Who wants to be a Millionaire? Do you? I have a confession to make, I would like to become one.
Why a Millionaire?
Regular readers of this Blog will be aware that I'm pursuing Financial Independence (FI) before my 40th birthday. I've written numerous posts on wanting an income from my investments that will cover my monthly expenses. If I'm able to achieve that I'll be free to make the decision on how I want to spend my time rather than feeling obligated to work a 9-5 job.
I don't seek fast cars, expensive watches, or lavish lifestyles, so why do I want to become a millionaire? Isn't that excessive?
For me, it's quite simply a mark of achievement. It's a milestone which I would be immensely proud of reaching. I acknowledge that the amount isn't something that I need, but I'm drawn into the challenge of getting there.
It's a similar question to why do people want to Climb Everest, or complete the Marathon des Sables? What's wrong with the climbing Scafell Pike in the Lake District, or running the London Marathon? There isn't anything wrong with either option, but most human beings can climb Scarfell Pike or complete a marathon with a few months of training or in some cases little to none at all. For someone on my salary (approx £30k or $47k a year) in order to get £1m, I will have to dedicate a lot of time, effort and avoid the temptations of consumer spending. Most people aren't able to manage this. I want to know - Can I?
I have two main passions in life - Exercise and Personal Finance. I can see a lot of similarities in the two subjects. I'm mainly attracted to the challenge they represent, and the addictive pursuit of progression in both fields. (I fully confess to having a compulsive personality. I'm constantly obsessing about something)
I have some physical goals which I've eluded to before - such as a 200kg Back Squat, 15 consecutive Muscle Ups and running a 4:59 mile to name a few. These aren't world records, nor are they unachievable for most humans, but many people will never have the determination and self-discipline required to practice them until they can be achieved. Actually, If I'm able to achieve all three of these examples at the same time, I'd be a rare human indeed and I would take massive satisfaction within myself for these feats.
I believe that having £1m represents a huge accomplishment in the world of personal finance, and I want to know if I have the strength of character to achieve it.
Priorities & The Road to FI
My route to £1m is a long term goal, and not one I'm focusing on right now. My attention is currently on increasing my Freedom Fund up to £50,000 by the end of 2015. Once I've reached this amount, I'll create another stepping stone until I hit that, then I'll create another one etc. Ill repeat this process until I reach a portfolio worth £250,000. At this point, if my investment income is yielding 4%, I'll be receiving £10,000 a year. You can see from my Monthly Budgets that this amount would cover my annual expenses and I'd be officially FI!
How I can become a Millionaire in less than 20 years and FI under 8 years
I recently spent one afternoon reading though other Blogs and I stumbled across an interesting post by The Escape Artist. In this post he explains that many people believe it's impossible to achieve FI, but they shouldn't be so deterred as the maths behind it is very simple. He displays a table to show how anyone on £15k a year (after tax) can become FI in 20 years and this got me thinking (oh no!).
I wonder how I'm currently tracking towards FI based on my situation this year. I decided to make my own table and see for myself. I made some tweaks and I based my numbers on the following assumptions:
- My salary after tax would only include income from my current job. I won't be factoring in Ebay, P2P lending or Topcashback etc.
- My salary would increase by 3% every year.
- My spending would remain in line with what I've spent this year. It won't go up or down over the years.
- My annual saving would be calculated by whatever's left over, and would not include any cash savings (this figure isn't in line with my current saving %).
- My investments would yield a constant 5% income, which I would reinvest. For simplicity, I haven't included charges or commission for investments made.
| Salary Only | £21,837 |
| Spending | £9,900 |
| Initial Saving rate | 55% |
| Salary Growth | 3% |
| Investment returns | 5% |
| Year | Salary After Tax | Annual Spending | Annual Saving | Saving rate (%) | Portfolio Before Income | Investment return | Portfolio After Income |
| 1 | £21,837 | £9,900.00 | £12,010 | 55 | £12,010.00 | £600.50 | £12,610.50 |
