“It would be nice if I can have $ 1 million worth of cash or investments (assets) in less than 20 years before I turn 45. I will have MORE OPTIONS in life”

A very common question I get from new graduates.

In fact, the following is a very common statement I get from those who are in the workforce for quite sometime.

I don’t think I can be working like this forever, I wanna retire at least 10 years earlier when I am in my 40’s, the earlier the better. I want to reach $ 1 million net worth a.s.a.p.”

These are students from the poor or lower middles class families. (Keep in mind, these guys are starting from ground zero, with no back up from family members, apart from their professional accountancy education)

Sometimes, I wish I can show them how this can be achieved using a step by step approach. But it is impossible because everyone’s circumstances is different.

So, it’s very hard for me to come out with a step by step conclusive guide to reach a $ 1 million net worth.

This post is not about a step by step guide on how to reach the goal, but rather to get you guys thinking about how you can reach the goal.

The short answer to both the statements is : “Yes, it’s possible” but,

I believe you need to have a holistic approach to achieve this goal, and you do not need to be an international movie star or sports personality or anyone else with unusual talent to achieve this.

So, to get you started….

I shall split this into 3 major categories, EARNINGS, SAVINGS and INVESTMENTS. (Which, coincidentally, is also a major theme of this blog)

1) Earnings (Active income)

This refers to your cash inflow. The money which is entering your bank account every month from your full time job or business.

It also includes that occasional inflow from your side hustles, such as part time business.

I like to split earnings into Active and Passive.

(I have excluded passive income in this post, and will be covering it in detail in other posts. Furthermore, young graduates should be dedicating their time on maximizing their active income while they are young.)

Active income will require you to put in some effort to get the cash inflow. You may need to trade your time and energy CONTINUOUSLY to get the inflow.

In fact, most days of your week will be dedicated to this. Your formal education from primary school to university has prepared you for this.

Examples of sources of active income, includes your:

  • Monthly Salaries (for trading in 40 or more hours of you work),
  • Side business drawings
  • Freelance income,
  • Wages,
  • 1-month bonus (13th month) salary,
  • Overtime income and etc.

In your quest to reach $ 1 million cash and investments, earnings play a HUGE role. Personally, I am a strong believer that the higher you earn, the more you can save and invest, which accelerates the speed in which you reach $ 1 million net worth.

In other words, you will have to put in massive effort to increase your income level year on year. This is especially important if you are a young graduate with a lot of time and energy.

The INCREASE in income can be achieved through:

  • Yearly salary increments.
  • Promotions which will increase your income by a higher percentage.
  • Higher bonus as a top performer at your workplace.
  • Higher profits from you side business
  • Fees from your freelance projects.
  • Income from part time work done over the weekends, such as tutoring, grab, food delivery and etc..

In conclusion, the more you earn, the more you can save and invest. As such you will need to put in MAXIMUM effort to maximize your earnings.

2) Savings

It’s pointless for you to earn $ 50,000 a month and spend it all away by the end of the month. You will have nothing left for investment, which means your net worth remains ZERO.

So, this brings us to our next component, savings, which refers to the balance of your income left at end of the month, after spending.

These savings play a huge role in your pursuit to a net worth of $ 1 million.

Most experts suggest saving at least 20% of your income for investment.

However, if you are HUNGRY enough, goal oriented, and can envision the benefits of having the $ 1 million liquid savings as early as possible, you can definitely aim for a higher rate of savings.

So, it’s time you create a budget and list down all your monthly expenses. Please analyse your ESSENTIAL and NON ESSENTIAL expenses, and try to reduce or cut the less essential expenses. This will increase your savings rate.

(I agree with some expert’s call to cut that daily Starbucks, buy second hand car or use public transportation, wear cheaper clothes, eat cheaper (but healthy) food, until you can stabilize your income)

Sir, but monthly budgets to track expenses are too tiring and tedious, I feel it’s very boring”,

 This is exactly what my young students tells me when I start talking about wealth creation.

My reply would be: “Until you can EARN WAY BEYOND YOUR NEEDS, please have the habit of tracking your expenses.”

So, what is earning way beyond your needs?

Okay this may sound weird but its just my own opinion.

Let’s say your monthly EXPENSES is $10,000 per month, which looks high, and need to be tracked.

However, in this case, your monthly income is $30,000.

You are a high earner. You are EARNING WAY BEYOND YOUR NEEDS, so perhaps you may decide not to waste too much time tracking your expenses and doing up a budget in detail. (I still think its always good to have an idea as to where your money goes !!!!)

Hey, you are saving 66.67% of your income, which is very good. So, rather than spending your time on budgeting, you would rather channel your energy to find out how to invest the money to achieve super normal % returns.

Alternatively, you may want to channel your energy and time to concentrate your time on increasing your $30,000 monthly income.

Until it happens, please do the “boring” budgeting and find ways to reduce your personal expenses.

If you are struggling to increase your yearly income by a huge percentage, I strongly suggest you start tracking your expenses and practice delayed gratification.

