Editor’s note: This article was first published in September 2011. The figures and context it uses, including a 1,100-euro starting salary, a 4% fixed-term deposit as the author’s fallback, and stock performance ‘at that time’, are from 2011.
When we wrote our article “The only secrets to getting rich“, we laid out the only rules that exist for reaching that goal, without selling magic formulas and staying completely realistic: work, saving, a financial plan and investment. If anyone tells you there’s another way, they’re lying through their teeth.
In the last paragraph of that article we mentioned a financial calculation: a 20-year-old with no debts, starting with 20,000 euros of capital and making some basic investments, could easily have 1 million euros by the age of 32 (12 years later).
Of course, that person would have to enter what we call the “financial prison” (we’ll explain the concept in a moment).
Because of the large number of emails asking us to explain this calculation, and the criticism from some readers who accused us of “fooling people” with that claim, a promise is a promise.
Here’s the explanation, step by step. We’ve split this article into two sections.
How to get 1 million euros (or dollars) for retirement
The first section is about reaching 1 million euros for our retirement at 70, starting with 10,000 euros of capital and assuming our portfolio earns 5% a year, which is very easy to achieve.
- If we start at 25, to have 1 million euros by 70 we only need to save 450 euros a month, about 15 euros a day.
- At 35, we would need to save 850 euros a month.
- At 45, the amount we would need to save is 1,700 euros a month.
- At 55, we would need to save roughly 4,000 euros a month.
Always remember that the calculation adds the interest back to the amount the return is applied to, which is what we call compound interest.
Making 1 million in 12 years by entering the financial prison
Now let’s turn to the case we described, entering what we’ll call the financial prison: 20,000 euros of starting capital, age 20, no debts of any kind and a first job that pays around 1,100 euros. We’re going to use a system very similar to the one some Chinese people use: to reach our goal of 1 million euros by 32, you’ll spend 12 years in a kind of prison, which we’ll call the financial prison. What does the financial prison involve?
To start with, you have to save all of those 1,100 euros. If you need money, find a second job, work overtime or work weekends, but those 1,100 euros are off-limits.
Forget luxuries and treats, and remember that not a single euro leaves your pocket unless it comes back with a return or comes from your second job.
Year 1
Savings: 13,200 euros + 5% = 13,860 euros
20,000 euros + 5% = 21,000 euros
Total savings: 34,860 euros
Year 2
13,200 euros + 5% = 13,860 euros
34,860 euros + 5% = 36,603 euros
Total savings: 50,463 euros
Year 3
13,200 euros + 5% = 13,860 euros
50,463 euros + 5% = 52,986 euros
Total savings: 66,846 euros
Year 4
13,200 euros + 5% = 13,860 euros
66,846 euros + 5% = 70,188 euros
Total savings: 84,048 euros
Year 5
13,200 euros + 5% = 13,860 euros
84,048 euros + 5% = 88,251 euros
Total savings: 102,111 euros
A new phase of the financial plan
Now we’ll aim for an average return of 8% from a mix of fixed income and equities.
Year 6
13,200 euros + 8% = 14,256 euros
102,111 euros + 8% = 110,279 euros
Total savings: 124,535 euros
Year 7
13,200 euros + 8% = 14,256 euros
124,535 euros + 8% = 134,498 euros
Total savings: 148,754 euros
Year 8
13,200 euros + 8% = 14,256 euros
148,754 euros + 8% = 160,655 euros
Total savings: 174,911 euros
Year 9
13,200 euros + 8% = 14,256 euros
174,911 euros + 8% = 188,904 euros
Total savings: 203,160 euros
Year 10
13,200 euros + 8% = 14,256 euros
203,160 euros + 8% = 219,412 euros
Total savings: 233,668 euros
Year 11
13,200 euros + 8% = 14,256 euros
233,668 euros + 8% = 252,361 euros
Total savings: 266,617 euros
Year 12
13,200 euros + 8% = 14,256 euros
266,617 euros + 8% = 287,946 euros
Total savings: 302,202 euros
See also: 5 undervalued stocks that could take off
We’re still about 700,000 euros short of our goal, so you could say the calculation made by these experts is wrong. But that’s not quite the whole story, so we should ask a few more questions, staying realistic.
From year 5 onwards, with more than 100,000 euros in your account, would you really keep working for 1,100 euros a month?
All we’ve shown is that someone with no knowledge of finance at all can build up 302,000 euros in 12 years. In short, any “fool” who sets their mind to it can save an amount that few people manage to save even over several generations.
The calculation isn’t wrong, because at that time, by leveraging our money in the stock market for 5 years, you could get astonishing returns (depending on the companies). Over 12 years Coca-Cola rose more than 90%, Google rose more than 70% in 5 years, and LinkedIn more than 90% in just one day.
With 200,000 euros, would our brain really be as “stuck” as that of someone with 300 euros in a savings account?
The truth is it wouldn’t. If, on top of having that amount, you have some basic financial knowledge, you won’t find it hard to spot business opportunities and find investments that pay more than the average return we’ve used in this article.
Note: I once mentioned my average stock-market return on a forum for finance and supposed investors, even though I don’t stop to analyse charts and I’m someone who runs away from risk. I got the feeling that in the world of stock investing there are plenty of people who get in and consider a 6% annual return a success. For that, I wouldn’t bother with the stock market; I’d stick with a fixed-term deposit at 4%.
As the charts on Bolsa.com show, high returns are possible. It can be done, and in fact it is being done.
Back to the article, though: maybe we got the calculation wrong, or maybe we didn’t, depending on the experience a person builds up over the years. That’s all I can say. I personally know people who have managed to save more than 500,000 euros by 33 after only 4–5 years in the financial prison, like the case of my friend Pedro that we described.
Still, if you’re young, or a parent with a teenage child, try every way you can to explain that by making an effort for just 5 years they can reach an excellent standard of living and save themselves some headaches down the road, because having 100,000 euros at 25 is, I think, a great luxury that very few people have been able to afford. Had you known this earlier… would you have spent some time in the financial prison?
Featured image: Matt Brown, CC BY 2.0, via Wikimedia Commons.
