This could be the million dollar question itself, since it’s something that so many people want to know. And actually, at least mathematically, it’s a question that has an easy answer. It just depends on how much money you save and what you earn on your investments.

But before we get into the mechanics of calculating how long it takes to become a millionaire, let’s first talk about something more basic.

## What It Means to Be a Millionaire

There are different ideas as to what it means to be a millionaire, so let’s start with a few things that it’s not:

- It’s not the total value of everything that you have – just because you have a million dollars worth of assets doesn’t mean that you’re a millionaire;
- It’s not about having a million dollar income – income represents cash flow, not money in the bank, and there are plenty of athletes and celebrities who have million dollar incomes but are technically bankrupt;
- It’s not about owning a house that’s worth million dollars, since that typically has debt attached to it, and isn’t very liquid; and
- It isn’t business equity either, since businesses don’t readily convert to cash.

As impressive as any of these are, having one of them doesn’t necessarily qualify you as a millionaire.

Being a millionaire is all about *net worth*, and that’s calculated as follows:

**Assets – Liabilities = Net Worth**

We can also take it a step further and say that being a millionaire is really about having a minimum of $1 million dollars in *liquid assets*. That means that if you had to raise a million dollars in a few days, you could do it, and do so with little effort.

If most of your net worth is represented by your home equity, business equity, or personal possessions (cars, furniture, entertainment equipment and the like), it’s not liquid. None of those assets could be quickly liquidated. In addition, a buyer of any of those assets may not necessarily agree that they are worth the amount of money that you think they are.

Liquid assets – stocks, bonds, mutual funds, exchange traded funds, bank assets, and real estate investment trusts – are easily traded and liquidated because there are recognized markets in which to trade them.

And for those who have never calculated your net worth, here are 3 tools that can help.

## What Really Matters: How Much You Save and Your Rate of Return

Okay, now that we’ve decided what it is to be a millionaire, let’s talk about how you become one. Unless you inherit that kind of money, or strike oil in your backyard, you’re going to have to reach that goal by saving and investing your money. It’s doable, but it isn’t easy, nor is the road always a straight one.

It will all come down to how much money you’re able to save – each and every year – and what kind of rate of return you can earn on your investments. You have to determine all of that if you’re serious about becoming a millionaire.

## The Mechanics of Saving and Investing Your Way to a Million Dollars

In order to assist you in your quest to reach that fabled financial level, I’ve prepared a table that maps out how long it will take to become a millionaire.

Annual Contribution | $1,000 | $3,000 | $5,000 | $7,500 | $10,000 | $15,000 |
---|---|---|---|---|---|---|

Annual Rate of Return | ||||||

5% | 80 | 58 | 49 | 41 | 36 | 30 |

6% | 70 | 52 | 44 | 37 | 33 | 27 |

7% | 63 | 47 | 40 | 34 | 30 | 25 |

8% | 57 | 43 | 36 | 31 | 28 | 24 |

9% | 52 | 39 | 34 | 29 | 26 | 22 |

10% | 48 | 37 | 31 | 27 | 25 | 21 |

The top row indicates certain levels of savings that you will need to contribute each year. The column on the far left provides the annual rate of return than you expect on your investments. At the intersection of each row and column, you’ll be able to determine how long it will take you to reach the $1 million dollar level.

So for example, in looking at the table, if you want to become a millionaire in 25 years, you can scan the table and see that you can reach that goal by saving $15,000 per year and earning a rate of return of 7%.

The table raises at least four questions.

**Question 1: What if my situation is different than what’s reflected in the table? **

It’s easy to make these calculations in Excel. The formula is called future value, or FV for short, and would look like this–

=fv(8%, 20, -18000)

If you enter the above formula in Excel, the result is $823,715.36. Here’s what each element of the formula means:

- =fv is the code used for the Future Value formula in Excel
- 8% is the assumed annual rate of return
- 20 is the number of years contributions will be made to the investment
- -18000 represents the annual contribution, expressed as a negative number, which produces a positive result (don’t ask, just trust me)

You can of course change any or all of the numbers to suit your situation. Also, the above formula compounds the return annually. If you want to compound the return monthly, here’s what you do–

=fv(8%/12, 20*12, -18000/12)

This modification converts all of the inputs to monthly numbers.

**Question 2: What if I’ve already started saving? How do I reflect my current liquid assets in this formula?**

Since many people have already started to save, they want to know how long it will take to become millionaires not starting from zero, but from the amount they’ve already saved. Once again, Excel to the rescue–

=FV(8%/12,20*12,-18000/12,-100000)

The formula hasn’t changed much. In fact, the only change is the addition of -100000 at the end. This represents the amount already saved. You can of course change it to fit your circumstances. The result of the above formula, by the way, is $1,376,210.90. That’s the amount you would have if you started with $100,000, invested $1,500 a month (-18000/12), for 20 years (20 * 12), and earned 8% compounded monthly (8%/12).

**Question 3: Is there an easier way to figure out how much to save to reach $1,000,000 in a set period of time?**

Yes, and it’s called the Payment (PMT) formula in Excel. Let’s assume that you want to become a millionaire in 10 years and believe you can earn a 10% return on your investments. How much would you have to save each month to reach your goal?

=PMT(10%/12,10*12,0,1000000)

Using the above formula results in a monthly savings amount of $4,881.74.

**Question 4: What’s a realistic rate of return to use in these calculations?**

The answer depends largely on your asset allocation. A portfolio weighted toward stocks will experience more fluctuations but also higher returns over the long period. I tend to stick with 7 to 8%, but your mileage may vary.

