Everyone makes it seem like becoming a millionaire is so easy: just put $100 a month into the stock market and retire a millionaire. Except there’s more to it than that.
If you want to be a millionaire investor, you need to know how to get started. Putting it all in Tesla and yoloing your money is not the right strategy.
If you want to increase your chances of becoming a millionaire, there’s an order of operations of how you need to go about investing your money into the stock market that I want to go over with you.
1. Savings: The first thing you need to do is not just throw your money into the stock market; you need to build some savings cushion.
2. Pay down high-interest debt: Before you put money in the stock market, you need to pay down your high-interest debts because you’re going to get a better return here.
3. Prepare to Invest: The 3rd thing you need to do is prepare to invest your money. I’ll go over what that means.
4. Build your investing strategy: The 4th thing you need to do is build your investing strategy. This is a mistake that so many people make: they start investing their money with no idea of how they’re actually going to make money. We’ll go over how to build your strategy.
5. Execute on your strategy and stick with it: The 5th thing you want to do is execute on your strategy and actually stick with it.
So let me go over these 5 things step by step so that you understand how you can become a successful investor and even a millionaire investor in the stock market.
Having the Right Savings
Let’s start by talking about having the right savings. There’s a difference between having investment money, which is going to make you rich, and having savings money, which is there to protect you against an emergency.
If you do not have $2,000 saved up right now in a bank account that’s there to protect you against an emergency, that’s not cash that you want to use to go out and buy a TV, buy a home, or buy a car. This is $2,000 saved up just to protect you against an emergency. Before you think about investing money in the stock market, I want you to go out and save $2,000 as fast as possible. The reason why is you don’t want to use your stock market money as an emergency savings fund.
In case something goes wrong, let’s just say your kid breaks their arm and now you need a few thousand to cover this expense. For whatever reasons, if you don’t have this cash in your savings account but you have this money in the stock market, and you don’t want to put it on your credit card, well now you might be forced to sell your stocks at a bad time.
You might be forced to sell your stocks in the middle of a market crash. You might be forced to sell your stocks when you don’t want to sell, and now you’re liquidating your stocks, you’re liquidating your lifetime investments, you’re liquidating your retirement account just to pay off this expense. That’s why the first thing you need to do is you’ve got to save $2,000 as an emergency fund. This is where I want you to remember is you want to ideally have 3 different bank accounts: one bank account to hold your spending money, one bank account to hold your investing money, and one bank account to hold your savings money.
Now of course your investing money needs to be invested, but depending on what your strategy is, sometimes you might need this money just sitting there on the side waiting to be invested. VS some of you are going to have this money automatically invested.
We’ll talk about that a little bit later in this blog post, but this is where you want to understand there’s a difference between your savings to protect you and there’s a difference between your investments, and you’ve got to have this before you start investing.
Pay Down Any High-Interest Debt
The second thing that you want to do before you invest your money in the stock market is pay down any high-interest debts. Let me show you why. Let’s do a little math problem.
According to Forbes, at the time of me writing this blog post, the average credit card interest rate is right around 27%. Then, according to Investopedia, the average historical stock market return over the last century is about 10% a year.
So now if we do a little bit of math, what you’ll see is that the average stock market return is a whole lot lower than the average credit card debt, which means from a math perspective, you were going to get a better return by paying credit card debt down before you start putting your money in the stock market.
And not to mention, that credit card has a guaranteed return. If we can pay your credit card off one year early, that’s a guaranteed 20%, 25%, 27% return because you paid off your credit card debt early, VS when you put your money into the stock market, well, remember, this is an average.
Sometimes the stock market will grow more than 10%, sometimes the stock market will grow less than 10%, and sometimes the stock market will shrink.
So when you put your money into the stock market, there’s no guarantee of you even making money or how much money you’re going to make next year, VS when you pay down your high-interest debts like your credit card debt or your payday loans, you’re getting a guaranteed return, which is why before you start worrying about putting your money in the stock market, be aggressive in paying this off ASAP.
Once you do the foundational stuff of saving your first $2,000 at the very least and then you work to pay down your high-interest debts.
Prepare To Invest
Now, this is where you can actually start preparing to actually invest your money into the stock market.
– Mindset: This is where things get one; this is where now you can start building the mindset of an investor.
– Long term: This is where number 2, understanding that you want to be investing your money for the long term.
– Willing to lose: Number 3, understand that, well, there’s a chance that you could lose money and you don’t want to invest more than you’re willing to lose.
– Risk: Number 4, you’ve got to understand the risks involved with investing as well and make sure that you are ready to handle those risks and seeing the market potentially crash.
