Making millions of dollars may feel like a far-fetched dream, but it is possible to join the other 21 million millionaires in the United States if you take certain steps. Unfortunately, these steps and strategies often aren’t taught to us when we’re young. Most often, this is because our parents didn’t know these principles either. This is because no one taught them.
Historically, there have often been racial, gender, and socioeconomic factors at play that have suppressed wealth creation within certain populations of people as well.
With this in mind, let’s dive into the steps you’ll need to take. I hope you find these strategies helpful because I want everyone to have the chance to become financially free—especially people from marginalized groups who may not have had access to this information growing up. You are the ones I want to see thrive, more than anyone.
So let’s dive in.
1. Determine Your Net Worth
The first step is to determine your current net worth. Calculate all your assets to determine your starting point. Add your assets and subtract your debts and liabilities. What remains is your net worth.
If you have a net worth of $100,000 or higher, you’re on your way toward making your first million. In this case, your challenge will be to fund ways to invest your money so that it can start growing. You’ll want to track your net worth over time because, as the old Peter Drucker saying goes, “What gets measured gets managed.”
This may not seem like an important step, but it is, because it will help you to get used to reviewing and tracking your net worth.
When you enter the wealth building phase, watching and tracking your progress will play in important role in keeping you motivated.
2. Drive Up Your Income (Yes, You Can Control This)
Learning to maximize your income is essential to becoming a millionaire by 40. You must be proactive and push to get promotions and raises at your current position. Leverage your skills and experience to get a raise at your current job, or look at outside opportunities to boost your salary.
One of the most important parts of increasing your income is increasing your skills. Spend time at work and outside of your work learning new skills that will make you valuable to both your current employer and other companies who might want to hire you in the future.
Here are a couple hard truths:
- Doing your job to the best of your ability is not grounds for a promotion, because that’s what they pay you to do.
- Being at your job for an extended period of time is not a reason to be promoted. (In this case, you could ask for a cost of living adjustment, but that’s about it.)
What will get you a promotion is becoming increasingly valuable to the company over an extended period of time by either improving your performance, improving your skills, improving your outcomes, or improving the company’s position within the marketplace.
Fore more on this topic, I’d encourage you to read this article on “11 (Real) Ways to Increase Your Income in 30 Days or Less.”
3. Save 10 – 40% of Your Pre-Tax Income
The reason that the previous step is so important is that you need to be able to save between 10-40% of your gross income and this usually isn’t possible when you are surviving on a lower income.
In most cities, you will need to be making over $70K as an individual, over $100K as a couple, and over $225K as a family of four to have any chance at saving 10-40% of your total pre-tax income.
Of course, there are some low cost of living cities and locations where you can accomplish this on a lower salary. If you’re young and motivated to become a millionaire, I’d certainly recommend that you consider moving to one of these locations.
This article shares the 20 lowest cost of living cities in the U.S. Currently, Sioux Falls, South Dakota tops this list, followed by Springfield, Illinois, and Wichita, Kansas.
4. Make Money on the Side
Another important step of becoming a millionaire before 40 is to start creating multiple flows of income. Every cent counts on this journey and a side hustle is an excellent way to make extra money.
There are tons of ways to make extra money on the side. Some simple options include:
- Renting out a room in your house (you can list it for free on Zillow)
- Having AirBnb guests to stay at your place when you’re traveling or staying over at a friend or partner’s house
- Renting our storage space in your garage or basement (yes, there is a strong market for this)
- Renting out a parking spot (i.e., your driveway or garage) or providing long-term vehicle storage
- Freelancing on Upwork
- Sharing your expertise on sites like Clarity.fm
- Giving you opinion in focus groups
- Selling physical or digital goods on Etsy
- Selling unwanted items you’ve accumulated on eBay
- Etc., etc., etc.
The goal is to find work you enjoy and that pays well. Making an extra $100 daily generates an additional $36,000 annually, which will propel you toward your goal.
5. Create Passive Income
As a wise mentor once told me, there are three times that you can be making money, and initially, when you’re in the wealth building phase of your life, you should be focused on all three. (Later, you can focus largely on the passive income side but that step doesn’t come first because it’s easier to create passive money when you have money to deploy.)
These three times are:
- During your prime working hours – This is usually when you make money are your main job
- After hours – This is when you can make money on the side
- When you’re sleeping – This is when you can make passive money
In the sections about, we talked about driving up your main income from your job or business and creating money on the side. So now, the question becomes, how do you make money while sleep? That is, how do you create passive income streams?
You can create passive income many different ways, but some of the most common ways to do this are:
Passively Investing in Real Estate
An easy way to passively invest in real estate is to invest with a real estate syndicator. When you do this, you get to own a small percentage of whatever property (or properties) the real estate syndicator is buying. This means you get to collect a portion of the cash flow, tax advantages, and eventually, the profit when these properties gets sold or refinanced. I love to invest in real estate this way, because gives me most of the upside of owning real estate, with none of the responsibilities of acquiring or managing properties. It also limits my liability (risk) because I’m not buying or operating the assets.
You can view a Master List of Real Estate Syndicators here.
