How to make a million rand in 5 years: The stepping stones to making your first million are actually the foundation blocks for achieving financial freedom — something most of us are striving for. While it requires a tremendous amount of luck to become very wealthy, anyone can achieve financial freedom.
The secret is not how much you earn or how much you have but rather how much you spend. If you can control your spending and live a sustainable life, you can achieve financial freedom relatively quickly.
How to make a million rand in 5 years
The average South African doesn’t even earn a million over 10 years – and that’s before paying all the bills. Even the average person in the top decile (top 10%) has to work for four years to make a million after tax – again, before deducting the cost of living. If you’re in the ninth decile (ie, better off than 80% of South Africans but not in the top 10%) it will typically take you over 10 years to earn a million rand after deductions. After buying groceries, paying the mortgage and putting petrol in the car most people don’t have a lot left over. So to accumulate a million rand, in cash, unencumbered, yours to do what you like with, is not a trivial matter for most South Africans.
Of course, if you already have a million, it’s a lot easier to make another million. All you need is an investment with a return of around 10% per annum and seven years later your one million has turned into two million (provided you haven’t been taxed to death along the way). Even better, find an investment that gives you 15% per annum and your money will double in less than 5 years. Money makes money.
But that first million, that’s the challenge. If you put away R4 000 a month and achieve 10% annual compound growth, it takes over 11 years of disciplined saving to end up with a million. And where are the savings accounts offering 10%? A rate of half that would be more realistic, especially after tax. At a net 5% per annum it takes over 14 years. And how many people can afford to save R4 000 a month anyway? If you save R2 000 a month it’s going to take you 23 years, and R1 000 a month… more than three decades.
So what’s the alternative to this demoralising scenario?
Plan 1 – How to make a million rand in 5 years
Last year we had a Money Matters show where we illustrated how you could save R1.1 million within 15 years using your tax-free savings allowance of R2 750 per month.
A viewer asked us if it was possible to reach R1.1 million within five years by tripling the amount to R8 250 per month.
This is where the power of compounding, and time, becomes so important. If you invested R2 750 per month for 15 years, you would have invested R495 000. If the investment grew at 10% per annum, it would be worth over R1.1 million.
However, if you invested R8 250 a month for five years, you would also have invested R495 000, but even if you had the same rate of return at 10% per annum, it would have grown to only R638 000.
This is because over the shorter period, you had not benefited from the power of compounding. At a growth rate of 10%, your money doubles every seven years. So, the longer you invest for, the more opportunity there is for your money to double.
In this case, if you invested R8 250 a month for five years, it would take another five years leaving the money to grow in order to reach the R1.1 million level. If you continued to invest R8 250 for longer than five years, you would reach R1.1 million in less than eight years.
If you still wanted to have R1.1 million within five years, you would have to invest over R14 000 a month or R840 000 over five years.
This is why the longer you invest for, the less you have to contribute because time and compounding do the rest for you.
Financial advisor Warren Ingram likes to say making the first million is always the hardest. Unfortunately many of us non- millionaires can attest to the truth of that statement. Getting from one to a million is possible, but if you hope to achieve that goal while you’re still in charge of all your faculties you should probably get cracking.
So how do you go from zero to six zero hero in five years (or less)? Jason Garner, Strategic Relationship Manager for Old Mutual Wealth is familiar with that question. “My clients often expect some magical answer, like there was a memo that they didn’t get,” he says. “The reality is most of us have some idea of how to go about making the elusive million, but, quite frankly, we lack the motivation to do so.”
If you’re earning an income or have a little cash squirreled away, let these tips motivate you towards your first million and send us a bottle of something deliciously bubbly when you get there.
Name the desire
You would think your road to R1m would start with some money, but we’re happy to report that the first step is as easy as answering a question.
Garner says he often talks to clients who want to save money or make a million without knowing why. “Without a real reason to save, the odds of sticking to the savings plan in the long term dwindles slowly. The simple reality is that we need a cause or solid reason to get behind a plan to keep us motivated. The money then becomes the means to an end not the end in itself.”
