Update: My newer post, “The Epic Tool You Need To Retire Early Like a King,” includes a revamped version of this tool. Read both of these posts to find out what I mean. Don’t miss out! 🙂
Take a look at yourself. Can you imagine becoming a millionaire? No?
Well, I’m here to tell you that it’s possible. Yes, you can become a millionaire even if you’re not a high income earner.
For instance, Gen Y Money (GYM) has the mindset and goal to achieve $1,000,000 net worth by age 40.
In the introduction of her Young Money Bootcamp course, she mentions that she was able to increase her net worth by ten times from $55,000 to over $600,000 in under ten years. The beauty? She did this without making more than six figures at her job.
If you believe that you can do it, like GYM, you’re already ahead of most people.
Continuation from Last Week
In my last week’s post about your BFF, Mr. Compound Interest, I mentioned how I wish I met him sooner.
So, today is a continuation of last week’s discussion about Mr. Compound Interest.
Man, I just can’t get enough of his sexiness!
Yes, I love him so much that I had to talk about him again. But it’s only because I really want to help you become a millionaire (or even billionaire)!
If you remember in my last post, I showed an example of two mice, Pinky (Ms. Dummy) vs. Brain (Mr. Smartie), who both started investing early, but at different times. If you missed it, feel free to take a look at their hypothetical results here. BTW, the dummy ended up outsmarting the genius!
Despite these results, I felt that this example wasn’t enough to prove my point. In addition to that, I wanted to illustrate how Mr. Compound Interest works hard for you. It really shows in his abs of steel, doesn’t it?
Mr. Compound Interest Freebie For You!
With that said, my fiance and I created this free tool (desktop friendly) that proves you can become a millionaire without much effort! Don’t worry, our tool is just as handsome as Mr. Compound Interest above. 😉
Again, the catch is to be patient and start as early as possible.
Why We Created Mr. Compound Interest Freebie
I felt more inclined to write this post and create this tool after having a small argument with my parents. We weren’t fighting, but they were laughing at me as if I was Krusty the Clown.
They don’t believe that it’s possible to become a millionaire. They think I’m unrealistic and just a dreamer, but like what Money Hungry Man said in my last post’s comments, the numbers don’t lie…
It’s crazy to think Brain would have less money after so many years of investing [compared to Pinky with only 10 years of investing], but the numbers don’t lie. Start Early, even if it’s a small amount. Let Mr. Compound Interest do the heavy lifting.
Again, the numbers don’t lie and we will show you how with our tool.
I was even more surprised to find out that other people, such as my friends and co-workers, were unaware of these results!
Despite learning about time value of money in school, it seems like many people don’t realize how powerful compounding interest can be.
As a test, we gave this tool to our friends to use. To our surprise, they were surprised with the results. After seeing these numbers, they are now motivated to put this into practice. We hope this will open up your eyes too!
How to Use the Mr. Compound Interest Tool
How you achieve your first million dollars will depend on a few factors — the age you start investing, your savings rate, and the average return on your investment. Let’s not forget the factor that most people lack… patience.
Okay, shall we dive in and take a closer look at each input? Yasss!
If you haven’t downloaded your free tool yet, you can grab it right here. Again, make sure you use your desktop since this is an .xlsx file.
1) Your Age
First, input the age that you’ll start saving. I highly advise you to start now even if you’re only 16.
After that, input the age you expect to retire.
Despite your age, it’s never too early nor too late. However, if you’re in your 40s and haven’t started, you might want to increase your savings rate.
As mentioned in my previous post, the best time to become BFFs with Mr. Compound Interest was yesterday, but the second best time is today. Investing as early as possible is always good because you can start contributing small amounts. That way, you won’t feel the pinch later.
But looking at the bright side, starting in your 40s is better than starting in your 50s. I know a few of my parents’ friends, in their late 50s, who are now aggressively saving as much as they can to prepare for retirement. Now, all you’ll hear them say (over and over again) is: “I wish I started sooner.” So, treat their words as your time machine to becoming a millionaire!
2) Savings Input
Next, input your monthly savings target. The “Annual Savings” field below should automatically calculate.