Invest in Dividend Stocks
Dividend stocks are stocks that pay out a portion of a company’s profits as monthly or quarterly payments to its shareholders. Examples of dividend stocks are AT&T (ticker: T), Energy Transfer (ticker: ET), AbbVie (ticker, ABBC), and Healthpeak Properties (ticker: PEAK). As a real estate investment trust (REIT), Healthpeak has to pay out 90% of its income to shareholders.Dividend stocks are another easy and effective way to create passive income for yourself.
Peer-to-peer lending involves the act of lending money to other people or businesses in exchange for receiving interest on your money. Basically, you’re acting as a bank and giving out a loan on which you are paid back your original amount, called principal, plus interest by the borrower.If you want to go this route, here is a list of peer-to-peer lending sites that you can explore:
- Upstart – upstart.com
- Prosper – prosper.com
- Lending Club – lendingclub.com
- Funding Circle (Business Loans) – fundingcircle.com/us
- CircleBack Lending – circlebacklending.net
- PeerForm – peerform.com
- StreetShares – streetshares.com
Debt funds are another great option for creating passive income. A well known debt fund with a great track record is DLP Capital, which uses investor contributions to offer loans for real estate construction and acquisition. When you invest with a company like this, you typically get paid between 8-12% on your money, while it is backed by real estate assets. In the case of DLP Capital, you can also request to have your money returned to you within 90 days (called a “redemption window”) and it will often get returned much sooner.
Of course, it’s important to due your due diligence when investing in debt funds, because some invest in riskier projects and assets, while others are more conservative.
Earn Income on Your Cash Holdings
Finally, right now is a bit of an usual time in history because interest rates are quite high. For this reason, you can also earn 5.0 to 5.5% in many high yield savings accounts, such as Robinhood’s high yield savings account called Robinhood Gold.You can also simply invest in Money Market Mutual Funds, like Vanguard’s Federal Money Market Fund (ticker: VMFXX) to earn 5 to 5.5% on your cash with very little risk. When you invest in a money market mutual fund, you are typically investing in short-term debt securities, usually U.S. Treasury bills.
Currently, I am holding most of my cash in money market mutual funds (like VMFXX) until it is ready to be deployed into higher yielding investments.
6. Multiply Your Money (Your Rate of Return Matters!)
Next, you will need to learn how to put your money to work so that it can multiply itself many times over. If you can earn 10% per year on your money, then it will double roughly every 7 years. Meaning, with a 10% rate of return you can turn $100K into $200K in seven years, and over 14 years, you can turn that $100K into $400K.
If you can earn 15% per year, then your money will double even faster—roughly every 4.5 years. This will accelerate your wealth creation even more.
The two most common metrics that are used to track how fast an investment will grow your money are IRR and ARR. ARR stands for annual rate of return and is a formula that calculates the annual percentage rate of return expected from an investment, compared to its initial cost. IRR stands for Internal Rate of Return and is another similar metric that lets you estimate the future profitability of an investment.
Both of these terms are similar, but IRR does a better job of accounting for the “time value of money”— that is to say, you’d rather have $100 today than $100 a decade from now.
I’d recommend that you get a basic understanding of what the terms IRR and ARR mean, because these metrics impact speed at which your money is predicted to grows. You can learn about these terms here.
Personally, I aim to invest in assets and opportunities that are targeting returns of 15-20% IRR (or more), because these investments help my money to double in value every 3-4 years.
The first time your money doubles it usually doesn’t change your life. However, when it starts to grow by 4X, 8X, and 16X, it can become a game changer. Meaning, this is how you can grow $100K into $200K, then $200K into $400K, $400K into $800K, and $800K into $1.6 million.
7. Defer Taxes
Finally, an important way to grow your wealth is to pay less in taxes or to let your money compound tax-free. There are retirement vehicles, like 401Ks and Roth IRAs, that can provide these types of tax advantages.
Contributions to a traditional 401(k) are made using income that hasn’t been taxed yet. Because the funds that go into your 401K have not been taxed, it allows you to have a larger amount of money to contribute. Additionally, by making these pre-tax contributions, each dollar you contribute lowers your current taxable income by an equivalent amount, resulting in a reduced income tax liability for the year.
Understanding your 401k and the tax benefits associated with it may help some people to become a millionaire by 40. Having said that, investing in retirement vehicles also comes with many negative tradeoffs, which you can read about here.
Of course, there are other important ways to defer taxes too, such as using tax credits and deductions.
For example, when you own a primary residence, you can deduct state and local property taxes in the year that you pay them. You can also deduct mortgage interest that you pay on up to $750,000 of mortgage debt if married filing jointly (or $375,000 if married filing separately). And, you can avoid paying taxes on up to $500,000 in profit when you sell your primary home, as long as you meet a few simple criteria.
Becoming a Millionaire By 40
Becoming a millionaire by 40 won’t happen overnight, but by increasing your income over time, saving 10-40% of your income, and deploying your savings into intelligent investments, you can grow your wealth quite effectively. Of course, side hustle and passive income streams can accelerate your timeline quite a bit.
To learn more about about how to increase your income, negotiate a raise, or invest in cash flow producing assets, explore the Finance Section of this blog.
Do you have questions about how to become a millionaire by 40? Ask them in comments below.