How to become a millionaire
There are millions of people out there who dream about becoming a millionaire. It is this magic dream that almost everyone has, but the fewest know how to achieve. People think they just need this one very good idea or simply luck in the lottery to become a millionaire. But the truth is that there is a mathematically way to show what is needed to achieve this goal. If you want to get a blueprint on the ingredients you need to achieve your goal and become a millionaire. Or you just want to look on the scientific side of things for once. This blog post is for you. I am going to talk about the mathematical formula that can make you a millionaire. Every single ingredient will be explained the same as the changes that will happen if you change them just a bit.
- How to become a millionaire
- What does it take to become a millionaire
- How much money do you need to become a millionaire
- What interest do you need to earn to become a millionaire
- Realistic expectations
- Get more interest
- How long does it take to become a millionaire?
- To become a millionaire without a huge amount of money
What does it take to become a millionaire
It will take three different things to reach the almost magical $1,000,000. The first one is money that you have right now. If you think that this already means that are out of the, let me tell you, you are not. The money part will be represented by the letter P in our formula. The second thing need is an interest that you earn on the money you have. This part will be represented by r. The third ingredient it takes is time. You need to have your money invested over a period to earn interest on it. The longer the period is the more interest you are going to earn. Time will be represented by t.
This left us with the simple formula: A=P*(1+r)^t
This may seem a bit complex when in reality it isn’t. That what this formula there says is that to get the amount A, in our case $1,000,000, you need to have the amount P invested. With the investment, you have to earn the interest r. But because of the fact that you still have your money after you earned the interest for one time period, we need to add a 1.
Otherwise, you would only calculate the interest you earn just likes you lose everything you invest and are only earning interest now. To calculate how this investment before over multiple years we need the time factor in it too by adding ^t to the interesting part from our formula.
One really important thing is that this formula only calculates how your money would grow if you don’t add any of your savings over time. This is because the formula for that case is way more complex. Even though it also has the same important ingredients as the one I use now.
Therefore I will use this formula to shows you how every ingredient changes the curve of your net worth drastically. So that you can learn how you can adjust your behavior to reach the become a millionaire as efficiently as possible.
How much money do you need to become a millionaire
As you know now there are three ingredients that you can change to be sure that you are becoming a millionaire.
The first thing I want to talk about is the money part. But even if you talk about hat its is clear that we need to consider the parts as well. Because you potentially could become a millionaire with only one dollar over time. If you would live long enough. in this formula the money is somewhat kind of a hard factor.
Because if you put 20% more money in it will result in you having 20% more money at the end of the period where you invest. If all other conditions are the same. On this money side, you also have a huge impact on the outcome.
If you are 40 years old and you want to become a millionaire before you retire it will be hard. You cant impact the time in this special situation, but you can impact the amount of money you invest. And if you invest more you’re will pass the $1,000,000 earlier than if you invest less.
Therefore you must invest as much as possible. Because if you do so you can reduce the time it takes. If I talk over the interest side of the formula I will exactly tell you why you even should invest your money in the first place.
You now know that investing as much as possible is key if you want to become a millionaire. So there is the big question of how to do do this. It is extremely important that you don’t think that you are going to start once you earn more money.
Because chances are that you already earn way enough.
What people often don’t understand is that how much they earn doesn’t matter most. What matters most is how much of the money they can keep. This is also called a savings rate. To find out your personal savings rate you only need to divide the amount of money you saved trough the amount of money you earned in a specific time period.
If you want to know why this is extremely important, I would suggest you read my article about the savings rate:
The answer to the question of why earning more money doesn’t mean that you are going to reach your target faster is that your spendings adjust to your earnings. Just think about the last time you got a raise in salary. It might have made a difference first, but once you got the new car you were in the same situation as were before, right?
Most people behave like that. Therefore if you want to come out ahead you should first focus on your spending s before you start focussing on your earnings. The art of your earnings that you are going to invest in the spread between your spendings and your earnings.
