Investopedia, September 1, 2016, Rebecca Lake- Here's How to Build Wealth Like a Multimillionaire
If you’re like most people, you’d probably give a lot to learn how to become a multimillionaire. According to Spectrem Group’s Market Insights Report 2016, there were 10.4 million millionaire households in the U.S. as of 2015. The number of millionaires with a net worth between $1 and $5 million topped 9.1 million for the year. (For more, see How Much to Save to Become a Millionaire.)
While some people become multimillionaires after being on the receiving end of an inheritance or starting a hugely successful company, others take a more traditional route by saving and investing wisely. Studying the financial habits of high-net-worth individuals is a good place to start figuring out how to get there. The 2016 U.S. Trust Insights on Wealth and Worth® survey reveals some interesting things about the methods used by multimillionaires to amass their wealth.
How to Become a Multimillionaire: Start With Discipline
Poor self-control can be one of the biggest killers of long-term financial security. If you’re constantly giving in to the voice that tells you to splurge on the latest gadget or a new pair of shoes, every dollar you’re spending is money that you’re not investing. (For more, see 5 Ways to Control Emotional Spending.)
Sixty-eight percent of respondents in the U.S. Trust survey said financial discipline was something that was stressed heavily while growing up. As an illustration of how much it was emphasized, it ranked only behind academic achievement as a key family value. The takeaway? If you really want to become a multimillionaire, you have to be willing to make achieving that goal a priority, even if it means sacrificing certain wants along the way. (For more, see Are You a Disciplined Investor?)
One of the most repeated mantras among retirement experts is to save early and often. That’s something the millionaires in the U.S. Trust survey practiced from their teens. The average respondent started saving money at 14 and began working to earn his or her own money by age 15. The average age at which investing in the stock market commenced was 25.
So why is saving early so important? The answer is simple: The longer you have to save, the more opportunity your investments have to grow using the power of compound interest. Here’s an example to illustrate.
Say you’re 25 years old and making $40,000 a year. You start saving 6% of your salary in a 401(k), and your employer matches 100% of your contribution. If you earn a 7% rate of return until age 65, you’d have more than $994,000 saved by the time you’re ready to retire. If you get a 1% salary increase each year, your balance would grow to more than $1.1 million. (For more, see 4 Ways to Maximize Your 401(k).)
By comparison, if you waited until you were 35 to start saving, you’d only have around $520,000 saved by age 65, even with a 1% annual pay raise. The lesson here is a simple one: If you want to retire a multimillionaire, you can’t afford to delay saving.
Stick With the Basics
The multimillionaires included in the U.S. Trust survey didn’t build their wealth by making flashy investment moves. Instead, they went with tried-and-true formulas for generating stable returns. For example, 86% of investors said they saw the biggest gains in their portfolio when they employed a long-term buy-and-hold strategy. Eighty-nine percent attributed their investment growth to traditional securities, such as stocks and bonds. Alternative investments along the lines of tangible assets, hedge funds and venture capital were far less likely to be a part of their holdings. (For more, see Stock Basics Tutorial.)
If you want to work your way toward becoming a multimillionaire, you don’t need a lot of bells and whistles. Sticking with dividend stocks that offer a regular payout, for instance, may yield a more positive result than trying your hand at options trading. That doesn’t mean you have to play it safe all the time, but, as these investors prove, a slow and steady course can win the race. (For more, see Introduction to Dividends: Investing in Dividend Stocks.)
The Bottom Line
Becoming a millionaire is something a surprisingly large number of people can achieve; you just have to be willing to put in the time and effort to make it happen. If you’ve been waiting on a windfall or a winning lottery ticket, you know what you need to do instead. Creating a focused plan for investing and making a firm resolution to follow it are key moves if you want to increase your net worth.
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