Oddly, wanting a million of the sake of having a million is not enough to get you a million. Before starting your journey to the millionaires’ club, decide why you need the money. Perhaps a little introspection will reveal that you don’t need a million after all. If that’s the case, we would recommend you stop reading immediately. However, if you find that you need a million to start a business, take a year off work or build yourself a completely new face through intricate plastic surgery, Garner says you might just make it. “Your chances of succeeding will go up incrementally with each month if you’re saving towards a specific goal.”
Face reality – How to make a million rand in 5 years
Knowing what you want is an important first step, but not enough to get you to the finish line, which is why your next step should be a long, hard look in the mirror. Investors are often unwilling to face up to the reality of their current financial situation, which makes plotting world domination tricky.
“We need to look at what we have at our disposal, what changes we are prepared to make in order to achieve the desired goal and what risks we are prepared to take,” Garner says. If you aren’t currently earning and income, odds are that you probably won’t be able to reach your goal of R1m in five years. If you are putting three kids through school, you might not be able to save as aggressively and would have to delay the one million celebration by a few years. A sustainable and achievable plan requires clarity and honesty. Only once you face up to the reality of your situation can you pick an action plan that best suits you.
Do the math
The word “million” might scare you, but understanding how much you have to pay in current happiness in favour of future happiness is very basic mathematics (providing the word “mathematics” doesn’t also scare you).
“The goal is to accumulate R1m in five years,” explains Ben Smit, strategy and marketing guide at business incubator Raizcorp. “Break this long-term goal down into smaller objectives. R1m in 5 years becomes R200 000 per annum, which becomes R17 000 per month.”
This strategy is what Garner calls the “no growth” savings plan. Whether you put R17 000 in the bank or under your mattress, you’ll be a millionaire by the end of five years. Luckily that’s not your only option. You can also choose the capital and growth plan, where you invest a lump sum for five years, or a combination of savings and capital investment to get you there.
The capital and growth plan
Term: 60 months
Capital investment: R783 530
Monthly contribution: R0
Real return (after inflation): 5% per annum
Term: 60 months
Capital investment: R250 000
Monthly contribution: R10 021
Real return (after inflation): 5% per annum
Deciding which option is right for you will require a fair amount of time and research. To make the process easier, don’t hesitate to engage with a financial planner who will help you determine your risk appetite and investment options.
CPI is not your friend – How to make a million rand in 5 years
Consumer price index (CPI) is the measure we use to determine how much we can buy with our money. When your annoying 76-year- old uncle drones on and on about how he only paid 20 cents for a loaf of bread back in the day, he is actually referring to CPI.
In addition to giving your uncle something to talk about, CPI slowly eats away at your money, which means even the money under your mattress is worth a little less every year. If you’ve invested your money somewhere, the fees you pay for that service is also chipping away at your wealth.
“Make sure you understand all the fees and inflation, because these factors erode the true value of our R1m investment outcome over a five year period. For example, if inflation is 6% and you’re paying 2% in fees, your money needs to grow at a minimum of 8% in order to achieve our goal of R1m in real terms.”
In other words, in five years you’ll need R1.2m to buy what R1m could buy today, and you uncle will pay even more for bread.
Honour the strategy
Smit says it’s important to be patient and not to lose sight of your goals once you’ve identified your strategy. You also have to let those around you know about your strategy. Saving R17 000 in your personal capacity will mean that you have to say no to the occasional weekend away. When your friends understand that you’re trying to build an empire, they’re more likely to forgive your reclusive behaviour.
Move it! – How to make a million rand in 5 years
Millionaires know that momentum is key. Fun though the planning stage is, at some point you have to jump in and do, or – as is often the case – hurry up and wait. “To get started, you are going to need to commit some capital. Then you need to save some money every month and lastly you need to invest in something that will give you the real return you need to grow your money sufficiently over five years,” says Garner.
It sounds simple, but that’s not the end of it. “You have to keep reminding yourself to keep saving, stop wasting money and stay invested for the full five years, even if the investment doesn’t perform in the short term. You have to stick to the strategy!”
