The title of this blog post may sound cheesy and conjure up images of the slick businessman with greased back hair, preying on the poor and unsuspecting in order to make a quick dollar. In fact, that's not what most millionaires are. Just as the majority of businesses in the United States are "small businesses", the majority of millionaires in the U.S. are average, everyday Americans who built the wealth themselves and/or with spouses. The majority don't inherit boatloads of money and it's usually hard work and ingenuity that pay off in the long run both professionally and monetarily.
In fact, education is typically the main determinant of who will become wealthy. A recent study by Spectrem Group found out that, "Households with over $1 million are more likely to have a graduate degree than those in the $100,000 to $1 million segment. Thirty four percent of Millionaires have an advanced degree and 30% of the ultra-high net worth are similar. Fifteen percent of the UHNW are Doctors, 17% have a MBA and 6% are lawyers."
All of this data leads me to the recent report that the U.S. millionaire population is nearing its 2007 peak of 9.2 million households. Currently, there are roughly 8.4 million millionaire households in the United States. So, how did this number grow 8% in 2010 and 16% in 2009? It's evident that our perception of millionaires as rich, jet-set types who are disconnected from the general public is way off base. Why? Because millionaires are the general public. They're your small business owners, accountants, doctors, lawyers, teachers and firemen...among countless other occupations. Ultimately, the question is - how did they get there? This leads me to my main point - how to become a millionaire.
Becoming a millionaire is easy once you've gotten the education part down (and provided you have a job). You need to do two things: 1). Keep costs low while not sacrificing personal well being 2). Max out Roth IRA contributions and/or 401(k) contributions while receiving an equal employer contribution in the 401(k) 3). Invest systematically in index funds
This may sound too simple but the answer is that simple. First, when you keep costs low, you'll get to keep more of the net income that you bring in via your paycheck and by not sacrificing personal well being (something many cost cutters do), you'll be happier and much more likely to have the drive to work hard and go out and do a good job day after day. Even better, you'll enjoy life! There's no reason to be a miser or a cheapskate because we only live once and we can't take it with us as they say.
Secondly, max out your Roth IRA contributions. Roth IRAs are retirement accounts that allow your current after-tax earnings to compound tax free. Right now, Gen Y can contribute $5,000 to their Roth IRA accounts. This is great for investors because you will not have to pay taxes on any of the earnings when you start withdrawing from the account. Also, take advantage of your employer's 401(k) plan and be sure to max out your contributions to the plan (if feasible) so you receive the biggest employer match - you're basically receiving free money by doing this.
Lastly, systematic investment in index funds is the surest way to build long-term wealth. Consider this: At age 30 you are armed with an MBA and a job that pays $80,000 (roughly the average MBA's salary). You have $35,000 saved already and invest $9,600 a year ($800 a month) for 30 years at a 7% return. Even if you didn't add anything additionally along the way, you would end up with $640,394.62. Talk about the power of compounding!
Through education, hard work and systematic investment, becoming a millionaire is easier than it seems. As long as you stay dedicated and disciplined throughout the process, you will have a great shot at joining the 8.4 million other households who consider themselves millionaires in the United States.