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Become a Millionaire

Money Manager | Thursday, September 4th, 2008

We have all seen the program on TV where the contestant answers questions and earns money. If they can answer enough questions they will win one million dollars. The dollar value of each question doubles and the difficulty of the questions increase as you move forward through the game.

I was in a meeting yesterday where we were discussing hiring someone to do a job. Of course we wanted the best quality, done yesterday and at a bargain price. My colleague informed me that I could pick any two but not all three. The three factors in investing are money, time and return. If we can get $1000 to double 10 times we will have the million dollars. If we use the rule of 72, it says that if you take your rate of return and divide it into 72, we will have the time needed to make your investment double.

If I were to invest $1000 into a stock that retuned 12 percent, it should double in 6 years. Leaving the initial investment at 12% return for 60 years would get us to the million-dollar mark. The problem facing most investors is that they can’t get 12% average return over time and most don’t start early enough to get 60 years in before they need the money.

So what do we do? Using our example it takes the same six years to turn $1000 into $2000 as it does to take the $500,000 to a million. By staring with $2000 we just saved six years. If we start with $4000 we save 12 years of investing and with $8000 we save 18 years. We can also apply this to other parts of the formula by investing at a lower rate. If we had a 6% return the money would double every 12 years, or 120 years to convert the $1000 into a million. To use the 6% return and get there in 60 years you would need to skip the first 5 doublings, and must have $32,000 for your initial investment. Adding to your investment on a regular basis over time will also dramatically reduce the time need to reach the goal.

The moral of the story is that you need to start early and sacrifice early in life to get the ball rolling. Don’t be crazy but certificate of deposit returns will make your job tough. Get involved and do your research. Find good investments with good returns. It is easier to recover from a mistake made early in life when it could mean a few thousand dollars than later in life when it could mean $250,000 or $500,000.

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