How to Save a Million Dollars
The richest people in the world are also some of the most frugal individuals you can hope to meet. Fast food fan Warren Buffet reportedly uses coupons when buying burgers and shakes from his favorite chains, and while some of the 1% are quick to splash the cash, throwing lavish parties and buying flash cars, others are so reluctant you’d think they were on the bread line.
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They didn’t make their billions by saving or skimping on luxuries, but that attitude is integral to the millionaire mindset and essential if you want to make a million dollars. If you start early enough, make some big sacrifices and truly commit to the goal, you can save a million dollars without striking gold in the stock market, winning the lottery or securing a 6 or 7-figure salary.
Even if you don’t start early, you can still save that elusive million dollars. Just follow these tips closely and you can secure a big net worth like the penny-pinching billionaires mentioned above.
Set Clear Goals
It’s important to set yourself targets, otherwise, the excuses will come thick and fast, you won’t hold yourself accountable for your slip-ups and, like the drug addict who insists that “tomorrow is the day”, you’ll constantly be moving the burden of responsibility several days, weeks and months down the line.
Spend some time going over your goals for the future and then set yourself targets for the next month, year, 5-years and 10-years. These targets can include earning more money, getting a house, avoiding debt—it doesn’t matter, as long as it leads to a bigger net worth, a better nest egg, and more cash in your bank account.
Avoid All Bad Debt
Debt is very expensive and over the course of your lifetime, you may pay over $50,000 in interest on unsecured loans and credit cards. This seems like a disproportionately high sum, but if you have ever been in substantial debt or taken a look at your credit card bill, you’ll understand just how expensive it can be.
As an example, let’s assume that you have a credit card balance of $10,000, one acquired after paying for an unexpected funeral or medical bill. Your creditor charges an interest rate of 25% and requires a minimum payment of 1% of the balance along with interest and fees.
Every month you will pay $308.33, which is not a lot of money on such substantial debt, but with compounding interest, that debt will cost you over $20,000 in interest alone. Even if you increase the payment to 5% of the balance, the high APR and compound interest will take more than $7,000 of your money over the term.
And this is just one credit card, one type of debt. Once you add student loans, personal loans, payday loans, and car loans to the mix, it’s easy to see why so many Americans spend their lives chasing debt.
Adopt a Frugal Mindset
Warren Buffet didn’t earn his billions by skimping on his Big Macs. But being frugal can make you a little richer and help with your savings goal.
For instance, every year the average America household spends:
- $4,000 to $5,000 on family vacations
- $3,000+ on dining out
- $6,000 on groceries (and throws 40% of them away)
- $300 on lottery tickets
- $230+ on subscription services
- $1,000+ on gym memberships and health supplements that barely get used
And that’s before you consider alcohol, cigarettes, video games that never get played, books that won’t be read, fad toys that will only gather dust, and clothes that won’t be worn.
What’s more, countless Americans pay over the odds just to own a brand-new phone, tablet or console, even though they could save up to 50% by waiting and buying used; designer clothes, even though they can get high-quality unbranded items for a fraction of the price.
You could save over $5,000 a year by being a little more frugal and making more sensible choices. Over a decade, that’s $50,000, and in thirty years, you’ll have saved $150,000.
Get a Better Mortgage
When we say, “Get a better mortgage”, we don’t mean negotiate better rates. Instead, you need to treat the purchase more like an investment and less like a home, as it could save you tens of thousands of dollars.
As an example, let’s suppose that you have $20,000 in your savings account and earn enough money to afford a $1,200 monthly payment on your first home.
You could buy a $300,000 house, stretching your budget to its limit by paying $1,170,23 a month (minus taxes and insurance) with a 4% interest rate and a 40-year term.
Alternatively, you could settle for something smaller in an up-and-coming area, aiming for a purchase price of $100,000. In this case, you can opt for a reduced term of just 15-years, paying $591,95 a month and just $26,515.07 in interest over the term.
In the first instance, you’re choosing a maximum term and a low down payment just to get a bigger and better house, but in doing so you’re borrowing $280,000 and paying every penny back along with interest of $281,707.81. The house needs to double in value for you to make a profit and unless you get very lucky, that won’t happen any time soon.
The result is that you’re wasting close to $300,000 just to buy a house bigger than you need and can afford. With the second option, you will own the house in close to a third of the time, you’ll pay less than a tenth of the interest amount, and by the time the house is repaid in full, it will likely be worth much more than you paid.