A fundamental question is *can you rely on any given rate of return over a period of decades?* And the answer is a qualified *yes,* at least based on historical trends. As you can see from the table above, the higher your rate of return on investment, the less time – and the less money – it will take you to reach your goal. But it will be virtually impossible to invest to become a millionaire without having most or even all of your money invested in stocks. Based on current interest rates, it simply will not be possible to grow a portfolio investing exclusively in less volatile securities, such as bonds or certificates of deposit.

But there’s good news here. According to New York University Stern School of Business, the historic annual rate of return on stocks as measured by the S&P 500 is 9.60% (geometric) for the period from 1928 through 2014. This of course represents at best your projected stock returns. Most investors have exposure to bonds, which is why I tend to lower my projected return to around 7%.

## Examples of Would-be Millionaires

As you can see from the table, it’s much easier – and far less expensive – to become a millionaire if you’re young.

Let’s take the example of a 20-year-old wants to become a millionaire. Looking at the table, by investing $5,000 per year at 10% per year – which would mean that 100% of his portfolio would have to be invested in stocks – he could reach the $1 million dollar level by age 51. Early retirement is definitely a possibility for this person.

But now let’s take the example of a 40-year-old who decides that she wants to become a millionaire. She can do it in a reasonable amount of time (relatively speaking), but it will require a larger annual contribution. If she invests $10,000 per year into her portfolio, and invests it 100% in stocks earning an average of 10% per year, she’ll reach her goal in 25 years. That can work well because at that point she’ll be 65 years old, and ready to retire.

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There’s an online compound interest calculator that I like and use:

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Thanks for the link Scott. Always good to find new calculators.

Hi,

Thanks for the useful article. With the FV formula, is there a way to increase the annual contribution over time, in line with for instance, pay increases? Perhaps by a percentage, say 5% annually? And/or decrease the real value of the contributions and final value by a percentage, for instance for inflation/CPI?

Thanks

Matt

This might help: http://www.tvmcalcs.com/calculators/apps/excel_graduated_annuities

Wow! Extremely useful, Rob. Thanks a lot – I have used several of these functions before as well, but its great to have a refresher.

One question – is there a way to know how much I need to have saved at a certain age?

Let’s take a hypothetical situation: John, now 33 years old plans to retire at age 65. Between now and retirement, John plans to add $40,000 to his retirement each year, while expecting an annualized 7% rate of return. John wants to know how much he needs to have saved already to understand if he is on track or not.

Is there a way to find an answer to this?

Forgot to add:

John determined that he needs 5 million in retirement savings when he turns 65, so he can withdraw $150K each year using the 3% rule.

I know the answer is in the vicinity of $70,000 since =FV(0.07, 32, -40000, -70000) returns an amount just above 5 million.. but how can I find the amount in reverse fashion..

Basically, I want to solve for ‘x’ in the equation

FV(0.07, 32, -40000, -x) = 5000000

Nevermind.. found the answer.

=PV(0.07, 32, -40000, 5000000)

Returns $67,843.43

Below is a link to a very good Retirement Calculator. It pretty will give you all the calculations on how much you need to save for your retirement.

http://www.calcxml.com/calculators/retirement-calculator

While technically a millionaire would be someone with $1,000,000 in Net Worth. As you stated in the post I think that I wouldn’t consider myself a true millionaire until I had that in liquid assets.

Because as you know, most peoples net worth is heavily waited in their primary residence…and you have to live somewhere. So its not likely you will be selling that anytime soon, and even so it could take months to liquidate.

Cheers!

I have a Business Insider piece coming out that answers this question, but I’m happy to share what I uncovered in my research:

76% of the wealthy in my Rich Habits Study (http://richhabits.net/rich-habits-study-background-on-methodology/) were what you would call, self-made millionaires. They came from non-wealthy households. 31% of them came from poor households. 45% came from middle-class households. What’s even more compelling is the age in which these self-made millionaires actually rang the bell and struck it rich. Here’s the breakdown from my study:

• 1% became wealthy before the age of 40

• 3% became wealthy between age 40 and 55

• 16% became wealthy between age 46 and 50

• 28% became wealthy between age 51 and 55

• 31% became wealthy between age 56 and 60

• 21% became wealthy after the age of 60

Tom, thanks for the data!

It’s irresponsible to make blog posts about this subject (compounding interest over decades) and not include adjustments for inflation.

I like this online calculator:

http://ratfactor.com/compound-interest-calculator

Anono, actually, inflation was left out on purpose. The question is how long it takes to become a millionaire. Not how long it takes to accumulate $1 million in today’s dollars. To make the adjustment, however, one could reduce the assumed rate of return by an amount equal to anticipated inflation, say 2 to 3%. But even that will be a wild guess.

Hi Rob,

Although, I like the current topic, I am not sure how I feel about your new format. But I am willing to continue listening, because overall I enjoy your thoroughness of each topic/podcast. As far as becoming a “millionaire,” I think too many people only consider personal income and traditional stock/bond investments as main avenue of approach. In my personal experience, I found that after a certain point, wealth accumulation and personal income generation will become independent of each other. Personal income and savings will provide you a base to live and seed money to invest. But after that, the compounding effects of your invested assets can and will take over dramatically. This is especially true with real estate investing, with or without leveraging.

The key is to start as early as possible, save until it almost hurts and get solid returns and your life will be totally different.

Want to make it really powerful? Open an investing account the day your grandchildren are born and they will have no money problems from day one.

@David Right you are, the earlier the better. It would also be best to teach your grandchildren how to be frugal.