Mindset
So now when it comes to building the mindset of an investor, what you’ll see is that these first 2 kind of go hand in hand.
As an investor, what you need to remember is that wealth goes to those who are disciplined and to those who are patient. Warren Buffett likes to say that the stock market is a device to transfer money from the impatient to the patient because the impatient are trying to chase stocks. They get excited about what’s happening in the news, they hear about this new hot stock, and they throw the money in there.
They think they’re going to get rich because everybody else is getting rich from it. But when you play that game, well, you’re going to be the person that’s making everybody else rich because what ends up happening is you buy when things are going up, and then when things start to go down, that’s when you panic and that’s when you sell. We don’t want to do that.
So you want to build a mindset of understanding that this is not the game that you want to play. You’re not trying to just chase what everybody else is doing. You’re going to have your own strategy, and you need to be able to cut through the noise and not fall into those same traps.
Long Term
Number 3 is you want to be a long-term investor, which means that now we’re not talking about trading stocks. We’re not talking about buying something and holding it for 6 months. We’re talking about buying something and holding it for the long term, maybe even forever depending on what your strategy is, where now you’re looking to buy investments that you believe in for the long term. That way, we can build long-term wealth because the most wealth is built from long-term investing, not from trading. Traders can make a lot of money in the short term, but then they can lose that money just as fast.
We’re talking about how you build long-term sustainable wealth because that’s how wealth is actually built. And then understanding that you don’t want to invest more than you’re willing to lose.
Sometimes people get excited about investing the money in the stock market, especially if you get started investing during a bull market, meaning when markets are going up, people can get very excited.
If you put your money into a good stock and you see your money grow by 20% very quickly, now you get excited and you think,
“Wow, what if I just use some margin or some leverage or some debt? Now I can make even more money.”
Or you take money that you can’t afford to lose and you put it into the markets because you think you’re a genius investor because of what you did in the last 6 months. But this is where I want you to remember, you don’t want your emotions to get the best of you. You don’t want to invest more than you’re willing to lose because markets go up and markets go down.
Your goal is to make money over the long term, but you don’t want to take that risk with money that you can’t afford to lose. And understand that more margin means more risks, and especially if you’re a beginner investor, please don’t even think about touching margin. I don’t mess with that stuff, and I don’t recommend that to anybody who’s just getting started.
As an investor, you want to be a long-term investor who’s understanding how do you actually build wealth in the markets, not trying to play these trading games. And the fourth, understanding that there’s risks associated with investing.
Look, the stock market goes through booms and busts. This is a part of our economic system. Our stock market crashed in 2020, the stock market crashed during the 2008 crash, the stock market crashed in the year 2000/2001 during the bubble, yet our stock market has still been resilient since then. We know that the United States economy has gone through crap and we will go through more crap in the future.
However, even though we’ve gone through it, we’ve become stronger each and every time. And this is where you’ve got to remember that there’s booms and busts in the market.
Market crashes happen, they have happened, and they will continue to happen and in fact probably get more severe in the future because of the amount of debt out there. This doesn’t mean that you shouldn’t invest your money, but this means you have to understand this because when you go through those bust periods, those down periods, there’s a lot of negative sentiment, a lot of negative emotion, of people thinking that the world’s going to end.
And when you go through the boom periods, there’s a lot of excitement and exuberance and just people thinking that nothing could ever go wrong. And this is where you want to be more of that disciplined investor and not get caught up with these emotions and understand that if you have a good strategy, you will be able to weather the storm and you will be able to make even more money, assuming you understand that those down periods create opportunity for you to buy even more and the up periods are the time now for you to realize your profits.
Now, once you start thinking like an investor, this is where we move on to number 4.
Strategy
Number 4 is now you build your game plan, you build your strategy of how you’re actually going to invest your money. There are 2 general game plans that I like to talk about: a passive strategy and an active strategy. You can figure out which one or both you want to choose. Me personally, I do a little bit of both.
So let’s talk about both of these, starting with a passive strategy. The passive system is what I believe most of America, 90 to 98% of America, should be doing to build wealth because the active strategy takes a lot more work and a lot more financial education that I don’t think most people are actually interested in doing. But if that’s something you want to do, that’s fine. I just want you to understand how both of these strategies work.
So, the passive strategy, the way that it works, is it is an automatic system where every time you get paid, maybe it’s every week, maybe it’s every 2 weeks, maybe it’s every month, you’re going to have cash be pulled out of your checking account and it’s going to be automatically invested into your portfolio of funds. This might be ETFs, this might be mutual funds, this might be index funds. And what these funds are is they are groups of stocks because you don’t want to be investing in individual companies with a passive strategy. You’re taking on all the risk.
