How I’m Planning to Become a Millionaire

Starting with $0

With $0 in assets — I’ve recently set a plan in motion to grow my net worth to $1,000,000 and claim “FI” (Financial Independence). Here’s how I plan to make that happen.

Before we jump straight into things, here’s what you need to know about me.

I’m 25 years old and my savings account is pretty much non-existent. Don’t even get me started on my investment portfolio either — coming in at a grand total of $0.00.

Now you’re probably thinking, what makes me qualified to even be writing about this topic. Truthfully, with such poor management of my personal finance, I’m not. Yet, I think that’s what is going to make this a very refreshing read.

Although, just know I’m not entering the conversation completely empty-handed.

I’ve successfully completed my Commerce Degree — Majored in both Accounting and Finance, also becoming a Scholar. I qualified to become a Chartered Accountant a few years later, working as an Analyst across several industries including Banking, FMCG, Professional Services and Online Fashion covering multi-million dollar (sometimes billion-dollar) budgets. Ironically, here I am today with a scarce bank account, a car loan and several “smart” plans established with my bank to pay down my credit card.

For some strange reason, it never crossed my mind to apply the diligence I used at work on my own personal finances. If I wanted to become a millionaire I had to start holding myself to account, which is why I decided to create a publication (Becoming a Millionaire) and write my first blog post — this one right here!

Understandably, there are endless articles, podcasts, subreddits, audibles… (the list goes on) on this topic alone, but the idea of sharing my journey from $0 to $1,000,000 really excited me, so I did it anyway. I’m not too sure how this will all eventually turn out but all I hope for is that I can connect with a community of people who share a similar goal.

If you want to stay up to date, I’ll be sharing monthly updates on the changes in my net worth here on Becoming a Millionaire.

Okay. Let’s get on with it. Here’s how I plan on becoming a millionaire.

There are a few different components to this so I’m going to break it down into a few steps.

1. Complete a reality check. Have a detailed view of my current income and expenses (a budget) and calculate my savings rate.
2. Improve my savings rate. There are three levers available to pull at this step. My expenses and both my active and passive income streams.
3. With my new monthly savings, pick an investment strategy and invest in it. This will become my investment portfolio, and will grow thanks to the beauty of compounding.
4. Time. The amount of time required to hit $1,000,000 will vary depending on how high my savings rate is and the return on my investment portfolio. Maximising both will minimise the time required.

| #1

Complete a reality check.

The aim of this step is to get clarity on my expenses. Below is a table that summarises my income, expenses and savings rate for the remainder of 2020. I’ve projected out my expenses assuming I don’t change any of my spending habits.

• Other — the dreaded miscellaneous bucket. This actually racks up a fair bit of dollars each month for me. Over the next few months, it’s going to be under a lot of scrutiny. It generally includes things like clothes, food and drinks that aren’t already budgeted for.

A few notes:

• Monthly ‘Smart Plan’ refers to my credit card repayments, I’m hoping to pay that off completely by the end of September. Paying that off boosts my savings rate by more than 20%.
• Having a car is expensive. After getting promoted at the beginning of 2019 I decided to treat myself to a car — which I financed. I’m a living example of what lifestyle creep looks like. While it seemed like a really fun and exciting decision at the time, it now costs me almost $500/month to maintain.
• I’ve just started a new job which provided a generous jump in salary. Prior to May, my savings rate would have actually ranged between -15% to -25%. What resulted was a very high credit card debt which I’m still paying down (the not so ‘Smart Plan’ mentioned above)

If I choose to make no changes to my spending habits, I would be looking at a savings rate of 42% by the end of the year once my credit card is paid off.

Now, this isn’t the worst savings rate and it’s much better than my negative savings rate that I’ve had for the past few months, but there’s definitely room for improvement.

| #2

Improve my savings rate.

As I mentioned earlier, there are three levers available to pull to improve my savings rate.

(1) Reduce expenses

I deliberately started with this lever as it’s the one that you can generally change the quickest. Here’s what I’ll be aiming to reduce;

• Consider the car gone. At this point, I view it as just an expense. Particularly with the lockdown from COVID-19 I’ve realised that I don’t need a car at all. This frees up $500/month from my current budget plus any servicing and repair costs that are likely to arise.
• Reduce my ‘Other’ expenses by $200/month.

Impact to current savings: +$700/month

(2) Increase active income

I was fortunate enough to have this occur just as I was writing this blog. As long as I don’t fall victim to any more lifestyle creep, the extra income has already lifted my savings rate from negative territory to positive.

Increasing your active income may take some time, so view this more of something you work towards long-term rather than an outcome you can influence from today.

Some other ways that you can increase your active income include:

• Start conversations with your employer about a pay rise or promotion. Put yourself forward but be prepared to explain to your manager why you think you deserve the extra money.
• Upskill. Enrol yourself in a course to pick up a new skill perhaps that’s learning a new programming language that will help you in securing your next role from a Junior Software Engineer to a Software Engineer. This will obviously vary depending on what industry you work in. For me, this was completing my Chartered Accountants program.
• Change jobs. If you feel like you already have sufficient skills and the likelihood of a pay rise or promotion are slim at your current company don’t rule out the option of switching companies. You may be surprised at just how much more you may get by doing the same work somewhere else.

