If you could become a millionaire for the price of a meal a day would you do it?
Most of you reading this would obviously choose to do so. Which of you wouldn’t want to be a millionaire?
This concept is quite simple, but it requires discipline. In my compound interest article, I discuss more in depth how compound interest can be used to your advantage as long as you have time on your hands. Before I go any further I want to make you aware that although this method of becoming a millionaire is very easy, it takes a lot of time!
Let’s look at what it would take to become a millionaire for the price of a meal a day!
Depending on where you live, an average meal would more than likely cost you anywhere from $8 to $15. This may not seem like a lot of money, but the cost of a meal could be very valuable in the future if you put that money to use elsewhere.
We’ll begin by crunching a few numbers.
For example purposes, we’ll assume that an average meal costs $10, and the average month consists of 30 days.
Over the course of 30 days, you place $10 into a bank account so that at the end of the month your account has $300 in it. You then decide to place that money into an investment account that averages a 7% gain on your investment yearly.
The next month, you repeat the process and place another $300 into the same investment account. You do so for the next 10 months until the year is done and so far, you have saved $3,600, and gained a little bit of interest.
Although $3,600 is a pretty large amount of money, it’s nowhere near a million dollars. This is where the magic comes in.
Over the next 45 years you repeat the process. In total, you’ve now contributed $156,486.60. That’s a lot of money, but it’s still not $1,000,000! However, because you were able to place the money into an investment account gaining 7% value each year, your investment has now grown to $999,988.25.
Congratulations! You’re now a millionaire (or very close)! But how did that happen if you only gained 7% on the money you put into the account?
In a brief summary, each year your money gains a little bit of interest. The next year that money that your original investment created also gains interest in addition to what you already put in.
To specifically relate to the example above, the $3,600 would gain $252 (7% of $3,600) of interest in one year. The next year (assuming you didn’t add any more money to the account) that 7% would be applied to the full $3,852 ($3,600+$252) in the account yielding $269.64. Because you’re putting more money in each month, your account has more and more money that the interest can apply to.
Compound interest was the way that you were able to gain such a large amount of money off of your investment. This is explained much more in depth in my compound interest article. Next week make sure to check out how a Roth IRA can make compound interest even more powerful over time!
If you have any questions feel free to contact me.