Want to be a Millionaire? How to Avoid the Biggest Mistake Most People Make

Becoming a millionaire is easier than you think. Primarily it just takes a little TLC: Time, levelheadedness, and compounding. Well, and a few dollars invested one a regular basis.

The Single Biggest Mistake
Time is definitely on your side, especially if you are young. The more time you have, the more your investments will grow. Younger people frequently delay investing because they believe that they can worry about that aspect of their life later — who can think about retirement investing when they are 25 years old? But that’s precisely when you should start investing.The single biggest mistake that many people make is waiting to start investing. People in the 20’s usually just want to wait five or ten years before they start investing. Those extra five or ten years can really make a dramatic different in your retirement nest egg.

Waiting 5 or 10 more years can cost you one million dollars
If you invest $5,000 every year in a typical 60/40 stock to bond ratio, you can expect to have about an 8% compounded annual return on your money. After 30 years, that money is projected to be worth over $600,000. Ten years later — after 30 years — thanks to the magic of compounding, that money could grow and nearly an extra one million dollars to more than $1.5 million.

Compounding is your best friend
As our friends at Get Rich Slowly say, “The miracle of compound interest is the secret to getting rich slowly.” In the short-term, it doesn’t make a huge difference — but don’t let that fool you. On the slow, sure path to wealth, we need to keep focused on long-term goals. Short-term results are not as important as what will happen over the course of 20 or 30 years.

Immediately below is a table illustrating the compounding effect over time. This table looks at the hypothetical results that one might achieve with a one-time $5,000 investment and how it is projected to perform over the years assuming varying average annual return rates.

Years

5%

6%

7%

8%

9%

10%

5          6,381         6,691            7,013            7,347            7,693            8,053
10          8,144         8,954            9,836          10,795          11,837          12,969
15       10,395      11,983          13,795          15,861          18,212          20,886
20       13,266      16,035          19,348          23,305          28,022          33,638
25       16,932      21,459          27,137          34,242          43,115          54,174
30       21,610      28,717          38,062          50,313          66,339          87,247
35       27,580      38,430          53,383          73,927       102,070       140,512
40       35,200      51,429          74,872       108,623       157,047       226,296

As you can see, during the early years, that $5,000 investment didn’t increase all that much — even when the interest rate was at 9% or 10% a year.  After 10 years, that $5,000, will have appropriately doubled regardless of the annual average increase, but as you move very down the chart, time wise, the gains really add up. Further, look at the difference a couple of percentage points can do for you over a few decades. That one single $5,000 investment might grow to more than $100K, $150K, or even to a staggering $226 thousand. That’s what compounding can do for you. Remember, that was from a single $5,000 investment. What would happen if we continued investing more money every year?

How to Become a Millionaire
Do you remember earlier I mentioned TLC: Time, levelheadedness, and compounding? We have discussed how time and compounding work hand-in-hand to improve your net worth. Add in the ability and willingness to contribute more money each year and your gains really take off.

The following table shows the effect of investing $5,000 every single year.

Years

5%

6%

7%

8%

9%

10%

5       35,391      36,568          37,779          39,026          40,310          41,631
10       74,178      78,812          83,754          89,022          94,639       100,625
15     123,682    135,345       148,235       162,482       178,229       195,635
20     186,863    210,999       238,674       270,419       306,845       348,650
25     267,499    312,241       365,520       429,014       504,735       595,082
30     370,414    447,726       543,426       662,043       809,214       991,964
35     501,762    629,035       792,950    1,004,437    1,277,693    1,631,146
40     669,399    871,667    1,142,920    1,507,528    1,998,506    2,660,555

As you can see, the longer your time frame, the more money you will have. If you have 40 years, depending on your investment returns, you could have $1.5 million, $2.0 million, or maybe even $2.66 million.

Five thousand dollars may sound like a lot of money to invest, especially when you are young and just starting out in your career, but it’s not as much as it might seem.It breaks down to just $416 each month or about $96 a week, or $19 every weekday. Most people easily spend that much money on coffee and lunch when they go to work. Try to think of it as a $20 daily investment in your future.

Presumably as you advance in your career, you will receive salary increases. That will make the $5,000 annual investment easier, but my suggestion would be to try to increase your annual investment in yourself. Aim for 15% of your gross wages. That might sound like a lot, but if you are already contributing to your employer’s 401(k) retirement plan, you are well on your way to hitting that goal. Those who are younger, might not need to save as much as those who are starting out later in life, but 15% of your salary is a good goal to aim for.

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