Who doesn’t want to be a millionaire? Of course, it’s everyone! Did you know that the United States presently has 12 million millionaires? That’s a lot, and there’s no reason you can’t be one of them as well. However, the question is how to turn your current savings into those coveted millions. Three Motley Fool contributors who are on their way to becoming millionaires (or have already done it) discuss three investment tips that have helped them along the way.
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Make it an automatic process.
Saletta, Chuck: Signing up for and contributing to your 401(k) or equivalent retirement plan at work is perhaps the most significant thing you can do to get yourself on the billionaire track. Contributions to your 401(k) plan can be made immediately through payroll deduction, making them automatic and putting your money to work for you without ever having to pass through your checking account.
Making your investing automatic increases your odds of sticking with it because you’ll be less tempted to spend money you’ll never see. Even if your new contributions are added to your current ones and compounding works its magic on your behalf, you might forget you’re investing at all.
Based on how much you save each month and what rate of return you get along the road, the chart below illustrates how many years it will take you to reach the $1 million mark.
Investment on a monthly basis
Returns of 10% per year
Returns of 8% per year
Returns of 6% per year
Returns of 4% per year
$1,625
18.2
20.4
23.5
27.9
$1,500
18.9
21.3
24.5
29.3
$1,000
22.4
25.5
29.9
36.7
$500
28.8
33.4
40.1
51.0
$300
33.7
39.4
48.0
62.5
Author’s calculations were used as a data source.
That $1,625 monthly commitment equates to $19,500 per year, which is the maximum contribution that anyone under the age of 50 can make to their 401(k). Over time, the market has delivered returns that have been in the area of 10% annualized, but those returns are never assured.
Even if you don’t have enough money to max out your 401(k) and the market doesn’t perform as well as it has in the past, there are lots of methods to reach $1 million in a career. As the table demonstrates, it’s even achievable if you can only save roughly $10 per day ($300 per month) but can do it regularly throughout your lifetime. That’s not terrible for doing nothing more than the really easy but extremely effective step of automating your investing.
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When others are afraid, be greedy and buy on dips.
Barbara Eisner is a well-known actress and producer. Bayer: Following the counsel of billionaire investor Warren Buffett, who famously quipped, “be greedy only when others are afraid,” will help you become a millionaire. As a result, investing is hacked. Number two: When the market is pulling back or correcting, add to your winning positions.
If you already have a stock in your portfolio, I’m assuming you’ve done your homework and believe in its long-term potential. As a result, if the market falls sharply and nothing fundamentally changes in the firms you own, this is the perfect moment to add to your holdings.
That may appear to be incredibly simple advice, but it isn’t. Because it’s difficult to be the contrarian who, rather than succumbing to rising dread, becomes an exploiter of opportunity when everyone around you is screaming, “Sell, sell… the sky is falling out of the stock market.” But that’s how people acquire billionaires in the stock market: by buying low and selling high (or, in many cases, never selling at all until they’re living off their savings in retirement). Too many people make the mistake of buying high and selling low, which is a surefire way to lose money.
To have the courage to put this millionaire-making method into action, you must first prepare yourself by taking the following steps:
Know the value or potential for growth of the stocks you own so you can seize the chance when it arises.
Have enough cash in your brokerage accounts to make a purchase.
Have the ability to overcome the dread that the market is about to crash and that it will never recover.
Nos. 1 and 2 are completely under your control, but No. 3 will be a challenge. Fear is a powerful emotion, and if you lack confidence, it can overwhelm you.
For example, you can start asking yourself, “Should I buy now or wait until the price gets much lower?” Is it possible that the stock has reached its bottom? The answer is that you can’t predict when the market will bottom because it’s hard to time it, therefore if the price seems reasonable, now is probably the time to buy. If you wait too long, the stock may turn around and the opportunity will pass you by.
One approach to become a millionaire is to take advantage of opportunities by buying on declines. It worked for Warren Buffett, so take a leap of faith and let it work for you as well.
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Profiting in small increments
Eric Volkman (EVL): My trick is a tried-and-true one: Return some of your shareholder dividends to the same security that gave them to you in the first place.
Dividend reinvestment is a tried-and-true strategy that pays off. This technique can help put some muscle on a portfolio rapidly if an investor is willing to forego an immediate reward in exchange for future benefits.
This method can be implemented in a variety of ways. Dividend reinvestment plans (DRIPs) are used by many dividend-paying corporations and funds to do exactly what they say on the tin: they use a shareholder’s dividends to buy more stock in the company. Brokerages and other third parties frequently provide this service, and this might be a good option for investors who want to reinvest dividends in companies that don’t have their own DRIPs.
Many of these programs can be set up to invest all or part of each dividend payout on autopilot, allowing investors to focus on other things.
DRIPs, as well as a number other outsider-run programs, are frequently commission-free. There’s usually no incentive to pay any fees to participate in one of these freebies because they’re so plentiful.
You can, in fact, do it yourself. It’s simple enough for an investor to flip a dividend payment around by investing the money in new stock in the firm that pays the dividend. Of course, there will be some money left over, but it’s simple to keep track of this “change,” which may then be added to the next dividend payout(s) to assist fund the purchase of additional shares.
Many DRIPs and third-party programs, by the way, reinvest in fractional shares, eliminating the need to deal with or account for any leftover funds.
Plow payments back into a Dividend Aristocrat, which is one of a tiny group of S&P 500 index firms that has grown its shareholder distribution at least once every year for at least 25 years.
Investing in a reliable, well-performing Aristocrat that raises its payment on a regular basis can provide investors with the best of both worlds: growing stock prices and continuously increasing dividends.
Target and Johnson & Johnson, which has created one of just three coronavirus vaccines approved for use in the United States, are good recent prospects for this.
This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.
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