How Do I Become A Millionaire (In Five Years Or Less)? Asks A Hubber

OK, at The Money Gym we teach people there is only four ways to make money - using what we call the "Four Lanes Of The Wealth Highway". People get easily overwhelmed (I certainly do!) and if they feel overwhelmed, they feel helpless and therefore unable to take action.

By breaking it down into the "Four Lanes" we can break down the question of how to become a millionaire within five years and examine each lane to see how suitable it is, as a vehicle to reach this goal, then look at the fastest way to make money in each lane, then examine how achieveable this is, then look at what skills we will need to tackle the plan, then time-line it so we have some interim goals.

Luckily I have lots of experience in this kind of strategic wealth creation planning, as The Money Gym has worked with hundreds of people who have asked a variation on that question many times before.

First though, let's look at the definition of a millionaire and dare to ask the question "why"?

1. What is the definition of a millionaire?

The official definition is someone who has more than £1 million in assets, after taking all liabilities (debts) into account. And the other consideration to take into account, is how much are they paying for that debt.

Thus who is better off? Someone who has over £1 million pounds worth of equity in their house and a mortgage of £500,000 at 6% over 25 years, with no consumer debt? Or someone who has £1 million of equity and a mortgage of £200,000 at 6% but £100,000 of consumer debt at 14%.

Once you know that £3000 of consumer debt at an average %, who is only paying just over the minimum off per month, will take 37 years to clear...it becomes obvious who is the more financially intelligent person there.

So once we know that you need a million pounds worth of assets to be classed as a millionaire, we can look at questions like "is it better to have a million in the bank or a million in equity in your house?"

The latter is the financially intelligent answer, as the million in equity has traditionally doubled in value every 7-10 years in most of Europe, the USA and Australia, so £1 million in equity will make another million in 10 years. What's more, there are ways to get at that money legally and tax free!

Whereas £1 million in the bank might be making 6-10% per annum at a push, but the rise in the cost of living and the fact that you will pay tax on any interest at your highest rate (40% or more if you have those kind of assets) will ensure that your million is effectively shrinking not growing at all.

(Dont' believe me about the doubling in value? check your local Office of National Statistics website)

SEE BELOW FOR THE REST OF MY ANSWER.....

Moving onto the question of "why" we have to consider the question of why you would want to become a millionaire?

Most people would answer one of the following:

1. Freedom

2. Choice

3. Peace

Freedom from a job they hate, to spend time with the kids, to travel. Choice of how to spend their time, whether to have another baby, where to live. Peace from worrying about money and from having to do things they hate.

Well, you don't need a million to achieve all that. You just need to create a passive income from your investments to be able to cover your living expenses. See my other hub for a great little drawing on how this works, if you are a visual person.

If you are having a pretty nice life on say $2000 net pay a month, and you are working for that and having tax deducted from your gross pay, then you only actually need to generate about $2500 gross a month from your investments, as there are quite a few more tax breaks for business people and investors than there are for the employed. (A great book to explain this clearly is "Swimming With Pirahna Makes You Hungry" by Colin Turner).

So let's say a really great living would be $5000 a month and you don't need a million in the bank, then all you have to do is look at each "Lane of the Wealth Highway" and figure out which one is most likely to get you to a passive income of $5000 a month the quickest.

So what are those "Lanes" then?

1. Property Investment

2. Business

3. The Stockmarket

4. The Internet.

Now, I'm going to largely leave the stockmarket for now, as the learning curve involved is a bit steeper for most people, but briefly, in order to generate 12 x $5000 a month, you would need to be generating $60,000 per year from your investments.

If you assumed that a good investment was generating say 20% per annum (and I know of many simple strategies that do that and more) then you could say that you would need to have $300,000 invested to generate $60k a year at 20% return.

The other challenge with the stockmarket is that you have to sell, to realise the cash, and that incurs charges, and capital gains tax.

Lane 2 is Business and this is the way many of the wealthiest people in the world have made their money. I'll cover that next!

So what would it take to become a millionaire from the business Lane of the Wealth Highway?

You have two ways, to create a business that can pay you, over and above the amount you need to live on, $1 million over five years. So say you need that $60k to live on every year, your business would have to pay you $60k x 5 = $350,000 plus another $1 million (or $200,000 per year).

Now that nasty thing tax kicks in again.

if you want $1,350,000 out of your business but you are on 40% tax again, that $1,350,000 represents 60%, so you will need to be paid $2,250,000 in total over the five years or $450,000 per annum gross.

