The Truth About Becoming a Millionaire
You want to reach $1,000,000? Stop making excuses and do this instead
$1,000,000. These 7 figures are a psychological threshold. A distant dream for some, a significant milestone on the road to financial freedom for others.
Yet, in the popular belief, this kind of numbers is restricted to “gifted” individuals like great sportsmen or genius.
For us, normal humans, it feels like we need to win the lottery or find a revolutionary idea and be lucky enough to make a lot of money.
This is not true.
If you think becoming a Millionaire is not for you, think again.
Leave the chance or gift aside, what you need are determination and self-discipline.
If you want to grow your net worth, it’s simple, you need to optimize a three-step process:
Each of these steps is crucial and deserve completely the hundreds of books on the subject. Going into the specifics is beyond the scope of this article but the bottom line is this: work smarter, spend less, save more, avoid bad debt and invest wisely.
Yet the critical factor is so evident that we forget it: TIME
I’m sure you’ve heard of the law of compound interests. Still, chances are you don’t fully recognize the impact of time combined with the eighth wonder of the world as Eisenstein famously called it.
A nice anecdote about this is Benjamin Franklin’s will. When he died in 1790, he left $1,000 for each of the two cities of Boston and Philadelphia, but only on the condition that those sums stayed invested for at least 100 years.
After 100 years, the city of Philadelphia withdrew $50,000 to build the Franklin Institute and let the account balance work for another one hundred years. In 1990, the account totaled $2 million.
Yet, the city of Boston followed a better investment strategy: it didn’t withdraw a dollar for 200 years. The $1,000 has grown into a $4.5 million. What a contrast!
That is how big is the power of compound interest.
So, when you incorporate time as a key element of your reasoning, there is an undeniable fact: the sooner you start optimizing the equation, the better. And time produces a huge difference.
To give you a little of practical context, if you start at 20 years old, you need to invest less than $273 a month to pass the 7 figures milestone by the time you are 65. That’s assuming a 7% annual rate of return, which is in line with the long-term expected performance of a low cost, well-diversified portfolio of risky assets (that’s a story for another day).
$273 a month is all it takes to become a Millionaire. Sounds ridiculous right?
Now, here is what happens if you start investing those $273 (around $3,272 per year) at different points in your lifetime:
You see it now?
Time makes a huge variation.
Starting at 20, you will have invested $147,240 to reach a total of $1,000,420. That’s a gigantic gain of $853,180!
But if you invest the same yearly amount over 25 years only, your account balance will be $221,437, not even close to 4 times less for a gain of just $139,637.
Yet the gap doesn’t stop widening here.
What’s even more interesting is this: let’s say you are now 65 years old and you want to enjoy your time. You won’t withdraw $1,000,420 all at once. Instead, you will let your money working for you while reducing your risk exposure.
At that point, you still have a long-term time horizon of the order of 30 years. But let’s be conservative and say we cut your expected return by 2 at 3.5% per year. Here is what happens: you will be able to withdraw $55,000 every year for the next 30 years (around $4,583 per month).
So, let me wrap up the story for you: you just generated $1,650,000 of income with an investment of $147,240.
Yep, that’s the magic formula of compound interest!
But the starting date is decisive. Below, I summarize the 3 situations:
The numbers speak for themselves. Saving less than $300 per month during the accumulation phase and enjoying more than $4,500 per month for the rest of your life sounds like a terrific deal.
Also, notice the shocking disparity of the overall amount withdrawn for each scenario given the relatively narrow gap between the invested sums.
This is only an illustration. But the takeaway is simple: the sooner you start investing, the better.
You can use this in reverse engineering. Define your objective, Input your own assumptions and work backward to find what you need to save. Depending on your circumstances, you might require a significantly smaller number to achieve financial independence. If you are older, boost your saving rate.
Do your future self a favor: stop making excuses and start growing your net worth now.
Remember the Chinese proverb:
“The best time to plant a tree was 20 years ago. The second-best time is now.”
Thanks for reading 😊
