These days, having a million dollars to your name is nowhere near as impressive as it used to be. And yet, putting away $1 million in savings account is a major goal that most people never realize. In fact, findings by research firm Spectrem Group show only 7 percent of American households ever do it.
But that doesn’t mean your dreams of becoming a millionaire should be tossed aside. What’s often needed to reach the million-dollar benchmark that most people are missing is a solid plan of attack to get there.
For instance, the chart below shows how much money you could plan to save each month, depending on time frame and estimated annual return.
Of course, this all works well in theory — if you know of a way to earn 10% a year, please, sign me up.
So in addition to making a concerted effort to sock away serious cash every month, there are a number of additional strategies you have to put in place if you ever hope to contribute one million dollars to your savings in your lifetime.
7 Ways to Become a Millionaire
1. Pay Yourself First
This “pay yourself first” rule of thumb means making saving money a line item in your budget, and making it the top priority — even above bills. The only way to ensure you hit aggressive savings goals is by putting the money away before rent, car loan payments and groceries can eat it up.
Andrea Travillian, president and founder of Take a Smart Step, agrees, “My husband and I have found the key to building our nest egg early has been to save from the start and make that a priority…our savings is the first budgeted item.”
2. Start as Early as Possible
As you can see from the chart above, the sooner you start saving money, the easier it is to reach $1 million. It’s tempting to put off saving money, but don’t bank on a higher salary or future windfall — even someone who makes up for years of no savings and contributes the same amount of money toward their million dollar goal as another younger person will end up with less savings overall.
It’s because of the same reason why the first $100,000 is the hardest to save: Compound interest. The more money you have over a longer period of time, the easier it becomes to save even more.
“This is the snowball down the mountain that turns into an avalanche,” explains “Uncle Bill.” “The growth comes from the compounding as the investments pay off. It is getting started that is the hard part.”
3. Take Advantage of Your Employer Match
If retirement savings make up a part (or all) of your million dollar savings goal, you can eliminate some of the heavy lifting on your part and take advantage of free money. Most employers offer a match to employees’ retirement savings — either a percent of salary or percent of contributions. Either way, it’s an opportunity not to be passed up.
4. The $500 Plan
The Early Retirement Blog lists a couple of interesting strategies for reaching a $1 million savings goal — and in just 20 years. The first is referred to as the “$500 plan.” Essentially, you begin by saving $500 per month in your first year. Then each additional year, you increase your monthly savings by $100. So, for example, in 2013 you would save $500 each month. In 2014, you would increase your monthly savings contributions to $600. In 2015, $700, and so on.
This is a slow and steady approach that will get you to your goal more rapidly as time goes on. Obviously, though, it only works if you have substantial income to set aside every month.
5. Save Your Raises
So what if you don’t? The other strategy proposed by the Early Retirement Blog is the “Save Your Raise” approach. Assuming you currently make $45,000 per year, you should expect an annual raise of 5 percent. Don’t increase your spending along with your raises, and allocate raises toward savings. According to ERB, this will get you to $1 million in 20 years.
6. Increase Income (but not spending)
Even if you aren’t getting any raises, there are a plethora of options for increasing your income. Give yourself a raise instead by exploring these options, and follow the same principles above to reach your million dollars.
7. Take on Some Risk
Finally, as evidenced by our chart above, you’ll never reach one million dollars by depositing your money in a savings account alone. A major savings goal requires the help of substantial returns, and the only way to realize necessary earnings is by taking on risk with market investments. Again, the sooner your start the more risk you can afford to take on and the easier saving $1 million will be.