Becoming a millionaire is a dream for many, but it can sometimes feel out of reach.
The good news is, there are experts out there with advice on how to make it happen. Financial guru Dave Ramsey is one of those experts, and Ramsey recently provided some clear advice on two things that you should do if acquiring a seven-figure nest egg is something you’re aiming for.
Ramsey said that there are two key things that he sees in millionaires, and that you should do if you want to join this exclusive club of wealthy individuals for yourself. Here’s what they are.
1. Prioritize retirement savings
Recently, in an episode of The Ramsey Show, the finance guru shared what he believes is a key path towards becoming a millionaire. The finance guru said, “The number one and two reason people become millionaires is they’re investing in their retirement and their paid off home.”
It’s very clear why investing in retirement would put you on the path toward millionaire status. When you invest for retirement, you can put money into tax-advantaged accounts such as 401(k) and IRA plans. The tax breaks that come from making these investments can help you to save more money more easily, as each contribution you make has less of an impact on your take-home pay because your deductible contributions lower your tax bill.
If you have a 401(k) match at work, you’ll also benefit from your employer putting money into your account when you do. That’s basically free money that you get to help you grow richer.
You also have a long time for compound growth to work for you when you invest for retirement. This happens when you earn returns on funds you invest, growing your balance. You then have a larger pot of money to invest, which in turn allows you to earn more returns. The more time this cycle occurs of investing, earning returns, and reinvesting those returns, the bigger your balance will grow, even without any additional contributions from you.
Say, for example, that you start investing for retirement at age 30 and you invest just $500 per month and earn a 10% average annual return. By the age of 65, you’d have over $1.6 million. Your $500 monthly investment, which didn’t even cost you a full $500 per month due to the tax breaks and potential employer match, would have made you a millionaire and given you a lot of security in your later years.
2. Pay off your home
The next thing Ramsey said that makes someone a millionaire is paying off their home. Ironically, the math may not actually work on this advice because, depending on your interest rate, you’re often better off just paying off your mortgage slowly over time and investing any extra money that you would put toward your home loan. You can usually earn a better return on investment that way, especially if you itemize on your taxes and your mortgage interest is at least partly tax-deductible.
Still, there’s a reason Ramsey believes paying off your home is important. If you can eliminate your monthly housing payment, this frees up a lot of money. You could turn around and invest that money, growing your wealth very quickly. If you really dislike the feeling of being in debt and you are more motivated to pay off your home than to invest those extra dollars, then this may be the better course of action for you.
Ultimately, you’ll need to think carefully about whether early mortgage payoff makes sense on your path to becoming a millionaire — and you may want to talk with a financial advisor to make that choice. But Dave’s other advice of prioritizing retirement savings is spot on, and if you make sure to invest steadily and regularly each month in a retirement account, becoming a millionaire is definitely within your reach.
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