I have come up with a strategy to become a millionaire web developer. Spoiler alert - you don’t have to be a web developer for this to work!
This post might seem like a massive brag but that’s not my intention - it’s to look at a solution to what initially sounds like a ludicrous pipe-dream. Edit to add It also shouldn’t be considered advice - just the documentation of a thought process and something I’m going to implement myself.
But first, WHY?
Finances, budgets and watching the pennies is boring so to keep track of my money with enough dedication to reach such a lofty sum would be impossible without having a driving force behind me. Your reasons could be to travel the world, quit your job, pay off your parents mortgage, buy an Aston Martin DB9 or anything else.
My “why” is simple: I want to open a restaurant one day.
My mum is an amazing cook and often talked about doing the same thing - she now thinks she’s too old to do so (I disagree) but I’ve inherited the foodie genes and aim to make her dream come true one day.
My million(s) are going to help me get it started; the restaurant business is insanely competitive and most fail sooner or later. The only way I will be able to achieve my dream, is if I can have my lifestyle expenses covered via other means.
It’s worth noting that this isn’t get rich quick, but get rich (very) slowly. But first things first:
Set a Goal
I’m 30 and probably have a good few years of writing code in me yet but as I don’t have a magic crystal ball, I have no idea what opportunities will come along over the next 20 or 30 years. However, the goal is to have in excess of £1,000,000 to my name in the next 20 years so I can start my restaurant business. Without a goal, I’d never know if I’d made it - and would have no idea how to get there either.
So, with the marker set, what’s the plan?
I could save for the future. To hit my target, what would I need to put away each month?
1,000,000 / (20*12) = £4166.67
Over the next 20 years, I could squirrel away £4,166.67 every month into a shoe-box to hit my target. Business is good, but it’s not that good. So, maybe this isn’t so easy after all, eh?
Most people probably can’t save four grand a month, but they probably could save £400 a month - or close to it if they wanted to. For a web designer or developer, that is just 1-2 days pay.
( 400 * 12 ) * 20 = £96000
So, I could comfortably save almost 100k in the next 20 years. And that’s almost 10% to the target already! To get a bit closer though, I’ve got a few more ideas up my sleeve.
Curb my vices
I enjoy a coffee in the morning and a (few) drinks in the evening from time to time.
A coffee on the way to work is a nice to have - not a must have. Most workplaces provide coffee for free and I always have one before leaving the house in the morning. I could probably do with drinking less caffeine anyway
If my morning coffee costs around £2.50 and couple of glasses of wine in the pub costs £10-15, I could save anything from a couple of quid to ten or twenty pounds a day. Let’s take a conservative saving of £10 a day just by cutting out a couple of frivolous expenses:
( (10 * 7) * 52 ) * 20 = £72800
Not bad. For a few small sacrifices, I could put away an extra ~73k over the next 20 years. If I was a smoker I could double that - although fortunately for my health, I’m not one.
“Cash is not an investment”
I could have put something like £168,000 in the bank (over 20 years from saving £10 a day and £400 a month) - which isn’t bad, but isn’t anywhere near my £1million goal. But things start to get interesting with a little wise investment.
If I took my £10 a day and invested it in a fund with a 6% return - which is nothing special but not bad given current interest rates - things start looking up and it’s due to the power of compound interest.
Interest is earned each year and added back to the principal amount. This slightly larger amount then earns interest the following year, and is added back in, and year on year the balance grows exponentially.
Here’s a formula for working out compound interest:
// Y = years, P = principal investment, r = rate, c = contribution Y = 20 P = 0 // start with nothing r = 0.06 // 6% return c = ( 10 * 7 ) * 52 = 3640 // annual contribution Balance = (0 * (1 + 0.06)^20) + (3640 * ( ((1 + 0.06)^21 - (1 + 0.06)) / 0.06)) Balance after 20 years = 141,933.53
I could increase my potential savings (by reducing frivolous spending) from £72,800 to £142,000 by investing my money - almost double. Nice!
As a web designer or developer, earning above the national average salary or a good daily rate, you could probably save more. Let’s see the numbers when compound interest is in the picture when saving £400 a month.
I used this handy compound interest calculator from Moneychimp to save myself from doing the math:
c = ( 400 * 12 ) = 4800 a year saved balance after 20 years = £187,165.09
If you were able to put away £1000 a month, you could be looking at a pot of almost £470k after 20 years at just 6% return. Interesting, huh? What could you do with £470k in cold hard cash?
