The easy way to become a millionaire

Everyone strives to be a millionaire. Think of the many television shows that have a $1 million prize for the winner. Or look at the lottery commercials touting the latest pot of multiple millions. I’m not going to discuss the ineffectiveness of this ambiguous goal many Americans have set for themselves. This can be a topic for another time. However, I will tell you how pretty much anyone can become a millionaire, and it’s fairly easy to do.

Becoming a millionaire is not done instantly with winning a reality show or picking the right lottery numbers. It’s done with consistent saving during your working career.

I advise clients to save at least 15 percent of their income to achieve goals such as buying a home and retiring comfortably. What is the current savings rate of Americans? It’s a measly 5 percent – well below the 15 percent target.

A 401(k) plan is the best option to save for retirement for most people. About 75 percent of employees contribute to their employer savings plan. That’s great! Unfortunately, they aren’t contributing enough. In fact, many workers don’t save enough in their 401(k) to get the full employer match. That’s free money going down the drain!

Let’s introduce our fictitious volunteer Pat to use as an example of how great it is to save in a 401(k). Pat earns $50,000 per year and contributes 5 percent per year to the 401(k) plan. The employer matches 50 percent of every contribution up to 6 percent of pay. (Notice that Pat is leaving some free money on the table.) If Pat maintains this savings level each year, then the 401(k) balance will grow to $290,000 in 25 years. Not too shabby for saving $2,500 bucks each year.

What if Pat increased her 401(k) contributions from 5 percent to 6 percent of pay and received the full employer match? The 401(k) balance would be $350,000 in 25 years. That’s $60,000 more for retirement just by increasing 401(k) contributions by $500 per year!

So how much do you need to save in your 401(k) to become a millionaire?

All you have to do is start saving a percentage of your salary that equals $1,000 each month into your 401(k). That will get you to $1 million in 25 years assuming your employer matches 50 percent of 6 percent, investment returns average 6 percent, and you get a 3 percent pay raise each year.

Saving $1,000 per month would be a pretty lofty accomplishment for someone like Pat. That’s why I’m not keen on having a $1 million goal. Instead, focus on your own personal savings rate.

If you don’t save anything in your 401(k) right now, then start putting in at least 6 percent of your pay. That’ll get you the full employer match at most companies. If you are already saving in a 401(k), then be sure to bump up that savings rate by 1 percent before the end of the year. Keep doing that each year until you max out your 401(k) contributions.

Becoming a millionaire is not going to happen overnight by winning the lottery. But millionaire status is easily attainable by saving each and every year during your working life.

Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.