So let me give you a little example of this. A couple of decades ago, some of the strongest companies on our stock market in our economy were companies like Bed Bath and Beyond and Sears. And a couple of decades ago, every financial adviser would have told you that these are strong companies, they’re strong innovators, they’re category killers, and they’re going to be strong investments.
Well, if you created a system where your money is consistently going into these companies because now you want these companies to fund your retirement, today you would have nothing. And so, this is where now you want to protect yourself against these bankrupt companies if you’re going to be a passive investor by investing in something like a fund.
And what a fund is is now instead of investing in just one company, you’re going to invest in hundreds of companies or thousands of companies depending on what the fund is. That way, now you’re protected if one of the companies in this fund goes bankrupt. Well, you have dozens or hundreds or maybe even thousands of other companies to protect you.
So, what these funds do is to lower some of the risk. Now, of course, they do lower some of the upside as well because if you invested your money in Amazon when it was a penny stock, well, you’d be extremely rich today. But that means you have to actually find that Amazon, make that investment, and hold onto it, which most people aren’t willing to do. So, with these types of funds, the index funds, ETFs, and mutual funds, you have the opportunity now to lower some of the risk and it does limit some of the upside, but you have the ability now to create this type of passive investment where money can automatically be invested into your portfolio of funds and now you just let the markets do their thing because now you’re investing into the market.
Now, for example, I’m not telling you what to invest in, just giving you an example. There are funds that give you exposure to the total stock market like VTI. That is an ETF, meaning it’s a fund that if you bought one share of this fund VTI, you’ll buy a little bit of every stock on the American Stock Market. That’s what VTI is. There are funds that give you exposure to the S&P 500 like SPY.
SPY is an ETF that if you buy one share of SPY, you’re buying a piece of the S&P 500, which is a group of the largest 500 companies in our stock market. There are funds like DIA, which give you exposure to the Dow Jones. The Dow Jones is a group of 30 selected companies in our stock market. You might have heard of people talking about the Dow Jones before. And there are funds like QQQ that give you exposure to the NASDAQ. The NASDAQ 100 is a group of the 100 largest companies that are not financial that are listed on the NASDAQ.
So now, instead of you going out and investing in one company, you can invest in funds such as these.
Again, I’m not telling you what to invest in, but there are so many funds out there. There are funds that can get you dividends, there are funds that can give you exposure to the stock market, there are funds that can give you exposure to technology or healthcare or emerging markets or innovation. You just got to figure out what it is that you want to invest in and then you build the portfolio of funds that you want to invest in. You figure out what types of funds that you want to invest in, you list them out, and then you see how much of every dollar invested you want invested in every fund.
For example, if you were to invest in these 4 funds, do you want it to be 25 cents, 25 cents, 25 cents, 25 cents? Or is it 50 cents, 10 cents, 10 cents, 30 cents? You just figure out how you want your money to be invested and then you turn on the system, you automate it, and then you don’t worry about it. This is where now you don’t want to change things when markets go down, except maybe you invest a little bit more aggressively because you understand that market crashes happen and they create opportunities for you to continue buying good investments.
The only time you really change this is if the fund that you’re investing in, the industry that you’re investing in, or the thing that you’re investing in, something is really wrong with that. Now, of course, investing has risks. You’re never guaranteed to make money investing. You might even lose money.
In fact, you will lose money at some point, which is why you want to always do your own due diligence and never blindly trust a random guy on the internet. But this is a strategy that has the potential to make you wealthy over the long term if you stay consistent with the strategy.
The way that I do this, again, I don’t recommend what I do to anybody else, is I have a system where every Wednesday cash leaves my checking account and it’s invested into my portfolio of ETFs.
Now, the largest piece of my portfolio are dividend-paying funds because I like to generate cash flow.
So now, I’m investing my money to buy cash flow. Every time I buy more cash flow, my cash flow is buying me more cash flow. I also invest in funds to give me exposure to value stocks. I also invest in funds that give me exposure to innovation stocks. I also invest in funds that give me exposure to market stocks.
So this is, right now, you’ve got to kind of figure out what’s right for you. Now, you can use different software to automate these types of investments.
Active investing works is now you are going to take money, so now this is money that’s going to be sitting in your account somewhere, maybe your bank account, maybe a high-interest savings account. Somewhere you have this cash and now you’re going to be looking for a good investment opportunity, maybe an undervalued stock, you’re looking for some sort of good investment that you believe is going to give you long-term potential and you’re going to be waiting until you find this stock to invest in. And when you find that good time, that good opportunity, that good price, that’s when you’re going to go in and buy. But the reason why this takes more work, more financial education, and more patience is because now, number 1, you have to know how do you identify a good stock to actually invest in. And this is going to require you to invest in your own financial education to understand companies.
