Nowadays, with seemingly rich people all over social media, one starts to wonder if can everyone become a millionaire.
Statistically speaking, there are about 62.5 million millionaires globally, and around 22 million millionaires in the U.S. For comparison, in the 1960’s there were around 100,00 millionaires in the U.S.
It may seem at first, it’s a lot easier to become a millionaire than before, but is it really?
So, let’s find out what it takes to join this esteemed club of millionaires!
Can the Average Person Reach Millionaire Status
Let’s get the sexiest part out of the way and bring in THE MATH.
I think the best way to calculate this is to find out how much the average person makes in a month, and what are the average monthly expenses.
This way we can calculate how much there is to put toward investments each month, therefore giving us a rough idea of how long it takes to accumulate one million dollars.
According to Ceicdata.com, the average earnings per person in the U.S. is about $4,000 per month. The average monthly expenses, on the other hand, are roughly $3,700 per person. These are obviously rough numbers, and your situation may vary greatly from the average.
What we can deduct from these numbers, however, is that saving and investing around 10% of your income should be manageable.
We can start our calculations with $300 ($4,000 – $3,700). That’s $300 you can invest every month.
Because there are innumerable different investment options out there, it’s best to focus on the most famous one, which is the S&P 500. The average inflation-adjusted return for the S&P 500 has been about 8% for the past 30 years.
How long would it take to become a millionaire by investing $300 per month in the S&P 500?
After 41 years, you would have around $1,050,000 invested. This calculation doesn’t account for any expenses, possible taxes, or any other fees, but it does give you a general idea of what becoming a millionaire takes. Depending on your financial situation, it may take considerably less.
So, the answer would be a resounding yes! It’s entirely possible to become a millionaire if you have a budget surplus and a long enough time horizon.
What Are the Most Common Pitfalls
What we are talking about here is long-term investing in its purest form. If you wish to reach millionaire status, you need to be able to invest regularly for a long time.
Unfortunately, while the process is theoretically very simple, it can be a lot more difficult in reality. Let’s take a look at the most common challenges a long-term investor can face.
Unstable Personal Finances
To be able to stay invested for a long time, you need to have a solid financial foundation. If you have to constantly sell your investments to pay for surprising expenses, it’s practically impossible to accumulate wealth by investing.
That’s one of the reasons why it’s important to keep enough money as an emergency fund in your savings account.
As we calculated before, to become a millionaire you need to invest $300 per month for 41 years (at an 8% annual return rate) and stay invested all that time. That amounts only to $147,600 without compounding interest.
Therefore, it’s essential that you don’t mess up the compound effect of your investments. The best way to ensure this is to have a strong financial status.
Because having your personal finances in order is such an essential part of investing, there’s a lot more content in the personal finance section that will surely help you with things like budgeting and financial planning!
Too Much Debt
If I were to name one thing that most often gets people in financial trouble, it’s having too much debt. And somehow, ironically, we’ve managed to normalize the idea of having a lot of debt.
The thing is that no matter what kind of debt you have – be it mortgage, credit card debt, or student loans – it always has to be paid back. What that means is the more debt you have, the more dependent you are on your income.
Therefore, having too much debt not only restricts the choices you can make, but can also be extremely stressful. Especially during times of rising interest rates, when you need more and more money just to maintain your repayment schedule.
Having too much debt can also have a tremendous impact on your investments. If you’re running a tight budget with a lot of debt, there’s more money you can’t afford to lose, and therefore less money to invest.
Not Enough Time
People often say that the first million is always the hardest, and it undoubtedly is. It takes time for your investments to compound returns, and it can be a long wait.
If you want to achieve the one million mark sooner, you either need to cut back on your expenses, or increase your income to be able to invest more. In other words, you either need more money or more time. There’s no shortcut to it.
We also must accept realities. The older we get, the less time we have left to invest. The reason why financial advisors always tell you to start investing as soon as possible is the fact that the earlier you start, the less you have to invest.
For example, if you wish to become a millionaire in 20 years, you’d need to invest $1,750 per month (at the 8% annual return rate. In 30 years, you’d need to invest $700 per month. So, time truly does make a difference.
Behaving Badly
I can imagine what some of you might be thinking – what if you gain more than 8% by investing in something else than the S&P 500? It’s a valid point. Some people do beat the market.
The problem is that the stock market is a fickle place, and picking the right stocks can be hard. Most people will not succeed in doing so.
Investing regularly in an index fund, on the other hand, is a lot easier to do, and will probably grant better results for most investors.
Then again, if indexing is so easy, why aren’t we all millionaires?
Well, I think that more often than not, the biggest challenge investors need to overcome is their own behaviour.
Regular long-term investing is a simple process, but it can be extremely hard mentally. Our minds aren’t built to grasp the idea of exponential returns that span over decades.
Instead of accumulating wealth through compound interest with a widely diversified portfolio, we tend to chase quick wins and risky investments that often lead to undesirable outcomes.
What Does It Mean to Be a Millionaire
When we think about most millionaires, we tend to think about high-net-worth people who can do what they want. They can quit their full-time job if they choose, they can travel wherever and whenever they please, or they can buy whatever they wish, etc, etc.
Then again, having one million dollars doesn’t really mean anything if it’s taken out of context. It’s merely a number.
For some, it’s an exceptionally large amount of money, while others barely even notice if it’s missing from their bank account.
What we usually mean by millionaires is not the exact amount of money they have, but the lifestyle of freedom they live.
Therefore, when people talk about millionaires, they usually refer to financially independent people.
Financial Independence
First of all, let’s take a look at the difference between being a millionaire and being financially independent.
Being a millionaire means you have lots of money, that much is pretty clear. Being financially independent, on the other hand, means you don’t need to rely on your paycheck to maintain your current lifestyle.
So, you need a certain amount of capital to be financially independent, but you don’t necessarily need to be a millionaire. Then again, you can be a millionaire without having financial independence.
What all this implies is that financial independence is not about how much you make, it’s about the lifestyle you have.
The Lifestyle Trap
In the end, it all comes down to how much you make and how much you spend. Earning a million dollars yearly is not enough if you spend one million and one dollar every year.
Even if you spend a dollar more than you earn, you will eventually go bankrupt. It might take a long time, but it will inevitably happen.
Therefore, it’s all about balance. If you want to have a lavish lifestyle AND be financially independent, you’re going to need a high income and a lot of investments. On the opposite, if you have a modest lifestyle, you can achieve financial independence with a lower income and a smaller portfolio.
Of course, the higher your standard of living is, the more difficult it is to not only achieve financial independence but also to become a millionaire. The money you spend is less money invested. Sometimes the lifestyle we have prevents us from having the lifestyle we want.
Then again, the less money you spend, the quicker you will accumulate wealth by investing. You also need less money to support your lifestyle. So, in a way, you don’t need to be a millionaire to be able to live like one.
Summary
Here’s what you need to become a millionaire:
- Decent income
- Moderate lifestyle
- Long-term investment plan
- Time and patience
- Reasonable amount of debt
- Strong financial foundation
When we look at the must-haves, it’s pretty safe to say that everyone in the world can’t become a millionaire.
Luckily, not everyone has to. Depending on things like where you live and what your lifestyle is, you can achieve financial independence with a lot less.
Even if you can’t become a millionaire or financially independent, you can still make your life a lot easier by becoming financially literate and taking care of your finances. In turn, your finances will take care of you.
