Becoming a millionaire through investing is a dream many wish to achieve. By investing money, people are essentially stashing it away in the hope of getting more money in the future. The length of time it will take to become a millionaire from investing in the stock market depends on the amount of money you invest and your annual rate of return. Before we jump into this, let’s look at the three factors that determine the amount of money you end up with:
- The amount of money you invest – Common sense will tell you that the more money you invest, the more money you will end up with. By investing a big hoard of cash, your chances of reaching millionaire status via investing will increase.
- Your annual rate of return – This is the amount your money grows by each year. The rate of return is important as it determine how quickly your money doubles. If you invest £1000 at 7%, your money should double to £2,000 in about 10 years. If you earn 10% return per annum, your money should double in about 7 years. If you earn 20% per annum, your money should double in very 3-4 years. You get the point – the higher your return the quicker the rate your money doubles at. It would be natural to assume everyone wants a high rate as possible. But don’t be seduced by high rates, many people have lost all their money stretching for abnormal rates of return. Only the very best like Warren Buffet, Peter Lynch and Seth Klarman can regularly get returns in excess of 15%. The rest of us average investors should stick to a return of about 8% per year.
- The amount of time you are invested in the market – For me, this is the single most important factor when investing in the stock market. By having a long time horizon, you let compounding work its magic. Say you invest £1000 in an index fund (like the FTSE100) and earn 8% a year on this. At the end of the first you should have £1080. At the end of the second year, you should have have £1166 as you get 8% on the full amount of £1166 as opposed to £1000. At the end of the third year, your £1166 should have grown to £1259. A one off investment of £1000 in year one growing at 8% should amount to £4,661 in 20 years. That is an increase of 366% – which is an average of 18.2% a year! Time is a great friend to the patient investor.
Once you understand and appreciate the above 3 factors, you will get an idea of how long it wake to become a millionaire by investing in the stock market.
The table depicts shows how long it will take you to become a millionaire via investing. The first row shows the amount invested each year whilst the first column depicts the annual rate of return on your investments. At the intersection of each row and column, you can see how long it will take you reach £1,000,000.
How much you need to invest monthly to become a millionaire
As you can see from the table above, the more money you invest and the higher your contribution, the quicker it will be to reach your goal of becoming a millionaire. If you invest £10,000 a year at 8%, you should have £1,000,000 in 28 years. Putting it another way, simply putting away £833 a month from the age of 27 will ensure you become a millionaire by the time you reach the age of 50.
Time is an investors best friend.
As I mentioned above, the most important factor to me of growing your wealth via the stock market is time. The longer you remain in the market, the more time you give your money to compound and this has the effect of increasing the chances of reaching your investment goals.
Have a look at the table below which shows the amount you need to invest on a monthly basis in order to become a millionaire. The first row shows the annual rate of return on your investment and the first column gives you the amount of time you are invested in the market.
Rate of Return
As you can see from the table above, as your time horizon increases, the amount you need to invest monthly drops. Increasing your time horizon increases your chances of getting rich as compounding takes effect. Time is truly a wonderful thing.
For people who find it hard to save or earn low incomes, investing via this long term approach is the best way of becoming a millionaire. Consider this, if you invest £179 a month in plain vanilla low cost index fund earning the market average 8% starting at the age of 25, you should have £1 million by the time you hit state retirement age.