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How to become a millionaire

It's simpler than you think.

· Money

There are only three rules to follow.

1.) Start investing as early as possible.

2.) Invest in index funds.

3.) Invest consistently.

Are you between the ages of 20 to 30? Even better.

"What if I'm not between the ages of 20 and 30? Is it too late for me?" Absolutely not! You'll have to invest more but this is still 100% attainable if you're committed.

Most of the people that I talk to understand the importance of investing to:

1.) Beat inflation

  • "What’s inflation?" The rising price of goods and services over time. This increases the cost of living, and reduces buying power so that as prices rise, your money buys less (e.g. 25 cents could buy a pack of gum several years ago, but not anymore, as the same pack of gum is now 35 cents). If your retirement savings is in a normal savings account, you are losing buying power, because your money is not growing to keep up with inflation.

2.) Grow your money and take advantage of compound interest

  • "What's compound interest?" You invest $100. You earn 10% returns on that amount so now you have $110. Well, you’re still earning 10% on the amount invested plus the gains, so you earn $11, and now you have $121. So on and so forth. If you start early, eventually, the amount of compounded interest will make up a substantially bigger percent of your portfolio than actual money invested because it builds on itself like a massive snowball rolling down a hill.

The part that many of us struggle with is the what and the how.

"What should I invest in? Stocks? Bonds? Real estate? Cryptocurrencies? Forex?" Next thing you know, we're overwhelmed with options, so we do nothing.

Here’s a quick data-based summary to help you determine what has the highest returns over the past 100+ years and the most historical data to back it.*

  • Bonds = ~3.5%
  • Real Estate = ~3.1%
  • Stocks = ~10% - 11%
*I'm aware that we can splice the data to find high-yielding bonds that outperform the above and stock returns that blow this out of the water, but the purpose of this post is 1.) average returns, 2.) over a long period of time, 3.) following a simple, basic investing strategy.

Even once we decide on, let's say, stock investing, there is the still the question of how? "How do I buy stocks? Do I call a financial advisor? A stockbroker?"

And then the variety of options leaves us overwhelmed, confused and frustrated, so we do nothing. After all, if we have no clue what we’re doing, we certainly don’t want to do the wrong thing and risk losing everything, right?
Well, fortunately, we live in the digital age, and investing is easier than ever. Let’s say we make a decision based on both maximizing growth and historical data, and decide to invest in stocks.

First, a quick synopsis of the key things you need to know in the simplest, most bare-bones form:

1.) Individual Stocks vs. Index Funds

  • Individual Stocks: a piece of an individual company, also referred to as a "share."  For example, if you sign up for Robinhood using my link, both of us receive one free individual stock. 
  • Index Funds: A fund that doesn't pick and choose it's stocks, but rather owns/holds all of the stocks or bonds on an index.
    • "Wait, what's the difference between mutual funds and index funds?" Mutual funds typically refer to funds that are being actively managed with the goal to beat the market.
    • "Which is better?" Index funds are inherently diversified which lowers your risk. If your portfolio is made up of 10 individual stocks and they're all in the tech sector, but the sector crashes, your portfolio will lose most of it's money. Alternatively, if you purchase as many shares of the S&P 500 as you can afford, you have a portfolio that is made up of hundreds of different companies across industries and sectors. Even if half of them failed, or a particular sector tanked, your portfolio would likely remain in tact because it has the buffer of hundreds of others. In a more advanced post, we'll talk about ways to diversify our index funds as well, spreading them across markets of different sizes and different regions.

2.) Asset Allocation

  • "What is asset allocation?" The amount of your portfolio that is dedicated to stocks vs. bonds vs. cash versus other assets. This is another tactic to mitigate risk. If you're young and don't plan on touching your investments for several decades, you can afford to invest more heavily in stocks /equities to maximize growth. As you get closer to your withdrawal date, you'll want to adjust this to add more bonds or lower-risk assets. You'll miss out on growth, but your focus should be maintenance at that point, not growth, and you wouldn't want to risk your portfolio taking a downturn if the stock market crashes right as you're planning to retire.

3.) Dollar Cost Averaging

  • "What is dollar-cost averaging?" This is a form of mitigating the risk of "entering the market at the wrong time." People often speculate about when is the best time to deposit a large lump sum -- should they wait for the market to dip and potentially miss out on the opportunity cost? Should they enter the market now? What if they buy too high? Dollar-cost averaging eliminates the need to time the market (which most of us are really horrible at doing anyway) by depositing a consistent sum on a consistent basis, regardless of market fluctuations. If you automatically deposit a set amount on a weekly, monthly or quarterly basis, you're already doing this. 
Now that we know the power of index investing, how can that make us a millionaire?

Let’s assume you’re either 20, 25, 30, 35 or 40.
Let’s assume you invest $500 a month, every month, until you're 65. Not your tax return. Not your spare change when you "can afford it." Not your birthday money. $500 every single month. Feel free to throw in that other stuff, but we're using a steady baseline of $500/month consistently.

