How to Become a Millionaire: Plan for Your Future

Many people want to become a millionaire. The actual reasons for this aim vary. An elderly couple approaching retirement age may want to become a millionaire to ensure enough passive income for retirement. Others may wish to become a millionaire to achieve financial independence. Yet others may want to become a millionaire to build generational wealth and pass it on to their heirs. Regardless of the reason, it is a goal for many people. 

There are four simple components to becoming a millionaire. First, you must earn money. Second, you must save money. Third, you must stay out of debt. Next, you must invest money, preferably in dividend growth stocks or passive index funds. Lastly, you should repeat steps one through four. 

You are probably asking yourself if the process works. There are many examples of everyday people who did not have high-paying jobs but became dividend millionaires. There are other ways to become rich, like starting a business. You can also be born lucky, win big in a lottery, or marry into it. However, those routes are much more challenging and not entirely in your control. 

This article focuses on a tried-and-true method to become a millionaire for the average person.

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Earn Money

The first step in how to become a millionaire is to earn money. This step seems like a basic fact. Initially, however, you must make enough money to meet your annual expenses and still have enough left over to invest money. In this context, this step is more straightforward said than done, especially if your income is low.

For example, the federal minimum wage in the United States is $7.25. Suppose you work 1,880 hours per week, earning $13,630 per year. This annual salary is probably not enough to become a millionaire. However, in some states, the minimum wage is much higher. For instance, suppose you live in New York, the state minimum wage is $15.50, which is $29,140. This dollar value is better from the perspective of earning money to become a millionaire.

If you are not earning enough to meet your expenses and have money left to invest, consider starting a side hustle. Alternatively, you can work extra hours, get a second job, or ask for a raise. For instance, an additional $1 per hour is another $1,880 of income per year. You do not need a six-figure salary to become a millionaire. However, every little bit extra helps you save money.

Save Money

The next step in answering the question of how to become a millionaire is to save money starting when you are young. The action seems like a basic fact. However, you will be surprised how difficult it is for many people to save money. Many people succumb to lifestyle inflation. They want the latest smartphone, a new car, nicer clothes, etc. It is OK to splurge occasionally. Nevertheless, if you spend all your raises and extra money from a second job, you will probably not have enough to invest and become a millionaire.

Save for Emergencies

There are three parts to saving money: taking care of emergencies, saving for retirement, and investing. Life is full of unexpected twists and turns. For example, you may lose your job or have unexpected health problems. Therefore, having an emergency fund to deal with these situations is good. The rule of thumb is six months of expenses in a low-risk savings account to deal with life’s unexpected events.

Save for Retirement

The second part is to save money for retirement in a 401(k) or 401(a) plan, depending on where you work. You can simply do this automatically through a retirement account from your employer. You pick a percentage of your income, and this amount is deducted from each paycheck. The key here is to select at least the percentage your company matches.

For example, if your employer matches up to 3% in their 401(k) plan, you should save 3% of your income for retirement. The total is 6% of your annual salary. Suppose you earn $40k annually, and 6% of $40k is $2,400. At first, this amount does not sound like much. However, it adds up over time, and investment gains add to the total value. Furthermore, you can increase the percentage each year to account for an annual cost of living raise. A goal is to save at least 15% annually in a retirement account.

Save to Invest

The third part is to save money for investing. It is unlikely that saving for an emergency fund or just retirement alone will make you a millionaire. It is possible, but the average retirement plan account is not a million dollars. Therefore, you will likely have to invest some money outside of a retirement plan to become a millionaire.

Stay Out of Debt

Debt is a reality of life. Few people can afford the high-budget items with their own money. If that is the case, you may already be a millionaire, and this article may not help you. The big-budget things in life are expensive. College costs tens of thousands of dollars. Even state schools are starting to get pricey. A basic family car is at least $40,000. If you are purchasing a home, you will likely need a mortgage. Even though debt is necessary for many items, you should not overdo it. The majority of millionaires have no debt, and most wait until they can pay cash for big-budget items.

In addition, some debt is not productive. Credit card debt can get out of control. Financing a car with a loan can be expensive, especially if your credit rating is not good. Student loans must be paid and can be with you for life. However, if debt is a reality in your life, consider paying it off by the Avalanche or Snowball method as quickly as possible.

The bottom line is that paying yourself by saving and investing is better than paying excessive interest payments to a bank or loan company.

Invest Money

The fourth step in how to become a millionaire is to invest money. You should start early and invest consistently. Following the methodology discussed in this article, you will need a few decades to reach millionaire status. It seems like an extended period, but it works, as seen in the many examples of dividend millionaires.

Invest for Retirement

In the case of retirement investments, the simplest and easiest method is to pick a diversified Target Date Fund, also known as a Lifecycle Fund. First, the fund and asset allocation are chosen by the investor. Then, the fund periodically rebalances based on age as you grow older. The idea is to reduce risk and ensure that the money is available at retirement.

Invest Outside of Retirement

However, in the case of non-retirement investments, there are several choices. My preference is for investing in dividend growth stocks, which have many advantages and few disadvantages. However, many investors like investing in passive index funds from Vanguard. For passive index investing, pick a portfolio strategy with a history of working, such as Warren Buffett’s Two-Fund Portfolio, the Bogleheads 3 Fund Portfolio, or the Coffeehouse Portfolio.

In either case, time makes an enormous difference. Suppose you start at age 22 and put $465 per month into your retirement account; then, you can reach millionaire status in four decades at age 62. This calculation assumes a 6.5 % total return after subtracting inflation and expenses. Suppose you reduce the time to 30 years; then, you must put away $940 per month to hit the $1 million mark. On the other hand, if the time is stretched out to 50 years, you need only save $330 per month to reach millionaire status.

Final Thoughts on How to Become a Millionaire

Many people want to become a millionaire. This dollar value provides some measure of security for retirement. It may also offer financial freedom depending on your retirement expenses. Almost anyone can follow the principles outlined above. All you need to do is earn money, save money, stay out of debt, invest money, and repeat. Keep doing it for a few decades, and a small amount of money each month can make you a millionaire.

Related Articles on Dividend Power

• Millionaire Interviews
• Is $1 Million Enough to Retire? It Depends

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