When we hear the word "millionaire," we tend to conjure up images of the elite few who jet around town in limousines and come home every night to gated mansions. In reality, nearly 7 million U.S. households have investable assets that exceed the $1 million mark. Not only that, but 29% of Americans today think they'll join the millionaires club at some point, according to data from GOBankingRates. If that's the sort of goal you'd like to set for yourself, here's how to achieve it.
1. Start saving as early as possible
When it comes to building wealth, compounding will be a major weapon in your arsenal -- so take advantage of it early on. Compounding, in its simplest form, means earning interest on top of interest, and it's what allows savers to turn smaller amounts of money into larger sums over time.
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The following table illustrates how compounding can work to your advantage:
| 25 | $1.2 million |
| 30 | $829,000 |
| 35 | $567,000 |
| 40 | $379,000 |
| 45 | $246,000 |
TABLE AND CALCULATIONS BY AUTHOR.
Now here's the cool part: Saving $500 a month over a 40-year period means forking over $240,000 in out-of-pocket contributions and winding up with roughly five times that amount when we apply a 7% average annual return (more on that in a minute). How do we get there? By investing our gains year after year and continuing to save at a consistent rate. But, as stated above, the longer your compounding window, the more wealth you stand to accumulate. Case in point: Cutting your savings window by only five years shrinks your gains from about $960,000 down to $619,000 -- still impressive but nowhere close to the former.
2. Invest wisely
The higher your return on investment year after year, the more wealth you stand to accumulate. If you're looking to fuel your savings' growth, you'll need to get somewhat aggressive in your approach to investing. This means putting a sizable chunk of your assets into stocks, which have historically delivered much higher returns than bonds.
In the example above, we applied a 7% average yearly return to our investments. Well, that's the sort of return you can expect with a stock-heavy portfolio. In fact, that 7% is actually a couple of percentage points below the stock market's historical average. On the other hand, if you were to go heavy on bonds, you'd probably wind up with something closer to a 3% average annual return. And here's what the above table would look like as a result: