#67 - How to Make $1 Million Dollars the Hard Way - Here's a Hint . . . Compound Interest
Updated: Mar 5, 2022
-Methods for High-earning Potential
-What if I am Just a Hard Working Man or Woman?
-Sticking with the basics of Investing
-The Value of Historical Stock Market Returns
There are many pieces of education and opinions on how to make a million dollars and it is meant to be at a young age; more in line with the Millennial generation. So as we dive into this topic let’s look at the top 25 paying jobs. Most of them are at $100,000 or more and many are in the medical field.
Here are some quotes from investors that took $100 and turned into a $1 million. (From CNBC)
-Invest in something you love
-Buy and sell items from garage sales
-Improve and invest in yourself
-Learn a high-income skill
-Write an e-book
-Buy a multimillion-dollar business with other people’s money
-Build a personal brand
-Start a Business on Amazon
-Start a Coaching Business
Other Common Methods for High-earning Potential
-Never Give Away The Free Money
-Start Investing Early
-Start a Side Hustle-Common with the FIRE Movement
-Live Within Your Means
-Budget (Of Course!)
-Pick a Major for Your Career that has High Earning Potential
What if I am Just a Hard Working Man or Woman?
Most people will never start a business, write a book or become a business coach. This is because we do not have personal finance education as a standard in this country therefore, most people are in debt when reaching adulthood and live paycheck-to-paycheck.
Now this doesn’t mean that one can’t take control of their money management and make $1 million dollars. So let’s start with the budget. If this is held in check while maintaining debt this will at least open doors to invest into a venture or in the stock market.
Investing in the Stock Market
So let’s stick to the notion that most people have to invest on their own. This means investing in the stock market. Ironically, many people who obtain high-net worth make it in their line of work as an entrepreneur or in real estate and they invest to preserve their earnings with long-term gains over time.
With that being said there are several ways that you can do this. The hot one these days is crypto but that is done by way of a commodity-like system and is not considered a stable investing ideal.
A growing trend is investing with stock options; however, they are highly risky and not for the faint of heart.
Sticking with the basics of Investing
The most traditional ways are by way of traditional IRAs, Roth IRAs, 403(b) and 457(b) plans, Roth 401(k)s and the most common, 401(k)s.
So this means investing this way is playing the long-game to make money over time (buy and hold). The beauty is that anyone can do it.
Anyone can be a millionaire, even a multimillionaire. There are a lot of people that say, no I can't.
We often talk about shooting for a safe target of 7% annualized return on your money. One reason is that many people have their money in employer-sponsored plans and the investing options are limited to the funds they have in the plan; otherwise you may have freedom with an IRA-type of accounts.
The Value of Historical Stock Market Returns
With that being said, we often say on this program that the S&P 500 since 1926 has made an annualized return of 10%. This is about as good as a measurement that you can base your information on.
However, this means you’d have to be in the market over several years and emulate the S&P 500 when you invest.
Keep in mind that the stock market fluctuates and typically investing styles change as people age or near retirement-type of thinking.
This is why some people choose to invest in ETFs as they emulate an index such as the S&P 500. This represents about 80% of the total market value.
In reality, you could invest in equal shares on your own and achieve the same thing by individual investing or in theory by purchasing fractional shares or stock slices with companies that offer these programs. In reality, if you have an employer sponsored plan more than likely it will offer a fund that is similar to the S&P 500; you may see it as a US large Cap Value selection.
What do we always say on this show? “Compound interest is our best friend.” It never fails you when investing, especially on a consistent basis; and the more that you invest / increase it over time along with dividends reinvestment, it is a tried and true formula.
So that’s it right? Actually, that’s right. Pretty boring right? So let’s look at some investing scenarios.
Invest in an equal weighted S&P-type of Fund at 10%
-$300 month for 20 years: $206,000
-$300 month for 30 years: $592,000
-$300 month for 40 years: $975,000
Imagine investing at 22 year of age for 40 years. This would be 62 years of age which is the earliest one can take Social Security .
So does $300 sound like a lot of money?
Now let’s bump up the investment:
-$500 month for 20 years: $343,000
-$500 month for 30 years: $986,000
-$500 month for 40 years: $2,650,000
The Million Dollar Recap
Don’t live beyond your means. So one must budget - besides budgets incorporate emergency funds, rainy day funds and money allocated toward retirement.
If you have an employer-sponsored plan that has a match, never give away that free money. In addition, if you’re only investing through funds that don't have an S&P type of fund, then you can opt for one that is the most akin to this strategy.
Invest 10-15% of your gross income; however, do not stop there. Any time that you receive a pay increase add more money towards the nest egg. If you receive a bonus, allocate money toward your goal as well. This means that you are paying yourself first.
This is the most boring strategy; however, it is effective and doesn’t take any work except committing to the plan. Then just watch the money grow.
Lastly, the investments that you make are based on your volition meaning, you have to be your own financial manager.