Middle-Income Earners Can Be Millionaires

Many people think you need to earn a high salary (e.g., $100,000+) to become a millionaire. In reality, many people of ordinary means (i.e., middle-income earners like teachers and police) become wealthy over time and achieve a net worth (assets minus debts) of $1million or more.

A key factor in their success is financial capability, which includes financial knowledge, decision-making skills, and habits. Below are nine things to know about "middle-income millionaires":

Planning is Key- Research has found that saving with a plan makes people two times more likely to reach their goals. Having a motivation to save also matters. One study found that emergency fund and retirement saving motives significantly increase the likelihood of saving regularly.

Slow Starts Are OK- A negative net worth (debts-like student loans-greater than assets) is not uncommon when young adults are in college. What matters is that proactive action is taken afterward to increase savings and reduce debt so that a positive net worth steadily grows.

Decisions Matter- Wealth and net worth are determined largely by decisions that people make about money (e.g., saving 10% of pay in a 401(k) plan). Two people with the same income, or two siblings raised by the same parents, can have very different financial paths and net worths.

Education Matters- One study found that 88% of millionaires graduated from college and 52% have a master’s, doctoral, or professional degree. One reason is that average salaries rise with higher levels of education. In addition, people tend to marry spouses with similar characteristics.

Automation is Key- One of the best “one and done” financial decisions that someone can make to build wealth over time is to set aside money automatically from each paycheck (or net income from self-employment) for retirement or other financial goals. Payroll deductions for defined contribution plans, like 401(k)s, make adhering to advice to “pay your first” automatic.

Wealth-Building Needs Protection- It is important not to overlook the role of insurance as a wealth-building tool. A growing nest egg can quickly be depleted if a family breadwinner dies or is disabled or a major illness or property damage or a large liability judgment occurs.

Backstops Can Mitigate Risk-Taking- Some investors feel that they can take on more investment risk when they have a guaranteed source of income (think tenured educators or retirees with a pension and/or annuities). Similarly, if one spouse in a couple has a stable income, the other spouse may decide to take a chance with entrepreneurship or by earning a degree.

Investment Expenses Are a Drag- Successful wealth accumulators avoid high expense ratios and front- and back-end loads (commissions) on mutual funds and costly annuities with high surrender and mortality & expense charges. Expenses are a drag on the performance of an investment. The second most important factor affecting investment portfolio returns, after asset allocation, is fees.

Knowledge is Power- Wealth-building is enhanced with financial knowledge (e.g., investment risks and characteristics) and skills (e.g., budgeting). A good rule to follow to build financial knowledge is to learn one new thing every day about personal finance (e.g., blogs, podcasts, newspapers, etc.).

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.