How to Make a Million Dollars

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Introduction to How to Make a Million Dollars

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A million dollars just isn't what it used to be. Thanks to inflation, there are more millionaires today than ever before. Last year, the Wall Street Journal reported that there were 7.5 million millionaires in the world in 2004 -- a record number.

At the end of 1999 there were 2.8 million Americans with $1 million in investable assets (meaning the value of their homes is not included among those assets). These are high-net-worth individuals (HNWI). About 2.5 million people had $1 to $5 million of investable assets; 200,000 had $5 million to $10 million, and the rest had more than $10 million. That's not counting the number of people in this country who have a million-dollar net worth if you include their principle residence.

What Your Net Worth Should BeAccording to Thomas J. Stanley, author of "The Millionaire Mind" and "The Millionaire Next Door," a good way to determine what your net worth should be is to multiply your age by your annual income (all sources) and then divide by 10. So, for example, if you are 30 years old and earn $50,000 a year, you should have a net worth of $150,000. If you are 40 years old and earn $100,000 a year, you should have a net worth of $400,000.

Before we get into becoming a millionaire, let's define the target. What makes someone a millionaire? Is it having a million dollars in the bank? Sure, unless they also owe a million. Is someone who owns a house that's worth a million dollars a millionaire? Not if there's a mortgage on it.

Most people define a millionaire as someone with financial assets that add up to a million dollars -- in other words, someone with a net worth of a million dollars. There are different ways to determine net worth, however. Some count the value of the person's primary residence, while others do not. For many of us, our primary residence is our most valuable asset, so not counting it as part of our net worth significantly lowers our personal bottom line.

Because money that's tied up in real estate or trust funds isn't easily accessible (known as non-liquid assets), some only consider a person a millionaire if they have 1 million dollars in liquid assets, like cash or stocks. For this article, we'll consider anyone a millionaire to be anyone with a net worth of at least 1 million dollars, including the value of their primary residence.

But how do you figure your net worth? That's simple (sort of). Just add up the value of your assets, which includes your house, all of its furnishings, your cars, your bank accounts and your investments. Then subtract all of your liabilities, which includes the balance of your mortgage, car loans, credit card balances and other outstanding debts. What's left is your net worth. (Try this online calculator to simplify the math.)

Next, we'll look at the millionaire lifestyle and find out what most millionaires have in common.

The Millionaire Lifestyle

Remember the TV show "Lifestyles of the Rich and Famous"? We all imagine millionaires drinking expensive champagne at breakfast, driving expensive cars, shopping at the most prestigious establishments and vacationing in exotic locations. And of course many millionaires (and multimillionaires) do that.

However, several researchers have studied the lifestyles of millionaires and come to the conclusion that the majority of them don't live that way at all. That's part of why they're millionaires. Thomas Stanley and William Danko's book "The Millionaire Next Door" revealed that most millionaires really could be the folks next door. They don't drive a new car every year or jet around the world. In fact, sometimes they're the least likely person you would suspect.

Stanley and Danko found that millionaires share a few common characteristics:

They live below their means.
Half of the millionaires interviewed did not live in high-status neighborhoods. Instead, they lived in average neighborhoods in average houses. That's how they were able to save money. The other half that did live in high-status neighborhoods only moved there after they had become wealthy.

Image courtesy Stock.xchng
Contrary to popular belief, many millionaires do not live in mansions in prestigious neighborhoods.
They lead frugal lifestyles.
Most do not buy $5,000 suits, expensive boats or even new cars. You might say they're tightwads. They shop for bargains and always negotiate for a better deal.
They're self-employed or own their own businesses.
They also love their work -- they connect with their jobs and feel very passionate about them.
They plan and study investments.
The majority of millionaires invest heavily and spend a large amount of their time studying their investments or seeking advice from financial advisors.
They weren't always at the top of their class.
Another surprising commonality among the millionaires interviewed was that they didn't all have advanced degrees or graduate at the top of their classes. Some didn't even go to college and a few didn't even finish high school.
They're self-made.
Finally, the majority of millionaires received no family money and do not plan to give their own children a lot of money. They want their children to succeed the same way they did -- on their own.

