A customised roadmap for salaried class to create wealth and generate a million dollars in next ten years
I wish I had the appreciation towards knowledge of personal finance, a couple of years back.
Contrary to what I believed earlier, one doesn’t have to sacrifice on the fun part of life to become a millionaire. If only I knew. Sigh!
Let me walk you through a customised portfolio, which can fetch you a million dollars in 10 years.
For simplicity, I am assuming an annual pre-tax earnings of $100,000. Which leaves you with roughly $5800 each month.
For all the below returns, I used this calculator –
First Things First: Emergency Fund
I couldn’t stress on this enough. An emergency fund is the foundation of your portfolio. It is your risk appetite.
Build it soon and enough. Ideally, you should have 6–9 months worth of your expenses saved and parked securely in a low risk-high liquidity instrument.
Start investing $500 monthly for your emergency fund and increase the investment by 10% every year.
Invest this in a good debt fund. With an average annualised return of 6%, it gets you $22,000 roughly in 2 years.
Let this $22,000 continue for 8 years in the same fund without putting any further money into it.
You will end up with $35,000 at the end of 10 years since you started.
Total wealth accumulated: $35,000
Systematic Investment Plan (SIP): Mutual Funds
I am a lazy bone. Hence, I do not intend to spend my time and energy on obsessing over the best and optimal mutual fund to choose.
Do some research on the SIP apps available in the market. Choose any one which best suits your need.
Invest regularly $500 in the recommended MFs by the app. The idea is that most MFs over a longer time period, give healthy returns.
Only $500 every month with a 10% annual increase in investment amount, would get you $150,000 in a decade.
This is assuming an average 10% annualised return from the chosen portfolio of mutual funds.
SIP 2.0: Remember that you had stopped investing in your emergency fund by the end of 2nd year. Now you have extra $500 starting the 3rd year.
Start redirecting this $500 also into SIP for the next 8 years. This gets you an additional $100,000 at the end of the decade.
Total wealth accumulated: $285,000
Laziness to the rescue: Index Funds
Choosing good stocks to bet your money requires knowledge and a lot of research. It is not for the lazy ones and involves a higher risk.
Now, an Index fund helps you take a bet on the stock market without having to research on individual stocks.
Index funds are an assortment of stocks of major companies. The expected return of these funds could be 15% roughly over a decade.
You would have heard of the S&P 500, Dow Jones and Nasdaq 100. All these are examples of index funds.
Start putting $1000 every month in an index fund for next 10 years and increasing the investment by 10% every year.
With an assumed annualised return of 15%, it gets you around $390,000 by the end.
Total wealth accumulated: $675,000
High Yield Savings Products
I would also advise you to have some liquid cash available for scenarios where you need to show proof of funds available with you.
It could be for a travel visa or child’s education. It’s always good to have some cash at hand available.
Use the high yield banking products to park this money. Start with $400 every month and ramp it up by 10% every year.
Given 1% rate of return, you would have $80,000 by the end of 10 years.
Total wealth accumulated: $755,000
Home Sweet Home: A Real Estate
At the end of 10th Year, use $100,000 from your total wealth to pay the down payment of a house worth $350,000.
You would need to acquire a mortgage of $250,000. This results in $1700 EMI every month for next 20 years.
Starting here, you can reduce your investments in the SIPs and index funds to compensate for the EMI.
Total wealth accumulated: $1,005,000 (One Million Dollars!!!)