What does it take to be a millionaire? – On the Money with Jarryd Neves

Jarryd Neves
On the Money. Budding stock market investor Jarryd Neves, of BizNews, sends out an invitation to everyone who wants to ask questions about share investing – but is too embarrassed to ask. Write to [email protected] And tune in for his regular Monday column: On the Money

We’ve all dreamed of winning the lottery. It’s a fun pastime, wondering what you’d do with all that money. One minute you’re a pauper and the next, rubbing shoulders with princes. As lovely as it is – fantasising about which colour Bentley you would like – your chances of winning the lottery is one in 14 million.

While the lottery has the ability to make you an instant millionaire, the chances are pretty slim. So what else can you do if you want to eat your cereal with a diamond-encrusted spoon?

The reality of becoming a millionaire is far from the expectation. It’s very hard work. Constant sacrifice and dedication that could see you sacrificing your wants – and some needs – to obtain millionaire status.

Unless you’re already earning bucketloads of cash, a monthly salary won’t make you a millionaire. However, saving and investing what you do earn can put you on the right track. Staying out of debt is important, too. Servicing credit card bills is taking you in the wrong direction.

Saving and avoiding debt may not be good enough. It’s also keeping your cost of living down to a minimum. One millionaire I spoke to (let’s call him Samuel) says he still lives like he did when he was a student. With a substantial net worth, he gets around on a bicycle – or a Toyota Yaris, should he need to travel longer distances.

“It takes a lot of dedication. If you really want to become a millionaire, you have to be patient, work hard, and remain focused. Being distracted by material things will only set you back, even after you’ve made your first million,” he said.

Samuel* earned a decent salary from his day job, but it wasn’t enough to keep him on track with his goals. At the age of 26, he worked two jobs, investing everything he earned from his second occupation in the service industry. “Don’t let pride get in the way of your goals. Many people see service industry jobs as beneath them. Work is work. I invested my earnings and only quit to further my studies.”

If working a second job isn’t for you, consider a ‘side hustle’ – a personal project or side business that can make you money after hours.

Many millionaires (and billionaires) are exceptionally frugal. Warren Buffett famously lives in the same house he bought in 1958 and reportedly purchases a $3 breakfast from McDonalds. This lifestyle, despite his net worth of $95 billion, is how he and the other clever money stay rich.

Samuel would seem to agree. “You have to get used to not spending money or splurging. Yes, it’s nice to dine at restaurants and wear fancy clothing. At the end of the day, it won’t get you anywhere. That’s not to say you shouldn’t enjoy your money, either. Life is short and to be enjoyed. But there’s a fine line.”

Most young people envision a millionaire ‘lifestyle’ as a champagne-soaked festival of decadence and glamour. While there are those lucky few who do, in fact, live like that, most millionaires got to where they are through frugality and clever investing. “Yes, a Bentley is lovely. But I fail to see how it will make me money,” added Samuel.

Last week, I asked you to send me your finance and investment queries. Here, Johan Steyn, CFA* of Stellenbosch University, and Stefan Janse van Vuuren* of Brenthurst Wealth Management, share their expert advice by providing answers to your questions.

Charlize asked,
I’m 26 years old and save R5,000 p/m. If I continue to save at this rate, I’ll have R300,000 by the time I’m 30. Are there any tips on reaching R1m in the same time frame?
 
Johan answers,
First of all, well done for having the self-discipline to save every month. Yes, if you put away R5000 under your mattress for 60 months, you will end up with R300,000. Putting it in a money market type account which pays 6% interest per year will increase your final amount to roughly R348,850.

However, if you want to increase your return above this final amount, then you will need to consider taking on more risk. This means you must be willing to potentially lose some of your hard-earned savings. The amount of risk you take and the corresponding assets you invest in should line-up with your overall risk tolerance. That is to say, how much are you potentially willing to lose? If you opt for a globally-diversified equity portfolio and manage to generate a decent 15% average return per year, your final portfolio value will equal R442,873. If this return equals 20%, then your portfolio value would increase to R508,791. As you can see, this amount is still some way off from R1m.

To get there, you will need to produce an average annual return of 42.6%! Which is very optimistic for any investment portfolio. To consistently generate this level of return is uncommon, especially if you stick to traditional asset classes. Also, you would need to take excessive risk, which could result in hefty drawdowns in your portfolio. If you are willing to lose a substantial part of your savings, you could opt for more risky, non-traditional asset classes like cryptocurrency, which may have the potential to get you there. All the best.

Ed asked, 

If one purchases a property and rents it out to generate an income, all costs in maintenance and mortgage interest are offset against income.

If you purchase shares on credit, can one offset this interest cost against the dividends and capital gain?

Stefan answers,

Unfortunately, the interest expense is unrelated to the shares and can’t be deducted from the investor’s taxable income as is the case with a mortgage bond. Dividends are taxed at a flat rate of 20%. Capital gains tax is only relevant to an individual’s taxable income once realised, subject to the individual’s R40,000 annual capital gain exclusion and the 40% inclusion rate. Read more to understand the risks and rewards of investing in property.

Also, please note that it is not encouraged to take on debt to invest in the stock market due to the risks involved. The first point of call from a financial planning perspective is to ensure that you have an adequate emergency fund before entering into the stock market. Read more about the components of a financial plan here. To create a financial plan and investment strategy best suited to your needs, speak to a qualified, accredited financial advisor.

  • Johan Steyn, CFA is a lecturer in Investment Management from the Department of Business Management at Stellenbosch University. He holds a Masters in Investment Management and has a background in Fund Management. Stefan Janse van Vuuren is a financial advisor at Brenthurst Wealth Management.

Have a question about share investing? Write to me at [email protected].

Read more:

*Samuel is a pseudonym.

(Visited 1,087 times, 7 visits today)