We'll look at what it takes to make a million dollars next.

High-net-worth Terminology When bankers talk about the mega-rich, here are the terms they use (and they do exclude the value of the person's home):

A pentamillionaire is someone with a net worth of $5 million.
A decamillionaire is someone with a net worth $10 million.
A hectamillionaire is someone with a net worth of $100 million, although most refer to them as Ultra-High-Net-Worth (UHNW).

What it Takes

Image courtesy Microsoft
Bill Gates had the best of both worlds -- a big trust fund and an entrepreneurial spirit that brought him success.

There are essentially two different ways that you can make a million dollars: the easy way and the hard way.

The Easy Way
The simplest way to become a millionaire is to choose the right parents and/or grandparents. Paris Hilton of the Hilton Hotel chain fortune "chose" this route, as did Jamie Johnson of Johnson & Johnson and many others. Since our lineage and the occasional corresponding trust funds are usually out of our control, most of us can't take advantage of this method.

If you're incredibly lucky or have a knack for trivia, you might have a chance at winning the lottery, hitting it big in Las Vegas or winning a load of cash on a game show. But those methods may or may not throw you into the millionaire circle. Plus, with the Las Vegas approach you may find that you're hooked (in which case, you should see our How Craps Works article) and subsequently lose your fortune on your next boondoggle.

If you have extreme athletic talent, you stand a slim chance of making millions as a professional athlete. LeBron James, who went straight from high school to the NBA, got a $90 million contract from Nike before he had even played a single professional basketball game.

Image courtesy Atlantic City Convention & Visitors Authority
You could always hit it big at a casino and make a lot of cash -- but the odds of becoming a millionaire aren't good.

Bill Gates has the best of both worlds. Not only is Bill Gates an ambitious and extremely successful entrepreneur, he also had the cushion of a million-dollar trust fund to fall back on -- just in case. Most ordinary people don't have that kind of luck, but that didn't stop over 7 million people from becoming millionaires anyway.

The Harder Way
Even if you're not a trust-fund baby and aren't the luckiest person around, you can still make it big. As we mentioned earlier, most millionaires are self-made, ordinary people very much like you. But they set a goal to become a millionaire -- or at least a goal to achieve financial freedom. In order to achieve their goals, most of them started their own businesses simply because it's difficult to earn enough money to become a millionaire when you're working for someone else. Instead, you're making them a millionaire.

Nothing is a sure thing. But if you want to really have a chance at making a million dollars then working for yourself is one of the best ways. Of course, starting your own business means taking a risk, but it may not be the risk we've always thought it to be. According to an article at Business.com, the old saying that nine out of 10 new businesses fail just isn't true. The author, Dan Kehrer, says that "a review of businesses gone bust by StartupJournal.com, a Dow Jones & Co. division, shows that the number of outright business failures in the United States is highly exaggerated" [ref].

The article also explains that about one-third of business closures that government statistics assume to be failures are actually successful businesses. Their owners simply sold off pieces of the business or closed them to retire or pursue other activities.

Data from the U.S. Census Bureau's Business Tracking Series show about 65 percent of new businesses still operating after four years. Another recent study estimates that only 10 percent of the nation's 5.5 million small businesses (not counting solo operators) close each year.

With this outlook for success, maybe starting that new business isn't such a risk after all. If you do fail, just remember that with each failure comes experience and knowledge to help the next venture succeed. Many self-made millionaires failed at businesses before they got it right. And each time they failed, they learned a lesson for their next business idea.

Next, we'll look at how saving and investing can earn you a million dollars.

A Dollar Saved...(or Invested)

If you save and invest money every month, you will become a millionaire at some point. As Einstein put it, compound interest is the "eighth wonder of the world." It all depends on how much money you currently have, how much interest that money will earn (the tricky part), and how much you can save each month -- and, of course, how long you can wait. Another critical part of the equation is that you leave the interest earned alone so that it keeps earning interest.

