How to become a Millionaire through time
Plenty of people have financial goals. The most popular goal is probably to become a millionaire. But often people don’t know how to achieve this goal systematically. Therefore I will teach you about everything that you need to do to become a millionaire. For this, I am focusing on mathematically based facts. If you want to learn to want to know exactly what it takes to reach this goal I will show it to you. Therefore I will talk about the main factors that take influence your plan. I also will talk about the exact amounts of money you need to invest, and when you are going to reach your goal.
To calculate the outcome of any investment you need three main factors. The formula to calculate this by a one-time investment is A=P*(1+r)^t.
But if you want to become a millionaire without keeping investing over time you need a huge amount of money right in the beginning. This is why I want to talk here about what it takes to achieve the same goal with constant investments over time. However, you have the same parameters in this formula as well.
Because I already wrote an in-depth article about the effect that every parameter in this formula has I am going to summarize it here. But if you want to get a deeper insight into this topic, go ahead and read this article:
The first parameter P is the money that you are going to invest in. This matters because, in the end, you will have a specific multiplicator that got for every dollar you invested.
If you invest more money you will get this multiplicator on more dollars.
Therefore the money you get in the end if invest $1,000 or $2,000 will be exactly double. Therefore you can say that it is really worth it to invest more if you can.
The second parameter r is the interest you get per year in percentage. This is so valuable because over time you will see exponential growth.
If you now have a really small interest rate you have to wait really long to see that this makes a huge difference. If you have a higher Interest rate this is effect will, therefore, show way earlier.
The third parameter in this formula is t which stands for the years that you are invested.
This parameter is really important too. Because with an increase of Time in the market your invested amount grows. And you get interest on this grown amount. That means your interest per year grows significantly.
Because in the end, you are getting interest on more money than in the beginning. Therefore the time you are invested should be as long as possible.
Invest over time
You know now that you earn more interest over time and that there are these important factors that are changing your return drastically. But about what return are we talking here?
If you want to become a millionaire with one single investment you have to invest a huge amount upfront and then wait really long.
For example, let’s just say you get 6% interest per year. Whether or not this is achievable I will discuss later on. And because you are young right now and you want to become a millionaire before you retire let’s say you have 40 years to invest your money. This would mean that you have to invest $100,000 if you want to become a millionaire based on these parameters.
A huge amount and chances are that it is not possible for most people. This is why I wrote this article. You can also achieve the same goal at the same time, but you have to invest steadily.
However, the effect why this all happens mainly is called compound interest. This is the interest that you earn on the interest that you earned. Without this effect, it wouldn’t be possible to reach the returns you can reach with it. If you want to read more about compound interest, check my other article about investing out:
Cost average effect
An advantage of investing in the market over time is the cost average effect. If you can not afford to invest the needed $100,000 early enough you need to invest steadily every month. And if you do so you are going to profit from the cost average effect.
This effect means that you are going to get an average price of the stock you buy if you buy all the time. But this also will boost your return quit a bit. This comes because you don’t average the price of one stock out, you are going to invest the same amount which will result in even more than that. I will give you an example.
Example of the cost aveverage effect
As you can see the price per share differences quite a bit. If you would average out the cost of one stock that would mean you are going to buy one stock per time period.
This would leave with five stocks for an average price of $100 and you wouldn’t have made any return. But because you are going to invest the same amount every time instead of buying the same amount of stocks it will be different.
Let’s assume that you are going to invest $100 per month. If the price is up to $150 you are going to buy only 2/3 of a stock, and when the price is down to $50 you are going to buy two stocks. This automatically buying fewer shares if the price is high ad more if the price is low will result in an average price of less than $100. This causes you to have 5.6666 shares that are worth $100 which means that you hade a profit of $66.66.
To reach your goal while investing your money slowly over time may sound difficult first because of the amount you need to invest every single month. But don’t be upset if you read the amount now,
I will go on and explain to you why this amount isn’t that huge than you think.
To calculate how much money you need to become a millionaire I had to set a few parameters, and I am going to explain to you now why I set them as I did. I thought that becoming a millionaire should happen before you retire out of your job so that you maybe can retire a bit earlier.
But because you cant invest when you are five on throughout your entire life the time gets cut even further. So I thought that 40 years would be a good amount of time. Because you can start even if you are a few years over 20 and you would still be able to reach your goal before you retire.
I also had to set an interest rate that is easily achievable for everyone. To do this I started the average annual return of the S&P 500. The S&P 500 is an index that combines the larges 500 companies in the US. This means that the risk is very broadly spread across multiple companies and sectors.
If then calculate a bit you will come to the result that you need to invest $6,000 per year for 40 years to become a millionaire after this period. This comes down to not less than $500 per month that you need to invest.
This may sound way too much for you know, but let me explain why this should be easily possible for an average American.
You can achieve it
When it comes down to explaining why this should be possible I want to discuss first of all the median income.
The Median income is the income that has 50% lower and 50% higher incomes. It is something like the average income, but the average income in the US is not that precisely than the median income, because the people who ear way more will boost it over the true average.
This means the median income is the income that every US American should be paid. Right now it is a little bit less than $66,000 per year gross income. This should let you with around $50,000 net income per year.
To save the needed $500 per month, you need to be able to spend less.
Most people don’t know how they have to act to have money left over at the end of the month. They are thinking that they just need to higher their income to have something left over. But this is completely wrong.
Ther are plenty of people out there that are getting a salary raise every year and most of them don’t manage it to have money left over after that too. This shows us that focusing on the income side is not everything.
You need to be able to keep this money too, otherwise, you won’t have money left over at the end of the month. To do this you need to know more about your financial situation. You need to know for every month how much money comes in, how much money goes out and for what do spend it
Because if you know all this it is really easy to plan how much money you spend. And you can easily plan how much money will be left over at the end of the month. This whole system I described to you is known as budgeting if you want to read more about why you should consider starting with it, read my article I wrote about it:
If you now set the money you would have to save in perspective to the median annual net income. You will find out that it is only 12% of it. This means if you have an average job, with an average income, over an average period chances are that you can become a millionaire.
The only thing that you have to do for this is to invest your money over an easily possible period with an average interest rate. And if you do that you would have a savings rate of only 12%. This is just a bit more than the average. But most people don’t have the consistency do this over 40 years straight.
If you can increase your savings rate, even a bit more, the money you are going to save will have a huge impact on your life. You want to find out why? Read this article about why you should care about your savings rate:
Thanks for Reading!
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