A million dollars is a life-changing amount of money. Some people say you need at least $4 million or $10 million to live comfortably forever. I disagree.
With a million dollars in the bank after-tax, you never have to work again if you can live off $40,000 or less per year ($3,333 per month).
If you make a million dollars and keep working, leaving the balance untouched in an S&P 500 index fund, it gets even better. Assuming a 5 to 10% annual return, you’ll have $1.3M to $1.6M in five years. After 10 years, you’ll have $1.6M to $2.6M.
Don’t let anyone fool you, a million dollars in the bank can change your life forever.
There are two paths to get there…
Path 1: Save
Let’s say you work at a job (or multiple jobs) and hustle on the side for additional income to make $125,000 after-tax per year.
You decide you to save your way to your first million. Your goal is to have a million dollars in 10 years. How much do you need to save each year to get there?
About 60%. If you save 60% of every dollar you make, you’ll have about $1.1 million saved after 10 years.
The big assumptions here are (1) you can make $125,000 after-tax per year and (2) can force yourself to live off 40% of what you make.
Path 2: Earn
I didn’t save my way to my first million. I earned my way.
For a couple years, I hustled, working at least 90 hours a week to build my first businesses. After quitting my investment banking job in 2009, I went 100% in to figure out how to sell online and run a business. I sold one business for low six-figures and built another one with millions of dollars in profit. It was the latter business that put the first million in my bank account by 25.
If you can build a high profit business, you can make your first million fast. It’s possible to do it in two to three years. Some of our students have started, grown, and sold e-commerce businesses in three years or less for millions of dollars.
An online business with under $5 million in annual sales and a good net profit margin is likely to be valued at three to five times annual earnings. For a fast-growing business, the valuation might be based on the past six months.
If you can build a business with about $21,000 in monthly profit, you might be able to sell it for $1 million cash ($21,000/month x 12 months x 4X multiple = $1,008,000). That’s possible to do in a few years.
The Supercharged Path
If you want to stack the odds in your favor that you’ll make your first million quickly, combine both paths.
First, save as much as possible. Aim to save at least 50% of every dollar you make. Take that money, put it into an S&P 500 index fund. Or, set aside a portion, 20% for example, and use it to fuel the growth of your business.
Second, start a business. Putting more than $10,000 into a new business is too risky for first-time entrepreneurs. There’s a good chance something will go wrong. It’s better to learn fast and cheap. This is why it’s best to start an online business – the cost and risk are lower.
Don’t take any money out of your business for a year. Reinvest profits to grow the business. If things go well, within a couple years you’ll have a good, profit-producing company that can be sold for a large amount of cash (if you wish).
The Simple Equation
What keeps most people from making their first million is they forget about the simple equation that guides all our financial results: we must earn more than we spend.
Some people have built multi-million dollar investment portfolios and retired by saving most of what they make. Others, like me, got there by increasing our earnings through business income.
If I were starting over again, I’d do both. It’s the safest and surest path to your first million.