There's one often-cited example of the power of compound interest. If Christopher Columbus had placed a single penny in a 6 percent interest-bearing account and instructed someone to remove the interest every year, the value of the interest earned by 2005 would be almost 31 cents. But if he had placed the same penny into the same interest-bearing account but left the earned interest to compound -- earning interest upon the interest -- the resulting balance for 513 years would be $95,919,936,112. That's $95 billion!

All over the Internet, you'll find calculators that tell you how much you need to save each month in order to have a million dollars by an age you specify. For instance, if you're 30 years old, have $5,000 already, save $100 per month, and can earn 8 percent interest, you'll be a millionaire in a mere 51 years -- at the ripe old age of 81. Most calculators will also tell you how much that million will actually be worth by that time because of inflation. In our example case of 51 years, a million dollars will only be worth $213,215 in today's dollars, which probably won't be enough for financial freedom.

The more you save and the better the interest rate, the sooner you'll become a millionaire. However, a million dollars will be worth less in today's dollars.

This means that you have to work to make that million happen in fewer years. Not only will you get to retire sooner, but when you do, your money will have more buying power. Let's go back to our calculator and change the numbers a bit. Let's say that, instead of $100 a month, we save $200. That changes our million-dollar mark to age 73, or only 43 years. It also changes the adjusted worth to $265,069. Now, let's say we find a way to scrape together $500 a month to save. That drops our million-dollar mark to age 63, or only 33 years. Not bad. And, the value at that time will be $361,977. Now, what if instead of 8 percent interest, we invest our funds well and can average 10 percent earnings? Now we'll be millionaires at age 59. Granted, that million will still be worth less than $500,000 in today's dollars ($414,882).

You should also determine how much money you will need. A million dollars sounds like a lot of money and a good amount to shoot for but depending on your lifestyle, it probably won't be enough to retire on when the time comes if that's your goal. Usually, the same Web sites that have those handy millionaire calculators also have retirement calculators. By plugging in your current expenses and an estimate of your expenses once you retire, you can come up with a more realistic financial goal for retirement. You may find that you need to be a multimillionaire in order to retire with the lifestyle you want.

Of course, simply being a millionaire (or multimillionaire) at retirement isn't everyone's goal. Most of us would like to experience the millionaire lifestyle sooner rather than later. We want financial freedom so that our investment interest is enough to pay our living expenses. In that case, let's talk about how you can make that happen.

Making it Happen

There's no one way to become a millionaire, but there are some basic, common-sense steps that you can take. Even if becoming a millionaire isn't your goal, these tips can help you save money and become financially stable.

Know your current net worth
In order to successfully travel anywhere you have to first know where you're starting out, right? So, the first thing you have to determine is your current net worth, because knowing your starting point will help you pinpoint that all important estimated time of arrival.

Set your goals
How soon do you want to be millionaire? In a year? In five years? Or are you just hoping to make it by the time you retire? Whether you want to make it in one year or 30, you need to have a written goal. If you're thinking about your retirement years, do you plan to downsize to a smaller and less expensive home? Do you plan to travel? Or are you content with cable TV and an occasional fishing trip? Whatever your pleasure, you need know how much money you're going to need in order to live the life you want.

Investing in Others If you're a shrewd investor (or if you have good advisers) you can certainly earn big returns by investing in other people's businesses. Many successful investors say you should invest in something you're interested in or know something about.

For example, if you work in the pharmaceutical industry, then you already have leg up on many other people. If you see that a company has developed a new drug delivery method that will revolutionize a specific area of pharmaceuticals, you can quickly recognize its value and get in earlier when the stock prices are low. That, of course, satisfies the first portion of the "buy low/sell high" rule of investing.

