The best time to plant a tree was 30 years ago. The next best time is today.
Is it possible for you to become a millionaire? The answer is most certainly yes.
80% of new millionaires are self-made, meaning they didn’t inherit their wealth. So, if you don’t come from money, you’re still in good company.
In fact, I think becoming a millionaire is essential.
I’m comfortable saying it’s required if you have any hope of being able to stop working. With the help of innovation, you may end up living into your 90s and beyond. Therefore, if you stop working at 70, you’ll need to have enough saved up to last at least 20 years.
So, how do you do it? How do you become a millionaire?
The first step is figuring out what delivery method you’ll choose. Will you become a professional athlete, entertainer, or YouTuber? Will you do it through the stock market, real estate or business ownership? Will you do it in a way no one’s ever heard of?
Once you decide, you’ll need to develop a plan and put your plan into action.
I’m going to talk about three methods for becoming a millionaire and close with the tax ramifications of each.
The big takeaway is this: the earlier you start, the better.
Here’s what we’ll cover:
- Stock market investing
- Real estate investing
- Entrepreneurship
- Taxes
These are all big topics, and in the interest of simplicity, I’m going to lay out simple paths to $1,000,000 in each of them.
Let’s get started.
Stock market investing
When thinking about accumulating assets for retirement via the stock market, we need to decide on a handful of variables. What account will you utilize, what will you invest in, how much will you contribute, how long do you have, and what return will you get?
The average return of the S&P 500 for the 30 years between 1991 and 2020 was just over 10%. While you’re welcome to use whatever number you like, I’m going to plan for an 8% rate of return.
I’m also going to assume you’re contributing to a qualified retirement plan (401(k) or IRA), and that you’re investing in a low-cost S&P 500 index fund.
From there, I’m going to share how much you’ll need to contribute based on your current age in order to accumulate $1,000,000 by age 65.
If you started at age 30, you’d need to save $435 a month to get to $1,000,000 by age 65.
If you started at age 35, you’d need to save $670 a month to get to $1,000,000 by age 65.
If you started at age 40, you’d need to save $1,051 a month to get to $1,000,000 by age 65.
If you started at age 45, you’d need to save $1,697 a month to get to $1,000,000 by age 65.
If you started at age 50, you’d need to save $2.889 a month to get to $1,000,000 by age 65.
If you started at age 55, you’d need to save $5,466 a month to get to $1,000,000 by age 65.
Obviously, it gets harder and harder every year. The earlier you can start, the better.
Real estate investing
There are a lot of ways to make money investing in real estate. My focus will be on appreciation.
Depending when you’re reading this, you may be surprised to learn that 3% is the average annual appreciation of real estate in the US.
Based on that, I’m going to model a $100,000 property and what the value will be after a set number of years assuming 3% annual appreciation.
After 35 years, the property would be worth $281,000.
After 30 years, the property would be worth $242,726.
After 25 years, the property would be worth $209,000.
After 20 years, the property would be worth $180,000.
After 15 years, the property would be worth $155,000.
After 10 years, the property would be worth $134,000.
In order to get to $1,000,000, you’ll need to acquire multiple $100,000 properties. Depending on your time horizon and financial situation, you can develop a plan to accomplish it.
A helpful tool in your planning is the Rule of 72. This rule tells us how long it will take for a number to double in value based on the interest rate you’re getting.
If you get a 6% rate of return, it will take 12 years to double. If you get a 12% rate of return, it will take 6 years to double.
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Entrepreneurship
Starting a business can be an excellent way to accumulate wealth. It’s also incredibly difficult.
There are many ways to determine the value of a business, and many factors which determine how much you can sell it for. For the purposes of today, I’m going to use EBIT (earnings before interest and taxes), and then assume you’ll be able to sell it for 0.6 times its annual revenue (the national average).
Based on this, you’ll need to start and grow a business which generates earnings of $1.6 million in order to sell it for $1,000,000.
Starting a business is easier than you think, and there’s never going to be a better time than now.
Taxes
On paper versus in reality are two very different things. On paper, you might be a millionaire, but the reality after you sell or begin accessing the money may be very different. I’ll go through the tax treatment of the three examples.
Stock market investing
If you utilize a pre-tax account like a traditional IRA or 401(k), all the money that you take out in retirement will be taxed as ordinary income. The rate you’ll be taxed at will depend on the tax rate in the year you withdraw the money.
If you utilize an after-tax account like a Roth IRA, or Roth 401(k), all the money you take out in retirement will be tax-free. In an ideal world, I’d prefer to have all of my retirement income be tax-free. As you’re developing your plan, this is something to keep in mind.
Real estate investing
Real estate is taxed as a capital gain. If you hold the asset for less than 1 year, it will be taxed as a short-term capital gain. If you hold the asset for over 1 year, it will be taxed as a long-term capital gain.
Historically, the long-term capital gain rate is lower than short-term, as well as the ordinary income tax rate. As you’re developing your plan, you’ll need to take taxes into consideration.
Entrepreneurship
Like real estate, the sale of a business is taxed as a capital gain. If you own the business for less than 1 year, it will be taxed as a short-term capital gain. If you hold the business for over 1 year, it will be taxed as a long-term capital gain.
As you’re developing your plan, you’ll need to take taxes into consideration.
Closing and resources mentioned
So, how will you do it? How will you become a millionaire?
There’s not a right or wrong way to do it, and there’s no rule against incorporating as many methods as you can.
You know it’s possible and now you know three potential paths for getting there. Make your decision, set your goals, develop your plans, and get to work.
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