5 things to start building your first million
Google “how to be a millionaire” and it will throw up an interesting list of follow-on suggestions: “by 40… by 30… by 25… in 3 years… in Singapore… fast…”. Take your pick – that’s “pop finance” for you.
The truth is setting target dates makes little sense unless the financial adviser knows how much income you’re working with and how much sacrifice you’re prepared to make. So, a lot of assumptions are going to have to be made.
But it is possible to become a millionaire. Given the rising costs of living and average human lifespan, a million dollars is probably just about right to provide for a comfortable replacement income on retirement.
No one can give you an iron-clad guaranteed formula for becoming a millionaire by a certain date. But there are certain principles that can help you on your way towards becoming a millionaire. Here are five things that can get you started on this journey.
1. Work hard, develop yourself, build your career
A good job is your best starting point towards building your first million dollars. If you don’t value your job, somebody else does. And somebody might, metaphorically, “eat your lunch”.
Strive to improve yourself even as you work. The late Stephen Covey – management and motivational guru and author of the bestseller “Seven Habits of Highly Effective People” – listed as habit #7, “Sharpen your saw”. Or as billionaire investor Warren Buffet put it, “the most important investment you can make is in yourself.”
2. Let others call you a miser… save!
What are your absolute necessities? What is a necessity for you may be a luxury for somebody who cannot afford it. So, it is about priorities. Cut back on the “nice to haves” to the extent that you live well within your means.
Plug money leakages. The multiple online subscriptions, the costly movie channels you rarely watch, the late fees you incur unnecessarily on bill payments, the food that sits in your fridge for weeks and ends up in the bin, the clothes and shoes you buy but hardly wear, the S$50 a month you could shave off your electricity bill. Go on, let people call you Scrooge. You’ll have the last laugh.
The median starting salary for fresh graduates from the National University of Singapore, Nanyang Technological University and Singapore Management University was around S$3,400 in 2017.
Taking away the mandatory CPF contribution of 20 per cent, that means fresh graduate's take-home pay would be S$2,720.
According to the popular 50/30/20 rule, you should aim to save 20 per cent of your salary every month. Half of your pay should go towards necessities such as food and rent while 30 per cent is used on ‘discretionary’ spending or, simply put, what you allow yourself to splurge on.
Assuming you stick to this formula, and save S$550 of your salary every month, that amounts to S$6,600 a year.
While this does not seem much when you consider the goal of S$1 million, it is important to instill the discipline right from the time you start working to set aside a fixed amount every month.
When your salary goes up with each passing year, the amount you save and invest each month goes up too if you stick to the 20 per cent formula.
3. Don’t just save… invest
While you need to save to become rich, few people get seriously rich just saving.
Of the three key asset classes – stocks, bonds and cash – historically, cash has offered the poorest returns. Indeed, over the long-term, returns from cash barely keep up with inflation in most economies.
To build wealth, you need to invest. And stocks have been historically the best asset class in terms of returns.
Over the period 1926 to 2016, US stocks registered compound annual returns of between 10% (for large companies) to 12% (for small companies). And Treasury bills earned only 3.4% per year.
Taking a shorter period of time, between 1998 and 2017, US$1 invested in US stocks would have registered compound annual returns of between 7% (for large companies) and 10% (small companies). The safe-haven asset, Treasury bills, returned only 1.9% a year. It fell behind the inflation rate of 2.1% a year.
4. Just do it!
Too many “wannabe” investors think too hard and wait too long before acting. To borrow from that sports shoe company, “just do it”. Over the long-term, the history of stock markets in strong economies is “mean reversion” on rising trend lines – meaning stock prices go up and down but they tend to trend higher after each downturn.
The rationale is that good economies enjoy longer periods of growth than periods of contraction. The US, the world’s largest economy, saw, between 1945 and 2017, almost 6 months of economic expansion for every month of economic contraction.
As a result, over the period 1926 to 2018, the average bull market (periods when stock prices rise more than 20%) in the US lasted 9 years, with average cumulative total returns of 474%. The reverse – US bear markets (periods when prices fall more than 20%) – last only 1.4 years, with an average cumulative loss of 41%.
A simple way to start is to impose a discipline of investing a fixed amount every month through a Regular Savings Plan (RSP).Under such plans, you determine how much you want to set aside each month for investments. This starts from as low as S$100 a month.
Under such plans, you determine how much you want to set aside each month for investments. This starts from as low as S$100 a month.
You can also choose the type of companies or the types of stocks or exchange traded funds you want to invest in.
Over time, as your income goes up, increase the monthly amount you put aside to invest.
5. Be disciplined and patient – “money is time”
Avoid “get rich quick” schemes – they’re usually either “fool’s errands” or illegal. As Leonardo Da Vinci put it: “He who wants to be rich in a day will be hanged in a year.”
The history of economies and markets suggest that patience and time in the market generally work better than greed and timing the market.
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