Please do not indulge in too many non essential expenses such as luxury travel, shopping and etc until your active income efforts pay off consistently.

In conclusion, combining the habit of increasing your earnings together with a high percentage of savings will really ensure you achieve your $ 1 million goal faster.

3) Investment

This is your final step and it will turbo charge your net worth or wealth.

Your monthly savings should be invested in various instruments that can generate returns above inflation rate (normal benchmark for Malaysians is 4%, but it could be much higher and I will write a separate post on inflation).

Examples of investment instruments to be considered include Unit Trusts, Shares of listed companies, ETFs (Exchange Traded Funds) through Robo Advisors, Peer to Peer Lending, Property Investment, Gold, Silver, Cryptocurrency, Amanah Saham Funds and etc.

The key is to pick between 2 to 3 instruments, learn them in detail and start investing in them.

Before you invest, makes sure you: –

  • Create an emergency fund which covers at least 6 months of your expenses (I suggest 12 months, and don’t forget to include your dependent’s expenses in your projections)
  • Settle all high interest debts, such as credit card and personal loans, for me, anything above 5% is considered high interest and so I will settle them off a.s.a.p, even before thinking about investing.

You also need to analyse your own personality before choosing an instrument to invest.

Some investors (with high capital) are very afraid about losing their capital so they prefer low returns instruments such as savings, fixed deposits, bond funds, fixed priced Amanah Saham funds and even EPF (Emplyee provident funds) as their investment choice.

Some investors are risk seeking, they have low capital, so would like to go all out (do or die approach) on their investments. They will invests in instruments such as cryptocurrency and small-mid cap equities.

The most important thing is don’t let greed dictate your investment decisions.

I strongly recommend a balance, keeping in mind your risk appetite, diversification, compounding returns and depending on time horizon.

Lets bring all this together…..

Assuming Mr A (25 years old) earns $ 5,000 a month for 30 years, and saves $1,000 per month in an investment instrument that generates 6.5% returns per annum.

He decides to reinvest all his annual returns to benefit from the magic of compounding returns. The total investment value after 30 years (when he turns 55) is:

(Source: Compound interest calculator at moneychimp.com)

So the questions is, if Mr A wants to achieve his $1 million goal earlier, what he needs to do.

He needs to:

  1. Earn more, either through superior performance in business or employment.
  2. Save more, save a higher percentage of his salary and bonus
  3. Choose an investment instrument which can generate a higher return, (but he must be willing to take on higher risks).

So, coming back to Mr A,

Assuming, Mr A earns $8,000 a month for 20 years and saves $2,000 (instead of $1,000) per month in an investment instrument that generates 7.5% (Instead of 6.5%) returns per annum.

He decides to reinvest all his returns, again to make full use of the power of compounding. The total investment value after 20 (instead of 30) at the age of 45 years old is:

(Source: Compound interest calculator at moneychimp.com)

Mr A retires in 20 years. It would be a nice bonus to have, on top of EPF savings when he retires at 55.

(The issue with the illustrations above is that its unlikely that someone can earn the same amount for 20 to 30 years, its normally progressive and incremental)

At the end of the day….

Personal finance (as the name suggests), is something personal. We should analyse our self and our situation making appropriate decisions to grow our wealth.

My suggestion to young graduates is this.

  1. Start the savings habit, as early as possible, even if you can save only $100 per month, just do it.
  2. Work hard in you job or business, increase your income.
  3. As your income increases, save more. (I call this incremental savings)
  4. If you get any unxepected or non routine windfall such as bonus or unexpected business opportunities, save a big portion of it.
  5. Learn about investment and invest your savings. (And this is lifelong learning which should not stop.

And the numbers will eventually add up.

I will write more posts focusing on specific areas of each component in the future.

So, which one is important? Is it Earnings? Savings? Investments?

You see, it would be easy to say all 3 are equally important, but that is something for you to decide in your journey to build wealth.

Personally, I am biased towards earnings, because there is no limit as to how much a person can earn, but there is a limit to how much a person can save.

There is also a limit to the level of risk a person can take when it comes to investing their money.

So, how much time should I spend on each component?

This is very subjective, a person who does not have the ability to increase his income substantially will definitely need to spend more time on savings and investments (with high risk vs returns).

While someone who can really earn really well, should spend most of his time on work or business to maximize his EARNINGS, while focusing on saving and investing a higher percentage of his income.

Different people will have different Income level, spending habit, saving pattern, risk appetite and much more, so I suggest you create you own plan to achieve whatever financial goal that you aspire to achieve.

You have to constantly monitor finances, and make many adjustments during the journey, as and when reality of life hits.

Thank you for reading and God bless you.

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This post has 10 Comments

  1. Its been 2 years since I passed my ACCA, and you are still helping me with your thoughts and now articles. Great read.

  2. Thanks for the very insightful article Mr. Sivasathish. All the key points have been very clearly articulated.

    1. Thk you so much Guru for dropping by. Hope I can add more value in the future. Appreciate your comments.

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