How to become a millionaire on minimum wage

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Becoming a millionaire is a pipe dream for a lot of people. But what if I told you it’s easier to accomplish than you might think and that you can hit this incredible wealth milestone on minimum wage?

Here’s how you can make some of your financial dreams a reality using some basic budgeting and investing principles.

[top_pitch]

What is the current level of minimum wage?

As it stands, the minimum wage in the UK is £8.91 for those aged 23 and over. You might see this given a different name because officially it’s the National Living Wage.

The actual ‘National Minimum Wage’ only applies to those under 18 and is a smaller figure.

For the purpose of this millionaire exercise, I’m going to be using the National Living Wage of £8.91 and a starting age of 23. So, if a standard working week is 37.5 hours, the gross minimum wage salary would be £17,374.50 per year.

After tax, this would leave you with a net salary of about £15,479 per year (or £1,290 per month). To keep things simple, I’ve not included pension contributions, student loans, or anything like that.

How can you budget well on minimum wage?

The method I’m going to suggest you use is the 50/30/20 rule. This involves splitting up your money into different categories for spending.

If you were to use your minimum wage salary of £1,290, the basic premise would be to use:

50% for essentials (£645)
30% for leisure spending (£387)
20% for saving or investing (£258)

Take a look at your spending and see if you can arrange your finances this way. You may find that you’re spending way too much in one of these three areas, in which case you should think about rearranging your money to balance things out.

Obviously, there are some costs you simply can’t control. But looking at your finances this way should give you a clearer picture.

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How can you become a millionaire on minimum wage?

Now, this is the exciting part. Remember the 20% from the 50/30/20 rule? Well, this is your key to success!

If you take that £258 earmarked for investing and follow some simple steps, you’ll be well on your way to a million pounds.

I’m going to use the S&P 500, which is a solid representation of the American stock market. Over the last 50 years, the average yearly return has been 10.9%. Of course, past performance doesn’t dictate future results, but if you were to invest using the figures from this index, the steps would look like this:

Start with £1.
Every month, invest £258 into the S&P 500 index.
Continue doing this like clockwork from age 23 to age 60.
Put your feet up and retire as a millionaire.

Based on the figures above, you’d be left with an approximate sum of £1,277,337 by the time you’re 60. You can use our investment calculator to play around with different figures and see the results for yourself.

A big factor leading to such an enormous total is the power of compound interest. After all, in the example above, your total investment would only amount to roughly £114,552. The rest is all interest!

Final thoughts

You’re now one of the lucky ones! This is because most people don’t understand that wealth can be created using simple budgeting and investing methods.

If you choose to invest and buy shares and funds, it’s also worth using a stocks and shares ISA. Because this way, you won’t have to pay any tax on your gains once you decide to start selling your investments and live off the money.

There are no guarantees when it comes to investing, and you may get out less than you put in. But by taking control of your finances and future, there’s a chance you could end up a millionaire on minimum wage.

Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post How to become a millionaire on minimum wage appeared first on The Motley Fool UK.

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