| 2 | £22,492 | £9,900.00 | £12,592 | 56 | £25,202.61 | £1,260.13 | £26,462.74 |
| 3 | £23,167 | £9,900.00 | £13,267 | 57 | £39,729.61 | £1,986.48 | £41,716.09 |
| 4 | £23,862 | £9,900.00 | £13,962 | 59 | £55,677.97 | £2,783.90 | £58,461.87 |
| 5 | £24,578 | £9,900.00 | £14,678 | 60 | £73,139.61 | £3,656.98 | £76,796.59 |
| 6 | £25,315 | £9,900.00 | £15,415 | 61 | £92,211.66 | £4,610.58 | £96,822.24 |
| 7 | £26,075 | £9,900.00 | £16,175 | 62 | £112,996.76 | £5,649.84 | £118,646.60 |
| 8 | £26,857 | £9,900.00 | £16,957 | 63 | £135,603.35 | £6,780.17 | £142,383.52 |
| 9 | £27,662 | £9,900.00 | £17,762 | 64 | £160,145.98 | £8,007.30 | £168,153.28 |
| 10 | £28,492 | £9,900.00 | £18,592 | 65 | £186,745.61 | £9,337.28 | £196,082.89 |
| 11 | £29,347 | £9,900.00 | £19,447 | 66 | £215,529.99 | £10,776.50 | £226,306.49 |
| 12 | £30,228 | £9,900.00 | £20,328 | 67 | £246,634.01 | £12,331.70 | £258,965.71 |
| 13 | £31,134 | £9,900.00 | £21,234 | 68 | £280,200.05 | £14,010.00 | £294,210.05 |
| 14 | £32,068 | £9,900.00 | £22,168 | 69 | £316,378.42 | £15,818.92 | £332,197.34 |
| 15 | £33,030 | £9,900.00 | £23,130 | 70 | £355,327.76 | £17,766.39 | £373,094.15 |
| 16 | £34,021 | £9,900.00 | £24,121 | 71 | £397,215.49 | £19,860.77 | £417,076.26 |
| 17 | £35,042 | £9,900.00 | £25,142 | 72 | £442,218.24 | £22,110.91 | £464,329.15 |
| 18 | £36,093 | £9,900.00 | £26,193 | 73 | £490,522.38 | £24,526.12 | £515,048.50 |
| 19 | £37,176 | £9,900.00 | £27,276 | 73 | £542,324.53 | £27,116.23 | £569,440.76 |
| 20 | £38,291 | £9,900.00 | £28,391 | 74 | £597,832.07 | £29,891.60 | £627,723.67 |
The green line signifies when the income from my investments cover the cost of my spending (FI). The yellow line is the point where my investment income matches my salary in Year 1.
These numbers suggest I'd cover my expenses in 11 years, and match my initial income in 17 years. Not bad......
The figures I used in the table above were very conservative and turned out being slightly unrealistic. I think I can do much better than this.
My income was higher this year due to my 'side hustles'. I would continue making extra money outside of my salary so why not include that. My salary has also increased more than 3% over the last 4 years, I looked back over this period and was surprised to see that it had increased over 12% on average each year! I'm not sure how sustainable this will be so I went with 6%. I updated the table with a new starting salary after tax and I increased the annual salary increase to get the following results.
| Salary Only | £25,338 |
| Spending | £9,900 |
| Initial Saving rate | 61% |
| Salary Growth | 6% |
| Investment returns | 5% |
| Year | Salary After Tax | Annual Spending | Annual Saving | Saving rate (%) | Portfolio Before Income | Investment return | Portfolio After Income |
| 1 | £25,338 | £9,900.00 | £15,438 | 61 | £12,010.00 | £600.50 | £12,610.50 |
| 2 | £26,858 | £9,900.00 | £16,958 | 63 | £29,568.78 | £1,478.44 | £31,047.22 |
| 3 | £28,470 | £9,900.00 | £18,570 | 65 | £49,617.00 | £2,480.85 | £52,097.85 |
| 4 | £30,178 | £9,900.00 | £20,278 | 67 | £72,375.81 | £3,618.79 | £75,994.60 |
| 5 | £31,989 | £9,900.00 | £22,089 | 69 | £98,083.24 | £4,904.16 | £102,987.40 |
| 6 | £33,908 | £9,900.00 | £24,008 | 71 | £126,995.36 | £6,349.77 | £133,345.13 |
| 7 | £35,942 | £9,900.00 | £26,042 | 72 | £159,387.57 | £7,969.38 | £167,356.95 |
| 8 | £38,099 | £9,900.00 | £28,199 | 74 | £195,555.93 | £9,777.80 | £205,333.73 |
| 9 | £40,385 | £9,900.00 | £30,485 | 75 | £235,818.65 | £11,790.93 | £247,609.58 |
| 10 | £42,808 | £9,900.00 | £32,908 | 77 | £280,517.60 | £14,025.88 | £294,543.48 |
| 11 | £45,376 | £9,900.00 | £35,476 | 78 | £330,019.98 | £16,501.00 | £346,520.98 |
| 12 | £48,099 | £9,900.00 | £38,199 | 79 | £384,720.07 | £19,236.00 | £403,956.07 |
| 13 | £50,985 | £9,900.00 | £41,085 | 81 | £445,041.10 | £22,252.06 | £467,293.16 |
| 14 | £54,044 | £9,900.00 | £44,144 | 82 | £511,437.29 | £25,571.86 | £537,009.16 |
| 15 | £57,287 | £9,900.00 | £47,387 | 83 | £584,395.94 | £29,219.80 | £613,615.74 |
| 16 | £60,724 | £9,900.00 | £50,824 | 84 | £664,439.73 | £33,221.99 | £697,661.72 |
| 17 | £64,367 | £9,900.00 | £54,467 | 85 | £752,129.15 | £37,606.46 | £789,735.61 |
| 18 | £68,229 | £9,900.00 | £58,329 | 85 | £848,065.08 | £42,403.25 | £890,468.34 |
| 19 | £72,323 | £9,900.00 | £62,423 | 86 | £952,891.58 | £47,644.58 | £1,000,536.16 |
| 20 | £76,663 | £9,900.00 | £66,763 | 87 | £1,067,298.80 | £53,364.94 | £1,120,663.74 |
The second table looked a little better now, and I feel it's a more realistic too. I've reduced the time to FI to under 9 years (8 years and 1 month), which is bang on target for my goal of FI by 40.
