How to Become a Millionaire in 5 Simple Steps

Are you on your way to becoming a millionaire? ...Do you want to be?

For some, the thought of having a million bucks seems ridiculous and impossible, especially without some high-dollar salary. But the fact is that becoming a millionaire is simple, even on a modest income.

If you have the discipline, building your net worth up to a million dollars or more takes nothing more than time. If you do not have the discipline, then even a $150,000 a year job will not help you reach a seven-figure savings goal.

Becoming a millionaire is about the simple, daily choices we all make. So, with that, let's see whether you are a millionaire in the making.

The Simple Math to Becoming a Millionaire

Let’s imagine that you were to contribute the maximum amount allowed to your 401(k) each year ($22,500 as of 2023), beginning at age 20. Assume that you then earn 9% on the money, with the balance compounding.

Your balance would easily grow to the $1 million mark before you are 45 (it would only take about 19 years, to be exact). Add to that a home you buy and live in for a long time, and your net worth would be well over the million-dollar mark, long before retirement.

If you increased your 401(k) contributions each year as the limits are raised for inflation, you'd reach the millionaire club even sooner.

If you think contributing the maximum each year to retirement is out of reach, how about $10,000 per year? Going this route, you would still have $1 million tucked away before you reached 50.

As you can see, the numbers make this sound easy. Here’s a fun millionaire calculator you can use. Try out different scenarios based on where your finances are currently, your realistic contributions, and how much you expect in returns.

Once you've charted your path to financial freedom, it's time to execute on the plan. Here are the five steps you need to follow.

Step 1: Earn a Reasonable Income

As the calculations above show, you do not have to make 6 figures a year to be a millionaire. Just maxing out your 401k contributions will turn you into a millionaire in about 20 years. But, you do have to make some money. You are never going to build wealth without some motivation to earn a reasonable income.

I hear from many folks that they are just tapped out. That every dime they make goes to the mortgage payment, food, utilities and just getting by. For some, that's true. For others, it may be more perception than reality. But the real question is whether you are willing to make some changes either in what you make, what you spend, or both, to improve your finances.

For example, if your job pays you just enough to get by, then figure out a way to make some extra income.

One of the things I do to earn extra income is blogging. Just on my blogging income alone, if I saved all of it, I’d be a millionaire in under 20 years. Blogging is not for everyone, of course, but the point is that there are many ways to generate extra income to help fund your retirement.

Find one that works for you, and get started today.

Step 2: Invest 10% (or More) of Your Income

How much you earn is just part of the equation. The bigger factor is actually how much you save and don't spend.

Even for those who make a lot of money, if they spend everything they make, they will never build wealth. Sound money management dictates that you invest at least 10% of what you make, though 15 to 20% would be even better.

How to invest your money is the easy part. With the mutual funds available today, finding low-cost well-diversified investments is really simple to do. But the key is saving at least 10%.

Depending on how much you make, this may not seem like much at first. But give it time, and it will add up quickly. Before you know it, your investments will be producing more annual income than your job. This is how investing creates millionaires.

Step 3: Avoid Consumer Debt

If you are unable to invest at least 10% of your income, you need to figure out why. Then, you need to find a way to make changes.

For many, you may be unable to set aside that much because of consumer debt. Consumer debt--whether on credit cards, a home equity loan, or a personal loan--is arguably the single biggest cause of financial pain in American households.

I'm a big believer in taking advantage of great credit card offers, particularly cash back, travel rewards, and 0% balance transfer offers. In fact, those can be great ways to earn free money and rewards with your everyday spending. But with the exception of balance transfer cards, you should avoid keeping a balance on credit cards. Credit cards should not be used to fund a lifestyle that one cannot afford.

If you are in debt, your first focus should be paying down and climbing out of consumer debt entirely.

To get started, check out our free debt snowball calculator.

Step 4: Take Advantage of 401(k)s and IRAs

The government has given us some great tools to defer the taxes we must pay on our investments. This makes saving for retirement (and becoming a millionaire) even easier.

If you invest in taxable accounts, you know just how significant taxes can be. Depending on the tax policy of the federal government, taxes on capital gains could be changing substantially at any given time. So, it is important to shelter as much of our investments from tax as we can.

Enter 401(k) and IRA retirement accounts.

In addition to the tax deferral, many employers match employee contributions to their 401(k) accounts. If your employer offers a match, it would be very wise to take advantage of it -- otherwise, you’re just leaving free money on the table.

If the match is in company stock, I would diversify my investments as quickly as company policy allowed. When I worked at a public company, my rule of thumb was never to hold more than 10% of my investments in my company's stock.

Step 5: Set Aside All Windfalls

If you're having trouble saving 10% or more of your income, or maxing out your tax-advantaged retirement savings, reaching millionaire status can take even longer. Or perhaps you want to speed the process along and meet your goal even sooner.

This is where capitalizing on any financial windfalls comes into play.

Does your company give a holiday bonus each year? Perhaps your Great-Uncle Tim passed away and left you a nice little sum. No matter the source, it would be wise to set aside any cash windfalls that come your way, and invest them right away.

