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When Will You Become a Millionaire?

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Three factors matter most when it comes to determining when you will become a millionaire. They are:

  • The amount of money you can invest,
  • The length of time you can invest that money, and
  • The rate of return you earn on that money.

While it may be a case of stating the obvious, the more you can sock away for a longer period of time at a higher rate of return, the easier it will be for you to become a millionaire.

If you're like most of us, though, you don't have thousands of extra dollars lying around every month to invest for your future. While that's OK, just understand that the tradeoff you'll face is between time, money, and financial risks while striving for those higher potential returns.

Pick your battle
The chart below shows the number of years it will take for you to go from $0 to $1 million, based on the amount you can sock away each day and the return your money earns:

Daily Investment

4% Annual Returns

6% Annual Returns

8% Annual Returns

10% Annual Returns

Significance of the Daily Value

$1.00 117.7 85.1 67.4 56.2 Help Your Kids Become Millionaires
$2.00 100.5 73.7 58.8 49.3 N/A
$5.00 78.3 58.7 47.5 40.2 N/A
$10.00 62.0 47.6 39.2 33.5 N/A
$13.69 54.9 42.8 35.4 30.5 $5,000 a year, IRA limit for people under age 50
$20.00 46.7 37.0 31.0 26.9 Become a Millionaire on $20 a Day
$45.20 30.8 25.6 22.1 19.5 $16,500/year, 401(k) limit for people under age 50
$58.90 26.3 22.2 19.4 17.3 $21,500/year, IRA + 401(k) limit for people under age 50
$76.71 22.2 19.1 16.9 15.2 $28,000/year, IRA + 401(k) limit for people age 50+

The swap among money invested, return rate, and time should be pretty apparent. What also should be pretty obvious is the choice you'll have to make if you want to become a millionaire in a reasonable approximation of a working career. You'll have to either come up with some serious cash or invest what you can fairly aggressively.

Getting those 4% returns requires you to do nothing more risky than invest in AAA rated bonds like Johnson & Johnson's (NYSE: JNJ  ) bonds maturing in 2023, then hold on to maturity. You can still get to the 6% returns by investing in long term, investment-grade debt like Citigroup's (NYSE: C  ) or AT&T's (NYSE: T  ) Ameritech subsidiary's A-rated bonds maturing in 2028.

In today's market, you need to dig into high yield (also known as "junk") territory to get to the 8% yield to maturity range on debt, and in that category, the default risk starts to get significant. Yields in the 8% range can be reached, but to do so in today's market typically requires some sort of financial engineering on the part of a capital management company.

Leveraged investments like closed-end fund Nuveen Quality Preferred Income Fund 2 (NYSE: JPS  ) and mortgage REIT Annaly Capital (NYSE: NLY  ) currently sport 8%-plus yields. But the volatility of their dividend payments and other risks that come with those securities underscore the lengths that their managers have to go through to deliver such tempting top line income numbers.

Add a dash of growth
The timelines offered by the higher-return part of that table typically requires a willingness to look beyond income and accept part of your potential returns as growth. Or in other words: stocks. As volatile as their day-to-day -- or even decadelong -- returns may be, over longer periods of time, making regular stock investments can be a great way to earn those higher returns.

Over long periods of time, the S&P 500 has returned close to that 10% range when dividends are reinvested. Should that trend be continued over the long-term future, tracking fund SPDR Trust (NYSE: SPY  ) would be a good potential option. And if you think better returns are available elsewhere, there's the Vanguard FTSE All-World ex-US (NYSE: VEU  ) ETF, which attempts to track the rest of the investable world.

It's up to you
If you really want to become a millionaire investor, you've got to understand the tradeoffs between time, money, and potential returns that govern your ability to get there. By regularly investing what you can, accepting the risks that come with more aggressive choices, and starting early enough to keep time on your side, you can greatly increase your chances of success.

Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Inside Value pick and a Motley Fool Income Investor pick. The Fool owns shares of Annaly Capital Management and Johnson & Johnson. Motley Fool Alpha owns shares of Johnson & Johnson.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

At the time of publication, Fool contributor Chuck Saletta owned shares of Johnson & Johnson and Annaly Capital. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 4:30 PM, pryan37bb wrote:

    If you really want a little growth, I would suggest instead of the SPY, take a look at IWO, the iShares fund that tracks growth in the Russell 2000 index, since small-cap stocks have been proven on average to outperform large-caps in the long-term (see Jeremy Siegel, "Stocks for the Long Run"). Sure, for someone closer to retirement, the reduced volatility of SPY would probably be easier to stomach, but younger investors with with a 20+ years timeframe, the IWO is worth a serious look in my opinion.

    And for people looking at junk bonds, I'd recommend the PRHYX, T Rowe Price High-Yield Bond Fund, for what it's worth. Not an outright buy recommendation, but a solid fund that warrants further research if that's one asset class you want to add to your portfolio.

  • Report this Comment On February 16, 2011, at 5:19 PM, mikecart1 wrote:

    According to that chart, I will be a millionaire in about 10 years. Woohoo! I love my life!

  • Report this Comment On February 16, 2011, at 5:40 PM, TMFBigFrog wrote:

    Hi mikecart1,

    Care to share your story either here or via email? If you'd like, I could potentially even use it as the basis of a future Fool.com commentary.

    Regards,

    -Chuck

  • Report this Comment On February 17, 2011, at 11:25 AM, mikecart1 wrote:

    My story? I'm an engineer and have zero debt. I've been investing (not saving) for years. Never having had debt and having no need to buy the next great car or gadget, the snow ball is already rolling fast. Had a bad experience with a financial advisor but that only taught me quicker a life lesson: no one cares about your money more than you. Instead of the 6% recommendation for 401K, I started putting in the max when I started working (over 30%) and still putting the rest of my paycheck in savings, roth IRA, and trading account. I have since dropped that and now put a lot more in trading account, roth IRA, and CDs. I keep a mixture from conservative to risky investments.

    Basically though, becoming a millionaire isn't that hard. It really depends on what expenses one has in life. For people that don't know how to use a credit card, they will never be rich. For those that get loads of debt, they won't be either. I got my MBA degree last year and had the entire tuition paid for 100% full through company scholarship.

    I say 10 years because I bought everything I wanted years ago and my only passion is to use money to make more money. I will ride my car until it falls apart (I keep it waxed, clean, and I do my own maintenance 90,000+ miles already). But while others are busy getting a new car every few years, or busy paying off a mortgage to a house, I will be a millionaire and still in my 30's.

    :D

  • Report this Comment On February 17, 2011, at 7:10 PM, TMFBigFrog wrote:

    Thanks, mikecart1,

    Sounds like an excellent plan. If you're interested in having me turn it into a potential site commentary, email me via the link in the signature line at the bottom of the article, and we can talk a few more details offline.

    -Chuck

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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