A young friend of mine just started working.
We met for lunch one day. As we were finishing desserts, he pops a question to me, “Vipin, how can I be a millionaire? And I mean a dollar millionaire. How should I be investing to reach that number?”
Hmm. It wasn’t the first time I heard a question like that. Who doesn’t want to be rich, a millionaire?
To answer my friend’s question, I ran some quick calculations. Now, he has set his goal to be a millionaire, that too a dollar one. For ease of understanding, a million dollars at the exchange rate of Rs. 84 to a dollar would mean about Rs. 8.4 crores.
Whoa! That needs some work. Let’s crack it. Here we go!
The ‘become a millionaire’ workout
My friend worked with a large well-known company as a ‘software engineer’. His first salary package is Rs. 11 lacs a year, means a monthly take home of about Rs. 75,000 a month.
“Let’s make a few assumptions, my friend. I am sure with your talent and the hard work that you will put in, you can easily get an average annual raise in your salary of about 10%. Yes, you will get more in some years, and less in others but by and large this is what you should be able to average. I am making a big assumption, that you will not startup!
Now, let’s say that since you have recently started making money, you would like to have a little fun too and of course there are obligations that you need to take care of. Your student loan, house rent, your new shiny gadgets that you finally will buy and the short and long trips with friends where you don’t have to penny pinch any more.
Even after all this, I believe you will be able to save 30% of your salary in the first 5 years, 40% of your salary in the next 5 years and 50% of your salary for every year thenceforth. Fair enough?
Now, let’s say that you put your money in a basket of investments way which can deliver an average return of 12%. Yeah, that may sound really small. But for assumption sake, let’s just stay with that for now.
Running the above guidelines through an excel sheet, I get the following numbers and chart. Have a look.
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In 10 years, you would have just about Rs. 56 lacs of wealth, in 20 years it would be up 7 times to Rs. 3.86 crores and in 25 years you would be sitting on a huge pile of Rs. 8.4 crores.
The important question is what makes this happen? What drives this wealth building? What will make you millionaire?
What matters to become a millionaire?
If you look at the assumptions again, we have been fairly moderate in our approach. A salary growth of 10% and an investment basket return of 12%.
We haven’t yet spoken about which stocks, mutual funds, fixed deposits, PPF, etc. to buy. Yes, there has to be a process to identify the right instruments too. But that is a different discussion.
If we can manage to keep our head over our shoulders, we can figure that out too.
In my view, when it comes to becoming a millionaire via the investing route, the things that are important and that really matter are:
- How much are you saving? – I have recommended that you save 30% in first 5 years, 40% in next 5 years and 50% of his salary from thereon.
- For how long are you investing? – This can make a huge difference. As you can see in the chart above, it takes time too. The earlier you start, the better it is. For you, we have considered an investment time frame of 25 years.
- What does your investment basket (also called asset allocation) consist of – to deliver a decent return on investment? – To deliver an average 12% return, you would need a fair share of equity to be working for the portfolio. PPF, EPF, Fixed Deposits would not be enough.
Amongst the above, the ‘how long part‘ is very important. Let me illustrate it for you with 3 scenarios.
- Scenario 1 – you start investing right away, you get to invest for 25 years
- Scenario 2 – you start investing from year 6, you get to invest for 20 years
- Scenario 3 – you start investing from year 11, you get to invest for only 15 years
This is what you would end up with in 25 years after you start working, saving and investing.
The difference is self – explanatory. The conclusion is obvious too. The longer the time you are invested for, the greater the effect of the power of compounding, the 8th wonder of the world on your portfolio. And this needs great discipline. Starting to invest early is the key!”
Want to be a millionaire – what not to do?
My friend saw and exclaimed, “But, that’s too slow. Is it going to take so much time to be a millionaire?”
“Well, the fact is that investing is boring.
If you want excitement, go play your favourite sport, watch an action movie or may be try your hand at gambling.
Investing is not hunting, it’s much like farming.
I am sure you can imagine the two.
But well yes, you can make the process work faster. The two factors that you can surely control are – how much can you invest and for how long? Increase the two as much as possible (without affecting your day to day) and the result will present itself as soon as possible.
As for the third factor, the portfolio returns, in my very humble opinion, you cannot do much about it. Unfortunately, that happens to be the focus area for most people. The next hot IPO, the best mutual fund or trading tips that can double your money in three weeks are some examples to blow your money.
A single minded focus on returns can be a big investment mistake. With that mindset, you could end up taking risks that can wipe out your money.
Don’t believe me. Ask the ones who have returned from the battlefield – other investors who have paid the price.
So, that’s about it my friend. That’s what it will take you to be a millionaire. Are you ready for it?”
“I guess yes“, my friend said beaming a big smile. “To begin with, I think I will be able to save more than 30% even today.”
That’s a good step.
Between you and me: How would you go about becoming a millionaire?
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