Published on August 26th by Ben Reynolds
A few months ago, I received a request to write about the fastest and best way for a working class person to become a multi-millionaire – and to hold onto his/her money.
For the purpose of this article, I’m going to define ‘working class’ as median income in the United States, which is around $53,000.
The first thing to understand is there’s no ‘one weird trick’ or ‘secret loophole’ that will quickly make you a millionaire.
If you are looking for the false promise of get-rich-quick schemes, look elsewhere.
It’s tempting to think that there’s some sort of secret or trick that will quickly make you fabulously wealthy. This is magical thinking; it isn’t reality.
Yes, people when the lottery. But on average buying lottery tickets is a terrible investment. The average payout is around $0.60 for every $1.00 invested. Obviously, this is a quick path to wealth destruction, not wealth accumulation.
The very best investors in the world, people like Warren Buffett and Seth Klarman are able to compound their money at around 20% a year over very long periods of time.
This means if you had $10,000 (and didn’t save anything), it would take 30 years to become a multi-millionaire (you’d have $2.3 million after 30 years). And this assumes you have the same investing acumen of the best investors in the world. And let’s be real, you don’t (and that’s okay – neither do I).
Expecting to be a ‘great investor’ and ‘strike it rich’ in the market isn’t going to happen. You aren’t going to 10x your investment in a year or two.
Note: Yes, it’s technically possible, but so unbelievably unlikely in real life as to not consider it.
Change In Mindset Is Key
Warren Buffett has laid out the exact type of business in which he invests to build long-term wealth. The Buffett quote below explains:
“We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:
(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a private owner; and
(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.”
Buffett looks for long-term success and value. In practice, this typically means investing in dividend growth stocks. Buffett’s portfolio is filled with high quality dividend growth stocks. In fact, his top 4 holdings (which make up over 60% of his portfolio) are all above-average yielding dividend stocks. You can see Buffett’s high dividend stocks here. His top 4 holdings (with their respective yields) are listed below:
- Kraft-Heinz (KHC) has a dividend yield of 2.7%
- Wells-Fargo (WFC) has a dividend yield of 3.1%
- Coca-Cola (KO) has a dividend yield of 3.2%
- IBM (IBM) has a dividend yield of 3.5%
Buffett chooses to invest in great dividend paying businesses when they are trading at fair or better prices. If this investment strategy is good enough for the 3rd richest person in the planet, it is probably good enough for you and I.
This guide to starting dividend growth investing from scratch covers the basics of how to begin dividend growth investing.
What sets Buffett and countless other wealthy individuals apart from the ‘working class’ are two concepts:
- Long-term thinking
Want to Be Wealthy? Understand Compounding & Long-Term Thinking
There’s no quick way to wealth outside of owning your own business and creating value for others. Compounding and long-term thinking are required to grow wealth over time through your investments.
The idea of compounding is simple. Compounding is powerful because you make interest on your interest. If you reinvest your dividends, your dividends will start paying you dividends. $10,000 with 10% simple interest a year (no compounding) is worth $20,000 after 10 years. $10,000 with 10% compound interest is worth $25,937; a $5,937 difference.
The longer the time frame, the more pronounced the difference between simple and compound interest. After 20 years, the $10,000 above would be worth $30,000 with simple interest, or $67,275 with compound interest. After 30 years, $40,000 versus $174,494.
The longer your time horizon, the greater the effects of compound interest.
Billionaire hedge fund manager Seth Klarman says the following about long-term thinking:
“The single greatest edge an investor can have is a long-term orientation”
The degree to which you can think about long-term consequences is the degree to which you will invest your money – and avoid ‘get rich quick’ investments.
How Long Will It Take to Become a Multi-Millionaire
Let’s assume you develop a long-term mindset and decide to invest in high quality dividend growth stocks for the long run. A reasonable rate of return assumption is 9%. The Dividend Aristocrats have returned over 10% a year over the last decade, for comparison.
The average personal savings rate in the United States is around 5.5%. If you make $53,000 a year, save 5.5% of that a year ($2,915) and make 9% a year on average on your investments, it will take 40 years to reach over $1,000,000 and 48 years to be over $2,000,0000.
The low savings rate is partially responsible for the longer amount of time needed to become a millionaire. If the savings rate were increased to 10% (saving $5,300 a year), you would be a millionaire in 33 years and reach $2 million in 41 years. Savings rates have a big impact on when you can retire.
If you want to become a millionaire while making a ‘normal’ (for the United States, not the world) salary, you need to live frugally, save as much as possible, and invest in high quality businesses for the long run.
For those looking to accumulate wealth much faster, income will likely need to be increased through investing in yourself. Knowledge compounds. The more you know, and the more valuable (to others) skills you acquire, the higher salary you will command in the workforce (or in running your own business).