While becoming a millionaire in your 40s may seem difficult, it’s something that many people can achieve. All it takes is the right mindset and a laser-sharp focus toward building wealth and increasing your net worth.
There is something about knowing that you have a million dollars that shows you that you are on the right track financially. But how do you get there? If you want to increase your chances of getting to $1 million in your 40s, there are certain habits that will help you achieve that milestone faster.
Read on for the habits that will help you build wealth and reach the seven-digit milestone.
Becoming a Millionaire in Your 40s
For the average person, becoming a millionaire conjures up thoughts of winning the lottery or getting a large inheritance. However, with the right mindset and focus, many people can achieve this milestone in their 40s without buying a single lottery ticket.
While being the proud owner of seven figures won’t make you rich, it will give you a sense of financial security. It can show you what hard work and dedication can do if you invest the time and follow the habits of self-made millionaires.
Looking at your accounts and knowing you have a million dollars is a visual representation of your hard work. If your goal is to become a millionaire in your 40s, one of the best things you can do is get financially savvy so you can make the most of every dollar you earn.Habits of Millionaires
Certain habits can help you move closer to becoming a millionaire, while others will pull you in the opposite direction. If your goal is to reach the double comma club in your 40s, below are some guidelines to help you get there faster.
Save more than the average person
It’s commonly recommended that the average person saves 12 to 15 percent of their income for retirement. However, if you want to become a millionaire in your 40s, such a low savings rate won’t cut it.
Let’s look at an example. James graduates college and gets a job at age 22 making $50,000 per year. He goes with the common recommendation of saving 12 percent of his income and enjoys a 5 percent raise every year. If he invests his money in the stock market with an average return of 7 percent, he would have $519,490 by age 45.
His friend Richard has always been an over-achiever. He also graduates college and starts a job at age 22 making $50,000 per year. However, he decides to save three times as much as the common recommendation, putting away 36 percent of his income. Keeping all other variables the same, he ends up with a cool $1,048,357 to his name by age 45.
As you can see from the example above, if you want to become a millionaire in your 40s, you need to go beyond common wisdom. The more money you can save and put to work earning interest, the faster you will reach the million-dollar mark.
You can boost your savings rate further by stashing away your bonuses and other financial windfalls. Every time you get a big bump in salary or an extra check, make sure you put at least half of it toward your financial goals.
If you want to become a millionaire in your 40s, you can’t settle for the status quo. Focus on keeping as much of the cash that comes your way as possible. Keep adding to your stash and invest it so it continues to grow and earn money, taking advantage of compound interest.
Live within your means
While it seems like a simple idea, living within your means is harder than you may think. Every day we are bombarded with temptations of things we deserve to have because we work so hard. From ads to TV shows and movies, even our neighbors and friends, everywhere we look there is something we want and must have now.
Many people give into the temptation to buy what they want when they want, using credit as a way to afford more than their paycheck allows. From fancy furniture to a shiny new car, it’s easy to get sucked into the vortex of living beyond your means.
If you want to become a millionaire in your 40s, you need to learn to live within your means. Only buy what you can afford on your salary while still stashing away some serious cash and letting your money grow.
Limit how much debt you take on and only use it for bigger purchases such as a house. If there is something you want but can’t afford, save money from each paycheck until you have the cash to buy it outright.
Pay yourself first
Many people spend their paychecks before the money hits their bank account. Between bills, a mortgage, and car payments, the money disappears quickly and easily. Saving money is usually an afterthought, using whatever is left over after everything else is paid.
If your goal is to become a millionaire, you need to switch around how you think about your money. You need to make paying yourself a priority and shift your financial life to accommodate this approach.
Instead of waiting to see what is left over from your paycheck before you put any money into savings, make it a habit to pay yourself first. The first transfer from your bank account after your paycheck hits should be to your savings account.
Decide how much you want to set aside from your pay and pull that money out first. Create a budget based on the difference to ensure you can meet all of your financial obligations.
Better yet, ask your employer’s human resources department if they can withdraw the money from your paycheck directly. That way you will never see it hit your bank account, so you won’t miss it. This works especially well with retirement contributions to employer-sponsored plans.
