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Become a Millionaire One Small Step at a Time

July 2009

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Would you like to have a million dollars by the time that you retire? There are several ways to become wealthy. One way is to marry a wealthy person (e.g., Bill Gates’ wife, Melinda). Another is to inherit a lot of money or receive a large settlement of some kind. A third strategy is to invent or produce a product or service that is in high demand. And then there’s always the possibility of winning $1 million on the Who Wants to Be a Millionaire? television game show. In reality, though, most millionaires become wealthy the old fashioned way: they grow rich slowly over time through a combination of systematic investing and compound interest.

According to the book The Millionaire Next Door, you can’t necessarily tell if a person is wealthy by looking at them. Also, most millionaires work hard to achieve their wealth; they are not born with it. Self discipline (i.e., regular investing and living below one’s means) are key factors. The average age of millionaires is 57, indicating that, for most people, it takes three or four decades of hard work to accumulate substantial wealth.

Research was conducted by the authors, Thomas Stanley, Ph.D., and William D. Danko, Ph.D., to determine characteristics that millionaires have in common. Key findings from Stanley & Danko’s research include the fact that most millionaires exhibit discipline and hard work. Many don’t look the part. The Texas saying “Big Hat- No Cattle” means that many people who look wealthy (big hat) really aren’t (no cattle). Contrary to popular myth, many millionaires do not work in a “glamorous” occupations. Instead, they own or manage “dull-normal” (the authors’ term) business such as a fuel oil company or funeral parlor.

An especially helpful part of the book is a formula, described on page 13, to evaluate your own financial progress based on your age and household income. PAWS (prodigious accumulators of wealth) are doing better than average (top 25% of households) and UAWS (under accumulators of wealth) are in the bottom quartile. Average accumulators of wealth (AAWS) are in the middle 50%.

The formula works as follows: multiply your age by your pre-tax (gross) income from all sources except an inheritance. Then divide by ten. This gives you a dollar figure to compare with your personal net worth (assets minus debts). For example, a 35-year old with a $40,000 annual income should have a net worth of at least $140,000 (35 x 40 = $1,400,000 divided by 10).

According to The Millionaire Next Door, frugality, goal orientation, and planning are key factors in wealth accumulation. Stanley and Danko found that many millionaires invest early and often and take action to achieve specific financial goals. They also avoid high-status items and often buy used cars. An interesting feature of the book is an appendix which indicates the “cost per pound” of available vehicles.

Of course, not everyone will become a millionaire. But everyone can learn from the habits that make millionaires successful and take small steps toward improved personal finances:

  • Live below your means by spending less than you earn.
  • Pay yourself first” through regular savings (e.g., payroll contributions to a 401(k) plan).
  • Invest in a diversified portfolio that includes stock to “grow” your money over the long term.
  • Set clearly defined goals with a price and a date (e.g., $20,000 saved within five years).

Motivation is a powerful incentive to save. What people think about, they bring about. Who knows? You could even become a millionaire sometime in the future, even if you’re never on a game show.