Million-dollar goal gets multiplied by two big financial tricks

Becoming a millionaire is still a significant achievement, but true wealth today comes from multiplying your money.

A million dollars isn’t what is used to be, but is still significant. Picture: iStock

The idea of being a millionaire still has a nice ring to it, even though Australia is flooded with more millionaires than ever.

Property owners are often millionaires simply based on the price of their home, thanks to soaring values in recent years.

Some measures of wealth exclude the family home in their calculations, which is misleading because homeowners can sell their property and walk away with the proceeds while renters unfortunately have no such asset to sell.

You may think that having a million bucks of wealth is not fancy enough anymore, but it’s still the best ticket to achieving millions two and three, which make an independent financial future much more likely.

However, growing that first million is the toughest hurdle to clear for most people, particularly in a world where we spend most of what we earn, and sometimes more. It requires discipline, a plan and a willingness to take risks.

It’s hard work making a million bucks, but the next ones are easier. Picture: iStock

In his new book Virgin Millionaire, author and financial adviser Ben Nash writes that the average cost of financial freedom in Australia today is $3 million.

“This comes from $2 million in investments to generate your income, plus almost $1 million for the cost of owning an average home, mortgage-free,” he says.

The first million will be the hardest to make, because the saying “it takes money to make money” is true to a large degree. But it doesn’t have to be just your own money working for you.

There are two massive tools to help anyone become a millionaire and later a multi-millionaire: compound interest and leverage.

Compound interest is the process of earning interest on your interest on your interest and so on. Its biggest benefits come from annual returns being reinvested, and the bigger the balance, the bigger the benefit.

For example, a single $100,000 investment earning 8 per cent of year, with those returns compounding, can grow to $222,000 over a decade, according to Moneysmart.gov.au’s compound interest calculator.

However, a larger $1 million investment compounding at the same rate over the same 10-year time frame grows to $2.22 million – an easier way to make a second million.

Compounding is why real estate investment makes people so much money, because properties usually start at $500,000 so the compounding effect, even with modest investment returns, is magnified.

Leverage, the other powerful tool for making multiple millions, is using other people’s money as well as your own to buy a bigger initial investment.

A property mortgage is the best example of this but it also works for other assets such as shares, investment funds and businesses.

You can use leverage to turn, say, a $100,000 deposit into a $1 million property asset. When that asset grows 8 per cent in one year, you will make $80,000 on your initial outlay – although borrowing costs will eat into the earnings, and you must be prepared to take the risk.

Nash’s new book quite rightly says you need debt to get rich. He says while people can get ahead without using any debt, “in my opinion it just doesn’t make sense”.

More Aussies are making their first real estate purchase a rental property rather than their own home, using other people’s money – the banks and the tenants.

The rich get richer because they have more overall assets growing for them. It doesn’t matter whether their annual growth is 6 per cent, 10 per cent or more – their wealth expands because the power of compound interest and leverage constantly combine.

Originally published as Million-dollar goal gets multiplied by two big financial tricks