Big money goals are intimidating, but that shouldn’t stop you from setting a high bar for your long-term financial health. With a lot of grit and proper planning, you can achieve a seven-digit net worth. Here are 12 steps to take to make your first $1 million.
1. Save at least 20 percent of your paycheck at a minimum
“In general, savings should account for at least 20 percent of income,” says R. Tyler End, certified financial planner and general manager of advanced planning for Policygenius.
If you are having trouble hitting that target, try auto-depositing a portion of your paycheck into a savings account. Slowly up this amount over time. You can also often “find” extra money by redrafting your budget. A financial app or simple spreadsheet can help you pinpoint areas of overspending or obvious money-wasters…like that gym membership you stopped using months ago.
2. Max out your retirement savings
The Internal Revenue Service currently lets you contribute a certain amount of money to tax-advantaged retirement accounts each year. For instance, in 2018, you can put up to $18,500 (or $24,500 if you’re 50 years or older) in an employer-sponsored 401(k) account. You can also contribute up to $5,500 ($6,500 if you’re 50 or older) to an individual retirement account (IRA) this year.
If you’re looking to hit the two-comma club, these numbers should serve as your North Star. If you can’t max out, aim to contribute at least what your employer is matching in your 401(k) and make incremental adjustments to your retirement plan as your income increases or financial situation improves.
3. Protect your income
You can’t bank money if you’re unable to make money. Disability insurance covers your income if you become too ill or injured to work. It’s “one of the integral pieces of wealth accumulation,” End says. “Basically, you are insuring your ability to hit your financial goals, whether that is paying off student loans, buying a house or retirement. People often say they will ‘stay with family’ if they ever fall ill, but fail to think about how it would decimate their savings.”
Policygenius makes it easy to compare and buy disability insurance online to protect your income. You can get started with Policygenius here.
4. Lean in
The job market has improved dramatically in recent years and, while wage growth has been modest, skilled and deserving workers aren’t necessarily beholden to their current salary. There might be opportunities for advancement at your current company. If you’re not happy in your current job, consider looking into what other positions are out there. Data shows many people increase their salary and improve their career trajectory after leaving a job.
5. Keep housing costs well below 30 percent of your income.
Money 101 says to spend no more than 30 percent of your gross income on major housing costs, like rent and utilities. If you want to make your first $1 million, aim even lower. Try to stay in a 20 percent to 25 percent threshold.
Renters, specifically, can find more affordable housing by forgoing fancy amenities, skipping pricey neighborhoods for up-and-coming ones and improving their credit. Landlords routinely check credit scores when you apply for a lease and bad digits can make it harder to secure prime listings.
6. Maintain good credit
A good credit score saves you on more than just rent. Lenders offer their lowest interest rates to people with a history of paying off loans as agreed. Insurers, cell phone service providers, cable corporations and utility companies are also in the habit of offering better prices to people with good credit — generally considered a score of 700 or higher with the best rates reserved for anyone with a score over 750.
You can build and maintain good credit by paying all your bills on time, keeping debt levels low, limiting new credit inquiries and adding a mix of accounts (installment loans like a mortgage versus. revolving loans like a credit card) over time.
7. Start an online emergency savings account
An online savings account is a secret weapon for super-savers. Why? For starters, they tend to offer higher annual percentage yields (APYs) than traditional financial institutions. Moreover, they create a little friction. Chances are, you have a checking account with a brick-and-mortar bank or credit union. Having a savings account with a completely different financial institution makes it harder to tap the funds for non-emergencies.
8. Take every tax break available to you
IRAs and 401(k)s aren’t the only tax-advantaged tools at your disposal. You can also catch a tax break (or two) by leveraging a health savings account (HSA), flexible spending account (FSA), 529 college savings plan or employer-sponsored commuter benefit programs.
9. Bank every windfall
It’s certainly tempting to cash big checks, like an unexpectedly high tax refund or annual bonus, and take a long, luxurious vacation. But your financial health is best-served if you save those dollars — or, better yet, find a way to make them work for you.
10. Invest and diversify.
These days, it’s very hard to nickel-and-dime your way to $1 million. You’ll likely have to dip a toe in more complex investments, like stocks, bonds, real estate and mutual funds. Fortunately, investing isn’t necessarily as scary or arduous as it sounds. Plenty of services offered by traditional brokerage firms or online investment companies can build you diverse portfolios and invest them according to your goals, End says, though you don’t need to use a professional.
“The most important thing is aligning the amount of risk you are taking on with your time horizon,” End says. “For example, if you are in your 30s, you have a long horizon until retirement and can take on a lot of risk, but if you are saving for a down payment for a house in two years, you want that to be in a safe, stable investment.”
11. Properly insure your assets
If you’re trying to build your net worth, you have to protect your major purchases. Have a car? Make sure you have a robust auto insurance policy. Ditto for if and when you buy a home. Tenants aren’t exempt when it comes to financial protection. Renters insurance covers the cost of replacing your possessions if they’re destroyed, damaged or stolen, plus liability expenses related to accidents in your rental unit. Your landlords’ homeowners insurance doesn’t cover your stuff or those situations.
12. Consider a side hustle
If you can’t save more, look for ways to earn more. Thanks to the growing gig economy, Americans have quite a few ways to make some extra money on nights and weekends. Popular side hustles include ride-sharing, errand-running, pet-sitting and tutoring. You can also explore renting out your property on vacation rental sites or selling gently used goods in online marketplaces.
Disclaimer: TaxAct, Inc. gets paid by some third parties, including Policygenius, that provide offers to its customers. We work diligently to work with companies that make sense for our TaxAct customers. This compensation may affect how and where offers appear on our websites. TaxAct is not a party to any transactions you may choose to enter into with Policygenius, does not itself offer legal, tax, insurance, or investment advice and disclaims any liability arising out of such transactions. Please see the Policygenius websites for full terms and conditions applicable to Policygenius services.