You’re a millionaire! That sounds pretty nice, right? Too often when we think of millionaires, we think of lottery winners, professional athletes, movie stars and the like. But what if I told you it’s entirely possible for an average individual just like you and me to hit that milestone?
First off, we must understand that very few people wander into success. The championship-winning team prepares. The top salesperson does their homework and due diligence. The best teacher continues to be a student of their topic.
Success with money is no different.
What’s this mean for you? It’s quite simple, really: if you want to succeed and achieve X goal, you’ll have to prepare for it. In my opinion, the best way to achieve any goal is to think about it, then work backwards to see what must be true to achieve it.
Let’s say you’re 30 years old and want to be a millionaire by the time you’re 50. For the record, by “millionaire” I mean someone whose net worth is $1,000,000. With 20 years to knock out this goal, we can work backwards to see how this can be achieved.
First off, let’s say in the next 20 years you work to purchase a home and have it paid off. Now I know real estate prices in the last couple years have gone absolutely bonkers and I’m not going to pretend I know what that market will do in the future.
According to Statista, the average new home sales price in the US from 2014 to 2021 is $384,6501. Now that’s an average, so some homes will be higher and some will be lower, therefore, we’ll take a conservative approach and say your home is worth $300,000 after you’ve paid off the entire mortgage in twenty years. That is a +300k towards your goal of $1,000,000 and you only need $700,000 to go.
With your home paid off, the next best option is to grow your assets by investing. This may or may not be with the help of a financial advisor or expert, but unless you plan to sock away a literal $700,000 in your mattress or savings account over twenty years, you’ll need to do some sort of investing.
According to the US census bureau, the average household income in the United States for 2021 was just under $71,0002. If you were to invest 15% of $71,000 for 20 years, you’d be looking at $10,650 a year, or roughly $888 per month (for simplicity, we’re going to run this calculation as if you currently have $0 dollars invested. If you do already have money invested, even better!).
We’ll use the S&P 500’s lifetime average return of just below 10% annually3, according to Investopedia. Again, this is an average return, where some years are high and some are low. Depending on rounding used in the calculation, you’ll get somewhere around $658,000 invested so we’ll use $660,000 for easier numbers. Now we’re looking at roughly $960,000 in assets.
Now you might be thinking: Aaron, I can’t invest $888 a month! That’s crazy. How will be able to achieve this?? Well, here’s how: the first step is get on a written plan (aka, budget) for your monthly income and get control of your spending.
Second, if you have consumer debt (basically anything that’s not a mortgage), get it paid off as quick as you can. Make some sacrifices here: stop going out to eat, pay off your car loan (or sell it and get a more affordable car), cut out some subscriptions, make fewer trips to Starbucks, pick up that extra shift, maybe start a side hustle, sell some stuff you haven’t used in years that is sitting around collecting dust. Just get that debt out of your life, then you can invest intentionally and purposefully.
I don’t mean to be the bearer of bad news, but I do want you to know that only investing 3% into a 401(k), even with an employer match, may not build the nest egg you’re hoping for.
I’d also like to point out a couple things with the above calculation for investing. First of all, it was using a $71,000 per year household income. Over the course of 20 years, I sincerely hope you’re not still making the same amount from age 30 to age 50! And since the amount invested per month is based off a percentage of your income, as you make more, you also invest more. If you’re already making more than $71,000 as a household, you’re ahead of the game. If you’re not quite making $71,000 right now, please don’t fret– we just said it would be unrealistic to believe you wouldn’t get a raise over the course of 20 years.
Secondly, we are not including any form of employer match in this calculation. Why not? Well, because you can’t control that. Maybe your work policy changes. Maybe you change jobs and the match changes. Maybe there’s a pandemic and workplaces pause matching retirement contributions. Regardless, you can’t control what your employer does concerning additional contribution to your retirement plan. By all means, please take advantage of this opportunity when you can! But let’s count chickens after they hatch and not put great reliance on what someone else does for your finance success. If your employer does match, your investment position will be even better than what we are calculating here.
After investing for twenty years, we’re forty thousand away from our millionaire benchmark. To be clear, this $40,000 gap will probably be jumped via the investments by (hopeful) raises over as time goes on and/or employer matches to your retirement. However, in case it isn’t, let’s say you have some rainy day funds sitting in savings (not invested) in case you need it. Three to six months of expenses is an ideal number for this, and it will vary from household to household. For this example, we’ll say that’s $18,000. Now we are $22,000 away from your goal.
By the time you’re fifty, what are the odds you have other random assets that accumulate to over $22,000? My guess, pretty high. If you are taking care of your vehicles and on a regular plan to buy and replace them (without going into debt), it’s very possible you have $10,000-$20,000 of assets in vehicles (please note these usually go down in value, though, not up). Maybe you have a few thousand dollars in technology assets, such as high power computers (these also generally go down in value), or maybe you have a hobby collecting something specific and accumulate some value there. We have a lot of options for this part!
And just like that, in a twenty year time span, we worked backwards from a goal and came up with a plausible solution a $1,000,000+ net worth. Again, by “net worth,” this assumes you own these assets and do not owe any debt to anyone. If you do, we would need to subtract the amount you owe from the calculation.
We were also able to calculate this amount using figures that aren’t unbelievable; actually, we calculated you wouldn’t see a raise for 20 years! Neither did we say you had to win the lottery, catch a “big break” like an inheritance, or become a celebrity to achieve it. This was just math based on information for our time period, put together with a plan to have a better future.
Now it is true that your situation won’t look as simple as this. Mine won’t either; life doesn’t work that way. However, this is a framework and a plan that can succeed as long as you prepare and follow through.