Would you like to have a million dollars?  For some people this quantity may seem unreachable.  However, if you live in a rich country, like the United States, even if you only have an average income, you can reach the goal of becoming a millionaire.  The quantity of one million dollars nowadays is not what it used to be anymore.  For people that live in some of the largest cities in the world, like New York in the US, London in England, or Tokyo in Japan, this quantity is only enough to buy a house or condo without any luxury.  However, this quantity is still used as a measurement to distinguish the privileged people, who are known as HNWI (High Net Worth Individuals).  For more information on this subject, see the article “How Many Millionaires are there in the World?” 

So, what is the secret for accumulating one million dollars?  First, your need to create a savings plan to generate a certain amount of savings to be invested every month.  Second, you have to develop an investment plan with a return high enough to generate 1 million dollars within an acceptable period of time.   The quantity to be saved every month and the period of time necessary to reach your objective will depend on your personal circumstance. 

Let’s deal first with the most difficult question, that is, the savings.  Without savings you will not be able to accumulate wealth.   In order to save you need to spend less than you make.  This may seem obvious, but this concept is fundamental and is not optional.  Many people do not seem to want to accept or face this simple concept.  Assuming that you have already accepted this concept, let’s move forward.  A reasonable quantity for most people to start saving is 10% (see the article “How Much Should you Save?”). 

A very effective strategy for savings is to pay 10% to yourself first before you pay anyone else, or buy anything else.   If you have an automatic savings plan through your employer, always deposit 10% of your gross salary into a savings account and don’t spend this money on day-to-day expenses.   Following this plan requires discipline, but in reality, if you are not at least somewhat disciplined, you will have difficulties becoming a millionaire. 

Let’s now deal with the second question, that is, the investment.  Your objective is to obtain a total return of 10% on your investment.  How do you reach this objective?  First, you need to invest in the financial asset that has the biggest return possible: stocks.  The average annual return of stocks in the last 70 years is a little above 10%.  However, you can obtain a return above average, and still reduce your risks, if you choose well the stocks, or better yet, the mutual funds that you will invest in. 

Even though stocks are the financial assets with the highest return, and it is where you should invest most of your money, in order to reduce risks you should also invest in other asset classes, such as real estate, bonds, etc.  Your allocation of investments in these financial assets depends on your objectives, the amount of time you have to reach your goals, and your risk tolerance.   As you will be investing part of your money in financial assets that do not have as high a return as stocks, your average return rate will be lower than if you were to invest 100% in stocks.  However, this reduction in your average rate of return is small, considering the associated risk reduction.  The combination of investments in stock mutual funds that have an above average rate of return with investments in other asset classes should result in your 10% rate of return goal. 

Here are is a suggested asset allocation for a person that wants to invest aggressively, but who does not want to take excessive risks, and who has an investment time horizon of more than 10 years: 

• Stock Mutual Funds – 60%
• Bond Mutual Funds – 20%
• Real Estate Funds (Funds of REITs) – 10%
• Commodity Funds – 5%
• Cash – 5%

There are other asset allocation options, some more aggressive, others more conservative, that may be appropriate for you, depending on you risk tolerance and time horizon.

If we use a savings rate of 10% for the average household income in the United States, which is roughly US$72,000 per year, or US$6,000 per month, this household would save approximately US$600 a month.  A monthly investment of US$600 with an average return rate of 10% per year, would reach the amount of US$1,000,000 in 27 years.

Obviously inflation will have an impact in the buying power of this quantity in 27 years.  If we assume an inflation rate of 3% per year, you would need another 7 years, that is, a total of 34 years to reach today’s equivalent of US$1,000,000.  If you start to save US$600 per month as soon as you finish college and get your first job at, let’s say, 22 years of age, you can become a millionaire by the time you are 56 years old.  This explains why 61% of all millionaires are more than 56 years old.

If you live in a developing country where the average income is much lower than in the US or in Europe the goal of reaching the millionaire status becomes a lot more challenging.  Let’s suppose your income is only US$30,000 per year, or US$2,500 per month.  In the US you would belong to the lower middle class, but in several developing countries you would be a privileged person.  If we use the same formula that we used before, that is, 10% savings rate, 10% return on investment, and inflation rate of 3%, it would take you 46 years to become a millionaire with this income.  If you start your savings at the age of 22, you can still reach the millionaire status at the age of 68.

If you don’t want to wait this much time to become a millionaire, you have to change one of the parameters mentioned above, as follows:

• Increase the risk of your investments in order to obtain a higher rate of return.  This alternative is not recommended.  One of the secrets of wealth accumulation is to not take excessive risks with your investments.
• Increase your savings rate.  This option may not be realistic for many people, as the majority of people with an average income would unlikely be able to save more than 10% of their income.  However, if you are able to save, let’s say, 20% of your income, and you make US$6,000 per month, you would be a millionaire in 25 years, assuming a 10% rate of return and an inflation rate of 3% per year.
• If the alternatives above do not work, the only option left is to increase your income.  How do you do that?  There are many ways:  you can increase your education in order to get a higher paying job; you can start a home-based business; if you work on commissions, you can increase your productivity, etc.  For a complete review of this subject see the article “How to Increase your Income”.