I'm able to match my initial income in 14 years, and I couldn't help but notice the portfolio numbers in year 19 and 20. Hello six figures!
The table is evidence that if I continued on investing in the same fashion I could go on to become a millionaire in 19 years.
I still couldn't resist playing around a little bit more with my new favourite toy. The results above were encouraging, but there were still two categories that I could review - An annual decrease in expenses and my investment return.
Miss FFBF and I will be planning on overpaying the mortgage over the next 5 years. We're doing it to an extreme level, but we want to make sure we're making annual overpayments to bring the total term of the mortgage down. It's currently on 18 years, and we would like to pay it off in 9-12 years. This will impact our expenses more than any other factor.
If I eliminated the mortgage from my expenses, and just paid house bills, my annual expenses would be under £5,500 (£5,484).
The last category I wanted to play around with was investment yield. I have some degree of control in this area when it comes to stock selection, and when to buy and sell. The stock market is an unpredictable beast though, so having any one figure is unrealistic, but for the purpose of this table I don't think it's beyond my ability as an investor to average a 7% yield over 20 years. When you look at the yields produced in Vanguard Index Trackers over the last 5 years you can see some far higher numbers and I would like to think that I can outperform it in the long run.
My final table kept the assumptions from table 2, and I added an annual decrease in Salary of 5% (This accounted for me having no mortgage in 14 years - Conservative), and I increased the investment returns to 7%.
| Salary Only | £25,338 |
| Spending | £9,900 |
| Initial Saving rate | 61% |
| Expenses Decrease | 5% |
| Salary Growth | 6% |
| Investment returns | 7% |
| Year | Salary After Tax | Annual Spending | Annual Saving | Saving rate (%) | Portfolio Before Income | Investment return | Portfolio After Income |
| 1 | £25,338 | £9,900.00 | £15,438 | 61 | £12,010.00 | £840.70 | £12,850.70 |
| 2 | £26,858 | £9,405.00 | £17,453 | 65 | £30,303.98 | £2,121.28 | £32,425.26 |
| 3 | £28,470 | £8,934.75 | £19,535 | 69 | £51,960.29 | £3,637.22 | £55,597.51 |
| 4 | £30,178 | £8,488.01 | £21,690 | 72 | £77,287.46 | £5,410.12 | £82,697.58 |
| 5 | £31,989 | £8,063.61 | £23,925 | 75 | £106,622.61 | £7,463.58 | £114,086.19 |
| 6 | £33,908 | £7,660.43 | £26,248 | 77 | £140,333.72 | £9,823.36 | £150,157.08 |
| 7 | £35,942 | £7,277.41 | £28,665 | 80 | £178,822.11 | £12,517.55 | £191,339.65 |
| 8 | £38,099 | £6,913.54 | £31,185 | 82 | £222,525.10 | £15,576.76 | £238,101.85 |
| 9 | £40,385 | £6,567.86 | £33,817 | 84 | £271,918.92 | £19,034.32 | £290,953.24 |
| 10 | £42,808 | £6,239.47 | £36,569 | 85 | £327,521.79 | £22,926.53 | £350,448.31 |
| 11 | £45,376 | £5,927.50 | £39,449 | 87 | £389,897.32 | £27,292.81 | £417,190.13 |
| 12 | £48,099 | £5,631.12 | £42,468 | 88 | £459,658.10 | £32,176.07 | £491,834.16 |
| 13 | £50,985 | £5,349.56 | £45,635 | 90 | £537,469.63 | £37,622.87 | £575,092.51 |
| 14 | £54,044 | £5,082.09 | £48,962 | 91 | £624,054.56 | £43,683.82 | £667,738.38 |
| 15 | £57,287 | £4,827.98 | £52,459 | 92 | £720,197.18 | £50,413.80 | £770,610.98 |
| 16 | £60,724 | £4,586.58 | £56,137 | 92 | £826,748.39 | £57,872.39 | £884,620.78 |
| 17 | £64,367 | £4,357.25 | £60,010 | 93 | £944,630.95 | £66,124.17 | £1,010,755.12 |
| 18 | £68,229 | £4,139.39 | £64,090 | 94 | £1,074,845.20 | £75,239.16 | £1,150,084.37 |
| 19 | £72,323 | £3,932.42 | £68,391 | 95 | £1,218,475.19 | £85,293.26 | £1,303,768.46 |
| 20 | £76,663 | £3,735.80 | £72,927 | 95 | £1,376,695.30 | £96,368.67 | £1,473,063.97 |
The table suggests I could be FI in 6 years as my expenses are decreasing. I could match my initial salary in 11 years, and I could have almost £1.5m in 20 years.
C'mon, how likely is any of this!