For simplicity, let’s say you aim to save $600 every month until you turn 65.
Some of you might be thinking: “$600 per month?? Are you cray??”
Now, assume you make the average Canadian salary of $51,000 per year. Your annual take-home pay would be roughly $40,000. Even saving 18% of that would be $40,000*0.18=$7,200 per year. That equates to $600 per month. Don’t forget that you may be eligible for a company match as well, so even more added to your savings!
Honestly, I could write an entire post that is specific to how you can save $600 per month without depriving yourself. But that’s not my focus for this post. For now, just take my word that saving $600 per month is very doable without popping out the box of instant noodles.
Believe it or not, it’s even possible to save $1,000 per month and still enjoy life. Hm… not a bad idea. It’s something I’ll consider blogging about in the next few weeks.
3) Expected (Long-term Average) Return
Now that you determined your age, retirement date, and savings rate, it’s time to make an assumption about the average long-term returns on your investments. I know, this one’s a bit tricky and uncontrollable.
According to this Globe and Mail article, John Heinzl wrote that the S&P 500 had an annual return of roughly 8.2% for 20 years ended December 31, 2015. He stated that this period is worth mentioning because it includes the two bear markets — the tech bubble between 2000 to 2002 and the financial crisis in 2008 to 2009.
Heinzl also adds:
“Twenty years not long enough for you? Over the past 50 years, the S&P 500’s compound annual growth rate was even better, at 9.7 per cent.”
With all that said, he believes that an 8% return assumption, after inflation, is reasonable.
As we all know, historical returns are not guaranteed indicators of future returns. But if you think about it, nothing in life is guaranteed.
I don’t mean to scare off anyone here, but death can unexpectedly happen at any time. Your company may cut you without notice. When a couple gets married, no one would ever think of a divorce.
You get my point.
$hit happens. But the best you can do is take on calculated risks and prepare a bit.
Prepare by doing what you can control such as starting early, earning more, and saving more. It also helps to set aside some emergency fund that will cover your butt.
Although you cannot control the markets, Mr. Compound Interest will do most of the heavy lifting for you over the very long term. There will be times where he loses steam and compounds the opposite way (i.e. bear markets).
During these times, it will be scary as eff! But instead of getting all emotional and letting go, hang onto him and give him hope. If you could, consider feeding him more stocks at a discount. Eventually, he will gain traction and start picking up again.
If you’re skeptical of Heinzl’s 8% assumption, feel free to use a more conservative number in the spreadsheet. You can even insert a real rate of return (inflation adjusted) by inputting a value that’s between 4% and 5%.
Becoming a Millionaire Requires Patience
Go ahead and use the tool. You can tailor it specifically to your situation.
So, did I prove that compound interest can turn you into a millionaire without much effort?
Again, the only discipline you’ll need is patience… and maybe some drive to earn more. Making more money will definitely increase your chances of achieving a $1,000,000 net worth sooner.
As you play around with these numbers, make sure your inputs are realistic. Overall, be honest with yourself and set some challenging but achievable goals.
Now, you’re likely going to ask:
“Where should I park my money to get these potential returns?”
I am in the progress of creating a free 101 investing course to offer some tips. Stay tune for it!
Overall, most people are skeptical about becoming a millionaire, let alone a multimillionaire (or even billionaire). But with patience, smart savings, and Mr. Compound Interest doing most of the heavy lifting, you’re richer than you think!
The tool we made for you will give you an idea of what you’ll need to achieve your first $1,000,000. Your results ($1 million net worth) will depend on these inputs:
1) The age you start investing
2) How much you save per month (and for how long)
3) The assumption of long-term average returns
While you cannot control market returns, you can certainly control when you start investing, and how much you save per month. Again, your inputs should be realistic and achievable.
Over to you
My question to you again. After seeing how compound interest works, can you imagine yourself becoming a millionaire?
More $avvy Reads for You!
Want more $avvy tips for help?
Here are more money tips and motivational reads for you:
If you like what you read, feel free to pin my posts! Don’t forget to subscribe (at the yellow bar on top) for more weekly money tips and inspiration! I promise that I do not spam. I also do not share anyone’s information.