Wouldn’t it be nice to have a million dollars? Don’t answer that, of course it would. But, if you don’t have an eccentric, billionaire widowed uncle anywhere in your family tree, your options might be pretty limited to either playing the lotto and hoping for the best, or saving up that seven-figure sum for yourself. We prefer the proactive approach, so we’ve come up with some ideas to help you reach self-made millionaire status. Of course it’s just for fun, your results may vary, and we can’t guarantee you’ll make it to $1 million—but then again, you just might.
Decide when you want become a millionaire.
What’s the difference between a wish and a goal? A goal is something you have a plan for achieving. So if you want to have $1 million someday, your first step is to drop that “someday” and set a target date for seeing your bank account balance hit six zeros.
Maybe your goal is to have $1 million saved up to enjoy in retirement. Or maybe you have no intention of waiting that long to claim the title of millionaire and you want to reach a million in five, 10, or 15 years. Whatever your target date, do the math and calculate how much money per year you’ll need to put away toward your million-dollar goal.
Pay yourself first.
If your goal is $1 million, then “saving for $1 million” should be a line item on your monthly budget. To calculate your personal savings rate, first subtract all of your necessary expenses from your income. Then decide how much of the remaining money you want to dedicate to your million-dollar goal: All of it? 50 percent? 75 percent? Your savings rate is the amount of money you save, divided by your income.
Ultimately it’s up to you to what percentage of your income to save, but remember the more you can save each year, the younger you’ll be when you join the millionaires’ club. If you’re just starting out, you can begin with a lower percentage and aim to increase it by a set number of points each year. Set up automatic deposits from your paychecks into your savings to stay on track. And, consider dedicating cash windfalls, like tax refunds and work bonuses, to your future million. Another tactic is to put away each raise you earn at work.
Fall in love with compounding interest.
Compounding interest means that interest earned is reinvested into the principal balance. If you have your money in an account with compounding interest, this means that the interest earned is added on top of your original deposit. Then, in the next period, interest is earned on that new larger balance and added again. Each period your savings accrue more and more interest as the balance grows.
If your goal is a $1 million nest egg for retirement, 401(k) and traditional or Roth IRA accounts are examples of compounding interest accounts you’d likely choose. If you want access to your $1 million sooner, a money market account is a type of savings account that generally provides a higher compounded interest rate than most other bank or credit union accounts.
Determine your risk tolerance.
One way to potentially speed things along is to invest a portion of your money. This gives you the opportunity to get a better return rate compared to keeping all of your money in a bank or credit unionaccount. If you’re not earning an exceptionally high income (though of course we hope you do, and more on that later), it’s realistically going to take a long time to save $1 million, unless you’re able to tap into the roughly seven percent 20-year average return rate of the stock market. If you’d prefer a lower return but guaranteed investment, you might try share certificates instead. If you do consider investing, we recommend you talk with a professional financial advisor first.