Determine your strategy
Now is the time to determine how you want to make that money. Most millionaires own their own businesses, but several (not counting sports stars and actors) have achieved millionaire status working for others. Many physicians, attorneys and corporate executives also earn incomes that enable them to achieve great wealth -- particularly if it's managed wisely. Obviously, if you want to make a million dollars in a short amount of time, say 5 to 10 years, you're going to need a pretty aggressive plan in order to succeed, and that usually means you'll need to branch out on your own.

Set up an emergency fund
One of the first rules you hear about managing your finances is to always have accessible cash in the event you're are laid off, injured, or some other catastrophe takes away your ability to earn a living. Recommendations vary, but usually that amount should be three to six months living expenses.

Setting a Budget

Set a budget and manage your money wisely
Budgets are something most people don't worry about if they have enough money from month to month. They don't see the need. The problem is they also don't see how much money they are throwing away on things that don't really matter. How much money do you spend on things like fast food, lattes or movies? Do you shop because you're bored, buying things you really don't even care about?

Think about how much money you spend buying things on a whim. Keeping track of where your money goes is one of the best ways to increase your wealth. Spend your money only on things that are actually worth it. Using a financial management software program makes tracking where your money goes much easier.

Setting a budget also helps you save more money. At the end of each month, any money you haven't spent on necessities (or budgeted items) could be transferred into savings or invested.

Pay off your debt
Start with your smallest debt first and chip away at it until it's gone. Then add the money you had been paying on the smallest debt toward your next smallest debt until it's paid off and so on until you're debt-free.

Start saving and investing early
As the Rolling Stones put it, time is on your side. When it comes to investing and even putting money into high-yield savings or money market accounts, the longer it sits there, the more free money you'll get.

Starting a high-yield savings account early is a great way to make money with no effort.

Let's say that at the age of 12 you won $500 in a raffle. Instead of using that $500 to buy the latest game console and all the games your heart desired, you did what your dad suggested and put that money in a savings account that earned 5 percent interest. Over time, that interest rate will fluctuate up and down, but to simplify things, we'll just say that it's a constant 5 percent. After the first year, your $500 became $525. At the end of the second year, it reached $551.25. At the end of five years, you had $638.14. At age 25, you had $942.82. By the time you were 40, that $500 would have turned into almost $2,000 ($1,960.06).

Now, assume that instead of a savings account, you had invested that $500 in stocks that earned 10 percent each year over those 28 years. If you were smart and did that, then at 40 your $500 investment would have turned into over $7,000.

If your company offers a 401(k) (particularly if they will match your contribution), invest as much as you are allowed. If you have an IRA, do the same.

Automated Savings and Starting a Business

Set up automated savings
This is an easy way to trick yourself into saving money. Have as much money as you can spare go directly into your savings account from your paycheck before you get a chance to spend it. Or, have it go directly to your 401(k) or other retirement account so you don't even have pay taxes on it (at least, not until you withdraw it).

When you get a raise, rather using that money to upgrade your cable service, invest it. If you really need more money to live, try taking out just a portion of your raise to invest.

Revisit your goals regularly
Don't lose site of your goals. If you have to, tape an index card to your refrigerator that spells your goals out in black and white. It's the same principle as putting pictures of skinny people on your fridge to keep yourself from snacking. When you're regularly reminded of something you want, you're more likely to get it.

Start a business
Are you an entrepreneur? Are you willing to put in the time and effort to build your own business? More importantly, do you have a great idea for a business? The majority of self-made millionaires are self-employed or business owners who had a great idea and the skill to bring that idea to life.

Take the Ferret Guys, for example. In 1994, Joe Palko and Scott Sanfilippo, both ferret owners, realized that few pet stores carried food and toys for ferrets. So they launched TheFerretStore.com, an online retailer that quickly took off. They started several more pet-related online stores as well as a Web design firm called Solid Cactus, and last year they hauled in $7 million in sales.

Often the secret is to find the unfilled niche just as the Ferret Guys did. Another very important factor when starting a business is to start a business doing something you love to do. After all, you will be spending a lot of time with it for at least several years. Obviously, the Ferret Guys were already ferret fans since they both had pet ferrets, so their venture was probably a fun and fulfilling one for them.

