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.
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 |
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) |
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.