Instead of losing huge sums of money, you could sell it for a substantial profit, money that you can then use to purchase your next piece of real estate, one that will provide an even better rate of return and may leave room for a second home or investment opportunity.
Health insurance can save you a lot of money and potentially prevent a complete financial disaster. It will cost you every month and may feel like a waste if you never use it, but insurance is there for a worst-case scenario and not everyday use.
Life insurance should also be considered by anyone who has dependents, including you, your wife, and your parents. If anything happens to you, they will be covered; if anything happens to them, you will be covered.
The idea of profiting from someone else’s death is pretty bleak, to say the least, but that money can provide some essential financial support.
Open a Savings Account
Once you start saving more money, as recommended above, you can start moving that money into a savings account. The average savings rate is less than 2%, which means you’ll get an annual return of just $221.92 if you deposit $10,000 as a lump sum and then add $200 every month.
It’s not a huge amount of money by any stretch of the imagination, but with a sensible savings plan it can move money out of the reach of temptation, and that’s ultimately the main benefit of a savings account.
A savings account can also serve as an emergency fund, covering you in your time of need, when you may otherwise look for a high-interest payday loan or credit card.
The more you put aside, the less you waste, and the sooner you will achieve financial independence, with an emergency fund and retirement savings behind you and a bright future ahead of you.
Create Short-Term and Long-Term Investments
Personal finance experts recommend that you invest at least 10% of your income. How you choose to invest is up to you, just remember to:
- Avoid volatile investments
- Look for something that pays dividends
- Don’t take big risks
- Calculate and pay capital gains tax
Investing in blue chip stocks on the stock market is one of the best decisions you can make and one that could earn you between 3% and 5% a year on average. If you invest $5,000 over 10 years, you will have earned $2,500 in dividends and will still have your initial $5,000 investment, which may have increased.
It’s not unreasonable to assume that your $5,000 could be worth $10,000 after that decade, and if you invest all dividends back in stock and keep building your portfolio, that $10,000 could become $20,000, $40,000, $80,000, and more.
Bonds, precious metals, collectibles—there are many more investment opportunities out there. If you’re not sure what you’re doing, stick with what you know for now and speak with a financial advisor to help you with everything else.
The power of education should never be underestimated. On the one hand, it can lead to excessive debt that may take decades to repay, on the other hand, educated individuals earn more throughout their lifetime and these earnings generally offset the costs of student loans.
But it’s not just college education that helps. Simply learning a new skill or trade can greatly improve your earning potential. Study something you enjoy, learn a language, acquire computing skills; push yourself academically and you may see your earning potential increase.
Start a Side Hustle
There are more freelancers in the United States than ever before. Freelancing websites like Upwork, Fiverr, PeoplePerHour, Guru, Freelancer, Preply, and countless others have made it possible to turn hard work, skills, and a good work ethic into a regular income. And the best thing about freelancing is that you choose how and when you work, structuring those hours around your full-time job to earn a little cash on the side.
Just remember that freelancer earnings are not tax-free, so don’t make the mistake that countless other part-time freelancers have made and remember to report every penny that you earn to the IRS.
Your tax rate will depend on your state and income bracket, as well as any expenses that you have accrued during your freelancing career, including equipment, bills, and more.
Improve Your Credit Score
You will find this tip on many of our personal finance articles as your credit score is closely tied to every aspect of your finances and will impact every loan you acquire, every credit card you apply for, and every penny you pay in interest and fees.
A better credit score also means you have more options when things turn sour. Imagine, for instance, that a loved one dies, and you have to cover the funeral costs. If you have bad credit, no savings, and no friends or family to help, your options are very limited, to say the least. You may be forced to take a payday loan or another high-interest loan, leading to dire financial consequences that you may never recover from.
If you have good credit, lenders will be throwing themselves at you, offering low-interest loans to guide you through this mess and help you get back on your feet. Like an emergency fund or savings account, a good credit score gives you a safety net and can catch you when you fall.
Summary: It’s Never Too Late
Regardless of your current age or the size of your savings accounts and retirement accounts, it’s never too late to start chasing those seven figures and improving your net worth. So, whether you’re a Millennial or a Baby Boomer, whether you have $10,000 and no debt or $0 and a whole heap of debt, follow the tips above, make a start, and save your way to a million bucks.