The ‘secret’ to becoming wealthy has been hidden in plain sight for as long as time.
If all you did was earn more than you spent each month, then given enough time, anyone can become wealthy.
If you only saved £1 per month, then after a million months, you would be a millionaire. (Admittedly, it would take you 83,333 years, but you would be a millionaire nonetheless.)
Now, you can argue against the impracticality and improbability of that event, but what you can’t argue against, is the logic. It’s undeniable.
So, to bring that millionaire event horizon within an acceptable timescale, all that’s required is the amount saved be increased, and an attractive interest/growth rate be injected.
That’s because Wealth is merely the combination of an affordable monthly investment, an advantageous interest/growth rate, and time.
It can be written as:
£ x % x T = W
Where ‘T’ is time and ‘W’ is wealth.
(Obviously this is not a ‘proper’ mathematical formula but more of a diagrammatic representation.)
Each of the symbols (£, %, and T) are variables, and changes to any of them have an effect on the wealth (W) accumulated.
Here are 2 examples (one of them is myself).
An 18 year old working at McDonald’s, decides to save the equivalent of only 2 hours of their weekly wage (£15) into a FTSE 100 Index Tracker (average growth rate of 11% pa), until retirement at age 67.
At age 67, they will have amassed £1,523,000.
To those who say ‘yes, but what is £1,523,000 worth in 49 years?’ Well, the calculation was made on the assumption that in the 49th year, this person is still putting in only £65 pm. What proportion of their wage at that time would £65 be? A lot less than it is now, right?
However, the amount this person is deciding how much they investing is linked to their current hourly pay rate. As their hourly rate increase with pay rises and promotions, the amount invested each month will grow. This then, protects the sum accumulated from inflation, meaning the eventual sum accrued will be well in excess of the £1,523,000 quoted in the example, and will maintain its purchasing power.
As another example, my personal target is to accumulate £300,000 in 10 years. Using the same investment vehicle, I need to invest £1,300 pm to achieve that.
The 10 year term is dictated by the fact that I’m 57 and want to retire at 67.
If I had the time to invest for 20 years, then the sum realised would be £1.28 million. Despite me only putting twice as much money in over that time, the sum arrived at is almost 4 times the original £300,000. That’s the difference Time makes.
The benefit of time in the investment has a disproportionate effect on the eventual sum amassed, due to compound interest.
The earlier you start the more money you will accumulate.
To work out how much YOU will need to fund your own designer retirement;
- Work out what you would prefer to do in retirement (mine is to buy a 50’ Beneteau yacht and sail it round the Mediterranean until I’m no longer fit enough).
- Cost the dream (mine came to £300k).
- Decide your retirement age (mine was 67, so I have 10 years).
- Using a compound interest calculator (click here), work out how much you need to invest each month to achieve the sum required in the time allotted (use 11% as a growth rate – average FTSE 100 since inception).
- Now, you need to generate the income to fund it.
Creating the extra income to achieve that goal is the subject of another blog (hit subscribe so you don’t miss it).
But know this – it’s possible. I know that because I’m doing it – £300k in 10 years. And if I can do it (a knackered Geordie 57 year old,) then anyone can do it.