Becoming a millionaire is not just for people with huge incomes. I believe it is totally possible to become a millionaire with a salary of $60,000 thanks to the power of compound interest.
There are two important factors to becoming a millionaire for a regular Aussie worker within 30 years:
Australia has a well-respected retirement system compared to most other countries. Mandatory savings towards your retirement is a probably a good thing. But we have to make sure we make the most of it. It’s important to find a low fee superannuation fund. Fees will eat away from your potential nest egg like termites.
In the financial services royal commission we heard how AMP Limited (ASX: AMP), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) had been charging lots of fees to their customers. There are other super providers that did not do that.
How important is super for becoming a millionaire? It’s very important and does a lot of the heavy lifting.
To make the calculation easy for a future super balance, I won’t adjust the salary for inflation and I will use the mandatory 9.5% contribution amounts only (less 15% tax) of around $4,850 a year. This isn’t meant to be an exhaustive calculation though, just a rough example.
Shares have returned an average of 10% a year over the decades, so using an average return of 8% a year over 30 years the superannuation balance could theoretically be worth almost $550,000 – you’re over halfway there!
Australian is an expensive place to live, so I’m not saying it would be easy to funnel a lot of money into additional investments. But for this $1 million goal to work you need to find another $450,000 of wealth.
You can either focus most/all of your savings from your after-tax money into buying a home and then paying off the debt (and hopefully the property will appreciate in value).
Or, you could focus some of your money towards investing in shares outside of super (or add more money into super if you wish). Using the same 30-year time period and 8% share market returns, you just need to invest $4,000 a year – which works out to be $333 a month – to create $450,000 of additional wealth.
You can easily build up more than $1 million in 30 years if you earn more than $60,000 a year, if you add more than $4,850 (after tax) a year into your super, if you earn returns better than 8% and/or if you invest more than $4,000 a year into additional investments.
What shares should you invest in? A start could be diverse exchange-traded funds (ETFs) with growth characteristics and low fees like Vanguard MSCI Index International Shares ETF (ASX: VGS) and iShares S&P 500 ETF (ASX: IVV). But I think there are more exciting individual growth shares out there that could make better returns than 8% a year.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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