The 10% Rule: Key to Becoming a Millionaire!
Published05/10/2017 by Trey Archer
As a financial advisor, I have many people asking me the same question, “How do I become a millionaire?” My answer is usually broken down into three simple responses:
1. Start your own succesful company
2. Win the lottery
3. Save and invest 10% of your yearly income
While #1 is certainly possible, it takes lots of hard work, determination and sacrifice. Point #2 is nearly impossible, but hey, it can happen...
On the other hand, the last option, the 10% Rule, is without question the easiest and something everyone can do. Parents, listen up – this is definitely something you’ll want to talk about with your kids; it's never too early to teach healthy savings. Here’s how it works.
What is the 10% Rule?
All you have to do is put away 10% of your income and invest it in a portfolio with a high growth rate. Banks barely give you enough interest to keep up with inflation, so it may be better to look at options that average 8%-10% in growth per year (this shouldn’t be too difficult since the average historic growth rate of the US stock market is about 9% per year).
Wait a minute… isn’t becoming a millionaire supposed to be much more difficult? Let’s crunch the numbers.
Calculating the 10% Rule
Let’s say you make $50,000 per year. (Usually, the older you get the more you make, but let’s just say you make $50,000 on average for your entire working career.) This means you should save 10% of $50,000, or $5,000 dollars per year.
Now assume that you invest that $5,000 into an investment portfolio that grows 10% on average per year, and continue putting $5,000 into it every year after that. Will you become a millionaire?
YES, you will! Actually, to be exact, if you do this for 32 years you will have $1,005,689 in your bank account.
Now let’s assume you make $75,000 on average per year, and invest 10% ($7,500) of that into the same investment portfolio. With the magic of compound interest (click here to read the article on compound interest), you will have $1,006,706 in just 28 years!
Becoming a millionaire has never been easier.
Exceptions to the 10% Rule
As mentioned, there are many ways to becoming a millionaire. Apart from starting your own company, landing a high-paying job, winning the lottery, or inheriting a fortune, money comes in many different forms.
For this reason, it’s important to note that there are exceptions to the 10% Rule. If you are a high earner, you’ll probably want to save more than 10%. If you have a lavish lifestyle and like to spend, you may need to bump this percentage up to 15% or 20% to make ends meet.
On the contrary, you may not be in the position to save this much of your income at this time. If this is the case, don’t worry, stay focused on your goal and try to save as much as you can. Saving 5% per year is certainly better than saving 0%.
Obviously, it’s always best to evaluate your own personal situation. But time after time, the 10% Rule stands as the benchmark of financial planning. If you can save and properly invest 10% or more of your earnings every year for several decades, you will most likely reach your financial goals.
Welcome to the millionaire club!
About the Author: Dewey (Trey) Archer
Dewey (Trey) Archer has been a Financial Consultant with Infinity Financial Solution, Ltd since 2014. He is qualified by the Chartered Insurance Institute (CII) with an Award in Financial Planning and has been awarded the title of Premier Advisor at Investopedia Advisor Insights. His studies and career have taken him to over one hundred countries, and his international experience has allowed him to add Spanish, Portuguese and Mandarin (along with his native English) to his list of fluent languages. Trey specializes in IRS compliant investments and pensions for American nationals but enjoys using his international background and linguistic skills to work with a vast network of people from all over the globe. Trey can be reached at +86 138 1620 7274 or firstname.lastname@example.org
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