Who Wants To Be a Millionaire?

When I was young, I remember watching this game show called “Who Wants to Be a Millionaire”. As I am watching the show, I was thinking how wonderful it is if I can be a millionaire one day.

From the family background I was brought up, I was told that being a millionaire is a very difficult thing. This mindset has deeply ingrained in me and makes me think that it is almost impossible to be one. I thought to myself, in order to be one I have 3 options. Either I got to study very hard and get a very high income job or I have to have a rich dad or get a rich spouse.

Many years later after my graduation from university, I start to become interested in financial planning and start to slowly accumulate financial education. I start to realize that being a millionaire is not exactly what I thought. There is a forth option. It is by a disciplined and systematic savings/ investment approach.

 

In fact in today’s situation, we may need to be a millionaire in order to have our basic retirements need being taken care of. I will elaborate this retirement needs in my next article.

Let me share what I have found out, and what I can do to become a millionaire.

 

1. Pure Savings

Becoming a millionaire is an accumulation game.

As long as I kept saving my money, I will be on my journey to becoming a millionaire. The only problem is how long will it take for me to do that.

So I decided to work it out over here. I calculated, if I were to faithfully save every month for the next 30 years into a fixed deposits of say 1% per year, how much would I need to save each year. Below is the table that illustrates the accumulation process.

 

End of year Interest Amount saved per year Amount at end of year
1 1% $28,463.48 $28,748
2 1% $28,463.48 $57,784
3 1% $28,463.48 $87,110
4 1% $28,463.48 $116,729
5 1% $28,463.48 $146,644
6 1% $28,463.48 $176,859
7 1% $28,463.48 $207,376
8 1% $28,463.48 $238,197
9 1% $28,463.48 $269,327
10 1% $28,463.48 $300,769
11 1% $28,463.48 $332,525
12 1% $28,463.48 $364,598
13 1% $28,463.48 $396,992
14 1% $28,463.48 $429,710
15 1% $28,463.48 $462,755
16 1% $28,463.48 $496,131
17 1% $28,463.48 $529,840
18 1% $28,463.48 $563,887
19 1% $28,463.48 $598,274
20 1% $28,463.48 $633,005
21 1% $28,463.48 $668,083
22 1% $28,463.48 $703,512
23 1% $28,463.48 $739,295
24 1% $28,463.48 $775,436
25 1% $28,463.48 $811,939
26 1% $28,463.48 $848,806
27 1% $28,463.48 $886,042
28 1% $28,463.48 $923,651
29 1% $28,463.48 $961,636
30 1% $28,463.48 $1,000,000

 

After all, it is still possible to save one million dollars. All I have to do is to save $28,463.48 per year to achieve. That will be around $2,371.96 per month.

 

After looking at this, 2 questions comes into my mind.

  1. Do I have 30 years of working life ahead of me to do that?
  2. Can I save the amount of $28,463.48 per year consistently for the next 30 years?

 

In fact after looking at this figure, how I wish that I could have 30 years ahead of me. If I can only do that for the next 20 years, I can only save $633,005, still fall short of my millionaire dream.

 

Therefore I move on to calculate if I only got 20 years to save, how much do I have to save per year to get the same One Million? Here are the calculations:

 

End of year Interest Amount saved per year Amount at end of year
1 1% $44,965.66 $45,415
2 1% $44,965.66 $91,285
3 1% $44,965.66 $137,613
4 1% $44,965.66 $184,404
5 1% $44,965.66 $231,664
6 1% $44,965.66 $279,396
7 1% $44,965.66 $327,605
8 1% $44,965.66 $376,296
9 1% $44,965.66 $425,475
10 1% $44,965.66 $475,145
11 1% $44,965.66 $525,311
12 1% $44,965.66 $575,980
13 1% $44,965.66 $627,155
14 1% $44,965.66 $678,842
15 1% $44,965.66 $731,046
16 1% $44,965.66 $783,771
17 1% $44,965.66 $837,024
18 1% $44,965.66 $890,810
19 1% $44,965.66 $945,133
20 1% $44,965.66 $1,000,000

 

Using the same compound interest calculations, the table tells me that I would need to save $44,965.66 per year. That will work out to be $3,747.13 per month. This is not to small sum of money to save per month, consider all my family and life’s commitments. I think I got to work really really hard to consistently save this amount every year for the next 20 years!

 

2. Invest

As I gain more financial knowledge, I discover that I could have an easier journey. All I have to do is to save at a higher interest rate. This can be achieved by investing through the various different financial instruments, for example stocks, unit trusts, REITs etc.

So assuming I can invest consistently for the next 20 years and get a 5% interest rate, how much do I need to save?