One of the quickest ways to drain your paycheck is by taking on debt. When you owe someone money, part of every dollar you make is already spent before it even hits your bank account. It’s the fastest way to living beyond your means as you take on more debt to afford things you can’t pay for with the money you make every month.
The less debt you have, the more money will be available to set aside toward your first million. Every dollar you can save and invest will grow exponentially, taking you that much closer to the seven-digit club.
Focus on eliminating your debt, starting with the highest interest first. Put every extra dollar you have toward paying down the balance and getting rid of the added financial weight. Avoid taking on new debt that will further enslave you to your paycheck.
Learn how to invest
If you want to become a millionaire in your 40s, you need to start putting money in the stock market early to take advantage of compound interest. Every dollar that you invest will earn interest and add to your balance.
You should spend some time understanding the basics of the stock market so you have an idea of how you can make your money grow. However, don’t spend any time trying to time the market as even experts can’t outperform the market.
Instead of trying to beat the market, focus on building a diversified portfolio of stocks and bonds. Keep adding to the balance to take advantage of dollar cost averaging and rebalance your portfolio on a regular basis.
Increase retirement contributions
If you have an employer-sponsored retirement plan through work, check to see if your employer offers a match. Many employers will match dollar for dollar your retirement contributions up to a certain amount.
Make sure you’re contributing enough to get the full match. It’s like free money that continues to grow right along with the contributions coming out of your paycheck. For example, if your employer offers to match dollar for dollar up to the first six percent of your salary that you stash away in your retirement account, it’s like saving 12 percent.
Tax-advantaged retirement accounts such as 401(k)s and traditional IRAs are a great way to increase your wealth and get to the one-million-dollar mark. Since the money is exempt from taxes until retirement, you get to earn interest on the full contribution amount, which makes it grow faster.
Increase your retirement contributions with each pay raise or more often, if you can. Since the money comes out of your paycheck before it hits your account, you never see. If you time it with your pay raise, you won’t really feel the pinch of a smaller paycheck.
Buy appreciating assets
One of the best ways to increase your net worth and your wealth is by focusing on spending your money on appreciating assets. One example of an appreciating asset is real estate where the value increases year-over-year in most cases.
On the other hand, a purchase such as a car is a depreciating asset. The moment you drive a new car off the lot, it quickly starts to lose its value. In the first year of ownership, a new car loses 20 percent of its value. This means that if you spend $40,000 on a new vehicle, within one year, you would have lost $8,000.
Avoid taking out loans to buy depreciating assets such as a new car since it just compounds the loss. When your car loses value, you end up upside down on the loan, paying interest on an asset that’s not worth the full value of the balance.
Put your money toward buying things that increase in value over time such as real estate, stocks, and bonds. When you buy a depreciating asset, buy it used to avoid the steep initial loss in value.
Diversify your investments
If you want to become a millionaire in your 40s, you need to keep adding to your savings and investing the money, so it has time to grow. However, having all of your eggs in the same basket makes it more likely that you will lose the value of your investment if something happens.
For example, people who were heavily invested in real estate saw the value of their portfolio sharply decline when the real estate bubble burst. This is why it’s important to have a variety of investments that can help you spread your risk.
The best way to build wealth and protect your assets is by diversifying your investments. Don’t just put all of your money in stocks or in real estate. Instead, pick a few different asset classes for your cash and spread your risk.
It’s best to look for assets that have an inverse relationship. For example, a well-diversified investment portfolio contains a mix of stocks and bonds. That’s because they behave in different ways with the ups and downs of the market to balance out your earnings.
The Bottom Line on Becoming a Millionaire in Your 40s
If you want to become a millionaire in your 40s, you need to change your mindset. The more you save, the faster you will get to cross the seven-digit threshold. Common advice tells you to save 12 to 15 percent of your income but that won’t help you get to a million dollars by your 40s.
Talk to a qualified financial advisor who can help you define your financial goals and help you figure out the quickest way to achieve them. Use this as a financial blueprint to build wealth and join the double comma club by your 40s.
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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.