When I was a youngster in the early 1970s, being a millionaire was a rare and precious status. Fifty years on, having £1m isn’t such a big deal. According to surveys, there are at least 2.8m UK millionaires today. In short, about one in 25 Brits (4%) has wealth of £1m+. But how would I aim for a million today, starting out with nothing?
How I’d aim for a million from zero
Step one: sacrifice
In order to have money to invest, the first thing I’d do is to spend less than I earn. To do this requires restraint and self-discipline. As celebrity chef Marco Pierre White once remarked, “The only true power is self-control”.
To boost my spare cash, I’d keep a close eye on my daily, weekly, and monthly spending. By analysing these expenses, I’ll discover where I’m leaking money. Then I cut back on items that don’t matter (such as snacks, treats, and impulse purchases).
Step two: pay myself first
Once I had my spending under control, then I can decide how much of my monthly earnings to put aside. Initially, I would set aside a minimum of a tenth (10%) of my take-home pay, with the goal of increasing this percentage over time.
When I started doing this in the 1990s, it proved rather difficult. But over time, ‘paying myself first’ — by automatically confiscating 10% of my wage on paydays — gradually got easier. Eventually, as my salary rose, I sometimes upped my savings rate to over half (50%+) of my net pay. That was wild.
Step three: play the long game
Next, I’d build an emergency fund or rainy-day pot to pay my expenses for a few months. With this cash cushion under me, I would finally start investing for my long-term future.
At this point, I have three choices. First, pay a financial adviser or fund manager to invest my money for me. As this option introduces another layer of (often hefty) charges, I’m not a fan of this route.
Second, I could use low-cost index trackers or exchange-traded funds (ETFs) to track the returns from various companies, sectors, or stock markets. This is my best option if I’m short on time or have limited experience of stocks and shares. It’s also been my wife’s preferred route.
Third, I could build my own balanced, carefully crafted portfolio of individual shares. By choosing a wide range of stocks in quality, well-managed businesses, I might beat the wider stock market — or I might not. But this is the choice I made 37 years ago and have stuck with so far.
Step four: time and compound interest
My one remaining step only needs time, thanks to the incredible power of compound interest doing the hard work for me.
For example, say I invest a flat £300 a month (£3,600 a year) for the next 40 years. That’s a total of £144,000 invested. If I make a yearly return of 8.5% compounded after charges, my investment returns will total £968,856. And my final pot will be worth £1,112,856. Result!
Finally, the buying power of a million will be much reduced by inflation (rising consumer prices) over the decades. But saving is its own reward, as they say. And we should always aim high, agreed?
The post How I’d aim for a million starting from scratch appeared first on The Motley Fool UK.
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