Have you ever wondered what it takes to become a millionaire? You might be surprised by how many people know the secret: About 20 million Americans, or roughly one in every 12 or 13 adults, are worth a million dollars or more. And while some got rich through luck or being born into the right family, most amassed wealth through perseverance—and knowing the answers to the following questions.
What Is Net Worth?
Your net worth is the value of all that you own (your assets) minus what you owe (your liabilities). Assets include cash, such as savings and checking accounts, and investments, such as retirement accounts, stocks and bonds and real estate. If you own a home or other property, that’s likely your biggest asset. Your car counts, too, though only its current market value, not what you paid for it. Your liabilities include debts such as credit card balances, college and car loans and mortgages.
If you’re trying to build wealth, calculating your net worth occasionally can help track your progress toward that goal. Here’s a simple example of how to estimate net worth. Let’s say your assets are a home worth $300,000 and a car with a market value of $20,000, and you have a combined $50,000 in savings, checking and IRA accounts. For liabilities, you owe $200,000 on your mortgage, $20,000 in college loans and $5,000 on a car loan, but you pay off your credit cards every month—good for you!
Assets: $300,000 + $20,000 + $50,000 = $370,000
Liabilities: $200,000 + $20,000 + $5,000 = $225,000
Net worth: $370,000 – $225,000 = $145,000
How Do I Make More Money?
The formula is pretty straightforward: Earn more than you spend and your wealth will build. Cutting costs is a good start, though financial experts say that building wealth inevitably requires bringing home more cash. Here are just a few ways (of many!) to pad your wallet:
- Ask for a raise. Be prepared to sell your boss on why you deserve the extra pay by spelling out the value you bring to the company.
- Get a new job. If your boss won’t budge, taking your talents elsewhere could lead to a pay increase. Again, be ready to make the case for why you deserve it.
- Upgrade your skills. While going back to school to hone your talents or learn new ones will cut into your budget initially, that could pay off with a higher salary down the road.
- Freelance on the side. If you have a professional skill such as accounting or graphic design, chances are there’s an employer who could use your talents for a few hours each week. Websites such as Indeed.com, LinkedIn.com and others list lots of freelance jobs. Another option is to apply some basic skills, such as driving a car or bicycle, by working for ride-sharing or food-delivery companies.
How Do I Start Investing?
Along with setting aside money for future needs (in a savings account, for example), investing a portion of your income is one of the most common ways to increase wealth. Don’t worry, though, since investing is simpler than you may think. You don’t need thousands of dollars to get started. And new options, such as apps like Robinhood, require just a few clicks on a smartphone to put your money to work.
When you invest, you’re purchasing something (or a share of it) that you hope will rise in value, such as a stock or real estate property, which will increase your return if you sell your shares. Of course, there’s a chance that an investment will decrease in value, meaning you lose money. If you put your money in the stock market, a financial advisor can help you identify investments that meet your “risk tolerance,” which reflects how much of a chance you’re willing to take in order to meet your goals.
One of the easiest ways to invest is having money automatically taken from your paycheck and placed in a retirement account called a 401(k), if your employer offers that option. If you invest through a brokerage, many charge fees for their services and take commissions for transactions, such as selling a stock, which can cut into your earnings. Using a no- or low-fee brokerage may help you keep more of your accruing wealth.
Where Should I Invest My Money?
There are endless options for new investors. Following a few rules can help you decide where and how to get the most from your money.
- Diversify. Allocating your money across an array of different investments, known as diversification, can protect your principle while building wealth. For example, if you invest in the stock market, purchase shares of different companies in a variety of industries. That way, if one company or industry suffers a downturn, gains by others in your portfolio can offset any losses you may experience. A financial advisor can help you select a balanced mix of stocks.
- Invest in a fund. Mutual funds do the diversifying for you, since they are made up of multiple stocks, usually including a mix of different industries. While the makeup of a mutual fund can change over time, an index fund invests in a set group of companies, such as the 500 largest firms in the United States (the S&P 500 Index). An exchange-traded fund (ETF) is like an index fund, but unlike mutual funds and traditional index funds, its value fluctuates during the trading day. ETFs also have lower associated costs.
- Balance risk. Including bonds, which are essentially loans to companies or governments, in your investment portfolio can provide balance against riskier securities. While not risk-free, bonds are generally safer investments than stocks, though their returns may be more modest.
- Consider your values. Special mutual funds are available that appeal to people who want to express social or environmental values through their investments. For example, a fund may invest in environmentally friendly firms, such as solar-energy companies, but exclude others that produce polluting fossil fuels.
- Know your time horizon. When do you hope to start enjoying the wealth you’re building? Knowing your time horizon, or the number of years you have to achieve your financial goal, will influence the types of investments you choose. Having a long time horizon allows you to select relatively safe investments that will increase in value gradually. Learn more about the importance of time horizons here.
You can learn more about investing in stocks here.
How Do Millionaires Make Their Money?
There is not a single path to the Millionaires’ Club—people acquire wealth in many different ways. However, research indicates that relatively few millionaires in the United States got rich through inheritance, known as generational wealth. Instead, most are self-made and built their wealth through a combination of hard work and wise decisions.
Experts who study wealth say most rich people got that way through one or more of the following routes:
- Living frugally, saving money and making sound investments.
- Starting a business that succeeded.
- Hustling in the workplace and getting frequent promotions—and pay raises.
- Having a special knowledge or talent in a well-compensated field, such as finance or entertainment.
All of these paths require sweat and sacrifice, but can lead to a wealthier future.
So, What Is the Best Way to Get Rich?
There are ways to get rich in a hurry, such as winning the lottery or betting big on the stock of a startup that turns out to be the next Apple or Google. But most people who build great wealth do so over time, by saving and wisely investing their hard-earned dollars. Think of building wealth the way you think about caring for your health—something you work on every day, by adopting smart habits.
Timothy Gower is an award-winning journalist whose work has appeared in more than two dozen major magazines and newspapers, including Prevention, Reader’s Digest, Esquire, Men’s Health and The New York Times.