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All Contents © 2017The Kiplinger Washington Editors
By Stacy Rapacon, Online Editor
| Originally Published September 2015
Wealthy people usually aren't born that way. Most spend their lives amassing their fortunes by working hard, spending little, saving a lot and investing wisely. It may sound like a simple strategy, but the fact that the vast majority of Americans fall short of millionaire status proves that it's easier said than done.
Then again, 10.1 million households in the U.S. have $1 million or more in investable assets, according to market research and consulting firm Spectrem Group, and their ranks are growing. So it's not impossible.
Read on to learn what you might be doing to keep yourself out of the millionaire's club. More important, find out how you can change your ways and build a seven-figure nest egg worthy of a one-percenter.
Accumulating wealth starts with your first paycheck, and some jobs can get you going faster than others. According to Fidelity's Millionaire Outlook Study, many wealthy people today work in technology, finance and medicine—fields that are well represented in our list of the best jobs for the future. Positions in these areas have generous salaries and are in high demand. For example, our top job, nurse practitioner, has a median salary of nearly $93,000 a year. In contrast, a tile setter, among our worst jobs for the future, can expect to make about $34,000 a year. Of course, given enough time and the right saving and spending habits, you can build a fortune even with a small salary. But a higher income can certainly make it easier to save more, faster.
If you're still in school, majoring in a promising field can put you on the path to a lucrative career and help make you a millionaire. But remember: You'll have an easier time working hard for the rest of your life if you have a legitimate interest in your chosen profession.
If you're past your college days, you can still learn some skills to advance your career and increase your earning potential with free online courses. Also consider supplementing your income with a side gig, making money off of an existing hobby or interest.
Cash stuffed under your mattress or even deposited in a savings account won't keep up with inflation, much less grow into $1 million. In order to maximize your gains, you need to invest your money wisely. In many cases, that means putting your money mostly in stocks.
Consider the math: According to Bankrate.com, the highest yield you can expect from a money market account right now is 1.11%. If you put away $10,000 in one and added nothing else, in 10 years, with monthly compounding, you'd have about $11,200 total. But if you invested that $10,000 and earned a 6% return (a reasonable estimate, considering that Standard & Poor's 500-stock index has gained an average of 7.1% a year over the past decade through late September), you'd have almost $18,200, or $7,000 more.
There's no denying that the stock market can take you on a bumpy ride, so your fears are understandable. But steeling yourself and diving in is well worth it. Over the long term, stocks have marched upward and proved to be the investment of choice for expanding wealth. For example, since 1926, long-term corporate bonds have returned about 6% a year, on average, while large-company and small-company stocks have gained 10% and 12%, respectively. No wonder 75% of millionaires invest in stocks while only 39% of them invest in bonds, according to Fidelity.
Savings earmarked for retirement are particularly well suited for the stock market. With a long time horizon, you have time to recover from market dips.
If you don't save money, you're never going to be rich. It's hard to get around that obvious (but often ignored) principle. Even if you earn seven figures, if you spend it all, you still net zero.
Begin saving as soon as possible. The sooner you start putting your money to work, the less you actually have to save. If you start saving at age 35, you'll need to put away $671 each month in order to reach $1 million by the time you turn 65, assuming you earn an 8% annual return. If you wait until you're 45 years old to start saving, you'll have to save $1,698 a month to hit $1 million in 20 years.
How can you start saving? First, you need a budget (more on budgeting later). Lay out all of your expenses to see where your money is going. Then, you can figure out where you can trim costs and save. Any little bit you can muster is a good start. And whenever you get a bonus or some extra cash—for example, after selling some belongings or getting a generous birthday gift—add it to your savings before you have time to think of ways you can spend it.
Spending more than you earn can put you in a dangerous hole of debt. On the bright side, you won't be in there alone: According to the National Foundation for Credit Counseling, one in three American households carries credit card debt from month to month. And among those indebted households, the average outstanding balance is $15,706, according to financial research firm Nerdwallet.
Again, you need to have a budget to make sure you have more money coming in than going out. With the availability of credit, it's easy to fall into thinking you can afford more than you actually can. But, as Knight Kiplinger has pointed out, "the biggest barrier to becoming rich is living like you're rich before you are."
Even once you are rich, you may still want to live like you're not. According to U.S. Trust's Insights on Wealth and Worth survey, the majority of millionaires don't actually consider themselves "wealthy." If you don't think of yourself as well off, and you maintain the same lifestyle after your income and savings increase, you can put away even more for your short- and long-term goals without losing an ounce of comfort.
No, we're not suggesting that you search for loose change under your sofa cushions. Rather, cutting seemingly insignificant expenses—such as baggage charges on your flights, late-payment penalties on your bills and out-of-network ATM fees on your cash withdrawals—can add up to substantial savings.
