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Building sizeable wealth is largely a matter of mastering certain habits and making smart decisions. We all don’t make millions of dollars a year and the odds are that most of us won’t receive a large windfall inheritance, either. But time is on your side if you’re young and retiring a millionaire is achievable.
Key Takeaways
- Personal spending is a habit that can be adjusted and modified.
- Pay attention to your taxes and claim all the deductions and credits you’re eligible for so you can keep more of your hard-earned money.
- Spend on real estate that will appreciate rather than automobiles that will depreciate and be worth less after you’ve owned them for a few years.
- Consider a job change if you’re not being compensated well and you think you’re worth more.
1. Stop Senseless Spending
Many people have a habit of spending their hard-earned cash on goods and services that they really don’t need. Even relatively small expenses such as indulging in a gourmet coffee from a premium coffee shop every morning can add up and decrease the amount of money you can save. Larger expenses on luxury items also prevent many people from putting money into savings each month.
It’s usually not just one item or one habit that must be cut out if you want to accumulate sizable wealth. One must adopt a disciplined lifestyle and budget to become wealthy. People who are looking to build their nest eggs must usually make sacrifices somewhere. This may mean eating out less frequently, using public transportation to get to work, and/or cutting back on extra, unnecessary expenses.
This doesn’t mean that you shouldn’t go out and have fun but you should try to do things in moderation and set a budget if you hope to save money. Saving up a sizable nest egg only requires a few minor and relatively painless adjustments to your spending habits, particularly if you start young.
2. Fund Retirement Plans ASAP
Your first responsibility is to pay current expenses such as rent or mortgage, food, and other necessities when you start earning money. The next step after these expenses have been covered should be to fund a retirement plan or some other tax-advantaged savings vehicle.
Retirement planning is unfortunately an afterthought for many young people and it shouldn’t be. Funding a 401(k) and/or an IRA early in life means you can contribute less money overall and end up with significantly more in the end than someone who put in much more money but started late.
You’ll have saved $985,749 by the time you’re 65 years old due to the power of compounding if you’re 23 years old and deposit $3,000 per year (that’s only $250 each month) into a Roth IRA earning an 8% average annual return. A $1 million goal is well within reach if you make a few extra contributions. Keep in mind that most of your earnings on this type of account are interest. Your $3,000 in contributions alone only add up to $126,000.
Now suppose that you wait an additional 10 years to start contributing. You have a better job than when you were younger by this time and you earn more but you know you’ve lost some time. You decide to contribute $5,000 per year.
You get the same 8% return and have the same goal to retire at 65 but your compounded earnings won’t have as much time to grow because you started to save later. You’ll have saved $724,753 in this scenario when you’ve reached age 65. That’s still a sizable fund but you had to contribute $160,000 just to get there and it’s nowhere near the $985,749 you could’ve had for paying much less.
3. Improve Tax Awareness
Individuals sometimes think that preparing their own tax returns will save them money and they might be right in some cases. But it may end up costing them money because they fail to take advantage of many deductions that are available to them.
Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your deductions on your tax return instead.
It may pay to hire some help if you’re not willing or able to become educated about filing your income taxes, particularly if you are self-employed, own a business, or have other circumstances that can complicate your tax return.
4. Own Your Home
Many of us rent a home or an apartment because we can’t afford to purchase a home or because we aren’t sure where we want to live for the long term. And that’s fine but renting is often not a good long-term investment because buying a home is a good way to build equity.
It generally makes sense to consider putting a down payment on a home rather than renting because you can build up some equity and the foundation for a nest egg over time.
5. Avoid Luxury Wheels
There’s nothing wrong with purchasing a luxury vehicle but individuals who spend an inordinate amount of their incomes on their wheels are doing themselves a disservice because this asset depreciates in value so rapidly.
How rapidly a car depreciates depends on the make, model, year, and demand for the vehicle, but the general rule is that a new car loses 20% of its value in the first year, then another 15% per year over the next four years.
Consider buying something practical and dependable that has low monthly payments or that you can pay for in cash. You’ll have more money to put toward your savings in the long run and your savings are an asset that will appreciate rather than depreciate over time.
6. Don’t Sell Yourself Short
Some individuals are extremely loyal to their employers and they’ll stay with them for years without seeing their incomes take a jump. This can be a mistake because increasing your income is an excellent way to boost your rate of saving.
Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills, and experience.
7. Don’t Rely on Luck
Becoming a millionaire won’t happen by luck like winning the lottery or because of some other unforeseen circumstance. The only way to become a millionaire is by diligently working to do so. Expecting luck to bring you a financial windfall will only delay the time you have to build your wealth. The money you spend on lotteries and other get-rich-quick schemes will be better utilized as savings and investments.
What’s the Difference Between a Roth IRA and a Traditional IRA?
You can claim a tax deduction for money you contribute to a traditional IRA in the year you make contributions, saving you tax dollars. But you’ll have to pay taxes on that money when you make withdrawals in retirement as well as taxes on the money’s growth.
You’re taxed on contributions to a Roth IRA at the time you make them but then withdrawals and growth on that money are often tax-free, subject to some rules that aren’t particularly hard to meet.
When Is It Better to Itemize Rather Than Claim the Standard Tax Deduction?
You’ll probably want to claim the standard deduction if the total of all your eligible itemized deductions is less than the amount of the standard deduction for your filing status. You’ll otherwise pay tax on more income than you have to. Common itemized deductions include state and local taxes, property taxes you paid during the year, home mortgage interest, and gifts made to qualified charities.
The total of your itemized deductions should be more than the $14,600 standard deduction for the 2024 tax year if you’re an unmarried taxpayer. The deduction increases annually to keep pace with inflation and it changes with marital status and other factors.
How Does Equity Build in a Home?
Equity is the difference between the current value of your home and the encumbrances against it, such as a first and second mortgage or other liens. You can build equity in your property by paying down these encumbrances, such as by making extra mortgage payments over the years.
You might also take steps to increase the value of your home, such as by remodeling, but this will cost you money out of pocket unless you’re a very capable do-it-yourselfer. You might also simply let market values increase over time.
The Bottom Line
You don’t have to win the lottery to see seven figures in your bank account. The only way for most people to retire with a million dollars is to save it up over time. You don’t have to live like a pauper to build an adequate nest egg and retire comfortably. Your million-dollar dreams are well within reach if you start early, spend wisely, and save diligently.