Everyone talks about the goal of being a millionaire. 1 million dollars in the bank.. But how likely are we to hit it? To be completely honest, it really isn’t as hard as many make it out to be.
Don’t get me wrong, I don’t currently have $1 million, but there is a very direct path to getting there, and the sooner you get on that path, the better.
It turns out, the only thing you need to become a millionaire in your life time is two simple skills: consistency and patience
Why Consistency and Patience Matter
Many people out there think becoming a millionaire is a pipe dream, and only a few lucky ones to get there. Then here I am telling you all it takes is a little bit of consistency and patience?
Honestly, the secret of the game is consistently putting your money into investments and… waiting for them to grow.
It really is that easy.
If you don’t believe me, let’s look into an example
The Power of Starting Early
Consider you and your friend decide at different times in your life that it’s time to start saving for your retirement.
You decided at the young age of 25 to start investing in the stock market, meanwhile your buddy decided at 35 it was time to start.
You start putting $500 into the stock market every month for 40 years.
Assuming a conservative 7% interest rate, you would retire with $1.2 MILLION in your investments. The crazy part is you would only contribute $240,000 of that $1,200,000! The rest is all gains.
The Cost of Starting Late
On the other hand, your friend starts at 35 and decides to catch up by contributing $1,000 a month, twice of what you contributed!
He should probably end up with $2.4 million, right? Nope! He *only* ends up with $1.1 million (still a huge amount, but trying to make a point here!)
Even though your friend contributed $1,000 a month, he amassed less wealth than you did, because your money had 10 more years to compound!
Plus, his total contributions were $360,000 while yours were $240,000, but he made roughly $70,000 less by retirement at 65.
The Power of Compounding
You saw me mention how you had 10 more years of compounding than your friend… what exactly is that? It’s actually pretty simple, let me explain.
When you invest in the stock market, you are giving your hard earned money to some of the world’s biggest businesses to use as capital to continue to grow their business. In return, they often pay you dividends which you can use to purchase more shares of the company.
Consider you have 100 shares at $10 in ABC company. They give you $1 per share you own every year in the form of a dividend because you allow them to use your $1,000.
After year one, you would have $1,100 ($1,000 initial investment plus $1 for each 100 shares you own). This would allow you to purchase 10 more shares after 1 year simply by holding the stock!
Keep in mind, this growth is without taking into account the overall movement in the stock. If the stock price went up to $11, your new cost basis after a year is $1,210 (110 shares * $11).
This is where the magic happens. The free dividends you got from the company will also increase in value!
Then every year, you will receive more dividends, which you will use to buy more shares in the company, who will then give you more dividends the following year. That is the power of compounding.
That’s why you made so much more in gains than your friend did, because you invested 10 years earlier. Your money had 10 extra years to compound!
Want To Learn More?
How can you take advantage of time? Well first, you can learn more about different stock market investments in a recent blog post we wrote. Being aware of what you are investing in is incredibly important.