Becoming a millionaire: how to save up to become rich

Provided for forever, never worry about money again – become a millionaire. For many people, this is a lifelong dream. There is more than one way to great wealth: Some millionaires have inherited their fortune, self-made millionaires are often founders of successful companies. But you can also become a millionaire by saving diligently. To do this, you need two things: perseverance and a good return on investment. But how much money do you need to set aside each month for your million-dollar goal – and for how long? We have done the math.

Three factors for maximum savings success

The ticket to the millionaires’ club is not easy to solve. If you can’t count on a large inheritance in the course of your life and don’t want to rely on a sixer in the lottery, you have to become active yourself. But not everyone has a brilliant business idea and the necessary know-how to earn a fortune and become rich with their own company.

Then saving is your best chance. For you to reach your million-dollar goal, three factors must work together optimally:

  1. You need an investment with decent returns so that your money and the assets you have saved grow quickly.
  2. You need enough time and have to sustain your savings efforts over many years. You will not become a self-made millionaire overnight.
  3. You need a sufficiently high monthly surplus that you can set aside and invest.

Invest your money in stocks

If you depend on solid profits, you can’t avoid the stock market and an investment in shares. In the current low-interest phase, German banks are only offering 0.13 percent interest on safe savings accounts. In the last 15 years, the average interest rate was 1.26 percent. But that is still too little to become a millionaire. You would have to earn over 1 every month for 40 years.700 euros to save a million euros at this interest rate. This is not realistic.

People Component Oliver Maier

Managing Director Verivox Finanzvergleich GmbH

Stocks are the best choice for long-term asset accumulation. Equity investments have the greatest return potential and in the long term the price risks are relativized.

Four basic rules for investing in the stock market

Investing in shares promises higher returns. But you should not put all your eggs in one basket and buy just any shares or funds you like. When investing your money, follow four basic rules to reduce risks and improve your return prospects:

Rule 1: Ensure broad diversification
Some shares have multiplied their market value in recent years. Don’t be blinded by such fabulous stock market stories. There are enough counterexamples of promising companies whose share price collapsed at some point, contrary to expectations. Investing in individual stocks is always risky. With equity funds or exchange-traded index funds – so-called ETFs – you automatically spread your investment across many different financial stocks. This makes you less dependent on the price performance of a single specific share.

Rule 2: Long investment horizon reduces risk of loss
"Buy and hold" was one of the guiding principles of stock market luminary Andre Kostolany. And rightly so, as data from the Deutsches Aktieninstitut confirm: Anyone who has invested in the 30 blue chips of the DAX and held their shares for at least 15 years has never had to accept losses so far. Over the past 15 years, the average annual return has been 6.7 percent – despite temporary price drops during the financial crisis. It is therefore important to have a long-term investment horizon so that you can ride out a possible crash. How to reduce the risk of loss and still benefit from the return potential of an equity investment.

Rule 3: All costs are charged to your profits
All costs incurred reduce your profits. This is what you should consider – when selecting your funds as well as when choosing a securities account.

Many actively managed equity funds are expensive. Annual fees of 2 percent of the market value are not uncommon. You first have to recoup this. ETFs manage with a fraction of the costs (usually 0.1 to 0.5 percent per year). They are not actively managed, but track one of the major indices one-to-one – for example, the DAX, the Dow Jones or the MSCI World. Few actively managed funds outperform their benchmarks over time. So with an ETF you have just as good profit prospects at significantly lower costs.

The second important cost factor is the securities account. Large established banks usually charge annual custody fees – usually a certain percentage of the custody volume. With a million-euro custody account, annual fees easily add up to five figures. With a free online custody account, you don’t incur these costs. Order costs are also generally significantly lower here than at branch banks – especially for ETFs. Some providers waive order fees completely for ETF savings plans.

Rule 4: Reinvest profits and dividends right away
When choosing a fund, make sure that profits and dividends are not distributed, but reinvested right away. These so-called accumulating ETFs are the best choice for wealth accumulation. The reinvested dividends and profits create a dynamic that is comparable to the compound interest effect. Future increases in the value of the fund not only affect the original capital, but also the capital gained so far. As a result, your assets will grow much faster and you will reach your million goal in less time.

How quickly you can become a millionaire?

But exactly how long will it take you to become a millionaire using this method? And how much money do you have to set aside for this each month?? Both depend on several influencing factors – for example, the return you can achieve in the future and the taxation of your profits.

So, like any forecast, our millionaire calculation is subject to certain basic assumptions:

Assumption 1: You want to become a euro millionaire
Becoming a dollar millionaire is not enough for you. Their goal is a fortune of one million euros.

Assumption 2: 8.9 percent annual return
In our model calculation, we assume that you invest your money in an accumulating ETF that tracks the DAX. We calculate with 8.9 percent price increase per year. This corresponds to the historical average annual return on regular stock savings on the DAX over a very long period of more than 30 years.

Assumption 3: Taxation according to current rules
We assume that you pay taxes over the entire investment period according to the rules in force today. You pay 26.375 percent final withholding tax on your profits, including the solidarity surcharge, with 30 percent of the profit remaining untaxed due to the partial exemption. Church tax is not taken into account in our calculation.

Assumption 4: Savings rates increase with salary
As your salary increases, you can also increase your monthly savings rates proportionately. Since the turn of the millennium, net wages in Germany have risen by an average of 2.6 percent every year. In our calculation, we also increase the savings rates by this percentage once a year.

How to save to become a millionaire

Under these conditions, how much you need to set aside each month depends only on the length of the savings phase. The following table shows the initial rates needed depending on the length of the savings period:

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