While looking at Moolanomy’s blog the other day, I stumbled on an intriguing post that illustrates why it’s hard to break that P1-million net worth mark.
It’s not just the persistence and focus needed to make your first million. Moolanomy correctly points out that it’s also mathematically challenging.
“If a person invests $15,000 per year starting at age 25 and the investment gains on average 10% a year, he can get to $1 million mark by 45. The first million took 20 years! But if you keep going down the table, it only takes…
6 more years to get to $2 million at 51
4 more years to get to $3 million at 55
3 more years to get to $4 million at 58
2 more years to get to $5 million at 60
2 more years to get to $6 million at 62
2 more years to get to $7 million at 64
1 more years to get to $8 million at 65
This confirms what one of the readers of this blog said in a comment on my post on The Science and Art of Making Your First Million. He said:
“Making your first million is the hardest because you’re starting from scratch. The next million is less hard. The succeeding millions are easier because you have a bigger base. Money begets money.
I made my first million at 25 in real estate during the real estate boom in early ’90s. I had to bet all my savings and borrow money to do that. Now I earn the same amount in interest alone.
Business is the fastest way to make money. It is also the fastest way to lose money if you fail. Don’t worry it’s okay to fail but don’t lose it all.”
Inspiring, right? As I was looking through MoneySmarts’ archives, I realize Pinoy Investor is only in his thirties. Unfortunately, he doesn’t want to be interviewed 
For average Filipinos, making the first million by 25 may not be as easy though. But what if we make some simple assumptions. Say, regular savings of P2,000 a month starting at age 20 when most of us start working? The table looks like this:
It will take 16 years to make your first million!
But it gets easier after that…
6 more years to make the second million
4 more years to make the third million
3 more years to make the fourth
2 more years to make the fifth
2 more years to make the sixth
1 more year to make the seventh
…then you’ll be making one million a year after the eighth.
Consider that this illustration is only for a P2,000 savings per month on a 10% return per annum. Come on guys, we all can do better than that!
48 Responses to “The first million is the hardest”
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November 16th, 2007 at 1:27 am
anna, most of us are caught up in our little world here in the Philippines. Global diversification means putting money in different markets, ie Singapore, Hong Kong, Japan, China, US, Europe etc. By putting eggs in different baskets, investors say they improve chances of earning more because those markets move differently in reaction to different domestic developments. This is the reason why American funds have some of their money in US, Europe instruments etc., but also save some for emerging markets. It’s not just theory, there’s a mathematical reason for this.
One expert, Mark Yu (President of the CFA Society in the Philippines), explained this to me this way. Consider dividing your portfolio in five equal parts and placing them in different funds, which give the following returns in one year:
Fund 1 — 12%
Fund 2 — 5%
Fund 3 — (-7%)
Fund 4 — (-2%)
Fund 5 — 2%
Overall return — 10% (hey, i didn’t design for this to be at 10%. i just made it up as i went along)
Compare this with just putting your money in one investment. With luck you could have hit 12% if you put your money in fund one, but statistically, there’s one chance in five for that to happen. There is more likelihood you would have placed your money in the others, which meant you would have earned at most 5%, or worse, got a hit of negative 7% for your entire portfolio.
November 16th, 2007 at 12:49 am
Pinyo, thank you for the very helpful replies. What do you think about just putting money in a globally diversified fund and letting the fund do the asset allocation for you? Most people would find it very difficult to keep track of funds from different markets.
on your reply to mikoy, that makes a lot of sense. reducing expenses can have a bigger impact in the long run. inflation will probably eat into the amount of money saved from expense reduction but inflation is much lower, especially in the case of the Philippines, from taxes.
November 16th, 2007 at 12:10 am
@mikoy - reducing any kind of expenses had tremendous impact on your wealth building. If you compare dollar to dollar — i.e., reducing expenses $10 versus earing $10 more (or P10 in your case) — reducing expenses has greater impact. One simple reason is when you earn more you also have to pay tax on the additional income, so equal amount of saving automatically wins.
@anna - for example, my 401k investment (US) involves diversification based on company size (i.e., large cap, mid cap, and small cap), globally (i.e., US companies versus international companies), by industry (e.g., REIT, technology, etc.), and non-equity (i.e., bond). So you can do something like: X% in Philippine stock fund of various size, X% in emerging market, X% in US and European stocks, etc. I highly recommend keeping the expense as low as possible — i.e., use index funds.
November 14th, 2007 at 6:19 pm
@Pinyo..
“You are right about the fluctuation, but it’s possible to get on average 10% annually if you invest long-term using a globally diversified portfolio and asset allocation strategy.”
- sounds complicated.. what do you mean? I do have very little munny in mutual funds.. im just starting to REALLY save
November 14th, 2007 at 5:35 pm
Next trick you can learn is the Rule of 72: 72 / yield% = # years to double your investment. Given the figures above, bonds could double in 36 yrs in real stuff(i.e. beer and pulutan, not depreciating pesos), while stocks could double in just 6.