Today, I’m talking about creating a proper £1m in net worth by the time a person is 54 if they start at 20. I reckon this can be achieved on a salary of £20,000 after tax… What’s more, I’ve done this calculation so that a person doesn’t even need to increase their salary to make it happen! Who said promotions were the only way to get rich anyway? That’s the beauty of passive income reinvested over time.
It all starts with discipline
Just imagine somebody who rents a room at 20 years old who works in a bar. There are so many of these people out there; they’re us common folk! What if we could turn that £20k a year salary into real wealth without pursuing those jobs we hate?
Imagine a person was to live frugally, investing just £300 a month of £1,700 per month in salary. They’d be able to build up £1 million in just 34 years.
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The great strategy here is living below our means. If we can invest in strong, undervalued companies, I reckon we could get even more than £1m by age 54. Why is that? My £1m estimate is based on only slightly better returns than the S&P 500’s 10% average growth from the past 90 years.
If we invested like Buffett, we’d be looking at a 20% a year return. Guess what that £300 a month invested would look like 34 years later after starting at zero?
£15.3m!
Let’s put the inflation risk into perspective. Let’s assume an average 3% inflation rate for the next 34 years. We’d still be looking at the equivalent of £5.6m in purchasing power today. That’s less because over time the value of money decreases as central banks increase the money supply, often for government borrowing.
Beach bum millionaire
At that point, I’d retire to the beach!
That doesn’t even consider reinvested dividends!
If we consider an average 3.2% dividend yield per year (adjusted for tax) reinvested in full, we’re looking at…
£38.3m!
Inflation-adjusted, that’s £14m of purchasing power in today’s terms. Those are terms I like.
However, let’s be honest, we don’t all invest like Buffett. So let’s look at the hardcore, boots-on-the-ground reality.
The achievable dream
To achieve our dreams, we have to be aware of dangers. Here, they include weathering recessions and surviving stock market crashes.
We may also need to take funds out for emergencies. We’ll also need employment for the duration of our investment horizon. It’s also not guaranteed that our returns will be above average.
I’m going to be pessimistic and assume we don’t beat the market by much. We only get 2.5% above Mr Market’s average return. So what? I bet I’d still get rich.
Here are the stats I’d be working with:
- 12.5% annual growth on shares;
- Net dividends averaging 3.2% per year fully reinvested;
- Reinvesting all sold shares adjusted for tax;
- Inflation-adjusted considering a 3% average annual inflation rate;
- 34 years starting at age 20;
- £300 per month of salary invested.
And here’s what I’d get:
£1,011,000
That’s £11,000 more, in actual purchasing power as relevant today, than I initially laid out. What more does a man or a lady need?