But because of the fact that your spendings adjust when your earnings rise it is important to focus on the spendings. To do so you need to have a look at what you are spending your money on. If you have this you then can start adjusting your behavior so that you can start spendings less than you are right now.
Now I want to give you an example of how things change when you increase the amount of money that you invest. Therefore we say that you invest $100,000 for 40 years. The yearly interest you get paid is 6%. So the formula we are working with is $100,000*1,06^40.
As you can see the result is $1,028,571.79. This means that would reach your goal in 40 years if you would invest $100,000 now.
If you would invest doubled that amount it would be $200,000*1,06^40.
This comes out exactly doubled the result we had before. Therefore it is 2,057,143.59. But the interesting part here is that you would have reached your goal in x years and not in 40. So it would be a bit faster, but clearly not twice as fast. Even though we put in the doubled amount of money.
The same thing can we see if act like we invested only $50,000.
We would have exactly the half amount, that means $514,285.90, after 40 years. But we reach the one million mark after only 52 years. This means that we are way faster than the 80 years you would expect because we only invested the half amount then we did when we needed 40 years.
The outcome of these facts is very clear if you compare the graphs against each other. The amount of money we invest in the beginning is trough out the time always in the same ratio to each other. This means that you don’t have any advantages in terms of return if you invest more money. The advantage that you have is clear that more of your money will get the multiplicator if you invest more of your money. So you can see pretty good that is important to invest as much as possible.
What interest do you need to earn to become a millionaire
The next thing in the formula is the interest that you earn on your money.
The reason why interest ist that important is that it is responsible for this exponential growth you saw in the graphs above. This comes from the fact that the interest is the factor of how much your investment grow from each one time period to another. If you let your earned interest invested so that you can earn compound interest.
As you already saw on the numbers I showed you earlier, compound interest is a really huge factor. Without compound interest, you would have only had $340,000 instead of the $1,028,571.79 after 40 years. This shows you how huge the whole investing thing is.
Just imagine you wouldn’t have invested your money at all. You would only have $100,000 after 40 years. But that is not enough, because of the inflation that comes because the FED just prints money you would have lost real-world value if you have quit investing. If you know more about the huge effect that investing has for your money, read this article I wrote about Why you should invest.
Now that we know how important the interest is to reach this one million dollar goal, we have to start talking about what interest is realistic. It is right that you would reach your goal way faster if you would earn a 10% interest per year, but that won’t happen.
The same applies to people who believe that 3% interest per is much in these low-interest rate times nowadays. But with an interest rate of only 3%, you are probably never able to reach your goal. In the example above I calculated 6% interest, which is actually realistic.
The stock market exists for a few decades now, and so do indexes. An index is like a pool of stocks. For example, the S&P 500 is a pool with stocks of the 500 biggest companies in the USA. These indexes have a huge advantage for all investors that don’t want to just buy a single stock.
Single stocks can go down really much and the company can go bankrupt. This means there is a huge risk in investing in single stocks. But if one of the largest 500 company goes bankrupt, the other probably don’t have any problem and chances are that you won’t even notice it in the S&P 500.
Because the companies in the S&P 500 change if one company et bigger than another. Therefore with indexes, you have a really low risk. You don’t profit if only one company goes up, you profit if the economy goes up. And because of the fact that we have data over multiple decades for multiple companies, we can see what the average growth of the stock market is.
And since the S&P 500 exist it yielded 8% per on average. But because of the fact that you have to pay for fees if you have a broker, and the yield is different if you use a different index, and there could be other factors, and so on. This is why I like to calculate with a 6% interest per year. In the examples down below you can see that this makes a really huge difference.
Get more interest
But before I am going to show you the graphs I want to talk about how you can get way more interest than 6%. However, this is only achievable with a small amount of your money, and only if you have credit card debts. If you do have credit card debits you should use your money to pay back your debts before you start investing it.