Be your own worst critic – How to make a million rand in 5 years
Critical to the success and failure of your investment is the ongoing measurement of your progress. This process should entail revisiting the main objective to ensure that it is still relevant. Checking your progress to date and ensure that you are on track. Lastly, if any changes need to be made to the objective or the strategy, make the relevant adjustments sooner rather than later.
WWYFAD (What would your financial advisor do?)
Alexander Babich is the CEO of Alexander Babich and Associates – an independent financial planning firm in Johannesburg. He says the basics of financial freedom are actually quite simple:
- Save more than you spend
- Let your money work for you: If you invest that money in shares, unit trusts or a business and earn 10% per year, your money is earning you more money.
- Compounding is your friend: When you earn interest, your money grows. When you reinvest the interest you earned, that interest earns interest. Compounding refers to this snowball effect and is what allows the money you already have to earn you more money.
- Don’t rely on your salary: Most wealthy people that become millionaires through blood, sweat, tears and determination also realised that working for a salary was not necessarily a recipe for true financial independence. You need to be courageous to venture out on your own. Being an entrepreneur is not for the fainthearted.
- Neither a borrower or a lender be: The recipe for financial independence is to save, plan and believe in yourself. Brush up on your knowledge and understanding of investing.
- Ask for help: If you lack the skills and confidence, find a competent and experienced financial advisor with a proven track record.
Millions from business – How to make a million rand in 5 years
Of course there’s more than one way to skin a cat. If setting aside your hard-earned pennies doesn’t seem like the best way to get your million, starting a business might just help you on your way.
Starting a business is a completely different can of worms entirely, and at Finweek we spend a lot of time unpacking the challenges of entrepreneurship. If you feel you are up to the task, Smit says it’s important to define the boundaries of where you want to compete in the market. Before starting a business, he advises that you answer the questions below to determine if you have a competitive advantage. Starting a business that is doomed to fail probably won’t help you make that million. Ask yourself:
- What is the current and potential market size?
- Can you segment that market further to find pockets of opportunity that you can specialize in or focus on?
- Do you and your business have the skills and expertise to be able to scale to a size that will achieve your R1m objective?
- Do you know the customer’s pain so you can fulfill that need?
- How do you win in the markets you play in?
- What sets you apart from the competition?
- Do you have resources that are rare, valuable and inimitable that give you a unique value system and creates barriers to entry for competitors?
- Do you have intellectual property that makes what you do difficult to copy?
A lot of hard work has to be done between answering these important questions and making a million through your business. Smit says you should decide what skills, capabilities and resources you possess that are relevant and will enable you to achieve your aspirations. Skills and capabilities are only as good as their ability to help you execute your strategy. “Allocate resources to critical areas. A lot of time you have to weigh up what you want with what you are willing to risk or sacrifice, like fancy cars and big salaries. Remember, entrepreneurship is living for a short while like no one wants to, to be able to live rest of your life like no one else can afford to!”
Plan 3 – How to make a million rand in 5 years
If you want to make a million by saving and investing, you need to understand that your rate of return is the key factor. The difference between a return of 7% per year and 15% per year is a decade – it takes 27.5 years to turn R1 000 a month into a million at 7% a year, but only 17.5 years at 15% per year. (We’re sure you’d like to make your first million in less than 17.5 years, but we’ll get back to that in a moment.) As we said above, if you can afford R2 000 a month and your rate of return is 5% per year, it will take you nearly 23 years to make a million.
The long-term stock market rate of return is between 14% and 16% (it varies depending on the exact time period used). This is based on the market average; by definition, therefore, on a consistent basis, half of all listed shares are doing better than this – some a lot better. But even the market rate of return improves things considerably. At the stock market average, instead of waiting 23 years, you can turn R2 000 a month into a million almost 10 years sooner.
Our point is that, compared to conventional saving, if all you achieve is the average market return, investing in shares is likely to halve the time it takes you to achieve your financial objectives (roughly speaking).
Unit trusts capitalise on the power of long-term stock market returns. As at May 2012, for example, the average annual return of the top 50 equity unit trusts was around 20% per year over 10 years, compared to a market average of around 14% per year. And listen to this – at 20% per year your money doubles in less than four years!
