How To Become A Stock Market Millionaire – Part 1: (The Plan)

Becoming a stock market millionaire is much easier than you think…[because] if you take about an hour or two of your time now to create an investment strategy, you are 95% of the way to becoming a stock market millionaire. What exactly do you need to know to become a stock market millionaire? I’ve outlined all the steps below to help you build your wealth in the stock market.

The original article has been edited here for length (…) and clarity ([ ])

Step #1: Create A Plan

Take the time to figure out what your goals are and why you are investing the way you are. This will help you to stay invested for the long term.

Here are the questions you should ask yourself when putting together your investment plan. Don’t worry, creating your plan isn’t difficult to do.

1. Why Are You Investing? Is it for a house, a vacation, a wedding, early retirement, a child’s college education, etc.? If you plan on investing for more than one goal, this is OK.

2. What Is Your Time Horizon? In other words, how long will it be until you need the money you are planning to invest?

• For retirement, you would tend to have a long time horizon, up to 40 years depending on your age.
• For a house or vacation, your time frame is going to be much less.
• The general rule of thumb is to invest in stocks for any goal that is more than 5 years away. Any goal shorter than this should have your money invested in bonds or in a savings account or certificates of deposit…

3. What Is Your Risk Tolerance? You have your goal and you know when you need the money. Now you have to figure out how to invest it.

• …Just how much of your portfolio should be in stocks? This is where you have to be honest with yourself. You want to find an allocation that helps you reach your goal, but one that you are comfortable with as well. We all want to sleep at night, right?
• Aren’t sure what your allocation should be? I suggest you read my post on understanding risk tolerance. Also check out this questionnaire from Vanguard that will help determine your risk tolerance. (One note about taking a risk tolerance questionnaire. Make sure you focus more on the amount of money you could lose versus the amount you can gain. We all will take more risk to earn extra money but we discount how we will feel if we lose money…)
• You will find most of you should be investing in a 60% stock and 40% bond portfolio. This allocation will allow you to earn a good rate of return on your investments. It will also allow you to sleep at night. Should you find that 60% of your money in stocks is too risky, then reduce that to a 40% stock and 60% bond portfolio. You don’t want to go much lower than this if you are young. The reason is over the long term, bonds will not offer the return you need to reach your goals.

4. How Much Do You Need? For a house or a vacation, the amount you need to save is easy to determine. You know how much a vacation will cost you or how much of a down payment you need for a house. For retirement, it’s a little bit harder.

Here is a rough calculation for you to perform that will give you an idea of how much money you need to save:

• Figure out how much you spend on a monthly basis
• Multiply this number by 12 to get your annual spending amount
• Multiply this number by 25
• The answer you get is the amount of money you need to have saved for retirement. For example, if you are spending $5,000 a month, you multiply this by 12 to get an annual spending amount of $60,000. Next you multiply $60,000 by 25 and you end up with $1,500,000. You need $1.5 million saved in order to afford retirement. Again, this is not an exact number as some expenses you have today you might not have when you are retired but it is a solid estimate nonetheless.

5. How Much Can You Save? Once you know how much you need to save, you need to figure out how much you can save each month. Don’t give up or become frustrated if you realize you can’t save as much as you need to save to meet your goal. You have time on your side.

• …[Whether] you can save enough each month or not, you should make it a priority to create and follow a budget…By creating a budget, you can see where all your money is going…After you create and follow your budget, you can better assess your spending and saving…
• Now, how do you get started with a budget? You can go the manual route or the automated route. For the manual route, check out my post highlighting free excel spreadsheet templates. For the automated route, you can go with You Need A Budget. There is a learning curve to YNAB but many swear by it. My favorite is Tiller, which is a combination of both options. You save time by automating parts of budgeting but still have full control over everything. You can learn more about Tiller here.

