Here's How I Plan to Become a Millionaire -- Eventually
KEY POINTS
- With regular contributions and the benefit of time, compound interest can turn an initial $50,000 investment into over $1 million in 30 years.
- Building long-term wealth is more important than becoming a millionaire.
It's not as impossible as it seems.
Did you know there are almost 22 million millionaires in the U.S.? With a population of 332 million, that means about 6.6% of Americans are millionaires, according to a Credit Suisse report. If you're struggling to make ends meet and cover the bills each month, it's hard to contemplate amassing that level of personal wealth. But it can be done, it just takes time.
Becoming a millionaire
I'm now in my 40s and am very focused on building wealth for my old age. About five years ago, I was dealing with the aftermath of a failed business and contemplating a pretty bleak financial future. Without going into my whole life story, let's just say I still had some cash, but I also had a lot of ground to make up in terms of savings. I sat down with a compound interest calculator and worked out how much I needed to save each month if I wanted to retire comfortably at 70 (or before).
My strategy to become a millionaire is not revolutionary, it comes down to taking it slowly and letting compound interest work its magic. Let's look at those two ideas in more detail.
1. Take it slowly
There's no point in being miserable for the next 30 years purely so you can live a comfortable old age. Plus, drastic budgeting is like crash dieting, if you go too lean, it's almost impossible to keep it going. My approach is to slowly build wealth by consistently investing a portion of my earnings each month.
It helps that I live abroad and have a low cost of living. That means I can comfortably afford to transfer $500 each month to an online stock broker, sometimes more. Since I'm not an expert investor by any means, I mainly use index funds and ETFs. It means I don't have to pick individual stocks, but can also maintain a diversified portfolio.
I am also extremely lucky that my parents taught me the importance of saving. Even when I had my first job and felt like my paycheck barely covered my living expenses, I still put money aside. Though, in hindsight, I wish I'd have saved more. It's now five years on from my decision to consciously build wealth and I have $50,000 worth of investments.
2. Use the power of compound interest
While I own a mix of equities, real estate, cash, and crypto, I'll focus on equities here. All investments carry risks and the stock market can go down as well as up. However, the stock market is a lot less risky than cryptocurrency. I'll be over the moon if my crypto boat comes in but I'm not relying on it to fund my old age.
Historically the S&P 500 has averaged a 10% return. Some years it may be less and other years it may be more, so I'll be conservative in my calculations and use a rate of 7%. What's powerful about compound interest is that if you don't siphon off any gains, each year you'll be able to earn returns on your earnings as well as your original capital.
Compound interest with no additional investments
| Amount | 10 Years | 20 Years | 30 Years |
|---|---|---|---|
| $1,000 | $2,000 | $4,000 | $8,100 |
| $5,000 | $10,000 | $20,200 | $40,600 |
| $10,000 | $20,100 | $40,400 | $81,200 |
| $50,000 | $100.500 | $202,000 | $405,800 |
Compound interest is incredible. Without doing anything else, a $10,000 investment can grow to $80,000 in 30 years. That's a huge amount of growth, but it isn't going to make me a millionaire. Here's how those figures change if we factor in the $500 contribution I mentioned above.
Compound interest with $500 monthly investment
| Initial Investment | 10 Years | 20 Years | 30 Years |
|---|---|---|---|
| $5,000 | $96,600 | $280,700 | $650,600 |
| $10,000 | $106,600 | $300,900 | $691,200 |
| $50,000 | $187,000 | $462,400 | $1,015,800 |
Every little bit counts
You don't have to become a millionaire. In truth, I probably won't be able to get there -- a lot of things could happen in the next 30 years that stop me reaching that pinnacle. It's one thing doing the calculations on paper, and quite another carrying them out. That's OK. What's important is to put some money aside each month, and know that you're building long-term wealth.
Don't panic if you can't save $500 a month or you don't envisage saving for another 30 years. That's OK too. Even a tiny investment now or a small monthly contribution can add up over time, especially if you let compound interest do the heavy lifting. It is fun to contemplate being a millionaire. But that monthly payment to my future self is more about peace of mind and well-being than building a great fortune.
Our Research Expert
Emma owns the English-language newspaper The Bogota Post. She began her editorial career at a financial website in the U.K. over 20 years ago and has been contributing to Motley Fool Money since 2019.
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