Wednesday, 7 October 2015

An Easy Way to Become a Millionaire

How can you become wealthy?  Really wealthy?  Millionaire kind of wealthy?

Obviously you need to do something to earn money.  There are lots of ways of earning extra money if you look hard enough, but that is not what I am looking at here.  Whatever you do to earn money, and no matter how much you earn, you may still never become wealthy.  That is the issue I am going to address.

If you take a good look at people who have become millionaires you may be surprised at how comparatively little many of them have earned.  I am not talking here about the Richard Bransons or Warren Buffetts of the world.  Not the super rich.  But lesser known people who have managed to accumulate at least $1 million.  If they do not earn much more than an average wage (whether or not it is actually a wage - many probably earn by running their own businesses) how did they become so wealthy?

Let's begin by looking at a quote from Charles Dickens:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

What Mr Micawber said here contains the key to becoming wealthy.  Not, of course, by saving only a penny a year, but the basic principle here is what those millionaires understand and put into practice.

If you work for a salary, when did you last get a pay rise?  If you run your own business, when did you last manage to increase its annual profits?  Think back to that time.  How much did you spend every month a few months before your income increased?  How about after your income increased?  Did you continue spending the same every month, or did you increase it, even if only by a little?

Digging a little deeper, do you tend to spend more every month than your income?  Don't be embarrassed if the answer is "yes" - many people are in this situation.

The first step is therefore to get your expenditure under control.  If you are spending more than you earn, at least make sure you reduce it enough to avoid going further into debt.  The next step is then to reduce it further so it is at least 10% less than your income.  And when your income next increases, try not to increase your expenditure.  If you simply have to increase it, make sure it is no more than 50% of the increase.  Now invest the money you are no longer spending.

If you can do this, I can assure you that your wealth will grow very quickly.  Within just a few years you will be very wealthy.  It is as simple as that!

The reason this works so well is because of the power of compounding.

Imagine for a moment that by following my suggestion you are able to save $100 this year.  How difficult is that?  Less than 10 cups of fairly cheap coffee a month.  This should easily be achievable.  According to Warren Buffett you should expect an annual return of between 6% and 7% if you invest long term (i.e. 10 years or more) in the stock market.  Let's take the mid range of this and assume you average 6.5% growth.  Within 12 years, if you reinvest the growth, you will have doubled your money to $200.

But this assumes you can only ever save that $100 once and that in all future years you save nothing at all.  That is certainly not the way to become wealthy.  So let us now assume you save $100 each and every year.  By year 13 you will have over $2,000 in your investment account.  A lot better than $200!

Finally, let's assume that by a combination of more careful pruning of your expenditure and periodic increases in income you manage to double that $100 saving each year.  By year 14 you will have nearly $2 million!

Ok, perhaps that last scenario was a little unrealistic.  It is ok doubling your savings in the first few years but it will get more and more difficult just to keep doubling it.  But also I believe if you look properly at your expenditure you can make savings of a lot more than $100, and also if you keep at least 50% of any increase in income there will be even more for you to invest.  Without doing anything particularly drastic, someone on average earnings should easily be able to become a millionaire in 10 to 15 years.

Never again think that becoming a millionaire is beyond you, that you need to be an adept at manifesting, that you need to be very lucky or born into the right circumstances.  Most of us can easily become millionaires if we really want to just by following the above steps.

1 comment:

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