According to Dr. Srully Blotnick, a psychologist and consultant who spent over 20 years studying how people became rich, most millionaires didn't make their money in real estate or the stock market. They made their money working in a field they had great interest in, which meant they enjoyed their work and became passionate about it. Later, after they had made their money, they invested in it (along with real estate and the stock market).

If you're not sure what kind of business you might want to start, do some research, network, ask questions and take notes. Look for needs that aren't being fulfilled. You may even design a product to meet a need, patent it and then license it to someone else to manufacture and sell. Often the most important thing is the idea.

But, it doesn't always have to be a new product or even a new business. You might find a new way to use an old product, like using materials that are typically discarded in a new way. Or, maybe you've noticed a location that could really use a certain type of store, but for the closest one is mile away. Maybe there's an opportunity for a franchise. Better yet, you could come up with the new successful business and become the franchisor.

In the next section, we'll learn about some successful millionaires.

Success Stories

If you're feeling overwhelmed by the number of steps to take on your way to making a million dollars, check out these stories of ordinary people who became millionaires.

Be a Virgo According to this Forbes.com article, more billionaires are Virgos than any other zodiac sign. Forbes confirmed the birth dates for 613 of their 793 billionaires and more than 70, or roughly 12 percent, were born between August 23 and September 22. According to astrologer Michael Lutin, Virgos are hardworking, determined, detail-oriented and analytical. Their desire to achieve excellence at whatever they do drives them more than the pursuit of riches. Two of the richest and best-known American billionaires are both Virgos: Warren Buffett, who also happens to be the second-richest person in the world, and Larry Ellison (CEO of Oracle).

Neil McCarthy
Neil McCarthy started investing in the stock market when he was 34, in the 1970s. Today he has a net worth of about $2.1 million. When stocks went down, he bought more. He contributed the maximum to both his IRA and his 401(k) and his employer matched 100 percent. That's truly free money -- no risk. The big payoff came during the 1990s bull market when his stock doubled in three or four years, suddenly reaching $1 million.

He avoided technology companies because it didn't make sense to him. He saw price-earnings ratios of 200 to 300 and "thought it was absolute nonsense." This practical investing style saved his millionaire status when the market crashed. When he retired in 2000, McCarthy took his retirement payout as a lump sum. Just before interest rates started to fall, he invested part of the money in an immediate annuity and earned a bigger payout than if he had chosen the company's pension annuity.

His number one piece of advice that made all the difference is this: "If you wait to save out of what's left over from your salary, it's not going to happen. Pay yourself first."

James Moran
James Moran began by pumping gas at age 14 and getting his hands dirty running gas stations and fixing cars. In 1968, he acquired a Toyota distributorship and eventually added financing, leasing and insurance for auto dealers. Today he owns the world's largest privately-held Toyota distributorship with sales of $7.6 billion. His net worth is 1.4 billion.

Petro Kulynych
Petro "Pete" Kulynych started at the bottom as the bookkeeper for a small hardware store in North Carolina, earning $25 a week. That store became the first in the Lowe's hardware chain and Mr. Kulynych ended up a top executive. He is quoted as saying, "I live in a small town and I don't stick out any more than the guy down the street who works in the service station."

Mike Domek
Mike Domek started his business with $100 in 1992. He had run out of money for college and decided to try ticket brokering full time to save up for school. He launched TicketsNow, an online company, 7 years later. Domek's projected sales for 2005 were $120 million and he did it without any outside funding.

Joel Boblit
Joel Boblit launched BigBadToyStore.com in 1999. He sold action figures as a hobby for extra money while he was in school. With the help of his parents, he was able to turn it into a thriving business. BigBadToyStore caters to specialty toy buyers with vintage favorites like Star Wars figurines and Teenage Mutant Ninja Turtles as well as comic- and movie-related items. His projected 2005 sales were more than $4 million.

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How to Make a Million Dollars