It’s a bit cliche in the western world perhaps but it’s hard to find an individual that doesn’t dream at some point in time of becoming a Millionaire. One of the more typical expressions of this is to wonder what it would take to become a Millionaire by a certain point in ones life. How to become a Millionaire by 40 years old is a pretty common question that is asked by many people.
The Math to become a Millionaire
In my last post, I wrote about how to become a millionaire by 30. In that post I laid out the math required to be a millionaire and some broad principles of what it would take to generate enough income to become a millionaire in 10 years, assuming that the individual started at age 20.
As the math to become a millionaire over a 10 year period doesn’t change regardless of when someone were to start, I’m not going to do the math here for what it takes to become a millionaire from 30 to 40 years old.
That said, I think what is important is to take a critical look into whether or not it requires different tactics and strategies on how to become a millionaire by 40 than it does to becoming a millionaire by 30. This to me is the crux of the matter because if it does require different tactics and strategies, then it would be important for us to all know what they were and how to execute them.
The more time we have, the less we have to make each day
Now one thing we need to consider before we go any further, if the time frame to become a millionaire in this situation is actually from 20 years old to 40 years old, then the math is very different of course.
In fact, the longer time frame we would have in order to build wealth the less amount of money we would need to make each day, month and each year, due in large part to the effect of compound interest.
For now, however, let’s go on the basis that we are looking to find out how to become a millionaire by 40 and starting from 30 years old. To that end, let’s look into what it would take to do that.
It’s about Strategy
First thing that I would say is that this is as much about strategy as it is about anything else. In fact, I would say from observation of individuals that I saw become millionaires before 40 years old is that it was more a matter of strategy than it was anything else.
Too many people think that it’s what people invest in that made them millionaires, assuming that there’s one magic asset class or one magic investment that got them there but that’s not the case. In fact, it truly is the rare case to see an individual become a millionaire by 40 years old simply on an investment, yet there surely are the outliers.
However, the majority of individuals that have become millionaires by 40 years old had a distinct strategy that they relied upon to get them there:
1. They created a Money Machine
Regardless of what it was, individuals who become millionaires before they are 40 years old have created a business or another vehicle, like real estate, that provides for the ability of leverage to be at play whether that’s using other people’s time (OPT) or other people’s money (OPM) to create income.
Either way, it’s usually something that has the ability to detach the time that they worked from earning a set hourly wage. Although harder to do, earning disproportionate income from commissions (sales) is also a possibility if these over sized returns are put to use creating additional income.
The bottom line is that in order to create this type of wealth quickly it’s imperative that one gets to make income disproportionately in their favor based on the time that is spent. An example of this would be a product that is selling while we are sleeping or not in ‘the store’ so to speak.
It’s the arbitrage principle whereby we are charging the client $100 an hour for the service but in turn paying the individual who performs the service $50 an hour.
There has to be a force multiplier in effect in order to be able to compound our effort.
2. They spent as little money on the ‘big three’ as possible
I use to scratch my head when I used to see what I perceived to be wealthy people come into my office looking to secure real estate development loans driving an older Toyota, Subaru or Honda. Surely these people didn’t have any money because if they did they’d be driving a Mercedes or a Jaguar. Wrong.
The people that I dealt with who were under 40 year old that had REAL wealth seemed to on average drive more affordable economical cars. In fact, those that drove the nicer cars tended to have lower net worth.
Over the years I started to see a pattern that my 40 year old millionaires tended to as a point spend less money on what I classify as the ‘big three’ purchases; housing, transportation and education.
Although there certainly are exceptions, and I did see them, more individuals that I worked with who were millionaires went to non-elite schools. In fact, a disproportionate amount of them went to public state universities or smaller non-select non-profit colleges.
3. They owned rental real estate first before they owned a single family house
What I thought was equally perplexing to not seeing them drive big expensive cars, on average they also owned multi-unit rental housing as an initial housing purchase. Even though they most certainly could afford to own a single family house somewhere, they chose to have someone else either help pay or completely pay for their mortgage payment.
I booked a loan once for an individual under 40 years old who had a net worth in the double digit millions who not only didn’t own a single-family house, he actually lived in one of the units of a large multi-unit housing complexes that he developed.
He told me that he worked out an arrangement with his partners whereby a share of his proceeds from the development was for him to get a paid lease on one of the units over several years. A millionaire with free housing, what a country!
4. They invested what they earned in other income generating assets
Regardless of what these individuals did to generate income, mostly by owning their own businesses, they all tended to put what they earned in investments that generated income ‘on their behalf’. More specifically, they put their ‘earned income’ into investment opportunities that in turn generated ‘unearned income’.
Although in many cases this was simply through ownership of stocks in publicly traded companies or Index Funds, they took advantage of someone else being make money for them when they were not working for it themselves.
In addition, these opportunities tended to be in conventional investments and were not speculative in nature.
5. They took advantage of paying themselves first
The individuals that had the higher net worth in the quickest amount of time had a propensity to take advantage of paying themselves first using whatever tax deferred investment vehicles that they had available, such as the SEP IRA or the Solo 401k.
These vehicles allow for a much greater amount of income to be invested prior to taxes, tax deferred, than someone who works for someone else, in fact usually more than twice as much.
In fact, a self-employed individual in a solo LLC is eligible to put up to $66,000 in a pre-tax dollars into a Solo 401k in 2023. A W-2 worker is limited to only $22,500 a year.
Conclusion
In the end, how to become a Millionaire by 40 is about the same process as it is for becoming a Millionaire by 30. It’s about executing a strategy that is built around what I refer to as ‘Force Multipliers’. Force Multipliers are activities or elements that by their very nature amplify our efforts or money.
As indicated above, these either amplify what we are able to save (like free housing or having someone else offset the cost of our mortgage by renting the other unit in our duplex) or these efforts amplify what we can generate for revenue through work that others do on our behalf (being the general contractor or resource assembler) or through a business that we own that we don’t have to physically be there (an online eCommerce store) in order to generate revenue.
The magic of it all is to be able to ‘duplicate’ ourselves by having other individuals do the work for us on multiple projects at the same time (contracting) or having systems and technology (businesses) do it for us without us having to be there.