The good news is that you can do even better than this. Much better, in fact. As a private investor, you can exploit opportunities that are too small for fund managers. In the words of Warren Buffet, “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
At a return of 50% per annum you can turn R2 000 a month into a million in less than seven years. Or R4 000 a month into a million in less than five years. Or R1 million into R10 million in less than six years.
Keeping it Real – How to make a million rand in 5 years
Let’s assume you can’t achieve 50% per annum! After all, Warren Buffett is an exceptional investor. Let’s assume, rather, that as private investors we can do just slightly better than the market average – that we can achieve 20% per year. This is a realistic objective.
Now we would like to be able to show you a way to make that first million in 10 minutes or a couple of years, but the reality is that it takes time. Consider this – if you put R2 000 under you mattress every month, after 12 years you’ll have R288 000 which is a far cry from a million. So although 12 years seems like a long time, it’s actually quite remarkable that by adding an investment return of 20% per year your savings of R288 000 will turn into a million over the same period.
What can you do to reduce the 12 years? Obviously saving more money every month would help, but if you can’t afford more than R2 000 a month, the best thing you can do is improve the rate of return. At a return of 25% per year you’ll shave two years off the program. Get it up to 30% per year and you can do it in nine years (having put away only R216 000).
We’re not going to lie to you – if you don’t have any capital, it’s really not that easy to make that first million in much under eight years (not unless you can save R5 000 a month or more, which is not realistic for most people). Anybody who tells you otherwise is either lying or has been exceptionally lucky in the past.
The great news is that, once you have some capital, it gets much easier. Once you’ve got that first million, you’re on your way. After that is really is feasible to double your capital every three to four years.
Finding the Return – How to make a million rand in 5 years
The only place you can consistently get returns of around 15% per annum is the stock market. (Some people will argue that property can also do this, but that’s only true when property is debt-financed, which brings its own set of risks and challenges.)
Before you get the wrong idea, let me emphasise that stock market returns fluctuate a great deal. Most years, on average, the market goes up – sometimes a little, sometimes a lot – but every few years the market actually goes down. So when I say that the market can consistently give you a return of 15% per year I do not mean that you can expect this if you go into the market just for one year! However, you can expect around 15% per year – on average– if you invest in the stock market over the long haul (at least five years, preferably 10 or more).
To get the 20% (or better) return that we want we have to select above-average shares. Talking simplistically, the market average (that 15% per year we keep mentioning) includes the performance of all shares – the half that are below average and the half that are above average. If you invest predominantly in above-average shares it stands to reason that you’ll get above-average performance. And the beauty is – simplistically speaking – that, by definition, one out of every two shares is above average!
How do you find above average shares? The answer is simple – by identifying above average businesses.
Never forget that shares represent ownership in companies. In the long run, the share price of a company can only keep going up at 20% per year (or more) if the underlying business grows at 20% a year (or more). There are certainly times in the stock market when sentiment causes a disconnect between share price movement and business performance, but this kind of disconnect is always relatively short-term. Over the long haul, any company that doesn’t grow its profits will suffer a falling share price.
Obviously, to identify above average companies you need to know something about their businesses. You need to know what they do and whether management have been successful at growing sales and profits in the past. You need reason to believe they can keep growing sales and profits in the future. And to do this, you need a way to access the right information quickly and efficiently.
A Quick Summary – How to make a million rand in 5 years
This article has a lot of per year figures. You might be thinking – 16% a year? 20% a year? Is it really such a big issue?
The answer is a resounding Yes. Seemingly small changes in your annual rate of return are really important – don’t make the mistake of thinking that a few percent here or there makes no difference. For example, R1 000 a month earning 16% a year turns into R1.6 million over 20 years. Not bad. But at 20% a year it turns into almost R2.7 million! That seemingly small difference means two-thirds more capital at the end of the day.
Couple this with the fact that, as a private investor, you can do slightly better than the market average and you have a recipe for success. All you need are the right tools for finding those shares that will be in the front half of the field.