There are many ways to become a millionaire – while a music career may be one of the more desirable ways, it's always a good idea to have a back-up plan…. just in case the whole Rock Star thing doesn't work out!
A back-up plan should follow a few basic rules, such as being easy to understand and straight forward to implement. Here's the outline to what could be considered a get rich back-up plan. To start with, I'll assume you've already broken the first rule which is to start saving and investing from a young age. Don't worry, it just means you have to save a little harder now! Secondly, you need to spend less than you earn – $200 per week to be exact. Thirdly, you need achieve a return of 12.5% per annum – this is tough, but do-able.
Here's the maths
- You're 30 years old.
- You haven't started investing but you have managed to save $20,000 during your 20's.
- From the age of 30 you invest the $20,000 and rigidly save $200 a week from your salary and invest it wisely.
- You find a way (either through your own investing prowess or via a fund manager) to achieve a return of 12.5% per annum from the stock market.
- For the next 20 years you keep adding $200 a week to your portfolio and keep compounding your returns.
- By the age of 50 you have a portfolio worth $1,005,054. Congrats!
How to achieve 12.5%
Admittedly achieving a double digit return year in and year out is no simple task and that's why investors are encouraged to start when they are young as it reduces the pressure to achieve double digit returns.
However it's not an impossible task. There have been a number of fund managers and a number of individual stocks which have performed well enough to help get you towards your goal. For example Ramsay Health Care Limited (ASX: RHC) an owner and operator of private hospitals has produced a total shareholder return (TSR) of 25.9% per annum (pa) over the past decade, while REA Group Limited (ASX: REA) the owner of property classified websites including realestate.com.au has produced a return of 51.2% pa for the last 10 years. In other words, if you pick the right stocks, a return of 12.5% can certainly be achievable.
