An Insight a Day

What Does It Take to Become a Billionaire?

This is probably something most people don't think about but have you ever wondered what it takes to earn a billion dollars?

It’s worth emphasizing just how nuts being a billionaire is. It’s just a single letter that separates it from millionaire, which can lead people (including me) to think “oh it’s like a millionaire but a bit richer”.

Here’s how I visualize just how much richer it really is:

Imagine earning so much that you could save or invest $1 million every year... that would be pretty cool, right?

Now imagine earning so much that you could save or invest $25 million every year... now imagine doing that for 40 years, every year, from age 25 to age 65.

If you saved $25 million for 40 years, you’d end up with $1 billion.

From Ali Abdaal's newsletter

Honestly, that blew my mind a bit. By definition, we know that a billion is 1000 million, but our minds can't quite comprehend the sheer scale of such big numbers.

Sure, we know that becoming a billionaire is nigh impossible for most people, but what about a millionaire? We would only need to save $25,000 every year, or $2,084 every month, to reach $1 million after 40 years.

What if we invest everything in a fund with a consistent 7% annual return? Assuming you're able to find such a magical fund, you would only need to invest $420 every month to reach $1 million after 40 years. Sounds a lot more doable now, right?

But wait, what if we invested $2,084 every month instead? That would give us $1 million in only 20 years! And if we invest for 40 years, we would end up with $5 million!

Becoming a millionaire in your 60s is definitely doable for a lot of people, but it's not exactly ideal since you'll be too old to fully utilize it. You might want to fast-track a bit and earn it in your 30s or 40s, so what would it take to be a millionaire in less time?

Years Monthly investment Monthly savings
40 $420 $2,084
30 $888 $2,778
25 $1,320 $3,334
20 $2,084 $4,167
15 $3,320 $5,556
10 $6,034 $8,334
5 $14,500 $16,667
Years to reach $1 million - monthly investing (7%) vs savings

By the way, want to know how much to save/invest every month to reach $1 billion? Just add three 0s to all the dollar values in the table above. That means at a 7% annual return, you would need to invest $420,000 every month for 40 years!

This is the magic of compounding. The earlier you invest, the bigger your returns. And instead of investing $N every month, you can get even bigger returns if you invest a huge lump sum right from the start.

For example, investing $10,000 every year for 10 years ($100,000 total) at a 7% annual return will give you $140,000 (1.4x). But investing $100,000 in the first year and waiting 10 years at a 7% annual return will give you $195,000 (1.95x).

Years $10K every year $100K and wait
10 $140K (1.4x of $100K) $195K (1.95x of $100K)
20 $410K (2.05x of $200K) $386K (3.85x of $100K)
30 $944K (3.15x of $300K) $761K (7.6x of $100K)
40 $2.0M (5x of $400K) $1.5M (15x of $100K)
50 $4.1M (8.1x of $500K) $2.9M (29x of $100K)
60 $8.1M (13.5x $600K) $5.8M (58x of $100K)
Investing $10K every year vs $100K in the first year at a 7% annual return

So what's the moral of the story? Nothing you don't already know, earn lots to save/invest lots. The longer you invest, the bigger your returns (provided you choose a good fund). Honestly, I just want to publish this so I can easily reference the numbers.