Become The ‘Millionaire Next Door.’ Do These 3 Things.
Although a million dollars today doesn’t buy all that it used to, it is still worth targetting. Here are three things you must do to get the ball rolling:
1. Put your cash in the right place and start early
There are two things you can do with your money; spend it or save it.
As a would-be millionaire next door, it is a given that you live below your means, and you are not frivolous with your cash. So what exactly are you doing with the money you are not spending?
Do you have a stockpile of cash in the house? A large savings account? A stock market investment portfolio? Where you put your cash will go a long way in helping you attain ‘millionaire next door’ status.
Let us compare the three options, using a hypothetical sum of $1,000 over a 10-year period.
In the example above, the invested amount more than doubled, while the savings account gained $78. As expected, the cash remained the same. Long-term, due to the higher return potential, your money grows faster when invested compared with a savings account or cash (zero growth).
Now that you know you should invest, instead of having a stockpile of cash, when should you start investing?
The earlier, the better! Waiting even just a few years to begin investing can have a big impact on your portfolio balance. In the example below, a delay of five years increased the required monthly investment amount from $286 to $436. That is a 52% increase!
2. Get the right portfolio allocation
When it comes to investing, it is important to find the appropriate balance of risk/reward for your particular situation.
In general, investments with greater risk (e.g. stocks) have the potential for higher returns, while investments with lower risk (e.g. bonds) have lower returns. Note that all investments carry some level of risk!
Finding the right risk/reward balance requires understanding your risk profile and your timeline (when you will need access to the invested amount). If you play it too safe, your money may not grow enough to meet your goals. If you are too aggressive, you risk losing part of your investment (and lots of sleep!) and not meeting your goals.
Target funds are a great way to automatically allocate, re-allocate and re-balance your portfolio. Target funds provide an initial mix of stocks and bonds depending on the target date you select (typically a target retirement date). As you get closer to your target date, the mix of stocks and bonds are adjusted to reflect your changing timeline.
3. Put it in writing
A written plan increases the likelihood of achieving a goal. Your written plan doesn’t have to be complicated. It can be as simple as stating:
“My goal is to have $1,000,000 by age 65, and I will invest $286 every month to achieve my goal.” Your written plan could also include your portfolio allocation.
It is important to review your plan annually. Your situation or the economic environment will change, and your plan should change accordingly.
Becoming a ‘millionaire next door’ isn’t complicated, but it does require a plan and the discipline to stick with it. In addition to the three things mentioned above, continue to educate yourself on financial basics such as budgeting, debt management, and investing. Seek help if needed.