The first thing you want to understand now is how do you read financial statements, how do you read a cash flow statement, how do you read a balance sheet and how do you read an income statement. This does take time and it takes work. What you want to understand is that a cash flow statement shows you how the cash moved through the company. An income statement shows you the profit and loss of a company this way.
Now you can see are the profits growing or are they shrinking? Why are the profits shrinking? If they’re shrinking, if the profits are growing, is it sustainable? What they’re doing? Then the balance sheet shows you the assets minus liabilities of the company. And this is where you want to take a look at are the liabilities feasible?
Are the liabilities too much for a company this size? Is this a good and healthy run company? Then in addition to that, you want to look at the executives of a company, you want to look at the company structure, you want to look at how they’re innovating, you want to look at the general pulse of do people actually like these products and will they want these products in the future, and how is this company going to stay competitive in 5 years and 10 years from now?
So you can start to see how this financial education takes much more work, which is why I don’t recommend everybody do this. In fact, I don’t recommend most people do this. But in addition to that, you also have to have the right psychology as an investor because now on the psychology side, you don’t want to come in and buy when the stock is overvalued just because you’re everybody else talking about it. You also don’t want to go in and sell at the wrong time because everybody’s panicking and freaking out. And so you have to know how to manage the psychology of investing with the financial education and understand that this comes with more risk.
More risk comes with more potential gain, but it also comes with more risk. And so now you have to understand if you’re going to be following the strategy, if you’re going to be investing in individual companies, that’s completely fine, but understand the risk, understand the strategy.
Also, understand your goals because now if you just go in and throw your money into something that you think is the next Tesla or the next Amazon or the next Meta, but you really have no strategy or goals because you’re just throwing the money in because you hear people talking about it, well, how do you know when to sell?
How do you know how long you should hold it? How do you know if something’s so wrong with the company that you shouldn’t keep owning it anymore? And how do you know what you should actually do with the stock if it starts paying you dividends?
Now I’m going to say this 1 more time: you don’t have to pick just one You can kind of do a hybrid, but you have to understand the risks associated with each one of these and understand what your strategy is before you start investing your money.
Execute
This brings us to number 5: execute. This is where you actually put your money to work, and now you’re going to start following your system.
Now, again, you don’t want to invest more money than you’re willing to lose, but this is right now you want to start actually putting your money to work and remember markets go up, markets go down, but you have to be patient if you really want to build wealth over the long term because your goal is to build long-term wealth.
Now what you need to remember here on the execute side is that when things go wrong because they will go wrong, you have to stay calm. There will be times where you’re going to have to pivot, maybe you have to change your strategy for a little bit, maybe you have to change what you were investing in because something went wrong, that is a part of the investing game.
Every single investor loses money at some point. It is a part of the process. I don’t care how smart you are, every single person loses money at some point. It sucks, but the goal is to make way more than you lose. And now when it comes to this execute strategy, you have to remember that the goal is to make money over the long term, and sometimes things will go wrong, and that’s where you have to make calculated decisions as to what you’re going to do because if markets crash and you just sell out of everything because you’re scared, well, that’s not a very good calculated decision.
But if markets are going down and now you’re seeing a big change if you’re investing in individual companies and your company’s on the verge of bankruptcy, then yeah, that’s something you want to get out of. If you’re investing in a fund and something’s seriously wrong with the fund, then yeah, maybe you need to get out of that.
But if you’re investing into something that is strong but the markets are just getting destroyed because of a market crash, this, this is where it creates opportunity for you to come in and buy even more. But again, these are the types of decisions you’re going to have to make in a calm mind, not in a panicky mind. And then you have to remember that the way that you build wealth is by consistently investing your money.
You don’t just invest your money once or invest your money for a few months or invest your money for a year. This is something now that you want to be consistently investing your money month after month after month, year after year after year if you really want to build wealth because wealth is built over the long term.
And then you have to understand that if you want to accelerate your path to wealth, you’re going to need more money to invest. That means working to now earn more money so you have more money to invest that way you can build the wealth sooner rather than later.
And these are the types of things now where you want to understand that building this financially fit lifestyle is a lifestyle. It’s not something you do for 2 months or 6 months or a year. If you really want to build wealth in the stock market, this is something that’s going to take time, but you have to actually use the stock market the way that it was intended to use instead of just throwing a little bit of money into a random stock hoping it’s going to double and then when it doesn’t double, you just run away and never invest your money again.
Again, this is where now you have to understand how wealth building actually works in the stock market that way you can win in the stock market.