Back to saving more money. Once your budget is set up and you see where your money is going, you can start looking for ways to save more. Can you cut your monthly expenses? Can you turn a hobby into an income stream

• For most people saving for retirement, your savings amount should be roughly 15%. Doing this is a safe estimate to help you to reach your long term goals.
• For shorter term goals, you can just take the amount you need to save, divide that by the number of years until you need the money, then divide that number by 12 to get a rough idea of how much you need to save each month. For example, if you need $25,000 for a down payment in 6 years, you need to save $4,167 a year and $347 a month. This calculation works best for goals less than 5 years away.

When it comes to cutting expenses, I recommend starting with the big expenses first. Look at insurance, mortgage, etc. and then focusing on the smaller expenses.

• Your first step should be to look at your mortgage. Does it make sense to refinance? Doing so could free up over a thousand dollars a month that you can use to invest. Play around with the calculator here to see how much you could save by refinancing.
• After that, the simplest option to save a serious amount of money is with car insurance. I shop around our insurance coverage each year. Most years we stick with the same insurer but every couple of years, we switch and end up saving $200 on average. Not bad for 30 minutes of work. Here is where I start my search for low cost auto insurance.

As for income,

• work hard so that you become valuable at work and can earner higher raises…
• do one-time things like declutter your house and sell things you don’t want, need or use or…
• create an income stream where you are consistently earning extra money every month…
  • I’ve found the two easiest options here are Survey Junkie and Swagbucks.
    1. With Survey Junkie, I take 30 minutes each day and take a couple of surveys. I consistently earn $150 extra each month. You could easily make more if you have the time or desire. You can click here to get started.
    2. For Swagbucks, I simply shop online through their site. I earn swagbucks on my purchases which I convert into cash every month. It’s simple and effortless and brings in some extra money each month. New users get $3 just for joining and you can click here to get started.

Of course, you should check out my post on over 51 ways to make extra money as well for more ideas. At the end of the day, you can earn a lot more money than you can cut out of your budget.

6. How Much Should You Save? Since the amount of money needed for your goals will differ greatly from person to person, you should save yourself the headaches and just strive to save a set amount of money each year.

• For most people saving for retirement, your savings amount should be roughly 15%. Doing this is a safe estimate to help you to reach your long term goals.
• For shorter term goals, you can just take the amount you need to save, divide that by the number of years until you need the money, then divide that number by 12 to get a rough idea of how much you need to save each month. For example, if you need $25,000 for a down payment in 6 years, you need to save $4,167 a year and $347 a month. This calculation works best for goals less than 5 years away.

Be sure to take the time to dig down to get to these answers. The more specific you are with your plan, the greater the success you will achieve because you are aware of your motivation to meet your financial goals.

Below is a brief summary of Step 2; Step 3; Step 4; Step 5; Step 6 and Step 7

• Step #2: Open An Account. There are a lot of brokers out there, for most people, Betterment, M1 Finance, and Schwab are your best options.
• Step #3: Set Up Automatic Transfers. By investing money on a regular basis, you take advantage of market dips and grow your wealth over time.
• Step #4: Pick Low Cost Investments. The fees you pay have a negative impact on your saving balance. Make sure you find the lowest cost investments so you keep more of your money invested.
• Step #5: Diversification. By not having all your money tied in one investment, you lower your risk while still earning a good return. Understand though that you cannot remove all risk from investing.
• Step #6: Don’t Chase Returns. Ignore returns and simply invest for the long term. A solidly built portfolio should earn you roughly 8% a year which is enough to allow you to reach your goals. When you try to chase returns, you end up costing yourself money.
• Step #7: Track Your Progress. Stay on top of how your investments are performing and rebalance as needed to ensure you earn the return you need to reach your goals.

Final Thoughts

There you have it, your step-by-step guide for how to become a stock market millionaire! I told you that it was easier than you thought! If you follow the above steps, you will be well on your way to investing success…I use all the steps and it has allowed my wife and me to have great success when it comes to investing….

(If you that want more detail on these steps, along with a few extra points, be sure to check out my eBook. The title is 7 Investing Steps That Will Make You Wealthy.)

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