What could $1 million do for you?

• It could replace around $75,000 per annum of income (a portfolio of quality, fully franked shares should do it), which to some might mean they no longer have to work.

• Average long-term capital growth of around 9% would see your investment grow by $90,000 in year one, but if left to grow year on year, your investment will reap the rewards of compounding

The Eighth Wonder of the World: Compounding

You may have heard the statement “The second million is easier to make than the first”.  This is due to power of compounding. A 9% return on your $1m equals $1,090,000. A 9% return on your $1,090,000 equals $1,188,100. Following this trend, your investment will be worth $2m in eight years.

But how do you get to your first million?

The Path to “Millionaire” Status

This is not a get rich quick scheme, but following a long term savings and investment plan, even the average Australian can become a millionaire.

Here are some points to help you get there::

• Save $100 per week, or $5,200 per annum.
• Contribute the savings into an investment portfolio of quality Australian shares.
• The long term average return of the ASX is around 12% p.a , but let’s assume a conservative return of 9% p.a.

All things being equal, in 32 years’ time, you will be a millionaire!

Of course, the earlier you start saving and investing, the sooner you can become a millionaire. For example, A 20 year old could become a millionaire at 52, a 25 year old at 57 and so on.

The key to this strategy is time. There is no substitute. Chasing higher returns through greater risk may thwart the strategy. This is not to say you cannot invest wiser, but beware of the risks.

Consider saving more: By contributing $1,000 per month to your investment, assuming all else remains constant, your timeframe reduces from 32 years to 24 years. Therefore, a 40 year old could still become a millionaire at 64.

If you already have some money saved, youcan shave years of your goal. Using our original example, starting off with savings of $25,000 could allow our 20 year old to reach their goal at age 48, as opposed to age 52. Likewise, a 40 year old with savings of $50,000, could reach their goal in 19 years, aged 60.

The Take Outs

1. From an investment perspective, “compounding” is your new best friend
2. There is no substitute for time. Start now: it’s never too late to become a millionaire!
3. Don’t be in a hurry: you will get there. Make calculated investments, not silly risks
4. The more you can save, the sooner you will reach your goal (give up a few coffees now and buy a beanery later)