Boost Your Profit MarginA profit margin isn't strictly reserved for businesses; it also applies to you. "By increasing the gap between what you earn and what you spend, you end up with a profit in exactly the same way a business earns a profit," said J.D. Roth of personal finance blog Money Boss. "This profit can then be used to pursue your long-term financial goals."
Start With $10 Million"Start with $10 million" is actually a joke, and it reflects how our brains tend to trick us into doing the wrong thing when investing. The best way to circumvent our "inferior mental angels" is to learn about investing, create a plan and stick with it.
Our psychology often works against us, said Kirk Chisholm, principal at Innovative Advisory Group. It's not difficult to make a million with investing—if you start young enough and avoid psychological pitfalls, such as following the crowd.
Avoid trading in and out of your investments. Create a sound investing plan, invest through thick and thin and over time you can become a millionaire. Those who buy and sell more frequently tend to underperform compared to those who buy and hold, according to Vanguard Research.
Turn Your Passion Into a BusinessPassion alone won't make your first million. There's no substitute for luck and flexibility. "Find something you are truly passionate about, become the authority and make a business out of it," said Joseph Carbone, wealth advisor at Focus Planning Group. "Not only will you be happy, but you probably will be very successful."
The Chipotle story illustrates this. After finishing culinary school in 1993, Chipotle founder Steve Ells was excited about starting a fine-dining restaurant. Lacking funds for the upscale place, he took a small loan from his father and opened his first Chipotle, to raise money for his exclusive restaurant. After selling 1,000 burritos in the first month, his passion for cooking veered from a high-end restaurant into a successful path to wealth, with the popular Chipotle Mexican Grill restaurant chain.
Invest EarlyGetting rich can be a matter of mathematics. It's well documented that investing in the stock market over many years, reinvesting your dividends, and letting that money grow and compound can make you a millionaire. But it's also a matter of knowing how much to invest, in what types of mutual funds and for how long.
You can find out how much you need to invest, for how long, and at what return with a simple calculator. Todd Tresidder, former hedge fund manager and owner of the wealth-building website Financial Mentor, developed a calculator to help with this. For example, you can calculate that if you invest $500 per month in a diversified stock market index fund—such as the Fidelity Total Market Index Fund—and earn an average 7 percent return—assuming a 2 percent inflation rate—you will be a millionaire in 36 years.
Be PatientRegardless of the path you choose to get rich, it will take time. Investing in the stock market takes years for your money to grow and compound. Starting a business and nursing it to success doesn't happen overnight. When it comes to the math of compounding returns, the greatest financial growth occurs in the later years.
"Making your first million will often take longer than making your second," said Daniel Zajac, certified financial planner and partner at Simone Zajac Wealth Management Group, and founder of the blog Finance and Flips Flops. "Whether it's through building a business, or years and years of saving, the first million is often the hardest. Stay committed, stay patient and keep your eyes focused on the goal."
Invest in Real EstateInvesting in real estate has long been a path to wealth. However, it's much easier to initially invest in real estate in lower-cost-of-living areas. If you live in San Francisco or New York City, you might want to invest in an up-and-coming area.
Paula Pant, an owner of the personal finance blog Afford Anything and resident of Atlanta, Ga., is building wealth with a real estate portfolio. Save enough to make a down payment on a rental property with a strong positive cash flow, she said. This means that after you pay the bills, there's money left over to go into your bank account.
Over time, as you pay off the mortgage, you'll ultimately own the property outright. Pant suggested starting with one property and repeating until you reach $1 million.
Adjust Your LifestyleDiscard the myth that millionaires all spend with abandon and live high on the hog. In the book, Millionaire Next Door, award-winning authors Thomas J. Stanley and William D. Danko studied how individuals became rich, and their findings were surprising.
"Many people who live in expensive homes and drive luxury cars do not actually have much wealth," they wrote. "Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods."
Max Out Your 401kThe government gives you a wealth-building gift: the 401k account. Here's how you can use it to make your first $1 million:
- Enroll in your employer's program and invest the maximum amount allowable by law—that's $18,000 in 2016, and an additional $6,000 catch-up contribution for those over age 50.
- You gain an immediate reduction in your taxable income for any contribution into the 401k. So if your income is $60,000, and you contribute $18,000, you're only taxed on $42,000.
- As long as the money remains in the account, it grows and compounds tax-free.
Be a Wealth-Building HustlerIt might sound obvious, but if you want to make your first million, choose a side gig to earn more cash. If you're making just enough to pay for rent, food and utilities, it's unlikely that you'll get rich. You don't need to be brilliant to become a millionaire, but you do need to be disciplined, hard-working, and creative.
Wealthy entrepreneur and businessman Mark Cuban started creating income streams at age 12. He sold packages of trash bags so he could afford to buy the shoes he wanted, according to Biography. In high school, he peddled stamps and coins for extra cash.
Avoid a Self-Defeating MindsetWealth-building is as much a mindset as anything else, so it's important to make sure you eliminate beliefs that will work against you. If you want to make your first $1 million:
- Don't think anyone owes you a living.
- Don't expect something for nothing.
- Don't take on any consumer debt. If you don't have the cash to buy something, then you don't need it.
- Don't get distracted. If getting rich is your goal, persist through obstacles.
- Don't avoid education. Learn the skills to excel in your chosen pursuits.
- Don't be afraid to take on an extra side hustle.
- Don't keep up with the Joneses. They're neck-deep in debt.
- Don't forget others. Giving seems to beget reciprocity.
Invent SomethingIf you have a lot of really great ideas, take your best one and monetize it. It doesn't matter if it's a product or service, as long as people are willing to pay up for the benefit it offers.
Grow Your InheritanceYou might think a relatively small inheritance—e.g., $25,000 to $75,000—won't go too far, but you can really cash in by allocating the funds wisely. Marc Johnston-Roche, the co-founder of Annuities HQ, acknowledged the temptation to splurge with your newfound worth, but advised investing instead.
"Work with a financial planner to create an asset allocation strategy that's suitable for your age group," he said. "This strategy will vary based on how much risk you're willing to take, and how much time you're planning to invest these funds for. It's definitely not a one-size-fits-all approach, so it's important to get some professional guidance."
To realize significant growth, Johnston-Roche recommended leaving the funds relatively untouched for the next five to 10 years.
"Additionally, by investing your money now and letting it grow, you'll be able to take advantage of compound interest," he said. "Compound interest can accrue significantly over time when you reinvest earned interest rather than paying it out."