Achieving financial status by the age of thirty requires a strong financial plan.
Starting Early
One of the strongest tools you have to save a million dollars by age thirty is time. While you save and invest your money, it earns interest. This interest compounds, meaning your interest also earns interest. The earlier you start saving and investing, the more time your money has to grow.
For example, suppose you are 16 years old, got your first job, and opened a Roth IRA. You contribute $5,500 to your account each year until you turn thirty, with an annual return of 6%. These contributions will give you just over $122,500.
Now assume you land your first professional job at age 22. Your employer offers a 401(k) match equal to 100% of your contributions, capped at 6% of your salary. To maximize the contribution limit for 2022 (note: the limit is usually increased annually, but we will assume it remains at the same level for illustration purposes), you start contributing 41% of your $50,000 salary. In turn, your employer will contribute an additional $3,000 (50,000 × 6%). With an annual increase of 2% and a 6% annual return, you will have over $248,000 in your plan by age thirty.
By this point, you will have amassed over 25% of your two-million-dollar goal. If you continue to save at the same rate and earn the same return, you will easily achieve one million dollars by age forty. By age sixty, this money will grow to over 6 million dollars. This illustrates the importance of starting early and how compounding can be crucial for your wealth goals.
Compound Interest
Starting to save early is essential for any retirement plan. Anything saved in your twenties has 40 years or more to grow before retirement. A few dollars can go a long way.
Savings vs. Investing
The previous example shows how you can save nearly $340,000 just by saving in a Roth IRA and a 401(k), but you still have some ground to cover to reach a million dollars. How do you do that? If you want to learn how to become a millionaire, you need to know the difference between saving and investing.
When you save money, you are likely putting it into a low-risk vehicle, such as a savings account, a money market account, or a certificate of deposit. These accounts are safe, meaning the chances of losing money are low, but you won’t build significant wealth when you earn a low return on your savings.
When you invest in things like stocks, mutual funds, or real estate, you increase the risk factor. The trade-off, however, is the potential for much higher returns.
For example, suppose you take the same $5,500 you could put into a Roth IRA and instead save it in a high-yield savings account. Your account earns 1% interest, compounded monthly. If you save this amount every year from age 16 to age 30, you would earn about $16,000 in interest. However, your Roth IRA would grow to $55,000, assuming a 6% return.
On
Although it is wise to have some cash hidden in an emergency fund, you will also need to invest if you want to reach a million dollars by age thirty. Utilizing tax-advantaged accounts like Roth IRAs and 401(k)s will bring you closer to that goal. Using a taxable brokerage account to invest in the market can help fill the gap. You will pay capital gains tax when selling an investment in your taxable account at a profit, but that may not be an issue if you are investing for the long term.
Diversify Your Income Sources
Working full-time can provide income for investments, but if you are on your way to achieving a million dollars, you may need to add other income sources to the mix.
Freelancing is a popular option for many. About 57 million Americans freelance, according to Upwork and Freelancer’s Union. Starting a side gig by offering freelance writing, becoming a virtual assistant, or providing programming or design services can lead to additional income that you can put towards your million-dollar investment plan.
Investing in real estate is another avenue to consider. Owning a rental property, for instance, can generate a steady stream of monthly income. The income is passive, meaning it comes in regularly as long as you maintain consistent tenants.
Additional ways to build passive income include investing in peer-to-peer loans, creating and selling an online course or product, affiliate marketing, or renting out a room in your home on Airbnb. Some of these methods require a greater investment of time and money than others, but all can lead to regular income to supplement your paycheck.
Track Your Goals and Know Your Worth
Saving and investing a million dollars by age thirty is a big goal to achieve, and tracking your progress helps. Breaking it down into smaller goals can make the process more manageable. For instance, you might set monthly, quarterly, and annual targets as you work towards a million dollars in savings and investments.
It’s also important to be aware of your worth and how that relates to your ability to build wealth. Negotiating a raise at your job, for example, can lead to more income for saving. The same skills to become a freelancer or sell a product online can do the same. The key is to know your true worth and how to leverage it to reach your goal.
FAQs
What makes you a millionaire?
A person becomes a millionaire when the total value of all their assets reaches one million dollars. This overall net worth includes assets such as bank accounts, stocks, collectibles, cars, and homes.
Who was the first millionaire?
Some call John Jacob Astor the first multimillionaire in the United States. Born in Germany, he amassed his fortune from the fur trade in the late 18th and early 19th centuries.
Source: https://www.thebalancemoney.com/how-to-become-a-millionaire-by-30-4157452
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