Do you want to become a millionaire? Not in the game show but in the game of life.
You will agree with me that one of the secret of the wealthy is how they take advantage of tax breaks. Roth IRA is one of those accounts with awesome tax advantages.
As in all successful ventures, the foundation of a good retirement is planning.—Earl Nightingale
Table of Contents
Having a million dollars is not what it used to be. For example, $1,000,000 in 1950 now has the purchasing power of about $10,170,954.36 in 2017. That a whopping 9 million dollar difference in 67 years. More information about the effect of inflation here.
However, I still believe that real wealth building starts with making the first million dollars.
I am sure you have heard of that saying before. This is still true even for physicians for many reasons. Here are few reasons I personally think making the first million is the hardest.
Debt is the enemy on the millionaire path
To have a positive net worth, you have to dig yourself out of your debt hole.For many physicians, we accumulate a lot of debt to get to where we are today. Don’t get me wrong, it was money well spent, or should I say well borrowed. I started with around 200,000 dollars negative net worth and we are now very close to zero. Thanks to extra shifts, early investments and curbing our spending. Yes! The homeless person on the street is likely richer than your doctor. Think about that for a minute. While some may be homeless, they most likely don’t owe 200,000 dollars in loans.
You need Self-confidence to become a millionaire
Money and self-esteem are intimately connected. You have to believe you can become a millionaire to realize that dream. This is worse if you have the constant fear of not having enough. I for one, viewed millionaires as gods when I was younger. Billionaires are super gods.
We all have doubt, worry and anxiety about our finances. This affects how we build wealth. I employ you to change your belief on wealth.
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.-Winston S. Churchill
Good news for you! The first million have been known to boost self-confidence and the ability to earn more. If you can make 1 million dollars, then you can make 2. So follow me on that journey to the first million.
Compound interest/inertia is an important principle to know on your journey to becoming a millionaire
After the first million, compound interest goes into high drive. I think of this as the law of inertia. Inertia is the resistance of any physical object to any change in its position and state of motion. Once the object starts moving though, it is more likely to keep moving unless stopped by another force. I know, I know. I sneaked in some physics there. But it applies!
In the beginning, it might feel like your money is not growing. But rejoice! For many people, once you have your first million, it takes about half that time to make the second million.
Here is a boggle head forum on what people think about doubling your first million.
The first thing to take care of, before accumulating wealth is to cure all your bad financial tendencies. Curb your spending! Learn from the rich people. For example, Warren Buffet once bought Bill Gates lunch at McDonald’s with coupons. The fact that you are rich does not mean you should not value a good deal. You don’t have to be a wasteful spender. If you want some entertainment, read the story about the couponhere.
There are countless people who have won the lottery and are now broke. Similarly, there are many athletes and celebrities who have made millions and are now also broke. These are prime examples, of poor financial literacy. Even, when handed millions, you will lose it overnight if care in not taken.
Brief Roth IRA review
Roth IRA is a form of retirement account. You contribute after tax and it then grows tax-free. It is also tax-free when you withdraw the money at the appropriate time. This is my favorite account personally. It’s a win for everyone. It is even better for those who think they will be at higher tax bracket upon retirement – aka high income earners.
Roth IRA is appealing for many reasons. It helps you diversify you pretax and after tax money “buckets”. You have the 401k with pretax money, then the Roth IRA with after tax money. This helps to minimize the tax burden in retirement. Also for someone like me, who believes in leaving inheritance for children, with Roth IRA, you can leave assets to your children tax-free.
Just make sure you are not over the IRS limit. If you are above the limit, then read up about backdoor Roth IRA.
You are probably saying to yourself by now, show me the calculation and how to become a millionaire already. Here we go below.
Financial calculations are fun
Chances are that you will not be investing in Roth IRA alone. But just for fun, let us do a calculation on how long it will take if all you do is contribute 5,500 dollars in Roth IRA every year.
Get out your calculator! If you faithfully contribute the maximum amount to your Roth IRA, which is 5,500 dollars per years, It will take less than 35 years to become a millionaire. I divide 5,500 by 12 to put the monthly amount of 458 dollars. If you start contributing at 14 and you manage to max the Roth IRA, you will be a millionaire by 50 years old. Not too shabby. Of course, our regular market assumption holds true – 8% average annual interest on your investment. You might not start at 14, i know, but start now and take advantage of your Roth IRA space. Read the post on time value of money to see why it is important to start earlier than later.
The fun part of the Roth IRA millionaire, is that you are really a millionaire. No tax when you withdraw it – you might have to wait till 59 years old to withdraw without a penalty but I’ll take it.
I make sure to contribute 5,500 dollars for myself and 5,500 dollar for my wife every year. That’s 11,000 of tax-free money invested every year. We backdoor it now of course, due to income limits. It might not look like much to you, but you will surely become a millionaire if you keep maxing your Roth IRA every year.
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Play around with my compound interest calculator here
Adebayo
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I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
