How To Go From Zero To Your First Million

Your first million

In a recent post, I wrote about my journey from zero to one million.  It was anything but predictable, full of setbacks, tough stretches, and lucky breaks – but making that first million was totally worth it in the end.

As I wrote about my experience, I cautioned readers against spending too much time forecasting their net worth.  Life is bound to throw a few curveballs at you.  You simply can’t create an Excel spreadsheet robust enough to accommodate them.

But that got me thinking – if I can’t give you a detailed roadmap, can I at least try and signpost the journey for you?  What would the road ahead look like for someone who is based here in the UK, is starting from scratch and determined to become a millionaire?

Sure, you are bound to have some ups and downs along the way.  It might take a bit longer – or you may end up getting some wind in your sails and crossing the finish line ahead of schedule.

But the beauty of building wealth is that unlike many other things in life, it’s not binary.  As long as you do the right things, you will achieve your goals.  All it takes is consistent execution.

Do you want to know where your first million will come from – and how long it will take?  Then let’s dive in.

Establishing The Building Blocks

Building wealth may not be easy, but it’s simple.  Let’s start by recapping the three fundamental principles:

  1. Spend less than you make
  2. Invest the difference
  3. Watch your wealth grow

The gap between your earnings and spending is also known as the savings rate.  The higher it is, the more you have to invest.  The more you have to invest, the faster you’ll achieve your goal.

Here in the UK (and many other countries with woefully underfunded public pension systems) the government finally realized that if you don’t save for retirement, it won’t have the money to help you down the road.

So to help you avoid a diet of fried wasabi in old age, it came up with a couple of nifty savings schemes that reward you for saving money.

In practice, this means that the government will give your savings an extra boost – as long as you agree not to spend the money you save right away (which is kind of the whole idea of saving to begin with!)

The first such scheme is called a mandatory workplace pension.  You are forced to put a percentage of your salary aside every month – but your employer and the government will make a generous contribution as well.

As a result, you can double, or even triple the contributions you are making.  The higher your tax bracket, the bigger the benefit.

pension pot wealth creation

If this isn’t awesome then I don’t know what is

Then there’s the Lifetime ISA, in which the government will top up your contributions by another 25%.

It isn’t as attractive as the workplace pension (because you don’t get the employer match).  However, it is tax-free on withdrawal and provided you’ve maxed out your workplace pension contributions, this can be a very good place to put your money.

Finally, there’s the regular ISA scheme.   While it isn’t as generous as the two above (no employer match, no government top-ups), it’s nonetheless a wonderful tool to shield your investments from taxes.

Depending on the nature of your employment, there are other schemes you can participate in.  However, it is the three above that form the core building blocks of your wealth-building strategy.

Now that we have established the tools we’ll use to get you from zero to your first million, let’s get into the nitty-gritty.

Step 1:  Pay Attention To Your Pension

If you think pensions are boring, then consider this: pensions are the #1 tool used by the wealthy to grow their net worth.

That’s right – and there is a direct correlation between people’s net worth and the amount of money they’ve got stashed away in their pension account:

uk pension as % of net worth

The top two deciles have 50%+ of their net worth in pensions

In other words, if you are serious about building wealth, you need to pay attention to your pension.

Thanks to the government, this is something you don’t even need to worry about.  Provided you are 22 or older, your employer is required to enroll you into a workplace pension scheme.

Let’s look at what this could mean for someone making £30k/year, which happens to be the median salary in the UK.

You are required to make a minimum contribution of 4% of your salary.  That will be £1,200/year.

Your employer then piles in with a 3% match, which works out to £900/year.

Finally, the government jumps in with a tax break.  That adds another £300/year (as at £30k/year you are in the basic tax bracket).

When all is said and done, your £1,200 contribution turned into £2,400.  Isn’t that neat?

Provided you don’t do anything silly with your investments and go for a low-cost, diversified index tracker instead, you can expect an annualized return of about 8%.

It won’t be a smooth ride.  Some years you’ll clear 30%+ and feel ecstatic.  In some others, you’ll see the value of your investments decimated by an equivalent amount.

But if you stay the course, two things will happen:

  1. You will not lose money
  2. You’ll make a nominal return of somewhere between 6% and 10%, which is why I’ve picked 8% as the midpoint

Of course, life isn’t static.  I will assume that you’ll do well enough at work to at least get a pay rise equivalent to inflation (i.e. about 3%) every year.

That should be the absolute minimum because if you are young, smart, and motivated, you should find a way to grow your earnings much faster than that.  And if your existing employer doesn’t reward your hard work, just find a new job.

But assuming that your pay will increase by 3% per year, then so will your pension contribution.

