Years to Become a Millionaire: Enter the number of years in which you want to become a millionaire.
Current Value of Investments: Enter the total value of all your investments and money you will invest starting today. Do not include money that you cannot lock up in an investment account for a significant amount of time (typically, you have to wait several months to a year in order to withdraw money from an investment). If you have nothing to invest now, enter 0.
Investment Rate of Return: Enter the rate of return you expect your investment to get you. Of course, it is generally impossible to know this in advance exactly, but you can use last year's rate of return as a guide. Or you can use the average rate of return of your investment fund over the last 10 years. If you do not have investments, a fairly conservative long-term rate of return is 8 percent.
Inflation rate: the current official inflation rate for the US is around 2%, an historic low. In the past, such as at the end of the 1970s, official inflation rates have gone as high as 10% or more. Of course, you have no control over the inflation rate. In Argentina at the dawn of the 21st century, people saw their savings cut by as much as 70% due to runaway inflation. Other times and countries have seen people lose almost everything to inflation and unfavorable government policies. It is impossible to estimate what the future inflation rate for the US will be. A conservative guess might be somewhere around 5%, and a more optimistic guess might be around 3%.
Becoming a Millionaire: Wealth and Interest Explained
You don't have to work to make money. The answer is in the old saying, "it takes money to make money." More accurately, that saying would be phrased, "it takes money and time to make money." Apart from money and time, there's really nothing else you need. You already know you can make money off a savings account's interest. But as you've probably noticed, that 1, 2, or maybe 3% interest is pretty paltry. Three percent of $1,000 is only $30. Even with $100,000, that still only gets you $3,000--not enough to live on for a year. But the same principle that gets you $30 from $1,000 can make you a millionaire--without any more work on your part. The secret comes in two parts: 1) the time value of money thanks to compound interest; 2) sound investments that yield solid returns.
The Time Value of Money: Compound Interest
That $3,000 you made from getting 3% interest on $100,000 isn't enough to live on--now. But imagine if you put it back into the savings account. Next year you'd get 3% of $103,000, which would be $3,090. The next year you'd get 3% of $106,090, and so on for years. In reality, you likely wouldn't have to wait till the end of the year to get $3,000 in interest on $100,000. That's because at the end of the month, you'd have some of the interest, on which the interest would in turn be calculated. The phenomenon by which interest builds on interest is called compound interest.
You may have already learned about compound interest from credit cards. The biggest factor in how credit card debt accumulates is compound interest. With a credit card, you don't just pay interest on your balance. You also end up paying interest on the interest of your balance. Like a game of Whack-a-Mole at the video arcade, as you pay down one chunk of your balance, another chunk quickly pops up. Imagine how rich the credit card issuer is getting off you? Indeed, the major credit card issuers are among the most profitable businesses in the US.
When you invest, you take the horror of credit card compound interest and turn it on its head. Compound interest is magical when it's working for you rather than against you. It allows you to get money for nothing at all. Of course, it's unlikely that you'll ever get as good an interest rate as the credit card issuers get from you. Even the very best managed investments in the world don't yield the 18% that many credit card issuers charge. Still, the results can be impressive when you choose a good investment.
Even with compound interest, you still won't become a millionaire if you're investing your money at 3%. You need to get a better rate than that. Fortunately, you are unlikely to do worse than 3%. Over the last 30 years, the stock market has returned an average of around 10% a year. Of course, some years the stock market lost money, as it famously did at the beginning of the 21st century. But on the whole, the good times more than make up for the bad.
The trick of course is not to put all your eggs in one basket. If your high-flying investment turns out to be an Enron, you'll lose your shirt. Even successful businesses such as Apple and Yahoo! did not do very well in the years after they first went on the market. That's why you should keep your eggs diverse: lots of different investments spread out in different areas. In investment lingo, your basket of eggs is called a "portfolio" and varying the kinds of investments you have is called diversifying your portfolio.
Don't worry if this sounds difficult. In reality, most people have someone else do all this work for them. They select a company to provide investments at the time of choosing an IRA, 401 (k), or mutual fund. Whatever company you choose to manage your money, make sure to choose one that has had a good rate of return historically. Ask to see how the fund has performed in the past.