In my previous post, I wrote a short guide about how to get started in investing. In this one, I would like to discuss how long it would take for an ordinary person to become a millionaire if following a paying yourself first mindset strategy.

But before running the numbers and describing a hypothetical case scenario, let’s start by introducing some general concepts.

What does pay yourself first mean?

Pay yourself first is a technique or strategy which consists on keeping a percentage of your monthly income aside, before paying any expenses. Instead of paying bills or rent, you are literally paying yourself first.  This money can then be in your savings account or any investment you may have. The funds left after paying the first “bill” (you) are the money you can use to live for the rest of the month.

Some of our ancestors already used this concept to build wealth across multiple generations, the same way some of us do today (or at least try to!). The popular and a must-read book “The richest man in Babylon” written by George S. Clason’s and published in 1926 spread this financial discipline around the globe.

Here is a short extract from the book:

Arkad told his friends of the first lesson he learnt about wealth. ‘A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn. It can be as much more as you can afford. Pay yourself first.’

According to Arkad, 10% is the minimum you should pay to yourself if you plan to build future wealth at all. No matter how low your income is, there will always be unnecessary spends we can get rid of.

Other people follow a similar but different approach; have a frugal lifestyle, spend as little as you can, and save or reinvest whatever is left. I found this system to not work very well with myself, as I tent to get obsessed with spending, and won’t enjoy any single thing that involves spending a penny. If I instead pay myself first, I know I am already paid, and I can spend the leftover however I want to, for instance buying organic food! I also find the phrase to be very encouraging, I am paying myself first! Yeah!

“Whichever method you choose and works for you will bring you wealth, as long as, you stick to the habit for a long period of time”

The magic of compounding interest

If paying yourself first may be encouraging, the magic of compounding interest is the faith of many to become rich.

As Albert Einstein once said,

 “the most powerful force in the universe is compound interest.”

If the discoverer of the famous Theory of Relativity equation (E = mc2) thinks so, it may be worth to find out more about it. Let’s go for it, keep reading.

While simple interest is calculated on the principal amount, compound interest adds the interest on interest.

For instance, your friend asks you to lend him some money for a holiday trip. You trust your friend and lend him 1000€ for his fancy trip. He requests to return the money after one year, and you charge him a 10% interest rate for so.  After this period, your friend gives you back the principal amount (1000€) plus the interest amount (100€). That’s great, you are now getting richer, congrats!

After that, imagine you now have three different options to choose from:

  • Take these 1100€ and spend them on a fancier holiday trip than your friend’s one (thinking you are so smart).
  • Lend another 1000€ to another friend with a 10% interest rate, but keep 100€ in cash underneath your mattress.
  • Lend 550€ to 2 different friends with a 10% interest rate, reinvesting your previous gains.

If you chose the second option, you earned simple interest. If you instead choose the third option, you will compound interests. I have no comments on the first option…

Now, let’s compare how much money will have a person choosing the second option, against the person choosing the third option, in 30 years.

The third option has compounded interest exponentially, transforming 1000 “miserable” euros to a decent number of 17449€. That’s the true power of compounding and what Albert Einstein refers to. It’s surprising how much a simple decision could impact our pockets.

How long it takes to become a millionaire?

Let’s make an example of an ordinary person who earns an average income and follows a normal lifestyle, as most of us do.

  • Salary income: 1500€.
  • Pays himself first a 10% of his salary income: 150€.
  • Age: 20 years.
  • Earns an average annual return rate of 10% (S&P 500 average since inception).
  • Reinvests and compounds earnings annually.
  • Uses a tax-free account and won’t pay taxes on returns (401k, ISA…)

How worth will this ordinary person be by the age of 65? Will he be a millionaire by just saving 150€ per month? Watch how the magic of compounding works….

