I’ve been a financial advisor, author, and educator for 16 years, and this is without a doubt one of the most frequently asked questions. So, without further ado, here is the step-by-step answer to unlocking your first million without having to own real estate, buy and sell businesses, or participate in get-rich-quick schemes.
Start with the goal of $1,000,000 in mind
Never underestimate the power of vision and focus. People who are financially focused, with clearly defined and written goals, are three times more likely to achieve what they set out to do. Start viewing $1,000,000 today. Try this Q&A vision exercise and if you like vision boards, make one.
What does $1,000,000 mean to you? Is that a bank balance you see? It’s a lifestyle? Describe it.
How does it feel emotionally to have this money? Are you financially fearless?
What are you doing at the exact moment you make your first million?
Describe what $1,000,000 would do for your life. What changes?
Open the right accounts
Tax-advantaged investment accounts are the way to go. Open your TFSA and RRSP plans along with any pension plans available through work. You will regularly contribute to these. Once these plans are fully funded, you can turn to off-the-record investment plans to grow your money. When choosing where to open them, get referrals from people you trust who actually have money. Are they using a wealth advisor, auto advisor, or bank?
Fund accounts with your unique number
Have you ever played with a compound interest calculator? If not, it’s about time you did. These calculators are free online and can be extremely motivating when you’re building up your savings to reach your first $1,000,000. I like the ones where you connect the end goal ($1,000,000), your age (say 35), and the rate of return you plan to achieve (anything between five and eight percent is fine if you’re under 50 and plan to keep the money invested for a minimum of 15 years). The calculator then gives you a number: how much you need to save monthly or annually to reach your $1,000,000 goal.
Let’s say you have 30 years to invest and you have $10,000 saved. If you earn a six percent rate of return, you would need to fund your accounts to the tune of about $935 per month to be a millionaire by retirement. If you’re 20 years old and the same scenario, it’s more like $2,100 per month. The less time you have, the more you have to save each month, so it’s always best to start investing early.
Many people have to supercharge their progress by making larger lump-sum contributions to their tax-advantaged accounts, especially if they are behind on their savings. A popular technique is RRSP loans.
Make your growth complicated through investment
Your money in your tax-advantaged accounts must be invested to grow it. It’s not enough to simply sock away. To invest well, you need to be in it for the long haul and choose high-quality investments.
The way to do this is to first determine the type of investor you are through risk assessment. Then select investments that are aligned with your risk profile. A professional investment advisor, financial planner, robo-advisor or money coach should be able to help you with this and give you specific advice on how much to put into your tax-advantaged accounts. If you have limited or no investment experience, do not go through the investment selection process on your own. Hire a professional (or service) to make sure you’re properly diversified. Unfortunately, DIY investors without extensive experience have a poor track record of achieving optimal returns.
Automate this system and celebrate
One of my favorite books when I was early in the process of building my first million was “Automatic Millionaire.” by David Bach. The central lesson of the book is to outsmart yourself through automatic contributions. So on payday (or weekly or monthly), automatically contribute your money to your investment accounts. Investment providers will allow you to do this through a pre-authorized contribution agreement. Once you have a good idea of what you should be saving to reach your million (the compound interest calculator will clear that up), set up your automatic contributions. If you are invested in funds, most are automatically rebalanced for you. If you’re using a wealth manager, they likely have some kind of automated system to help ensure your portfolio is properly balanced.
My pro advice here is don’t. on-automate things to the point where you stop looking at your investment portfolio. You still need to be present – this is your money!
Guess what the secret ingredients to this five-step process are? Patience and perseverance. Building wealth takes time and effort. And that, my friends, is how to make your first million in five steps.