Why You're Not a Millionaire
Having $1 million in the bank might sound impossible, but in fact, it's a goal well within reach for many people. After all, it's perfectly possible for someone with an enormous income to have zero or even negative net worth -- similarly, it's possible for a person with a middle-class income to become a millionaire through dedicated saving. Net worth has more to do with how you use your income than with how much income you have. If any of the following points sound familiar, you may have discovered what's keeping you from wealth.
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Spending everything you earn (or more!)
This is what typically goes wrong for the aforementioned high-income folks with no money in the bank. Enormous sums of money come in, yet they manage to spend it all. This trap is even easier to fall into if you have a more modest income level. And if you spend more than you earn, you'll end up with debts that drain away even more of your income. Regardless of how much you make, breaking out of the "spend it all" mindset is tricky; consider trying some expense-cutting tricks to get you started.
Not distinguishing between wants and needs
Some things are required for life: food, shelter, warmth. Notice that Netflix does not appear on this list. If you're struggling to find extra money to save because your entire paycheck disappears every month, it's possible you aren't considering your priorities when deciding what to do with your money. If you have little to no money in savings, then saving money should be a very high priority. One way to reorganize your priorities painlessly is by moving some money into savings the second your paycheck comes in. If you never get a chance to spend that money, you may not even miss it.
Not having a plan
Spending is easy; saving is hard. But saving becomes a lot easier if you come up with a plan and a goal. The goal gives you a target, and the plan gives you a way to reach your target. Assuming you have settled on the goal of becoming a millionaire, the next step is to come up with a savings plan that will get you $1 million in the bank. This is where a lot of people throw up their hands and get discouragedbecause a million dollars does sound like a lot of money. However, you don't actually have to save $1 million to have $1 million. You just need to save enough so that compound earnings and interest can turn that money into $1 million. Fortunately, there are tons of calculators on the Internet that will help you to figure out how much you need to save over how long in order to end up with $1 million. Just play around with the parameters until you come up with an amount to save per month that you think you can manage, note the time frame, and voila -- you have a plan.
Obsessing about expenses and forgetting about income
So, you've figured out how much you need to save every month to get you $1 million within the timeframe you've chosen, and you've cut your expenses to the bone trying to free up enough money to manage this. Before you decide you'll have to live on Ramen noodles for the next 10 years, consider that there's another side to the whole budget equation: income. If you have more money coming in, you can keep spending at a reasonable level and still have enough to save to hit your $1 million goal. Don't know where to start? Try browsing through this list of ways to make more money. Odds are that at least a few of them will be suitable for you.
Putting your savings in the wrong place
You've probably noticed that for the last few years, interest rates have been practically nonexistent. This is great for debtors, but not so good for savers: Put your money in a standard bank savings account, and the fraction of a percent of interest you'll make every year won't be nearly enough to propel you to millionaire status. Sad to say, if you want to become a millionaire in your lifetime, you may have to take a few risks with your money. Stocks are a great choice for any saver with a long timeframe to work with; the market bounces up and down from year to year, but over the long haul, if you stick with it and don't panic sell, it produces impressive returns. And keeping at least part of your savings in a tax-deferred retirement account, such as a 401(k) or IRA, will help your money grow that much faster because you won't have to pay taxes on it until you take it back out.
Thinking it's impossible
If you're living from paycheck to paycheck, saving any money at all can seem impossible -- let alone saving a million dollars. But once you take the first steps, you'll find that your goal becomes a lot easier to believe in. Start by saving just a few dollars a month, then gradually increase the amount you save until you start to notice a difference in your available cash. At that point, you can take steps to create or free up more income. And before you know it, you'll be looking at a bank statement with a $1 million balance.
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Wendy Connick has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.