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.
- Do I have 30 years of working life ahead of me to do that?
- 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:
- Property value must appreciate
- The property must be able to be consistently being rented out
- 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:
- Start early
- The power of compound interest
- 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.