Free Money from the Government
You can invest the fruits of your labour, but what about a helping hand from those nice folks at the government? Does that sound good? Read on
If you invest in a pension, the government gives you free money in the form of tax relief. To put it simply, if you put £80 in a pension fund, the government will give you £20 for free to make the contribution up to £100. This is if you are a basic rate taxpayer. But if you pay more in tax, you get more tax relief as per this graph from Money Saving Expert
Pensions are a huge subject - and one in which I’m not an expert at all. The short version is: if the government will give you free money, take it!.
Money can work hard if invested wisely, but interest rates are pretty low at the moment so this puts a bit of a go-slow on growth. Leverage - by taking out a loan - on the other hand, makes things really exciting. Buying property with a mortgage, for example, allows your money to work even harder.
A typical loan to value (LTV) ratio for an investment property is 75% - ie. you need a deposit of 25% to get involved and take out a loan (mortgage) for the remaining 75%. For a £100,000 property you would need £25,000 as a deposit.
So with savings of £100k, you could buy four properties, with £25k down on each. Over time, the value of these properties will rise and at some point the value of each of them might have gone up to £125k - this would only take a few years as property prices double every 10 years or so (sometimes in as little as 3 or 4!). Don’t believe me? Check out this recent episode of the excellent Property Podcast: Does property really double every ten years?
If each property goes up by £25,000, that means the whole portfolio has increased in value by £100k. This is a return of 100% on the initial investment (over time). That sounds a bit better than 6% annual return, right? There are still mortgages to pay, but there will be tenants in these properties paying rent - and paying more than the mortgage payments each month. In fact, most property investors will be after a return on investment (ROI) of around 10% just from the rental income alone - with the capital appreciation a mere bonus!
Saving money is hard. In fact, I’d quickly run out of fingers when counting the number of times I’ve come to the end of a month and seen close to a zero balance in my account. If there’s nothing left, there’s nothing to save, right?
The only way to save is to pay yourself first - and then spend only what’s left on necessary expenses and then on entertainment and fun stuff. And in my experience the only way to make this a reality is to automate the process - you don’t miss money you never see.
Here’s a bullet proof 4-step process for automating paying yourself first:
- Create a savings account online - you don’t even need to leave your desk!
- Set up a standing order for your savings amount (say £400) to leave your current account the same day your paycheck hits it
- Reschedule all your recurring expenses (rent, phone, broadband, software subscriptions, etc) to come out on this same day
- Spend what ever is left (and nothing more!) for the rest of the month
When you’ve accrued a reasonable sum, you can start a pension or pay into something like a multi-asset fund - again, I’m no expert so I’d definitely seek the advice of a competent financial advisor at this point.
I’ve outlined a few ways to save money, and make it work for you by investing it wisely. I’ve outlined my goal of £1,000,000 in 20 years but what is a goal, without a strategy?
It’s worth noting that you don’t have to be a web developer or designer - or banker, doctor or lawyer for this to work; really all it takes is a bit of discipline and a system that does all the hard work for you.
My strategy is a bit more pro-active than just saving a tenner a day or a few hundred a month though:
I’m currently saving 50% of my net earnings each month
I’m putting around £3,000 a month into savings and investments. This allows me to invest £36,000 a year in my future - which over 20 years would actually grow into just over £1.4 million in a fund with a 6% return.
But realistically, I don’t know if I could sustain that level of saving for 20 years, so I’m being a bit more aggressive with my strategy instead.
I plan to buy one investment property per year for the next 10 years. My figures are based on 1-2 bed flats and terraced houses outside of London - where prices are still relatively affordable and percentage rental yields are stronger. After 10 years, the profit on the rental income will earn enough for me to continue to buy one property a year without saving any more of my money. Don’t believe me? Take a look at this spreadsheet:
After 10 years, the rental profit from 10 properties will be at least 25k a year, which will cover the deposit for (at least) one property a year for EVER. This simplified plan doesn’t account for interest rate rises but also doesn’t factor in rental increases or any of the capital appreciation.
If this plan works, I’ll actually have a net worth of a million in 10 years, leaving me another 10 years to make it grow even more.
Remember than property prices (tend to) double every 10 years on average? Well that means that after 20 years, my portfolio could be worth approximately £2 million. At this point I’ll probably go on holiday and chill out for a day or two ;0)
My target and my restaurant dream is a bit of a way away yet, but having a big goal, is the first step to achieving it.
I’d be really interested to hear your feedback on this one. Does it sound mad? Does it sound doable? Do you think it’s something you could do? I’d love to hear your thoughts! Shoot me a tweet @guyroutledge and let me know what you think!
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