Paying yourself first – how long it takes to become a millionaire?
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.
Table of Contents
What does pay yourself first mean?
Pay yourself first is a technique or strategy which consists of 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 transferred into your savings or investment account 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 any future wealth. This should be achievable for the vast majority of people who lives and works in developed countries. Even those who are paid the minimum wage could possibly save at least 10% of their income if they get rid of unnecessary purchases.
Other people follow a similar but different approach; they have a frugal lifestyle, spend as little as they can, and save or reinvest whatever is left. I found this system to not work very well with myself, as I tend 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”
Related content: The Millionaire Mindset #5 – Build Good Habits
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, don’t you think?
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 broadly known as making your money work for you.
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.
- 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.
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 17,449€. 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, isn’t it?
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…
| Year | Year Deposits | Year Interest | Total Deposits | Total Interest | Balance |
|---|---|---|---|---|---|
| 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 depends on us.
If you feel curious, play with this online compound interest calculator to find out how much you could accumulate in a lifetime of saving and investing periodically if you would start 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 hard work.
Keep it as a lifetime habit, while you learn how to give yourself a pay rise, spend less and invest more and 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 could you be if you would start investing today? Or perhaps, you already invest and have your plans in 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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24 Comments
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ABOUT ME
Hi there! It's Tony here and I am hoping to post my journey towards one million euros.
NET WORTH GOAL
Good one!
And I like that you include the long-term scale of things. An interesting conclusion is that, given some financial intelligence and discipline, almost anyone can become a millionaire, or at least financially free(r).
Thank you!
Exactly, that’s the right conclusion. We don’t need to be born rich to archive FI, but to learn the basic concepts and to be disciplined, like a Monk 😉
Highlighting the importance to start saving as soon as possible!
With compounding, even low incomes can become fortunes!
Eventhough, I must point out that 10% yearly interest rate is far away of current pension plans interests… will we still be able to become millioners? ?
Hi XGT, happy you see you back!
Yep, you got the point, savings as soon as possible is a key factor.
In the example, I use the S&P500 index fund which has historically return an annual average of 10% (7% if we discount inflation)
These are past results and we don’t know what the futures returns will be, but I think we can use them as a statistical reference.
Regarding the low returns on your pension plan, do you know what the pension plan is buying with your money? Is it buying IBEX-35 index shares? If so, unless the world turns 360 Degrees, reaching a million may be an impossible task to accomplish with this strategy, hehe.
Man, compounding is amazing isn’t it!
I’ve been thinking about this for my children rather than me. Specifically if I set them up with a pension and put in 5-6-7 years worth of contributions at say £100 a month. After half a century or so of tax free compounding that will give them a huge boost to their pension. Maybe not a millionaire level but a pretty good start!
Yes , it really is!
Your children would be very lucky to have you as a father if you would do that. I am also considering to do it once I have kids. Then they could use this money for studying, paying a house or simply keep compounding.
Hi Tony. Just read the post and im sad ? im not going to be a millionere. Im 33 an saving 200€/mo. According to your calculation ill have “only” 0.5m€ at pension age of 65 ? darn it will have to work until 70y ?
I am sorry my post made you feel sad P2035, it wasn’t my intention. Half a million is still a nice number and many wish they could ever have it 😉
I have a plan to fix it. All I need is to increase the investment to 300€/mo 🙂
Good one!
How do you plan to add this extra 100€/mo?
Simple, ask for a 100€ raise 🙂
? I was expecting the common FIRE answer: cut down expenses and have a super frugal lifestyle.
Good luck with it mate! Wish you all the best!
I’ve made a simple calculator for, well, not for how long it takes to become a millionaire, but when can you retire with your current spending. I think that’s even more relevant. Although, for many of us that threshold is so close to a million that why not go that far, for a couple of extra years, huh?
https://www.thewealthyfinn.com/2019/01/when-can-you-retire-calculator-for.html
Let me know what you think!
Excellent calculator indeed, thanks for sharing it. I will definitely take it into account for future blog posts 🙂
If assuming a 7% interest and using the 25-rule I should be FF in 20 years, which is kind of what I was expecting.
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