The chances of winning the lottery or inheriting a lot of cash could be low, but the odds of becoming a millionaire may be higher.
Saving and investing smarter rather than the old way can get you to where you want.
1. Start young
If you start young, you have a great shot at becoming "The Millionaire Next Door." If you invest the money you save, the power of compound interest combined with the investment returns can grow your assets exponentially.
You can potentially go from saving $5,250 a year starting at age 25 to over $1 million by the time you are 55 if you earn an average of 10.3% on an annual basis.
A portfolio with all stocks could offer a rate of return of 70%. Although you could target this rate of return when you are young, you may discover that the time is right to minimize your stock allocation as you near retirement.
If you do that, your volatility is reduced but you earn a lower rate of return. You can compensate for this lower rate of return by adjusting your contribution percentages annually.
Calculating the quantum of your investing success requires factoring in how much you've already saved, how many years it will take you to reach your millionaire goal, as well as your new rate of return.
2. Consistency is key.
The assumptions that calculate the potential amount of profits on your investment are made by assuming you are doing the same thing consistently.
It is not unusual for your account to lose money occasionally, but you may have a lot of gains in some years. On the other hand, you might lose money in some years as well.
The average rate of return that predicts the potential growth of your account is derived from these different numbers. If you miss one of your best years, your account could have changed greatly.
As an example, if you stayed away from 2013's 32.4% gain, you would've lowered your average rate of return by nearly 3 percentage points to 11.25%.
Your savings goal may get greatly affected by years when you cannot contribute to your account. The more years you miss, the more difficult it will be to reach it.
In the event you skip a year, you ought to recalculate your contributions going forward and make any necessary adjustments.
3. Maintain a check on expenses
Those who believe that only their income contributes to how much they can save are mistaken.
Nevertheless, how much you spend every year may be even more in your control. Instead of waiting for your next pay cut to start saving more, cut your expenses and increase your savings rate even more.
By preparing a monthly budget you can manage your finances. To do so, first, keep a meticulous record of what you spend on a monthly basis, and then segment your spending into things you might want and things you might need.
We cannot eliminate essential expenditures like your mortgage or rent. However, expenses like your entertainment budget and travel could be lowered, thus allowing the savings to be redirected to help you become a millionaire.
4. Make wise investments.
A portfolio that is too conservative or too aggressive could hurt your chances of achieving your goals. A conservative portfolio may not enable you to grow your assets in the amount of time you require, while an aggressive portfolio may make it difficult for you to weather current market conditions.
Your risk tolerance and your comfort level with volatility should be taken into account when choosing an asset allocating model.
You can learn more about your investment objectives by taking a simple quiz that evaluates your attitude towards volatility and your time horizon.
5. Remind yourself to check your accounts regularly.
Stocks often move upward in the long run, but those movements are not always smooth.
Regardless of how well diversified you are, different asset classes will drift over time. Not managing them correctly can result in subpar investment returns.
When large-cap stocks didn't do well in 2008, investment-grade bonds did well. 60% stocks and 40% bonds would've changed to 47.3% stocks and 52.7% bonds in a portfolio consisting of 60% stocks and 40% bonds.
After the market rose in the following year, this new allocation would've underperformed the previous one.
Make sure no changes are needed to your accounts by reviewing them at least once a year. The review is an opportunity to assess how well you are doing, or if you need to adjust your goals as necessary.
You do not need the fortune to be the millionaire next door. But patience, consistency, and diligence are necessary. Making small adjustments can help make saving a habit and reduce the stress of saving for such a lofty goal over time.