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Tuesday, 20 February 2018

How To Become A Millionaire - It's Easier Than You Think

I guess that's one way of doing it! 
Ah yes, the magical 7 figures. The stuff dreams are made of!

Being able to call yourself a millionaire is something that many aspire to (or at least those who aren't there yet!) And it is definitely something worth aiming for because, as they say, the first million is the hardest!

So practically speaking - is it possible for someone to become a millionaire, and how long will it take to get there?

Well, using a few assumptions, you will see that it is very possible, and the time it takes depends only on your priorities and discipline – i.e. how much are you consistently willing to put towards this goal? You may need to realign your priorities a little bit, and decide if financial security is important to you (it really should be!)

As you will see, there are no scams or gimmicks involved in getting to a million, just good old fashioned disciplined and consistent investing, and allowing the power of compound interest over time to do the rest.

So just how long does it take?

The following table shows how many years it will take someone to go from 0 to 7 figures, according to the amount invested each month, and the investment returns they get (click for a larger image.)

What is quite amazing, is that even with R200 a month, and very conservative returns of 10%, it is possible to become a millionaire in less than a normal working career.

Finding an extra R10 000 a month can be a very tough ask, but if you are able to do that, you could be a millionaire in around 6 years!

Maybe more realistic could be freeing up R4000 a month, and then assuming returns of 15% (historically this has been achievable) in which case you can get to R1 Million rand in less than 10 years. That means someone starting at age 20 could be a millionaire before their 30th birthday!

The next table (click for a larger image) shows by what age you could be a millionaire, depending on your current age you and your monthly contribution going forward (again assuming a 15% return.)

So, for example, if you are 30 and want to be a millionaire before your 50th birthday, you should put away R1000 a month.

The Million Rand mark is a very nice psychological number to aim for, but I can already see some smoke on the horizon as the “but what about inflation" mob approaches from over the hill…so let me douse their torches and get them to put down the pitch forks by factoring in inflation.

I fully agree - R1 Million in future years won’t be nearly as powerful as it is today due to the effects of inflation over time.

To account for inflation, I put together the below table which works with after inflation (real) returns and assumes that you also adjust your monthly contribution by inflation. The table shows how long it will take someone to get to the future equivalent of R1 Million (which of course in nominal terms will be more than R1 Million, but which should in theory go the same distance as what R1 Million in today's money would.)

If inflation is around 6% and you assume long term equity returns are around 15%, then we can work with long term real returns of 9%. This means that it will take a little under 42 years for a R200 monthly contribution to turn into an inflation adjusted R1 Million. If you are able to up that contribution to R500 a month, it will take a little over 30 years. A R2000 contribution will get you to a Million in under 18 years – a 22 year old could be a millionaire before their 40th birthday.

Out of interest, a contribution of R2750 per month (which happens to equate to the annual TFSA contribution limit of R33k per year) at a 9% real return, will make you a Millionaire in less than 15 years (assuming Government adjusts the contribution limits for inflation). And there is only one thing better than being a Millionaire, and that is being a Tax Free Millionaire! So there's some motivation to get your TFSA going...

Finally I think it would be irresponsible not to point out that R1 Million rand doesn’t actually get you that much (even in today's money.) If you use the 4% rule, R1 Million only allows for an income of around R3300 a month. I am not saying this is to discourage you, but rather to point out the importance of making sure you are investing enough for your future!

We all have to start somewhere, and aiming for your first million is not a bad place! Hopefully breaking the R1 Million mark will spur you on, and you will find the second million is achieved easier and quicker, and the third million even easier and faster. You could be well on your way to financial freedom – especially if your investment is in addition to a pension plan you may have with your employer.

Till next time, Stay Stealthy!
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