The name of my company is "Making of a Millionaire" so you would think I would talk all the time about the goal of becoming a millionaire. In fact, I rarely discuss how to "become a millionaire" because that should not be every person's goal. Every person should strive for "financial independence". Depending on your lifestyle, you may need more or less than $1 million to reach financial independence.
In this article, I'm going to discuss how to become a millionaire. Really, this should be considered a lesson in how to achieve any savings goal but I am going to use $1 million as an example for two reasons.
It's a large and ambitious savings number.
It's a round number and makes the math simple.
Tallying up your current net worth
The definition of a millionaire is someone whose net worth is at least $1 million. If the goal is a net worth of $1 million at some point in the future, you need to know your starting point.
Your net worth is calculated by adding up all of your assets, all of your debts and subtracting all of your debts from your assets. Your net worth is a snapshot of your current financial position. Whether or not you want to become a millionaire, it's useful to know what your net worth is. Doing so forces you to examine your debts and assets more closely.
Action item: I have made this very simple for you. I've created a free tool that will calculate your net worth for you, it's available right here. Before you do anything; use the tool to figure out your net worth, write it down and then come back to this article.
Return on investment
To grow your net worth beyond where it is today you are going to rely on 2 factors
How much you save and invest.
The return on your savings and investments
When it comes to making assumptions about your return on investment I hope for the best but plan for the worst. Meaning I like to be conservative with my investment assumptions. I see so many personal finance "gurus" saying you should expect a 10%-12% annual return on your investments. That is simply not realistic.
To make realistic investment assumptions, I rely on a source I can trust. PWL Capital is a Canadian wealth management firm that produces top-notch research. They have provided the expected future returns of different asset classes in this paper.
Real estate: 3%
Some people might think those returns are too low, but it's better to be under-promise and over-deliver, rather than giving people false hope of 10%+ annual returns every single year.
How much you save every month is the most important factor in growing your net worth. It's also the only factor you have any control over. You can't control what happens in the stock market, but you can control how much you decide to save and invest each month.
When it comes to savings you need to do two things.
Include the amount you want to save in your budget.
Automate the sales process.
I hear people tell me constantly that they "can't find" any money to invest. I will reply by asking "how much do you have budgeted for investing every month". The reply is usually nothing because most people don't have a formal budget.
Budgeting is really not hard.
You start with your monthly take-home pay (what you clear after taxes).
Subtract your fixed costs like rent, cell phone, insurance etc.
Subtract your variable spending like food and entertainment.
Whatever is leftover can be allocated towards saving and investing.
Action item: I've created a free tool for you to create a budget. Click here and make a budget. There is even a line item for investing in the budget tool. There, you have no excuses as to why you don't have a budget!
Put it on automatic
Once you have created a budget that includes a certain amount towards investing, there is only one thing that can stop you from following through on your investment plan; you.
We humans often have the best of intentions but rarely follow through on committing to a long term change in behavior. When January 1st rolls around every gym is packed with people who are excited to follow through on their new year's resolution to lose weight. By February 1st, most gyms are ghost towns.
Budgeting is no different than dieting and exercise. We always tell ourselves we are going to stick to a budget, and we usually mean it. But, life tends to get in the way and before you know it we have reverted back to our old ways of eating cake and not budgeting.
That is why you need to automate the savings in your budget.
Most banks allow you to easily set up an automated withdrawal from your checking account on every pay-day and have that money placed into a savings or investment account. By doing this you are taking the concept of paying yourself first and automatic the process.
This has two major benefits.
It takes the decision out of your hands.
You don’t even miss the money.
Let's say you created a budget that includes investing $800 per month. If you want to automate that savings, call your bank and set up an automatic withdrawal of $400 from your checking account to your investment account on the 1st and 15th (or whatever days you get paid) every month.
The money is never in your checking account long enough for you to spend. After a while, you adjust your spending as if that money was never there. Think about the taxes that come off your paycheck every two weeks, most people don’t even notice because the process is automated.
How to become a millionaire
I'll use a hypothetical example to make clear how to apply the concepts discussed in this article to achieve a $1 million net worth.
Billy is a 31-year-old accountant living in the suburbs of a major city. He wants to know when he might expect to become a millionaire.
The first thing Billy does is calculate his net worth.
He starts by adding up his assets
Total assets: $100,000
Billy is not a homeowner, takes the bus to work and never carries a balance on his credit card so he has no debt. Billy's net worth is $100,000.
Next, Billy decides to calculate the expected future return on his investments. Billy knows the expected future returns of stocks is 6.5% and for bonds is 3.7%. Billy invests in a portfolio that is 60% stocks and 40% bonds. So, he expects his investments to return 5.38% per year moving forward.
Billy decides to create a budget and determines that he can invest $1,000 per month moving forward.
Then Billy plugs his information into a savings goal calculator. Which tells him that he is on pace to become a millionaire in 24 years. So, by the time he reaches 55, Billy will be a millionaire.
Putting it all together
I've created a calculator that will tell you when you can expect to become a millionaire here.
Here's how to use it to determine when you will become a millionaire:
Enter $1,000,000 into the field that says "desired amount".
Enter how much you have invested or your current net worth in the field that says "initial investment".
Enter a reasonable rate of return based on your asset mix.
Enter the amount you have budgeted towards investments.
The calculator will tell you when you should expect to become a millionaire. You can also use the calculator to determine any savings goal.
If you're not satisfied with your results of using the calculator, become a "Millionaire in the making" and join the 30-day money challenge where each day you will receive a new action item that will move you closer to your financial goals.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions