Ramit Sethi says this “super conservative calculation” can still turn a low-earner into a millionaire

With a popular Netflix show titled How To Get Rich, a popular podcast, and a self-made personal net worth fortune of $25 million, financial management advisor Ramit Sethi is not shy about breaking the principles of investing into basic math principles that anyone can utilize.

Ramit Sethi includes some helpful tips from his NY Times bestseller, I Will Teach You To Be Rich. Contrary to many assumptions, Sethi makes the point that the majority of millionaires are first-generation wealthy.

Sethi has advice on how to become a millionaire, even for those who:

• Weren’t born into wealth;
• Didn’t attend an elite college
• Don’t earn $500k a year.

Sethi cites 3 Main Levers to hit a $1 million net worth:

Lever 1: Investment Time Length

Starting early investment habits build up wealth over the long haul, thanks to compounding and historical market index gains.

• Sethi has personally invested for over 25 years and advises taking advantage of compounding interest for as long as possible.
• Ex: With a $50,000 income, to take $7,500 (15%) and invest it for 30 years can grow to $743,849, based on a 7% APY and 0.1% fee.
• A 34-year investment will result in $1,006,939. 
• Growth accelerates past this point if left longer. 
• This growth is independent of any salary increases.

Lever 2: Investment Amount

Increasing investment amounts during one’s peak earning years will accelerate the pace at which an investment fund will reach $1 million, assuming the same 7% APY is the conservative constant.

• Ex: by investing $425 per month, or $14 per day, one can easily become a millionaire by age 65, or in 40 years.
• At the same 7% APY, this would grow to $1.028 million.
• A 1% per year increase accelerates reaching $1 million faster via compounding.
• Ex: Year 1, invest 5%. Year 2, 6%, and so forth. This will quickly amass hundreds of thousands in invested income. This is also because each year a salary increases, the percentage sum increases as well.
• Additionally, cutting unnecessary expenses and basing the percentage off a 2-income family for those with spouses, exponentially increases the amount of savings that are generating investment growth.
• Sethi also advises investing 20% of any salary increase and to enjoy spending the 80% leftover.
• Additionally, any money earned from a side business can supplement the investment fund.
• Sethi notes that the 35-55 age bracket is the one where most people enjoy their maximum earning power, so contributing to an investment program early on allows one to maximize the additional investment potential from extra income allocated towards an investment plan. 

To reach the $1 million mark in 30 years, Sethi calculates an investment amount of $10,100 per year at the same 7% APY and 0.1% management fee equates to $1,001,716.

To reach the $1 million mark in 20 years, Sethi calculates an investment amount of $23,100 per year, at the same 7% APY and 0.1% management fee. 

Lever 3: Investment Returns

Investment returns can exceed expectations, provided one doesn’t pay out unnecessary high fees and other expenses that can eat into gains over the long period.

• Despite various schemes that have cropped up every year for abnormally high returns, the stock market index has had a historic average real return of roughly 7=8% since 1957. This is an average gross amount of 10.26% – 3% for inflation. 
• Sethi cautions about paying fees. A 1% fee equates to over 27% of one’s potential lifetime return over the long haul. He advises flat fee or hourly rate only; NEVER a percentage. 
• Sethi advises not paying higher than 0.2% for management fees, if needed. 

Sethi notes that because of the emotional component towards money, many people feel that they “can’t afford it” or invest too small to realize larger gains. Additionally, attitudes, behaviors, and discipline levels differ broadly between people. Stereotypes about trading the market or the evils of capitalism can create close-minded reluctance to learn about investing fundamentals. 

Special circumstances, like caring for infirm relatives, having children, unforeseen medical emergencies, etc. can all throw a wrench into one’s investment plans. 

Sethi cheekily points out that real investing is “boring” and like “watching paint dry.” However, the rewards from growing an investment fund to achieve the financial capacity to spend generously on personally important family goals, charitable causes, or other areas are well worth the effort.

This article is intended for informational purposes only and should not be construed as investment advice on its own. Professional advisors should be sought if such counseling is desired.