I worked this out by dividing the amount you want to take home by 60 then multiplying it by 100 to get the gross, after 40% tax has been deducted.

If you calculate that a business can afford to pay.....say.... 10% of it's profits to it's founder, then in order to pay you $450,000 gross per annum, then it must be making $4,500,000 ($4.5 million) per annum in pre-tax profits.

Now all you have to do is figure out which business to start that has that potential, and start building it.

The other, more attractive way, is to build up a business and sell it, usually for a multiple of turnover or profit - each industry sector is valued differently. Sometimes businesses are valued and then sell for x 5 annual turnover or x 10 annual profits for example.

So for you to pocket $1 million within five years, you need to enter a sector with good high valuations on sale, and then build your business to the levels when it becomes attractive to a potential purchaser.

If you are in a x 10 multiple of profit kind of sector, you need to build your turnover to profits of $100,000 per annum. Other factors are a good database of customers, repeat business ideally on some kind of automated marketing system and they really don't want the business to be dependent on you being there!

"Rich Dad's Guide to Investment" by Robert Kiyosaki is one of the best books I've ever read on this topic.

CARRY ON READING BELOW >>>>>

So that covers the stockmarket (not in detail but it's there) and the business Lanes of the Highway.

Let's move onto property investment shall we? While many wealthy people have made their cash in business, as many have made their money in property, and many business people put their money into property once they have sold their businesses.

Why? Because property is not such hard work!

In the same way that you have two ways to make a million in business essentially, you have two ways to make a million in property, within five years.

Actually, there are SO MANY ways to make a huge amount in property - like buying, renovating and flipping - but most of them incur capital gains tax whcih will make my sums harder, so I'm going to concentrate on the simplest and most tax efficient methods.

To make (and keep) $1 million in property in five years, you could work out that you need to create $250,000 rental profit per annum, net of tax, or $416,666 per annum gross. That's $34,722 per month. If you work out that a good rental profit on a small condo or family unit is $200 per month, then you can see that you need 173 rental units to achieve your goals.

An easier way is to create a property portfolio that appreciates in value by $250,000, per annum, which you can periodically refinance to pull out your equity, tax free (it's not earned income you see, so not taxable).

If you figure that property appreciates in value by 10% per annum on AVERAGE, which means that some years it will do better, some years not so well, but over time, 10% per annum is reasonable for most of Europe, the UK, the USA and I believe most urban parts of Australia.

So in order to own a property portfolio that will appreciate by $250,000 per annum and that's 10% then yes, you've guessed it, you will need $2.5million worth of property.

And before you tell me that this is impossible, let me tell you about my great friends Greg & Andy, who took £10,000 on a 0% credit card, bought property under market value, did it up a little bit, revalued, refinanced, pulled their deposit back out and went again, which enabled them to build up a £37 million (that's pounds NOT dollars) within just 10 years.

They can pull out £3.7 million per annum, tax free, but it gets even better than that.

Do the sums for yourself because every year, the compounding effect kicks in, and every year, their portfolio is growing exponentially, and so then is their available income every year.

CARRY ON READING THIS HUB BELOW >>>

Now lets move onto one of my favourite Lanes of the Wealth Highway, the Internet.

Now I'm not going to tell you that making money online is easy, but like all wealth creation, it's simple when you know how. I have created a hub in this "Wealth Creation" group that covers the three main topics of how to make money online.

I have myself created a six-figure turnover business, The Money Gym, using a very simple marketing plan, online, using just a five page website, a telephone, and a weekly ezine, but let me assure you it was not easy - I had to work at it. Every week, consistently, and I had to watch it growing slowly and certainly more slowly than I would have liked!

But every month the passive income element of that business grew and grew and I built it block at a time. First came an ezine, which became a 101 wealth creation tips, that grew into an ebook, which became a real book, which became a blog, which attracted traffic, which generated tele-seminar attendees, which became a group coaching programme, which became a 1:2:1 coaching programme, which became a membership site, which became a business with other coaches (ex-clients) doing the coaching, which became a three man business with out-sourcing to experts.

All from an idea and a one man band.

This is the most wonderful thing about the internet, the low level of intial investment required. If you have time and no money, you can learn to do it yourself (I did) or if you have more money than time, and know what you want to achieve, you can outsource most of it.