Impact to current savings: $0 (fortunately, I was able to improve this last month so I’m not expecting any changes to my active income any time soon)

(3) Increase passive income

This comes in at $0 for me. While I’ve tried standing up two side hustles in the past six months, neither of them have generated any income and have only accentuated my savings problem.

For the time being, I’ve put a pause on any new passive income ideas until I fix my savings rate. However, I do have a few ideas in the works that I can’t wait to work on!

Impact to current savings: $0

It’s clear I could relatively easily improve my savings by $700/month. This means increasing my savings rate from 42% in December 2020 to 52%.

At a savings rate of 52%, I’m looking at reaching $1,000,000 in about 13.6 years.

The graph above charts the expected value of my net worth with various savings rates. I’ve assumed that with those savings I’ll be investing the majority of it and be able to achieve a return at least 8% p.a (I’ll touch on this more in Step 3). The red line is my goal of reaching $1,000,000.

• At a savings rate of 52%, it will take me 13.6 years.
• At a savings rate of 42%, it will take me 15.4 years.
• At a savings rate of 30%, it will take me 18.5 years; and
• At a savings rate of 20%, it will take me 22.6 years.

By reducing my overall expenses by $700 it means I can shave almost 2 years off of the time it takes me to currently hit $1,000,000.

I think one of the most striking things from this chart is that without changing my income, by splurging on my expenses and averaging a savings rate of 20%, it’s going to take an additional 9 years to reach my $1,000,000. That’s a really long time and not something I’m ready to accept.

So, what savings rate should I be happy with?

When I was researching this topic, I came across a few ‘FIRE’ (Financial Independence, Retire Early) adherents who were able to achieve a savings rate upwards of 75% of their take-home pay. In my personal opinion, this was a little on the high end for me and I felt like I would be sacrificing too much of the things I enjoy day-to-day to make getting to $1m a little quicker worth it.

I think 52% is a good starting point but as I become tighter on my expenses, I’m hoping to grow this to around 60–65%.

| #3

Picking an investment strategy.

I’ve done a fair bit of reading on this and the recommendation from those who have reached financial independence or are well on their way has definitely all swung in a similar direction.

The approach of the more popular ‘FIRE’ (Financial Independence, Retire Early) bloggers such as Aussie Fire Bug all seem to revolve around investing in Exchange Traded Funds (ETFs), Listed Investment Companies (LICs) and a hint of real estate.

Since I’m starting with $0 and won’t be directly investing in real estate any time soon, I’m ruling this last one out. However, I’ll probably consider Australian REITs (Real Estate Investment Trusts) a little later down the line as the next best alternative. There are even some ETFs that actually invest in multiple Australian REITs — such as the VanEck Australian Property Fund that is worth considering.

If you aren’t too familiar with the term ETFs I recommend reading this article by Money Smart. They also have a great article on Australian REITs too, which you can find here.

Now that I’ve narrowed down my investment strategy to ETFs, let’s get to picking some.

As a starting point, I took a look at Morningstar’s ETF Performance tables and pulled together an extract below. I’ve sorted the data by the 3-year return of each fund in descending order to get a feel for which funds were generating the highest returns — and what types of funds they were.

I was a little surprised at first to see that some of these ETFs were generating such high returns. I was also a little overwhelmed — how do you pick just two ETFs out of this list when you are starting out.

The ETFs in this list also track specific sectors, commodities, indexes, chase high yields, property, small caps and so on. For example, some of the top-performing funds on that list tracked Cyber Security securities, precious metals (Palladium, Gold), or followed an underlying high growth managed fund.

Perhaps if I had a larger investment portfolio I could further spread my investments across the different types of ETFs and explore them in more detail — however that’s not the case. My priority at the moment is to just make sure I’m diversified and make a return of at least 8% a year in the long-term.

While I was writing this post I also received my first pay from my new job. That combined with the little savings I had, meant I had about $5,000 to start investing with.

With all of the above in mind, I decided to simplify my first investment and seek two ETFs that simply tracked both the Australian and US Indexes. I settled on NDQ and VAS.

NDQ: Betashares NASDAQ 100

This fund aims to track the top 100 non-financial companies listed on the NASDAQ with management fee at 0.48% p.a.

I decided to invest $3,233 in this fund — (67%)

VAS: Vanguard S&P/ASX 300

This fund aims to track the top 300 companies listed on the ASX. Management costs are much lower than NDQ at 0.10%. However, it seems like NDQ has been offering some really consistent returns (excluding the dip that we saw across most markets from COVID-19), so I didn’t mind paying a little more in terms of the management fee.

While the current 3-year return per the ETF Performance table I linked above isn’t too high, I couldn’t resist buying after looking at the historical share price. I got in at around $66 per unit. The last time it traded at this price was four years ago back in 2016 so this definitely felt like a great buying opportunity.

Initial Investment: $1,538 — (33%)

I also had $100 I was required to keep as cash in reserve on the investing platform I was using (BT Panorama)

Total Starting Investment: $4,871

Summary of my investment position as at 08/05/2020

| #4

Time

The journey to $1,000,000 is definitely going to take time (13.6 years at this rate) and the only way to keep on track is to stick to my budgeted savings rate of 52% and continue to invest into my investment portfolio.

I’ll continue to share my journey on Becoming a Millionaire with topics centred on:

• Findings ways to improve your savings rate (Minimising expenses and increasing both active and passive income);
• Investment strategies; and
• Monthly status updates on my net worth from my new starting point of $4,871