Investing fees attached to mutual funds and 401(k) plans can be especially detrimental. For example, let's assume you currently have $25,000 saved in your 401(k) and earn 7% a year, on average. If you pay fees and expenses of 0.5% a year, your account would grow to $227,000 after 35 years. But increasing the extra charges to 1.5% annually would mean your account would grow to just $163,000 over that time.
More than you realize. Pay attention to the fine print, and avoid those sneaky extra charges. You can skip airline baggage fees by packing lightly and bringing only a carry-on or by flying Southwest Airlines, which allows you to check two bags free. If you make a late payment on a credit card, ask the issuer to waive the fee. Long-time customers who usually pay on time are often given a pass. For more, see How to Avoid Paying 21 Annoying Fees.
For your 401(k), you can see how it rates with other plans at www.brightscope.com. You can select low-cost mutual funds to lower your investing costs. Check out the Kiplinger 25, a list of our favorite no-load funds, as well as the 28 best popular funds in 401(k)s. Also consider talking to your employer about the possibility of lowering the plan's fees.
Again, debt can be a danger to your financial well-being. If you're constantly paying credit card bills and racking up interest, you won't have a chance to save any money.
But not all debt is bad. Borrowing to go to school, to get professional training or to start your own business can help boost your career and income potential. Especially in a low-interest-rate environment, the investment can be well worth it. In fact, 39% of millionaires say that borrowing allows them to put their cash to better use, according to U.S. Trust.
If you already have some debt troubles, be sure to devise a repayment plan. One strategy is to pay off the debt with the highest interest rate first. The sooner you clear that away, the more you save on interest. Another strategy is to pay off the smallest debt first to give yourself a psychological boost and encourage you to keep chipping away.
If you're considering taking out new loans—to go back to school or seed your business, for example—make sure you understand all the terms, including your interest rate and repayment details, so you can decide whether it's truly worth it.
You need to work to make money, and you need to be healthy in order to work. The rich understand that, and 98% of millionaires consider good health to be their most important personal asset, according to U.S. Trust.
Take care of yourself—and do it on the cheap. You can take advantage of free wellness programs offered by your employer, as well as free preventive-care services guaranteed by federal law, such as blood pressure screenings, mammograms for women older than 40 and routine vaccinations for children. Also try to quit any bad health habits, such as smoking or excessive drinking, that can cost you dearly (see Six Healthy Habits That Will Save You Money).
Without a budget, it's easy to lose track of how much you're spending and live beyond your means. Working toward financial goals, such as saving for a vacation, buying a house or funding your retirement, can also prove difficult if you don't have a well-thought-out plan.
Do what the majority of millionaires do: Establish a budget. Knowing where your money is going helps you identify ways to keep more in your pocket. Break out the pencil, paper and calculator to lay out your income and expenses.
Or go digital with your finances by using a budgeting Web site such as Mint or BudgetPulse to help you track your spending. With Mint, you provide your usernames and passwords for bank accounts, credit cards and other financial accounts, and the site organizes your money movement for you. Your bank or credit card issuer might offer similar tools to help you analyze your spending habits.
Did you get a tax refund this year? Receiving that lump-sum payment from Uncle Sam may seem like a good thing. But it actually means that you've loaned the government money without earning any interest.
Adjust your tax withholding. You can use our tax-withholding calculator to see how much you can fatten your paycheck by doing so. If you got a $3,000 refund (about average for 2014), claiming an additional three allowances on your Form W-4 can boost your monthly take-home pay by $250. The extra money, which can be invested in stocks or deposited in an interest-bearing account, should start showing up in your next paycheck.
Such a sum may not lend itself to millionaire status on its own, but being mindful of taxes is important to increasing—and keeping—your wealth. Indeed, 65% of millionaires prioritize minimizing taxes when it comes to investment decisions. A couple of smart tax-planning strategies you should consider: picking the right tax-deferred retirement savings accounts and holding investments long enough to qualify for the lower, long-term capital gains tax (see 8 Smart Tax Moves to Make Now). Even choosing the right state to live in can have a big impact on your finances when it comes to taxes—see our State-By-State Guide to Taxes.
There's more to life than money, and wealthy people know it. According to U.S. Trust, 94% of millionaires say they have a clear sense of purpose in their lives. "Whatever that purpose or direction happens to be—whether it's their family, their family legacy, philanthropy or stewardship of a business—[knowing their purpose means] they have the emotional maturity to focus on it and make decisions in the context of what's most important to them," says Paul Stavig, managing director and wealth strategist of U.S. Trust.
Entire religions and philosophies are dedicated to helping people figure out what they're meant to do in this life. We won't try to compete. But we will note that a clear purpose can help motivate you to make and save more. Indeed, 76% of millionaires recognize that money can give you the opportunity to create change and fulfill your life's purpose.
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