Opinion: How to become a millionaire

With the median house price in Australia’s two largest cities now north of a million dollars, being a millionaire isn’t perhaps as significant as it once was. As a milestone though, getting to the point where your net assets pop over the million-dollar line remains significant, and something worth taking pride in.

Financial security provides choices in life. Whilst it is true that money can’t buy happiness, poverty and indebtedness can most certainly provide buckets full of unhappiness. So, let’s look at how you might be able to set yourself on the path to financial security and even membership into the millionaire’s club.

Step 1 – Focus on Income Generation

The absolute foundation in attaining millionaire status and the financial security that flows, is your ability to generate income. When I started my working life, I was immature, more concerned about fitting in and being liked then thinking strategically about the actions I needed to take, to get me to where I wanted to be five to 10 years down the track. The one good thing I did though, was complete a university degree at night, whilst working a full-time job during the day. It took six years to get my degree this way, but at its conclusion I had gained the maturity to look forward. My studies not only provided me with some of the skills necessary for my career progression, but also demonstrated to management that I possessed some degree of drive and determination.

Consider what investments you can make in your income generating capacity. Those investments are often not significant financial investments, but rather investments of your time. Becoming a millionaire will be challenging on a wage of forty or fifty thousand dollars a year. You want to be thinking about the skills and experience you need to acquire to put yourself in the six-digit income range.

Step 2 – Spend less than you earn

This is the dull one, but it can’t be overlooked. If you spend every cent that you earn, or even worse, more than you earn, then you have no hope of building significant wealth, and becoming a millionaire will forever be out of reach. You need to have surplus cash flow that can be used to save and invest. There are many ways to budget and manage your cash flow. Find one that works for you. The sooner you figure this out in life the better off you are likely to be.

Step 3 – Get comfortable investing

Okay, so you focused on your income generation, and that healthy wage and prudent spending is now providing you with a regular savings capacity. But if those savings simply sit in the bank, you’ll likely be old and grey before you ever hit the millionaire milestone. Instead, you need to get comfortable putting those savings to work. Investing.

The good news is, it’s never been easier to gain investment experience. Exchange traded funds enable easy diversification at a typically low cost. And various apps make it easy for you to access these investments.

Step 4 – Leverage

Once you’re comfortable with investing, it’s time to talk about leverage. Leverage means borrowing to invest. Whether you wish to buy a home or an investment property, it’s near impossible to make that a reality without a preparedness to borrow. Success in the earlier steps set you up here. Your savings capacity can be used to make loan repayments, and your accumulated investments can be used as a deposit or an emergency fund. If property isn’t the way you want to head, to reach millionaire status, using leverage to build your share portfolio could be a necessity.

Leverage, sometimes called gearing, magnifies outcomes. With the introduction of leverage, an investment that generates a positive outcome results in you, the investor, reaping a greater reward. But of course it works in both directions. When your chosen investment experiences negative returns, the addition of borrowings will make the outcome worse. So leverage is not something to be taken lightly, and it’s important to get a good grounding at Step 3, before migrating on to this 4th step.

Step 5 – Be patient, avoid distractions

The final step on your journey to becoming a millionaire should be the easiest but it isn’t. Successful wealth accumulation requires patience. There will always be noise in the media about some impending catastrophe, or trend that is apparently making people millionaires overnight. Ignoring all this and staying true to your approach is far harder in the moment than it seems from a dispassionate distance.

Go into your investments with realistic timeframes and then be prepared to leave them alone to ride the normal ups downs. Property for instance, given the high transaction costs associated, typically requires at least a 10-year timeframe to have confidence in a profitable outcome. Share portfolios require five years plus, and maybe more for particularly aggressive portfolios. So, if you enter these investments with these timeframes in mind, be prepared to largely forget about your investments until this minimum time frame is up. Avoid the temptation to fiddle and tinker.

Need additional help?

Well there you have my five steps to becoming a millionaire. One final thing I suggest you consider is establishing a relationship with a financial planner. Even Roger Federer had a coach. Having someone who knows you, who can act as a sounding board and support, can pay enormous dividends over time.

While I can’t predict the future and guarantee that by following these steps you will become a millionaire, following these steps should help you on a path to financial security. Learn more at www.financialautonomy.com.au

Cover image source: EpicStockMedia/Shutterstock.com

Paul Benson

Financial and Investment Contributor

Paul Benson has been providing financial planning advice for more than 20 years and launched his Financial Autonomy podcast in 2017. Paul is a best-selling author and holds a Bachelor of Business in Economics and Finance and is a Certified Financial Planner.