I get the proverbial question “How do I become a Millionaire by (enter age)” all the time. So much so lately, that I thought I would write a series of posts over the next several entries that would chronicle how I have seen my students and clients do it in their 30’s, 40’s and 50’s. Let’s start by looking at how to become a Millionaire by 30.
What IS a Millionaire?
First things first. Let’s define what ‘being a Millionaire’ is. I like to use Net Worth (Assets – Liabilities) https://thefinancialstoic.com/?p=223 as this indicator but I like to use a very straight forward interpretation of Net Worth as follows: Assets that have tangible value and which can be liquidated in whole.
This would include all cash savings, stocks, bonds, mutual funds, ETFs, 401(k), 403(b), 457 accounts, real estate, held mortgages, personal property, life insurance cash value, and other like kind assets.
I do NOT include pensions, life insurance death benefits, pledged inheritances, potential beneficiary payouts or like kind assets.
I also like to use the straight forward ‘old school’ description of Liabilities as well. T
his to me would be all outstanding total payment amounts that remain against identified Assets.
Determining Net Worth
Once we have our Asset amount and corresponding Liabilities amount, we can quickly subtract the Liabilities from the Assets to determine if we have a $1 million dollar Net Worth. Simple enough.
However, before I even do this exercise with my students or clients I like for them to develop a context as to how to compare what a million dollars actually looks like that they can relate to. As a result, I ask them to do a little math with me.
So what would it take for us to literally make a million dollars in one year? To put this into something easy to relate to, we would have to make $2,740 a day for each and every day of the year to have $1million dollars. (Of course this gets more complicated because that is a ‘gross’ figure but the math is the math).
It ONLY takes $2,740 a day
Essentially then, someone who made $2,740 a day and was able to keep it all would be a millionaire. That’s a good place to start.
However, becoming a millionaire by 30 would allow for the advantage of time to be added to the equation as well. That’s good.
So now let’s arbitrarily say that someone who wants to become a millionaire by 30 will start at age 20 and will have 1 day less than the next 10 years in which to do so.
Now we can see the effect that ‘time’ has on building wealth because now that person only has to make and keep $100,000 a year for the next 10 years. That’s only $274 dollars a day! ($1 million/3,650 days). That just became VERY doable!
Let’s put a little more ‘real world’ spin on this calculation. Let’s assume that taxes would reduce the gross amount that was needed to be earned by 30%. Therefore, our gross amount that was needed to be earned in order to have a net of $274 dollars a day would have to be $391 dollars a day. STILL very doable!
Which option makes the most sense?
Now step back and compare these two exercises for a minute. If we wanted to become a millionaire by 30 but started at age 29, we’d need to make a net $2,740 dollars a day.
However, if we started at age 20 and made a net $274 a day for the next 10 years, we’d also become a millionaire by 30.
See how incredibly powerful time really is in building wealth? By starting early someone could make 10 times less each and everyday and still become a millionaire by 30, if they only started at age 20!
Here’s what’s even crazier! Combine time AND compounding interest into the equation. Let’s further assume that our 20 year old can’t put all of the $274 net dollars they earn each day towards building their wealth to become a millionaire by 30. Is there still a way they could become a millionaire by 30?
Here’s what’s surprising about investing; if they were able to put $205 dollars away each day out of the $274 (75% savings and investment rate) if they were to earn 6% annual return over the next 10 years they would reach becoming a millionaire.
And that’s even after they chose to spend 25% of what they made. THAT’s the power of investing!
Okay, so we have the math down. Now HOW are we going to become a millionaire by 30? Again, the secret is in the math.
If we start at age 20 there are quite a few things that we could do to become a millionaire by 30 because we have time that helps ‘dilute’ how much money that needs to be made in any given day.
So let’s get down to brass tacks. How are we going do it?
House hack –
Could there be a way that from age 20 to 30 our subject lives rent free? Perhaps they could live with parents for no to low rent or with other friends in a housing situation where the divided rent is marginal.
Or a purchased multi-unit is a positive cash flowing asset.
Vocation –
If we are going to have to have a primary job it should be in something where wages are not tied to dollars to the greatest extent possible.
Excellent vocations that provide high upside potential on time spent would include real estate agents, financial services, general sales and commission based opportunities.
Life Expenses –
Over these next 10 years we’re going to live as frugal a life as absolutely possible. We’re not going to take on debt nor are we going to lock in monthly payments unless they are absolutely needed; and those are related to our health. Netflix does not count!
Business ownership –
It will come as no surprise to anyone here but it is exceptionally difficult for a 20 year old to land a $100,000 net income producing job.
There are VERY few occupations that provide this level of income (engineering, IT, medical are the exceptions). That said, we are going to want to own a business that is in the high margin sectors.
These businesses also do not necessarily require a college degree, as any contractor business in the construction trades would be ideal right now at this time in the economy (electrical, plumbing, building, paving, etc.)
We also want to take advantage of everything we can from a tax perspective in order to reduce the costs of our possible daily life expenditures that could be considered legitimate business expenses; internet, communication, vehicle expenses, etc.
As a general concept, we’re going to want to look at how we might be able to make a high margin on larger expensive services (such as those mentioned earlier in the trades) or how we might be able to establish a high volume flow of customers on lower margin items (physical products sold online through high volume sales platforms)
Invest –
Here’s where there is an advantage of starting early to invest and having time for compound interest to work on our behalf.
Because of having time to be in the market, market risk can be reduced significantly.
To that end, just mirroring the market’s performance of what would potentially be reflected in a broad composite index like the S&P 500 Index Fund would be all the risk that would be needed.
What’s great about being 20 years old and having a decade to reach our goals is that this time allows us to not have to be particularly risky beyond just what the level of risk is in the entire market as a whole.
Conclusion
Wanting to become a millionaire by 30 would otherwise seem to be a big audacious goal. And don’t get me wrong, it certainly is. However, it’s also DOABLE. That’s what is so compelling if someone just took the time to sit down and do the math.
Of course it’s going to take some serious effort. Yes, it’s also going to take being uncomfortable and working beyond one’s comfort zone. If it didn’t, as they say, everyone would be doing it!
However, the ‘how to’ do it is not necessarily complicated nor is it beyond the reach of an average person. A reasonable approach where the ‘numbers work’, as was outlined in this post, gets someone there.
It truly is not as complicated as we’d like to believe that it is.
