How to be a millionaire with just $11 a day
Sounds like a gimmicky click bait? It is understandable to feel sceptical about how $11 a day can accumulate into a million decades, just in time for retirement. Read on to find out more.
Saving $11/day
Most of us will be able to save an average of $11 a day. This can mean skipping a Starbucks coffee or bubble tea, choosing to dine at a kopitiam, or simply opting to not buy new work clothes given that most of us are working from home now.
Saving just $11 a day sounds like nothing much. However, this adds up to about $330 a month, or over $4,000 a year. After all, we know that the latte factor exists - a phenomenon where small and habitual spendings add up to a large amount.
Let us assume that you start work at age 25, and that you continue to save $11 a day until you retire at Singapore’s official retirement age at 62. This means that you will work for 37 years for more than half your life, giving you about $149, 000 in savings. This does not factor your ability to earn more over time with experience, which will allow you to save more money every day.
The figure is also calculated with the assumption that you did not save the money in an interest-generating bank account, and that you have simply placed $11 in your safety deposit box every single day.
$149,000 suddenly sounds like a lot of money, right?
This is, however, very far from a million bucks. Instead of just storing all these saved up money, let us look at how much you can earn by investing it in stocks instead.
Understanding market growth
Nobody can outguess the market. If you were to miss out on just one best day in the S&P 500 Index, you can cut your annualised compound return by a shocking 4%. Missing five best single days can result in a drop of almost 15%, and missing 25 best single days can almost half the returns that you could have secured by simply staying in the market without reacting.
With this in mind, what if you put $11 a day into the stock market?
In the long run, indices do not disappoint.
Let us take a look at what happens if you invest in the Straits Times Index (STI) in Singapore from April 2002 to May 2017. Your annualized return over the 15 years would be 7.28%. Assuming that this rate remains at 7%, you will earn over $800,000 by retirement.
We are still falling short of a million. So let us bring our focus abroad instead.
If you invested $100 in the S&P 500 from 1928 to 2016 for 88 years, your total compounded returns will be almost $330,000, at a long-term annualised rate of 9.53%. That sounds like a huge leap in profits. Assuming that the average annual return continues to be at 9.5%, you will easily hit above one million dollars by your retirement age. There is no stock picking involved, and the process is simple. You do not even need to manage your emotions since you are buying an index.
Of course, past performance may not indicate future results, but generally speaking, playing the long-term game is always more beneficial when it comes to investing. After all, a forest does not grow overnight.
Understanding safer investment instruments
Just as how higher return investment types such as stocks have a higher risk, safer investment instruments have a lower risk and give you a peace of mind in exchange for comparatively lower returns. Risk is defined in financial terms as the degree of uncertainty that an outcome or investment's actual returns will differ from an expected outcome or return. Simply put, high risk investment types may even result in you losing your investment capital.
Comparatively safe investment types include fixed deposit and AAA-rated government bond such as the Singapore Savings Bond (SSB). However, as you can imagine, it can be difficult to achieve our goal of hitting one million with just $11/day for retirement with these instruments because of their low interest rate.
Fixed deposit rates, for one, have gone down in recent years. During pre-Coronavirus times, you can get around 1.8% or even 2% during fixed deposit promotions at various banks. However, even a 0.7% interest rate can sound highly appealing now.
Similarly, AAA-rated government bonds are highly secure and are able to give you a peace of mind. However, the rate for SSB has been going down. May 2021’s bond gives an average return of 1.61% interest rate over 10 years, at 0.38% for year one, and 3.22% for year 10. Previously, you were able to get an average of above 2% for a 10 year bond.
It is also important to note that you can only invest a maximum of $100,000 in SSB, which makes the millionaire dream even further away.
Getting professional finance advice
Seek the help of a financial advisor if you’re not sure.
That being said, buying the market may not always be the best option. Depending on your personal needs, you will also need a percentage of safe investments, and even advice on how to protect yourself and your loved ones through insurance. This is where having a financial planner from Life First Advisory can help drastically.
When it comes to investments, personal values and motivations serve as a crucial guide. While stocks may seem to have the most potential for the highest return on investments, it comes with risk. As an investor, if you tend to lose sleep over market movements, then perhaps stocks are unsuitable for you in the long run. Focusing too much on the returns alone can cause devastating mental impacts, and we will never want that for our clients.
Creating wealth valued at a million, five million or even ten million dollars for retirement does not mean that your personal aspirations have been achieved. It is not about the dollars, but about what you and you loved ones want and need at different life stages. Tailored life planning is the focus here at Life First Advisory, and is what sets us apart from other wealth advisors who may possibly over-emphasize the returns that stocks can bring, while compromising on what you actually need.
Our financial planners are better able to advise you on a variety of investment instruments, not limited to global mutual funds, bonds, shares, ETFs, REITs, and more to improve your investment portfolio such that you can better achieve your life goals.
Speak with us today for a non-obligatory consultation at hello@lifefirstadvisory.com. Alternatively, drop us a Facebook message here at https://www.facebook.com/lifefirstadvisory/.