4 Tips on Becoming a Millionaire

By Markets Fool.com

Continue Reading Below

Source: Flickr userErvins Strauhmanis.

There may not be any financial achievement more closely associated with financial security than becoming a millionaire. Whether you intend to live simply or you'd prefer to indulge a little, $1 million or more can give you the freedom to lead the lifestyle you choose. The hard part, of course, isbecoming a millionaire. Fortunately, our Motley Fool experts have some ideas that could help folks get there.

Dan CaplingerThe key to becoming a millionaire is to understand that time is your greatest ally. If you start out thinking you need to find a get-rich-quick scheme in order to become a millionaire, you'll sabotage your chances of building up wealth even before you've begun. By contrast, if you accept that you won't become a millionaire overnight, you'll be in a much better position to accumulate $1 million or more in the end.

When most people think of millionaires, they tend to think of celebrities and professional athletes. However, most millionaires accumulate their wealth in much less glamorous ways. Saving up small amounts and investing them over time isn't flashy, but it helps to create a snowball effect that uses the power of compound interest to turn even modest savings into big wealth. Investing for the long haul can be boring, and you'll inevitably have to ride out some drawn-out bear markets that sap your net worth temporarily.

Given that markets always have always recovered in the past, though, you can remain confident that in time, you'll still be on the road toward becoming a millionaire -- all because you had the courage to start investing even when you thought you didn't have enough for it to make a huge difference.

Continue Reading Below

Dan is right that you shouldn't be in a rush to get rich. Still, my advice is tostart soon. You don't have to make any hasty decisions, but you can nevertheless start on your path to your first million today.

You might start by beginning to save as aggressively as you can while reading up on how best to invest your money. One good investment option is a simple, inexpensive, broad-market index fund that will deliver returns that roughly match the overall market. Over several decades, the stock market, as measured by the S&P 500, has averaged an annual gain of about 10%. Here's how your money will grow if you sock away $5,000 each year and it grows by 10%:

Time Period

Ending Balance

10 years

$87,656

15 years

$174,749

20 years

$315,013

25 years

$540,909

30 years

$904,717

35 years

$1.5 million

A glance at the chart reveals exactlywhyyou should start saving and investing soon in order to become a millionaire: The earlier you start, the easier it is to grow your wealth. Based on the model above, you'll need to save $5,000 per year for more than 30 years to reach your first million. If you put off tending to your retirement needs, you can lose valuable years in which your money could have grown for you. So if you don't have a few decades to save and invest, you'll have to save much more aggressively or be content with less than $1 million. So start soon!

As Selena and Dan point out, time and consistency can go a long way toward making a millionaire, but an investment's market potential can have a big impact, too.

When Motley Fool co-founder David Gardner first recommended Amazon on Sept. 9, 1997, he didn't have a decade of financials to analyze. Instead,he took a calculated riskthat Amazon's bold vision of revolutionizing American retail would trump its lack of a long-term track record. Gardner has continued to make similar calculated risks over the years, embracing top-performers likePriceline andNetflix early on.

Market-busting innovators like these rarely climb in a straight line, but investing in them during their formative years -- and sticking with them through thick and thin -- can be a remarkably successful strategy. Admittedly, discovering the next Amazon, Priceline, or Netflix won't be easy, but identifying and investing in game-changing companies early on could help investors achieve millionaire status.

How can investors find these next 100-bagger stocks? Gardner attributes his initial investment in Amazon to three things: Amazon's visionary leader, a doubling in its stock price following its IPO, and his own positive, personal experience with the company as a consumer. Following that formula might be a good place to start.

Millionaires become wealthy because they take calculated risks to generate returns. But they keep that wealth by shielding it from unpredictable risks.

The 401(k) is an invaluable risk shield for your assets. Federal law protects your 401(k) funds from creditors, so should you go bankrupt for any reason, you can still exit bankruptcy a millionaire. Many find it hard to believe, but by putting money in a 401(k), you're essentially investing in a "can't touch this" account that will remain safe from creditors, even in the most dire of financial crises.

And where a 401(k) offers protection for what you already have, you should also protect your future financial assets -- your income. Statistics suggest that as many as three out of 10 people will become disabled during their career, losing their ability to generate income. Luckily, this risk is relatively easy and inexpensive to plan for with long-term disability insurance, an insurance policy that will pay you a percentage of your current income for a period spanning from two years to the time you turn 65 years of age. It's a valuable safety net that, in many cases, costs just a fraction of a percentage of your annual income.

Becoming a millionaire isn't just about growing your wealth, but also making sure you protect it.

The article 4 Tips on Becoming a Millionaire originally appeared on Fool.com.

Dan Caplinger owns shares of Priceline Group. Jordan Wathen has no position in any stocks mentioned. Selena Maranjian owns shares of Amazon.com, Netflix, and Priceline Group. Todd Campbell owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Netflix, and Priceline Group. The Motley Fool owns shares of Amazon.com, Netflix, and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.