 

End of year Interest Amount saved per year Amount at end of year
1 5% $28,802.46 $30,243
2 5% $28,802.46 $61,997
3 5% $28,802.46 $95,340
4 5% $28,802.46 $130,349
5 5% $28,802.46 $167,109
6 5% $28,802.46 $205,707
7 5% $28,802.46 $246,235
8 5% $28,802.46 $288,790
9 5% $28,802.46 $333,472
10 5% $28,802.46 $380,388
11 5% $28,802.46 $429,650
12 5% $28,802.46 $481,375
13 5% $28,802.46 $535,686
14 5% $28,802.46 $592,713
15 5% $28,802.46 $652,592
16 5% $28,802.46 $715,464
17 5% $28,802.46 $781,480
18 5% $28,802.46 $850,796
19 5% $28,802.46 $923,578
20 5% $28,802.46 $1,000,000

 

The savings journey here seems to be easier, I will need to save $2400.21 per month for 20 years. Not too bad compared to $3,747.13 per month at 1% savings rate. Of course for this option, I will have to take a bit more of risk with my money.

 

3. Invest or save into a property

After all the calculations above, I started to question myself, will I have the discipline to consistently put money aside and save the targeted amount every month?

Then, I discovered a very interesting finding. I have never missed my mortgage instalment payment, and yet I may not have the discipline to consistently save the same amount every month.

The next thing I figure out is that I can save my money into a property, and use the mortgage instalment as an “enforce savings mechanism”. However in this option, I may have to have some money for initial downpayment.

 

Here are my assumptions:

If I buy a $750,000 property to rent out, taking out a 20 years loan at 3% per annum interest:

 

Initial downpayment                                                              :           $187,500

Initial Loan                                                                               :           $562,500

Property Capital Appreciation per year                              :           5%

 

Cash flow calculation

Assuming rental per month                                        :           $2,000.00

Monthly instalment                                                      :           $3,119.61

Management fees and other costs                             :           $400.00

Cash top up required                                                    :           $1,519.61

 

If I can get a monthly rental of $2,000, after accounting for bank instalment payment and other costs, I will have to top up $1519.61 per month. 20 years later, I will have fully paid off my loan. Let’s see how much I can make

 

20years later:

Property value                               :           $1,989,973

Initial property value                   :           $750,000

Profit                                               :           $1,239,973

 

Yes I would have made my $1.2M profit. After deducting the initial downpayment of $187,500, I will have nett a $1,052,473, I still have make my one million dollars.

Compared here with the other 2 savings methods above, my monthly top up is only about $1,519.61 per month. This amount is quite manageable. However a word of caution here, there are some risk that I will have to take, namely:

  1. Property value must appreciate
  2. The property must be able to be consistently being rented out
  3. Mortgage interest rates do not skyrocket

 

The comparison here may not be fair here, as there is an initial downpayment for the property. In order to do a fair comparison, lets do the same. If I have $187,500 to start with and top up of $$1,519.61. With the same initial amount and monthly bank savings at 1%.

 

End of year Interest Amount saved per year Amount at end of year
1 1% $205,735.34 $207,793
2 1% $18,235.34 $228,288
3 1% $18,235.34 $248,989
4 1% $18,235.34 $269,896
5 1% $18,235.34 $291,013
6 1% $18,235.34 $312,341
7 1% $18,235.34 $333,882
8 1% $18,235.34 $355,639
9 1% $18,235.34 $377,613
10 1% $18,235.34 $399,806
11 1% $18,235.34 $422,222
12 1% $18,235.34 $444,862
13 1% $18,235.34 $467,728
14 1% $18,235.34 $490,823
15 1% $18,235.34 $514,149
16 1% $18,235.34 $537,709
17 1% $18,235.34 $561,503
18 1% $18,235.34 $585,536
19 1% $18,235.34 $609,809
20 1% $18,235.34 $634,325

Yes I would have save $634,325. After deducting the initial downpayment, I will have nett a $446,824.

 

With the same initial amount and monthly investment at 5% interest:

 

End of year Interest Amount saved per year Amount at end of year
1 5% $205,735.34 $216,022
2 5% $18,235.34 $245,970
3 5% $18,235.34 $277,416
4 5% $18,235.34 $310,434
5 5% $18,235.34 $345,103
6 5% $18,235.34 $381,505
7 5% $18,235.34 $419,727
8 5% $18,235.34 $459,861
9 5% $18,235.34 $502,001
10 5% $18,235.34 $546,248
11 5% $18,235.34 $592,707
12 5% $18,235.34 $641,490
13 5% $18,235.34 $692,712
14 5% $18,235.34 $746,494
15 5% $18,235.34 $802,966
16 5% $18,235.34 $862,261
17 5% $18,235.34 $924,522
18 5% $18,235.34 $989,895
19 5% $18,235.34 $1,058,537
20 5% $18,235.34 $1,130,611

 

Yes I would have made my $1.13M. After deducting the initial downpayment, I will have nett a $943,110.

 

 

Conclusion

After going through this exercise, I find out that it is actually quite possible to be a millionaire. It is a combination of correct accumulation strategies coupled with a disciplined approach. I discovered in this journey that some critical factors will help me to accumulate the one million, namely:

 

  1. Start early
  2. The power of compound interest
  3. Taking some calculated risks is necessary for a better retrun

 

Do consider reading my article on the millionaire next door, and see how simple and small changes to your life’s decisions can make a vast difference in your wealth position.

 

Meanwhile, I will enjoy this interesting Hokkien song, if I have a million dollars…and see what I can do with my million when I have it.