At first, it won’t be very exciting.  As a matter of fact, once you’ve set your contribution level and investment mix, I’d encourage you to leave your pension on autopilot.  There won’t be much going on there for the first couple of years.

But after a while, thanks to the magic of compounding and minimizing your investment fees, things will get much more interesting.

So interesting that in about 25 years, your pension pot value will reach about £250k.  Not too shabby, considering you’ve only contributed about £44k out of pocket over the years.

Your First Million - Pension Pot

Boom.  You are 25% of the way on the journey to your first million.

Step 2: Take Advantage Of Free Money

It’s time to turn to the Lifetime ISA.

The rules here are quite simple.  As long as you are between 18 and 39 years of age, you can open up an account.  Once an account is open, you can keep depositing money into it until you turn 50.

The maximum annual contribution is £4k, which the government will top up by 25%.

By now, you already know all that money should be invested in an index tracker.  Once you’ve got it all up and running and on autopilot, it’s time to step back and let this happen:

Your First Million - Lifetime ISA

At the end of 25 years, you end up sitting on a cool £400k.  Add this up to the value of your workplace pension pot and you are 65% of the way to that coveted millionaire status. 

Which means it’s time for:

Step 3:  Bring On The ISA

There’s a gap of £350k to bridge to get you to your goal of becoming a millionaire.

Assuming you don’t overcomplicate things and put your savings in a good old stocks-and-shares ISA account, you’ll need to contribute about £4,500/year for 25 years until you build up a balance of £350k.

Your First Million - ISA

Boom.  Here you go – you now have £250k in your workplace pension, £400k in your Lifetime ISA and £350k in your ISA.  Provided my math skills haven’t abandoned me just yet, that means you are now a bona fide millionaire.

And not the boring, dollar kind either.  Nope, you’ve got one million pounds, which hopefully translates into much more than $1.3m if when we ever recover from that Brexit-induced punch to the gut.

Bringing It All Together

Let’s now take a step back and see how the three pieces of your millionaire equation come together.

It will take you about 10 years to go from absolute zero to £200k.  This is the toughest bit, the place where most people falter.

The advantage that you have, however, is that this is the part of the journey where you are youngest, most energetic and highly motivated.    And things get rather easier from here onwards.

Because the next £200k will only take six years.  By this point, you will have found your pace, so you will add a further £200k in another four years.

And the last £200k will take just over two years – five times faster than the first £200k (which I’m sure felt like a total slog).

In other words, you’ll be like a runner smashing through the banner at the finish line, feeling mightly ecstatic that you didn’t give up when it felt like you are hitting the wall in the early years.

Path to your first million

This is the magical road ahead of you

And the reason it gets easier with time?  Well, take a look at the graph below.

Save for your pension contribution, the amount of money you are putting away isn’t growing over time.  It’s denoted by the blue line in the graph.

But thanks to the magic of compounding, your investments grow faster every single year.  That’s the orange line.

Your First Million - Contributions

Another way to think about it is to conceptualize every £1 you put aside as a soldier in your wealth-building army.

As that £1 works for you, over time it creates another £1.  Now you’ve got two £1 “soldiers” busting their chops for you while you sleep.  They create another two “soldiers”.

And if you give it enough time, you will go from a one-man squad to a whole army that is working tirelessly for you, day and night.

That is how millionaires are created.

I Need To Save How Much? 

I knew you were going to ask that.

If you are making £30k/year and contribute £1,200 in pre-tax earnings to your pension, your take-home pay works out to about £23k.

You then contribute another £4k to your LISA and £4.5k to your ISA.  This brings your savings rate (excluding pension) to about 37% (£8.5k divided by £23k take-home pay).

It may seem punchy at first.  But consider this:  as time goes on and your earnings go up, the savings rate will start declining.  It will go from 37% all the way to a very manageable 18% in your last pre-millionaire year.

Savings Rate Evolution

And even at the outset, you are still left with £14.5k of disposable income per year.  I am pretty sure this is significantly more than you had as a student – so why not live like a student for a few years until your compensation catches up?  You may even consider moving to a big city in order to take advantage of higher-paid jobs and all the free entertainment.

Still not happy?  Well, let me give you a fast and proven way to reduce your savings rate:  get a side hustle.

Working a regular 40 hour/week job leaves you with tons of free time.  So why not use some of that time to make money, instead of spending it?

If you can line up a gig making £10/hour, you only need to work 8.5 hours a week to cut your savings rate in half.  And if you find a way to work 17 hours a week (that’s one weekend day + two nights), the extra money you make will add up to exactly the £8.5k you are putting away each year.