Because paying your credit card debts it like investing the money. You are probably asking yourself why you earn interest if you pay your credit card debts off. The interest that you earn is that you don’t have to pay interest to the bank anymore. So you can just pay off your $1,000 debts that you used to pay 12% interest on and you are going to save yourself the $10 per month that you had to in interest.
It is like you invest the same amount for the same interest anywhere else. And what would happen is that your investment would pay for the interest on your debts. In other words, you wouldn’t have any costs for the debts. Just as you would have no cost for the debt if you don’t have any. That why you can look at paying your debts off as an investment.
If you want to use this method and earn more then 10% guaranteed interest, you should read my article where I talked about two exact methods that you can use to pay off your debts:
I already showed you how much money you would have if you invested $100,000 for 40 years with an average interest of 6%. Now I want to show you how more interset boost your investment. Therefore I am going to use the 8% interest that the S&P 500 earned on average per year. So we are using the formula $100,000*1,08^40.
As you can see the graph goes up quite a bit earlier than with 6%. And the amount you would have after 40 years is about twice a high as the one million you would had with 6% interest. The result is a whopping $2,172,452.15 with an only 2% higher interest. This means you would reach one million dollars after only 30 years.
The performance if we use the formula $100,000*1,04^40 will be interesting also. So now we would get only 4% interest.
As you can see the impact is huge. After 40 years with 4% interest, you would have only $480,102.06. What is less than half what you would have with a 6% interest after the same amount of time. If you want to reach the one million dollar goal with this interest rate you would have to wait 59 years.
In the comparison of all the graphs, you can see know that you would have doubled the amount after 40 with 2% more interest. And also you can see that this huge exponential growth starts to come earlier if you have more interest. Because this huge growth it what really carries your investment, you really want an interest that is as high as possible.
How long does it take to become a millionaire?
It obviously depends on the amount of money you invest and the interest that you are going to earn.
But because of the crazy exponential growth that gets bigger at the end, you want to start as early as possible. If you start earlier you are more likely to reach the goal even if you haven’t invested that much money at that a huge interest rate. The second thing is that we all want to reach our goal as soon as possible and if you start investing earlier you will reach it earlier.
The problem with starting early often ist that you don’t think about money when you are 5 years old. And if you would do, the $5 you get per month cannot get invested, because you are obviously under 18. This means that you need to reach a specific age before you even can start investing.
Lets just you are 20 and you want to become a millionaire once in your life just by investing your money smart over time. Chances are that you don’t want to reach this goal if you are 80 years old. Therefore you shouldn’t wait 20 years after you become 40 to start investing. You should start investing money from the point on when you realize that it helps you.
Another point is inflation, I talked already about it, but it makes a huge difference. It is the decision to let the time work for or against you. If you don’t invest your money because you rather save it, time will work against you. You will lose 2% real-world value per year from all your savings. But if you invest your money properly you can gain way more value over time.
For this example I am going to give now I won’t work with a graph, because you already saw all the graphs earlier. Now I will show you a table which contains the potential growth of your investment over time. I will work with the formula $100,000*1,06^40 for this. Because it will leave you with around one million dollars at the end.
|Year||Amount||Average growth per Year|
Here you can see that, in the beginning, the amount you earn in interest per year is really small compared to the ones that you earn later on. This is the case because you first earn 6% from the $100,000 put later on you earn 6% from the overall amount you had in the year before. As you can see the numbers are truly amazing. In the end, you earn up to $58,221.04 per year. This should point out that starting early really is key.
To become a millionaire without a huge amount of money
Of course, not everyone can afford to invest $100,000 when he is 20 to become a millionaire with 60. The good thing is that there is another way to. If you invest your money over time you can also reach your goal. But because of this formula for that kind of investing is way more complex I wanted to show you how which ingredient takes influence on the outcome. Therefore you can see things really clear and notice how you need to adjust everything to perfect your way to one million dollars.
However, if you don’t have the needed amount to invest it today and become a millionaire over time. I wrote another article that shows you how much money you need to invest every month to become a millionaire at the same time. Go and check it out here.
Thanks for reading!
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