This will boost your portfolio substantially, and you won't even feel the pinch since that is "extra" money anyway. However, over time, that extra money can make a serious dent in your millionaire goal.

3 Average People Who Became Millionaires

With the right attitude and values, you can become a millionaire too. Generally, it doesn’t take a lot of luck or good fortune. It simply requires you to do a few simple things that others may not be willing to do.

The 35-Year-Old Millionaire

In his early 20s, Chris Reining didn’t have a lot of extra money laying around. However, he knew the importance of saving early and often. So, he started investing about $500 a month. Eventually, that money grew into over $1 million by the time he turned 35. He didn’t do anything special. He just lived simply, invested consistently, and practiced patience through the market swings. He stuck with his plan and understood the power of compounding interest.

At his blog, Mr. Everyday Dollar, Chris writes, “You might think when your account rolls over to seven digits that fireworks light up the sky, confetti falls, and champagne starts flowing. I can tell you that doesn’t happen...Honestly, the financial milestone that really mattered to me was making my first $1K from investing. That meant my investments could make me $10K, which meant they could make me $25K, and so on.”

The Mommy Millionaire

According to Jen Smith, her parents were intelligent, hard-working adults. Unfortunately, they always lived paycheck to paycheck. Jen eventually married her husband, a construction worker who made just $8 an hour, and drifted from one minimum wage job to the next. Eventually, she realized that she was just one missed step away from being homeless.

Jen made it her mission to learn about personal finance, entrepreneurship, investing, and building wealth. The couple saved as much as they could, lived on less, and followed her financial plan. By age 40, they were debt-free with a net worth of over $1 million! “The morning I calculated our net worth to be north of one million dollars, we were living in a rented apartment, driving a six-year-old car, and wearing used consignment store clothes,” writes Smith. “At age 40, we were closet millionaires.”

The 10-Year Millionaires

Justin McCurry went to law school, but he never worked as a lawyer. His wife also attended law school, but she never made law her profession either. Still, they became millionaires and retired at age 33. So, how'd they do it?

You’d think that they must have hit the lottery or made six-figure incomes. Nope. They earned ”abnormally normal salaries... that generally (but not consistently) increased” year after year. Justin writes, “We never received stock options or worked for a company that went public. No winning lottery tickets or inheritances, either. Just steady saving and investing in our low-cost index fund portfolio year after year.”

How to Become a Millionaire - 3 Essential Ingredients

There’s nothing extraordinary about what these people did. They didn’t receive any big windfalls. They weren’t making astronomical incomes. They just worked hard, sacrificed some, and saved a lot.

There's no secret to getting rich. In fact, if you're doing it right, becoming a millionaire is really quite boring. From both my own experience and learning from the experiences of others, building wealth simply takes three things: Savings, time, and patience.

1. Savings - First and most importantly, you need to learn how to live below your means. This means cutting your expenses, learning to track what you spend, and living within a budget. The further you can live below your means, the more you’ll be able to save and invest. The more you invest, the faster you’ll reach millionaire status. How long will it take?

Well, that all depends on how much you save. If you’re shooting to make a million in 10 years, you’re probably going to need to live on 50% of your income or less. (As a benchmark, you need to save about $1,000 a week and average a 12% interest rate to reach $1 million in 10 years. That’s a very hefty savings and optimistic growth rate, but it is doable.) Regardless, save early and often. If you do it consistently, you’ll be on your way to becoming a millionaire.

2. Time - When you ‘reinvest for your future, time is often your best friend. Markets can swing wildly over the short term, but over the course of several years, the general trend of the U.S. stock market is up. From 1914 to 2014, the average stock market return - including dividends - was a little over 12% with a CAGR (or “true return”) of just over 10.1% per year. Creating wealth doesn’t happen overnight, but it can happen with consistent investing.

3. Patience - For most people, there is no fast track to wealth. You need to understand that time is your friend, and you have to exhibit the patience necessary to make it work for you. Yes, it can be scary to lose money in the market. However, have to learn to understand the market’s cycles and ride them out. This isn’t to say that you need to time the market; on the contrary. Know that market swings are part of the wealth-building process. Hang in there and stick to your plan. Better days will come, and you’ll be rewarded for seeing it through.

Can Anyone Become a Millionaire?

As I wrote this article, it occurred to me that there really isn't much to becoming a millionaire. At the end of the day, it's all about discipline and just how dedicated you are to the goal.

I kept trying to think of more and more things to add to the article, but the fact is, becoming a millionaire requires only diligence and self-control. You do not need to make a ton of money, you do not need to be an investing guru, and you do not need sheer luck. You just need to want it badly enough that you put in the effort and sacrifice required.

Perhaps Paul Clitheroe put it best:

The amount of money you have has got nothing to do with what you earn. People earning a million dollars a year can have no money and... people earning $35,000 a year can be quite well off. It's not what you earn, it's what you spend.

Millionaire Tool

If you are serious about becoming a millionaire, I highly recommend Empower’s free financial dashboard. This online tool tracks every aspect of your finances. From credit cards to 401ks, Empower provides great insight into your money. It will analyze your investment fees, spending patterns, and asset allocation. It even tracks your net worth.

I use Empower every day to manage our wealth.

(Personal Capital is now Empower)