To contextualize things, consider that doing 17 hours/week only gets your total workweek to 57 hours.  Still far below what most lawyers, consultants, and bankers do every week.

The difference, of course, is that while they are feeling mighty smug about their jobs, lifestyle inflation usually creeps up from behind and smacks them right between the eyes.  But that won’t happen to you – because you have your eyes firmly on the goal.

But I Want It Now

The more attentive of you will also have picked up on the fact that it will take 25 years.  You may consider standing up and heading for the exits, unwilling to bear the thought of waiting that long before you reach your magic number.

Do you want it now?  So do I.  But let me make a couple of observations.

First of all, if you start upon graduation, you will get there by the time you are 47.  And while it may not seem that way now, but as most of your 47-year-old friends (if you have any) will attest:  you are still young.

You’ve got at least 20 – 25 years of great health.  Considering you’ve spent the first 20-odd years of your life chilling out and partying, following that with 25 years of work to become a millionaire isn’t such a bad deal.

Secondly, I’ve ignored a bunch of things in my analysis, which makes the approach above rather conservative.

It ignores the probability of you getting married and forming a dual-income household.  It ignores the fact that statistically speaking, about 50% of the people reading this will have an above-average salary.

In addition, I’ve assumed the absolute minimum employer match when it comes to your pension scheme.  The majority of employers out there are far more generous – which means you can take some of the cash destined for your ISA and put it into your pension instead.

It’s exactly how these three people become pension millionaires.

Thirdly, I’ve ignored real estate.  While buying a property will reduce the amount of money you can sock away in your pensions and ISAs, the accretion of wealth from mortgage paydown and price appreciation will more than offset the impact.

Most importantly, remember this – no one owes you your first million.

As of today, only about 5% of individuals (or 10% of households) in the UK have a net worth that high.  It’s a high bar to clear.  Achieving ambitious financial goals is never easy.  Doing so on ordinary incomes is even tougher.

Despite what some people may want you to believe, get rich quick schemes don’t exist.  If they did, no one would be trying to sell you that proven method to go from zero to gazillionaire in 12 hours.

The sooner you stop trying to get rich quickly, the sooner you will start getting rich slowly.

Enjoy the journey!

About Banker On FIRE

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

Find out more about me and this blog here.

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6 Comments

  1. Hey BoF,

    Question for you on your index fund of choice. Mine has been a broadbased tracker world fund with low fees – rather than over exposing myself to the UK economy. Is this what you would do?

    My slight issue is that this effectively locks in my sterling : dollar FX rate as these funds are generally denominated in dollars (albeit you can buy a GBP version which is converted from USD). If Sterling strengthens, then the value of my investments in GBP will drop to compensate for the fx movement. So the USD value of my investments is effectively set as soon as I buy a world fund.

    Or am I missing something simple

    • On your first question, yes – get a low fee world tracker fund, set and forget. My portfolio is much more US-focused but that’s because (i) I’m a massive believer in the long-term outperformance of the US market and (ii) I might end up living in the US again at some point so want a local currency hedge.

      Bottom line is that the world tracker is a fine choice.

      On your second question, the nuance is that it’s more about the other currencies. If you hold a world fund, you are invested in euro, rouble, yen, peso etc-denominated stocks. So if I’m reading your question right, it’s really about how those currencies perform vs the GBP/USD FX rate. In the long run, i’d expect it to be a wash.

  2. Wow I loved this article! It’s great to see someone break down this information for a British audience. I personally am not a fan of the Lifetime ISA because of how restrictive it can be – but there are some definite perks. I should perhaps give it another go in 5+ years time when it matches my finances better. I also love how you’ve broken this down to an attainable salary – lots of people think that to retire well you need £100k+ as a salary, and that’s totally not true!

    • Yes, things get much easier if you have a roadmap you are working towards. But because we aren’t that great at talking about money here in the UK, many people are missing that roadmap.

      Agree with you on the Lifetime ISA. As with any deferred savings plans, there are bells and whistles. Just make sure to open one before it’s too late to maintain optinality.

      PS: I’ve tried to check out your blog but the domain won’t open for me

      • I definitely think that you’re right about learning to talk about money! I’m very lucky in that my parents introduced me to investing whilst I was young and talked to me regularly about how their decisions worked.

        The Lifetime ISA is a great idea, but as somebody who has a decent chance of living abroad, the idea of my money not being able to buy a house etc. in another country is a real turn-off – particularly as you get penalised!

        I’m disappointed to see that the link to my blog didn’t work, could you please let me know if this does? I can’t make a link here but it should be fine copied and pasted into a browser. I’ll make sure to find out what the problem is there – thanks so much for letting me know!

        http://www.theallroundinvestor.co.uk

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