Why is that some people can come from poverty and rise to great levels of financial wealth while others, starting from a higher base, struggle their entire life to get by? Is it just luck, or is there a guaranteed way to become a millionaire?
Luck may play a role, but there is a formula that guarantees financial wealth. And while luck may never show up, there are actions you can take that will push you into seven figures of net worth.
It is difficult to grasp the math behind wealth creation when you are struggling to make ends meet every day. Yet, there is a guaranteed way to become a millionaire.
The best way to understand this guaranteed method to millionaire status is with the story of Three Brothers, triplets.
Three Brothers
There once were three brothers. Triplets. Bob, Frank, and Marty.
The brothers went to the same school, got the same grades, graduated high school the same day, decided to skip college, got a job at the same factory, on the same floor, earning the same wage: $1,000 per week.
Bob, Frank, and Marty were identical in every way, save one: behavior. Each earned their $1,000 wage each week. Their wage increased in tandem with inflation each year.
After the first week each brother got their paycheck, minus taxes.
Bob used his money to get a nice apartment, expensive furniture, a massive TV, and a subscription to every streaming service he could find. He visited the bank and showed his income and borrowed what his first paycheck allowed. Bob was living the dream. A dream fueled by an ever growing and revolving line of credit.
Frank took a different approach. He bought what he could afford and no more. Used furniture was plenty for Frank and his TV modest. If any money was left after normal household expenses, Frank would visit the corner tavern and enjoy time with friends. Frank had no debt and never would. But he would spend every last dime in his pocket. He was always as rich as his next paycheck.
Then we get to humble Marty. He also bought used furniture for a modest apartment. Marty watched his spending close. He avoided debt. And he had no desire to empty his pockets every payday. Instead, Marty managed to save $200 each week. He dropped the money into the employer’s retirement plan with his funds going into the S&P 500 index fund at a major financial house.
After a year it was clear the three brothers were on different courses. Bob was deep in debt. Each paycheck went to cover loan servicing. Interest was a serious line item in Bob’s budget. The good times rolled because the debt balance kept climbing.
Frank was easy to figure out. He had nothing, but also had no debt. He just was. Money in, money out.
Marty had $10,400 invested after the first year. The account value climbed to $10,900 with dividends and capital appreciation by the end of the first year. Not a lot, but still more than he had before. The S&P 500 index climbs about 10% per year on average. If the index managed to do average the next year, Marty would enjoy dividends and capital appreciation of over $1,000 a full week of wages before taxes.
To recap, Bob had a negative net worth and will work the rest of his life if he does not change his behavior. Frank will also work until he collects a pension. He has no net worth, positive or negative, worth mentioning.
Marty, on the other hand, is on a path, if continued, will lead to financial independence. He can retire early at some point and live a life better than anything Bob financed.
Bob pays interest, so he has less over time for spending on what he enjoys. Frank is treading water. And Marty is generating a gain over time.
After 10 years Marty invested $104,000 into the index fund. Gains and reinvested dividends brought his account value to over $165,000. And now it gets very interesting.
In 20 years Marty is touching a $600,000 account value. In 25 years Marty’s account value broke $1 million. And after 30 years Marty had over $1.7 million!
Let me remind you that we inflation adjusted the number by default. Their wages went up with inflation. No more, no less. That means Marty added more than $200 each week when he got a raise. Because we adjusted for inflation, Marty has a cool $1 million in 25 years with the buying power of a million back when he started.
Marty can seriously consider retirement by age 43, while Bob is flat broke with debt to service, and Frank is still living day-to-day with no future.
Note that I did eliminate all noise. I did not include tax savings for the retirement plan contribution or any employer match. The simple outline makes it easier to see how money works.
Behavior of Millionaires
The story of the three brothers clearly shows how behavior determines outcome. Over 25 years, Marty gave up $60,000 of spending, $200 per week at a time. For this sacrifice he received $1 million in today’s buying power. Add another five years and Marty has over $1.7 million for a sacrifice of $200 each week, a total of $72,000. Most of the gain those last five years came from the account balance growing rather than from new investments.
Behavior, more than any other data point, determine your financial outcome. Money has a flaw designed into it that can never change. Those who have money see their pile grow faster and faster because as you keep working and adding to investments, the original monies invested are hard at work generating a gain themselves. Some flaws are worth keeping.
We should not neglect Bob and Frank. Bob is in a world of hurt. He will work until his body breaks to service his mountain of debt. Retirement isn’t even a dream for him. Frank is better off, but not by much. He has no hole to dig out of. He also has nothing to show for his years of hard work. I recommend Frank start acting like his brother Marty. Frank is behind, but that is no excuse to let it get worse.
Calculating Your Future Growth
There are two ways to project your future growth. The first is to enter your numbers into a future value calculator to get an exact result. However, when dealing with the stock market there is not a steady rate of return. There are up and down years. Marty could have more of less at any point, depending on how the market is performing.
A back of the envelope way to estimate future value is with the Rule of 72. The Rule of 72 gives you the approximate time it takes to double an investment.
We can use the author as an example.
I became of age in 1982. Back then there was only one kind of IRA, the traditional kind we still have today. The maximum contribution was $2,000.
If we look at your favorite accountant and ask if he made the $2,000 investment, I would answer yes. Assuming a 10% average return in the market, we can make some calculations.
Every seven years I double my $2,000 investment. (72/10%=7.2 years. We will round to seven years even for easy figuring.)
From age 18 to 25 is one doubling. From 25, to 32, 39, 46, 54, 61, 68, 75… are additional doublings.
I am currently age 60 so I should have seen nearly a full six doublings of my $2,000. $2,000 goes, to $4,000, $8,000, $16,000, $32,000, $64,000, to $128,000. The future value calculator says I should have around $110,000.
There is a difference between the two methods. But because the market can do better or worse, with no guarantees, a reasonable estimate works.
The point to keep in mind is that small amounts of money grow very large over time. My great personal wisdom was not outsmarting or timing the market. My great personal wisdom was investing when I was young and keeping my fingers off the stack for 42 years. In other words, my wisdom was living for a bit once I started.
Once again, it comes down to behavior. I made a small investment in 1982. I kept my grubby paws off the thing, and ta-da!
Exceptions to the Rule
Whenever I write about building serious wealth I get comments on how it can’t be done. “I live in a high cost area?” I hear. I say, “Move to a lower cost area.”
Some will mention medical issues, incarceration, and abusive relationships. Yes, those are valid reasons to skip the message above. If Mrs. Accountant had cancer I would spend every dime to save her life. If you are in an abusive relationship you need to take steps to protect yourself and your children. 100%! And, of course, it is kinda hard to bring in money while visiting Crowbar Hotel.
I hear the complaints. I also know people use these excuses at a higher rate than really exists. If you really have these issues you can’t take the necessary steps to reach guaranteed millionaire status. For the remaining 95%, I don’t want to hear excuses. Either you want to be rich or make excuses. Your call.
Ginzu
Monday 23rd of September 2024
Father Time has three sons; Shoulda, Woulda and Coulda.