YearYear DepositsYear InterestTotal DepositsTotal InterestBalance
1€ 1,800.00€ 96.08€ 1,800.00€ 96.08€ 1,896.08
2€ 1,800.00€ 285.69€ 3,600.00€ 381.77€ 3,981.77
3€ 1,800.00€ 494.26€ 5,400.00€ 876.03€ 6,276.03
4€ 1,800.00€ 723.68€ 7,200.00€ 1,599.71€ 8,799.71
5€ 1,800.00€ 976.05€ 9,000.00€ 2,575.76€ 11,575.76
6€ 1,800.00€ 1,253.66€ 10,800.00€ 3,829.42€ 14,629.42
7€ 1,800.00€ 1,559.02€ 12,600.00€ 5,388.44€ 17,988.44
8€ 1,800.00€ 1,894.92€ 14,400.00€ 7,283.36€ 21,683.36
9€ 1,800.00€ 2,264.42€ 16,200.00€ 9,547.78€ 25,747.78
10€ 1,800.00€ 2,670.86€ 18,000.00€ 12,218.64€ 30,218.64
11€ 1,800.00€ 3,117.94€ 19,800.00€ 15,336.58€ 35,136.58
12€ 1,800.00€ 3,609.74€ 21,600.00€ 18,946.32€ 40,546.32
13€ 1,800.00€ 4,150.71€ 23,400.00€ 23,097.04€ 46,497.04
14€ 1,800.00€ 4,745.78€ 25,200.00€ 27,842.82€ 53,042.82
15€ 1,800.00€ 5,400.36€ 27,000.00€ 33,243.18€ 60,243.18
16€ 1,800.00€ 6,120.40€ 28,800.00€ 39,363.58€ 68,163.58
17€ 1,800.00€ 6,912.44€ 30,600.00€ 46,276.02€ 76,876.02
18€ 1,800.00€ 7,783.68€ 32,400.00€ 54,059.70€ 86,459.70
19€ 1,800.00€ 8,742.05€ 34,200.00€ 62,801.75€ 97,001.75
20€ 1,800.00€ 9,796.26€ 36,000.00€ 72,598.01€ 108,598.01
21€ 1,800.00€ 10,955.88€ 37,800.00€ 83,553.89€ 121,353.89
22€ 1,800.00€ 12,231.47€ 39,600.00€ 95,785.36€ 135,385.36
23€ 1,800.00€ 13,634.62€ 41,400.00€ 109,419.98€ 150,819.98
24€ 1,800.00€ 15,178.08€ 43,200.00€ 124,598.05€ 167,798.05
25€ 1,800.00€ 16,875.89€ 45,000.00€ 141,473.94€ 186,473.94
26€ 1,800.00€ 18,743.47€ 46,800.00€ 160,217.42€ 207,017.42
27€ 1,800.00€ 20,797.82€ 48,600.00€ 181,015.24€ 229,615.24
28€ 1,800.00€ 23,057.60€ 50,400.00€ 204,072.84€ 254,472.84
29€ 1,800.00€ 25,543.36€ 52,200.00€ 229,616.21€ 281,816.21
30€ 1,800.00€ 28,277.70€ 54,000.00€ 257,893.91€ 311,893.91
31€ 1,800.00€ 31,285.47€ 55,800.00€ 289,179.38€ 344,979.38
32€ 1,800.00€ 34,594.02€ 57,600.00€ 323,773.40€ 381,373.40
33€ 1,800.00€ 38,233.42€ 59,400.00€ 362,006.82€ 421,406.82
34€ 1,800.00€ 42,236.76€ 61,200.00€ 404,243.58€ 465,443.58
35€ 1,800.00€ 46,640.44€ 63,000.00€ 450,884.02€ 513,884.02
36€ 1,800.00€ 51,484.48€ 64,800.00€ 502,368.50€ 567,168.50
37€ 1,800.00€ 56,812.93€ 66,600.00€ 559,181.43€ 625,781.43
38€ 1,800.00€ 62,674.22€ 68,400.00€ 621,855.65€ 690,255.65
39€ 1,800.00€ 69,121.65€ 70,200.00€ 690,977.30€ 761,177.30
40€ 1,800.00€ 76,213.81€ 72,000.00€ 767,191.11€ 839,191.11
41€ 1,800.00€ 84,015.19€ 73,800.00€ 851,206.30€ 925,006.30
42€ 1,800.00€ 92,596.71€ 75,600.00€ 943,803.01€ 1,019,403.01
43€ 1,800.00€ 102,036.38€ 77,400.00€ 1,045,839.39€ 1,123,239.39
44€ 1,800.00€ 112,420.02€ 79,200.00€ 1,158,259.41€ 1,237,459.41
45€ 1,800.00€ 123,842.02€ 81,000.00€ 1,282,101.44€ 1,363,101.44

Effectively, he will! It seems impossible but it really is possible for an ordinary person to become a millionaire. It only depends on us.

If you feel curious, play with this online compound interest calculator to find out how worth you could be, if you would start investing today.  Also, check how every parameter (interest rate, years, compound intervals,) affects the final value.

Conclusions

If starting soon enough, an ordinary person can become a millionaire from scratch.

Pay yourself first and invest at least 10% of your earnings every month. Wait and watch how the magic of compounding does the rest.

Keep it as a lifetime habit, while you learn how to give yourself a pay rise, spend less and invest better.

The time needed to become a millionaire will depend on how hard you work for it and stick to the rules.

The sooner you start, the sooner you’ll get it, as simple as that.

Let’s connect

Did you play with the online interest calculator? How worth would you be if you start investing today? Or perharps, you are already investing and got your plans in your mind? Whatever your case is, I would love to hear from you, so don’t forget to leave a comment down below 😉

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