Do you want to become a millionaire in 25 years by investing just $20 a day?
In this article I'm going to show you how it could work.
Reaching $1 million seems like a great goal for the average Aussie. Becoming a 'millionaire' has a nice ring to it. However, don't get caught thinking that means driving a Ferrari. Inflation has meant $1 million isn't quite as impressive as it was 25 years ago.
Why 25 years to become a millionaire? Why not 10 years?
It's important to be realistic with your financial goals. The more unrealistic you make your goals the more likely it is you'll never reach that goal. 'Get rick quick' schemes lure people in with dreams of a luxurious lifestyle, but they don't warn of the risks, the fees and the low chance of success.
I think 25 years is a good timeframe because it gives an investment a long enough time to utilise compound interest, but 25 years doesn't mean your whole life either.
Even the richest people in the world take time to grow their wealth and businesses. For example, Warren Buffett didn't become a billionaire until he was 56. He added all those other billions to his net worth when most people are thinking about retirement.
You may only need $20 a day to become a millionaire
As long as you have a decent income, I think it's possible to find $20 a day. The most important thing for your budget is to not get stuck into expensive monthly payments you can't afford. Your home, a car loan – those big ticket items can really drain your monthly budget.
If you can save $20 a day, that's $140 a week or $7,300 a year. If you save $20 a day then that amounts to around $146,000 over 25 years.
You might say: "Hang on. That's not even close to $1 million." Stuffing $146,000 under the mattress or into a safe isn't going to compound into $1 million.
The best interest rates from savings account you can find right now in Australia are around 2%. If your daily $20 saving compounded at 2% per year you'd finish with $233,821.
I think you need to invest in (ASX) shares to make the required returns to become a millionaire these days. Businesses have the ability to generate strong returns and re-invest for growth.
If you invested $20 a day for 25 years, it'd be possible to make $1 million if you were making returns of 12.25% per annum.
It's difficult to generate those types of returns, you'd have to find great growth shares at a fairly early stage of their growth. Shares like A2 Milk Company Ltd (ASX: A2M), Afterpay Ltd (ASX: APT), Appen Ltd (ASX: APX), REA Group Limited (ASX: REA) and Xero Limited (ASX: XRO) have generated very strong returns for early investors. Names like Amazon, Netflix, Alphabet/Google, Facebook, Visa and Mastercard are international names that have made great returns over the years.
Two of my preferred small cap ideas right now are Bubs Australia Ltd (ASX: BUB) and Pushpay Holdings Ltd (ASX: PPH) for long-term returns.
However, I think it's important to remain realistic. You may not find many of these growth shares early on.
A realistic scenario of 10% returns
Let's alter a few of the assumptions a little. The share market has returned an average of 10% over the long-term, so let's use that growth rate. Let's assume you've already been doing some saving and you've got $10,000 ready to invest at the start of the process. But to become a millionaire you'd need to save a little more per year (if shares return 10% a year), you'd have to save an average of around $25 a day.
Foolish takeaway
I think it's possible for the average Australian household to achieve what I've outlined, particularly when you add the mandatory superannuation contribution amounts (and lower taxes within super) into the mix. If you're younger you may not be able to commit much money at the start, but you can then invest a lot more in your later years as your earnings hopefully increases.