Thanks to compound interest (aka the 8th wonder of the world) these are your expected returns (assuming 11% returns).

Invest $500/month until the age of 65.

Age 20 -> $6.5 million

Age 25 -> $3.8 million

Age 30 -> $2.2 million

Age 35 -> $1.3 million

Age 40 -> $760,000+ You didn't make the cut. You'd have to increase your contributions to about $700/month to hit $1 million.

What if you decided to stop contributing at age 40 to become a stay at home parent, or retire early, or do virtually anything else?

Age 20 - 40 -> $5.8 million

Age 25 - 40 -> $3.1 million

Age 30 - 40 -> $1.5 million

Age 35 - 40 -> $557,000+ You didn't make the cut. You'd have to increase your monthly contributions to about $1,000/month to hit $1 million.

Age 40 -> $0

What in you contribute a lump sum of $25,000 and then never add another dollar until you turn 65?

Age 20 -> $2.7 million

Age 25 -> $1.6 million

Age 30 -> $965,000+ You didn't quite make the cut. You'd have to increase your lump sum amount to about $28,000.

Age 35 -> $570,000+. You didn't make the cut. You'd have to increase your lump sum amount to about $45,000.

Age 40 -> $339,000+. You didn't make the cut. You'd have to increase your lump sum amount to about $75,000.

Now, we did we learn from doing this exercise?

1.) Time in the market > Amount of money placed into the market.

2.) Over time, your compound interest / growth actually makes up a greater percentage of your portfolio than your actual contributions. Growth accounts for 96% of the portfolio in the below example. 

3.) Time is such a significant factor, that even doubling your contributions a decade later doesn't make up for the time lost in the market.

Now that we've decided to invest in index funds as soon as possible, to increase our time in the market, we can go three main routes:

1.) Use a stockbroker or advisor.

Why should you trust this advice? Warren Buffet not only preaches this, but recently won a 10-year bet with a hedge fund that an S&P index fund could outperform their best picks.

2.) Do-It-Yourself with a brokerage like Vanguard.

  • Advantages: The fees are low and the steps are simple to follow and understand.
  • Disadvantages: We probably won't be able to beat a robo-advisors performance when it comes to tax loss harvesting, rebalancing, etc. "What's rebalancing?" Maintaining your desired asset allocation. For example, if you want your portfolio to be 90% stocks and 10% bonds, but your stocks rise in value and now represent 95% of your portfolio, rebalancing is the act of shifting it back to your desired state by selling off the gains and using that cash to buy the desired percentage of bonds.
    • Kristy & Bryce at Millennial Revolution also run an investment workshop where they show you how to do-it-yourself and walk you week-by-week through monitoring the performance of this particular workshop. Why should you trust them? They retired at age 31 from their successful engineering careers and have been traveling the world ever since. Not only are they successfully living off of their portfolio, they are actually *making money* in retirement because their portfolio growth is outpacing their spending.
    • Jarim at Brass Knuckle Finance shares the step-by-step (including screenshots) details on how to create a millionaire do-it-yourself portfolio in his investing bookWhy should you trust him? He’s been financially independent for close to a decade, is a wildly successful multi-asset investor, and actually *made* money during the 2008 crisis.

3.) Use a robo-advisor like Betterment or Wealthfront.

  • Disadvantages: It costs more than doing it yourself.
  • Advantages: Compared to a human advisor, the fees are low. It's a done-for-you service. You can set up the account to auto-transfer the amount that you want deposited weekly/biweekly/weekly, set your asset allocation, and then carry on with your life. They’ll automatically reinvest your dividends, rebalance your portfolio, and do the tax loss harvesting, in addition to some other neat features.

Why should you trust this advice?

Jarim agrees with this approach, as does Mr. Money Mustache, who retired in his early 30's with his wife and child as a multi-millionaire. He's notoriously frugal, and only spends about $40,000/year so if he's willing to pay fees when he can do it himself? The. product. is. really. good.

"Okay, I'm ready to set up a robo-advisor and start investing right now. How do I get started?" Investor Junkie has a handy how-to guide for how to get started using Betterment, complete with screenshots.

Are there other ways? Dozens. But this is the simplest, most historically guaranteed. If you want to fool around with other investment methods, do it *in addition to* index funds, preferably with no more than 5% of your overall portfolio.

Now, if you're beating yourself up about not starting sooner -- stop it right now. An ancient proverb says "The best time to plant a tree was 20 years ago. The second best time is today."

Disclaimer: The above link is an affiliate link. I do not receive any compensation from using this link, however, if you sign up using my link and fund an account, you'll get 90 days managed free (no fees) and I'll get 30 days.

P.S. If you want to 10x your savings, you can use remote work to move to sunny, tropical destinations with a much lower cost of living - download the guide, Work from Anywhere, to learn how to take your job on the road.

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