How to Become a Millionaire: The 10% Rule
Written by Trey Archer on June 19, 2017.
As a financial advisor, I have many of people come up to me asking the same question, “How do I become a millionaire?” My answer is usually broken down into three simple responses:
- Start your own company
- Win the lottery
- Save and invest 10% of your yearly income
While #1 is certainly possible, it takes lots of hard work, determination and sacrifice. Point #2 is nearly impossible, but hey, it can happen...
On the other hand, the last option, the 10% Rule, is without question the easiest and something everyone can do, especially if you have time on your hands. Parents, listen up – this is definitely something you’ll want to talk about with your kids. Here’s how it works.
What is the 10% Rule?
All you have to do is put away 10% of your income every month. Banks barely give you enough interest to keep up with inflation, so it may be better to look at options that can achieve 5% or more per year (this shouldn’t be too difficult).
Wait a minute… isn’t becoming a millionaire supposed to be much more difficult? Let’s crunch the numbers.
Calculating the 10% Rule
Let’s say you make $50,000 per year. (Usually, the older you get the more you make, but let’s just say you make $50,000 on average for your entire working career.) This means you should save 10% of $50,000, or $5,000 dollars per year.
Now assume that you invest that $5,000 into an investment portfolio that grows 7% on average per year, and continue putting $5,000 into it every year after that. Will you become a millionaire?
YES, you will! Actually, to be exact, if you do this for 40 years you will have around 1 million in your bank account.
Now let’s assume you make $75,000 on average per year, and invest 10% ($7,500) of that into the same investment portfolio. With the magic of compound interest (click here to read the article on compound interest), you will have 1 million in just 35 years!
Becoming a millionaire has never been easier.
Exceptions to the 10% Rule
As mentioned, there are many ways to becoming a millionaire. Apart from starting your own company, landing a high-paying job, winning the lottery, or inheriting a fortune, money comes in many different forms.
For this reason, it’s important to note that there are exceptions to the 10% Rule. If you are a high earner, you’ll probably want to save more than 10%. If you have a lavish lifestyle and like to spend, you may need to bump this percentage up to 15% or 20% to reach your retirement goals.
On the contrary, you may not be in the position to save this much of your income at this time. If this is the case, don’t worry, stay focused on your goal and try to save as much as you can. Saving 5% per year is certainly better than saving 0%.
Obviously, it’s always best to evaluate your own personal situation. But time after time, the 10% Rule stands as the benchmark of financial planning. If you can save and properly invest 10% or more of your earnings every year for three decades, you will undoubtedly have a healthy nest egg by the time you're ready to retire.
If you’re interested in saving for your future and achieving your financial goals, feel free to call me at +86 13816207274, or email me at email@example.com.