment income is a great idea, but the starting money has to come from somewhere. While you don't need to earn a massive income, it's a good idea to do something that actively brings in money — at least when you're starting out.
Over time, as your investment accounts grow, you should have passive income in the form of dividends and capital gains, in addition to your active income in the form of W-2 wages or freelance income.
2. Max out your tax-advantaged accounts
For most people, this means contributing the annual maximum to your Roth IRA and employer-sponsored retirement plan, like a 401(k). Not only does this allow your investments to grow unencumbered, but it also allows you to limit annual taxation. Making it a habit of contributing the maximum (or as much as possible if you don't immediately have the cash to contribute) should make it relatively easy to push your net worth to new heights.
An important point to remember: Once you've contributed money to these accounts, make sure it's invested. A vast number of people will simply contribute money to these accounts and the money will sit there in cash, earning little to no interest. It's usually best to take the active step to invest the money in broad market index funds for sustainable results over time.
3. Don't micromanage your investments
Substantial research has shown that actively trading your account is likely to cost you in taxes, fees, and investment results. Savvy millionaires know better than to trade in and out of the market, with many opting for passively managed, broad-market, low-cost index funds. This method of investing allows you to take advantage of long-term capital gains rates (which are lower than ordinary income tax rates) and frequently provides greater returns than if you were to try and pick stocks based on feel.
Passive investing is also a great demonstration of humility: None of us knows for certain where the market is headed next. If someone says they know, reiterate to yourself that they don't. By focusing on asset allocation and allowing your funds to grow along with the index, know that you'll be outperforming a grand majority of active investors by simply leaving your accounts alone.
4. Embrace the process
This is a process, and it's probably a slow one for most people. This is not a bad thing. A vanishingly small fraction of the population is able to become a millionaire at a young age — if ever — so it's best to create an action plan and make sure you're sticking to it every year. You don't need to pressure yourself to have this done tomorrow, but you should consider developing the habits that ultimately will help make you a millionaire. Essentially, it's about getting the basics right and letting time take care of the rest.
5. Be deliberate
Much of becoming a millionaire is about being very intentional with your money. You'll need to know where every dollar is going and why. If you have a broad and flexible plan to increase your net worth over the long term, becoming a millionaire should be a natural byproduct. Take action now to set things up properly and you'll be surprised how quickly you'll see the numbers balloon.
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