4 Steps to Become a Millionaire | The Millennial Millionaire
- The Millennial Millionaire
- Dec 28, 2017
- 4 min read
Now I’ve covered Why Saving Will Make You Poor so now many are wondering, well, how do you become a millionaire. This is not something that’ll happen overnight, however, it is something that everyone can do. There are some fundamentals that go with this however. Firstly, you need to be financially secure to some extent.
Financial Security
Financial security is something that varies in definition from person to person, however, my interpretation of it is that you have, as Tony Robbins says, an emergency fund of 3-6 months’ worth of your expenses, this is in case you come across a hefty emergency such as losing a job, and gives you time to recover. The other half of financial security is that you’re in control of your expenses, that is, your income per month is greater than your expenditure per month, you aren’t living month to month, as if you cannot pay yourself first, then this is not for you. Get in control of your finances and build from there.
Now that the boring basics are out of the way, let’s talk money! As I mentioned in my last blog post, compounding is the eighth wonder of the world, and there are many ways to make this work for you in your investments, as opposed to against you in inflation.
1) STOP Mutual Fund Investment
First and foremost, STOP INVESTING IN MUTUAL FUNDS. It’s been proven that you cannot predict individual stocks and their performance, so why try. Now the average return of the top 500 American stocks in the S&P 500 is 10%, 7% adjusted for inflation.
Now 96% of mutual funds get out performed by the market! So why pay the higher management fee if you can get a very low fee index tracker that does the same thing! This would mean as opposed to 1.5% in management fees, you're likely to pay 0.5% or less, which over time and with compounding makes a huge difference.
2) Diversify Your Income Secondly, obtain multiple streams of income. The average millionaire has 5 streams of income, and it is believed that this figure is set to increase in future years. You cannot rely on your job to get you rich if you’re an average person. Ideas for streams of income can include:
Your job
Stock investments
Affiliate Marketing
Youtube Videos
Social Media
In our digital generation the opportunities are endless and less time consuming than ever! The list can go on with shopify and amazon but I’m sure you get the point. Don’t restrict your income to just your job.
3)Direct Debit and the power of compounding
Thirdly, set up a direct debit. Now, cost control is incredibly important, so you should know your monthly income and expenses. After you have this calculated, you should have some left-over income. Out of that you need to decide how much you are willing to put towards investing, the more you put aside, the more you have to compound. You can start with as little as £50 a month which is the best part! Be sure to invest this in a stocks and shares ISA to reap the rewards of the tax benefits, as opposed to a normal stocks and shares account!
If you pay in monthly, you’re spreading out your risk, so if the indexes you invest in decrease in value, you still take advantage of their drop somewhat in acquiring the stock for a lower cost the following month.
Now for the fun part, let’s see what you can expect from a £50 a month investment in the S&P 500! Let’s assume we’re paying 600 a year for a decade, at the end of the time period you’ll have £10,518.70 and adjusting for inflation it’s the equivalent to £8870.16.
We should also look at what someone in a more financially secure situation would be able to achieve, for example, someone on a £30,000 salary can afford to put away £500 a month if they are in control of their finances. Let’s say they do this for 20 years. The result: £378,015.
The best part about this is that it only requires 2 income streams, that is stocks and a job. If we were to include income from youtube videos, social media, blog posts, e-commerce etc. this person could be looking at putting away a lot more money. The best part about the ISA is that you can deposit £20,000 a year, and all interest gained on your investment is tax-free!
Now you wanted to become a millionaire, right? That’s why you’re here. Now let me show you something quite remarkable using an online calculator. If you are a 20 year-old and are able to put £250 a month to one side, using Calculator.net by the age of 65 you’ll have £2,253,863.11. That’s all it takes to be a millionaire… £250 a month. I cannot stress the importance of starting early.
4) AVOID unnecessary taxation
Now my final tip would be to look for tax advantages. For example, here in the UK we can invest in these index funds within a stocks and shares ISA, which shelters us from paying a lot of tax. Furthermore, for property investments, mortgage interest can be written off as an expense before taxation in limited companies, but not if you’re a soletrader or in a partnership. There are other advantages and disadvantages, but we won’t get into them here, I’ll save that for another post.
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