March 31, 2009, 5:00 am

What Happened To My Plan To Become A Millionaire?

by: The Financial Blogger    Category: Assets and Net Worth,Financial Planning
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moneyI recently had a comments by James-Montreal on my post about what age do I think I’ll reach one million dollar in assets. He was asking what happens now that we see the economy down and we don’t expect to see it coming back for the next year or two. Since this post was done about a year ago, I though it would be a great idea to update it and see where I stand now!

In my previous plan to become a millionaire, I started with the assumption of getting a 7% annualized returns. Since I am heavily invested in stocks, there should not be a problem over the long run. Historically, the market has been doing 9% before taxes and fees. Do I have to change my numbers since the market went down 40% and I did -27% with my Smith Manoeuvre last year?

The answer is the following: if you invest in the long run, you will still get a positive yield of return. I remember that only a year ago, the 5 years, 6 years and 7 years result for a growth fund (asset allocation of 75%-80% equity and 25%-20% fixed income) was in the double digit. Now it is about 3 or 4 % ;-).

Therefore, no changes here. However, Since the market is pretty low right now, I decided to increase my monthly investment and do some cost averaging. Therefore, I am now investing $500 per month in my Smith Manoeuvre. So If I try to become a millionaire at the age of 45, I will get 245K in my Smith Manoeuvre investment account (7% yield, $500 per month, already $8,500 sitting in the account).

I decided to become more realistic in regards to the mortgage I would pay off at the same time. Even though I pay prime –2 (yeah, this is a huge advantages of working for a bank!), I decided to calculate my mortgage rate at 4% (which would suppose a prime rate at 6% when we are currently at 2.5%). Therefore, I would pay off 21K by the age of 45K.

Then, if my house increase in value by 3% (it already grew up by 8% annualized for the past 2 years), my house would worth 510K. That is a huge improvement since we are starting with a market value of 300K instead of 275K last year (it was a professional appraisal and there is actually 2 houses selling on my street for 325K and 350K).

Then, there are no much changes on my pension plan. I think will keep growing by 7K per year. However, I decided to drop the yield to 4% since I have little control on how it is invested and they will probably slow down the risk in pension plans according to what is going on in this crazy market 😉 Then again, it is a determined pension plan so it is very hard to get a “real value”. Therefore, at the age of 45, I assume it will worth 200K. This is a very small number considering that at the age of 57, I will have right to the full pension (which is 70% of my 5 best years for life).

Small RRSP contribution of $2,500 will still grow over time as well. At the very same rate of return (7%), I should get at 115K considering that I have a few thousands already accumulated.

Since last year, I have added an important growing asset in my financial situation: my company! I have invested $7,000 last year in a partnership with one of my friend. Assuming a conservative 15% return (I’m already receiving a 30% dividend and income is still growing steadily), my investment would worth 86K by the age of 45. I am actually convinced it will worth more than 200K but my financial planner side tells me to stay conservative 😉

So by the age of 45, I will get almost 1.117M$ in asset! However, I would have to take off a mortgage of 260K (my only debt) out of the equation. Therefore, I would have a net worth of 917K. Since I have been pretty conservative on most of my assumptions, I will probably become millionaire by the age of 45.

Now, the key points of increasing my net worth:

– using other people’s money (leveraging baby!)

– using the power of compounding interest

– investing in my own company

We will make money working for an employer but we will never make as much as working for ourselves. This is the true path to financial freedom

image source: planetgreen


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Comments

While it’s too bad that your SM portfolio dropped 27%, it’s good to hear that your increasing your investments during this recession… the temporary price of the stock you own is nothing compared to the buying opportunity you have over the next year or two!

I’m dealing with my mortgage broker and finalizing my house purchase today. In a couple months I’ll finally be starting my own Smith Manoeuvre!

by: The Financial Blogger | April 1st, 2009 (9:06 pm)

Glad to hear that you are starting leveraging 😀

this is definitely the opportunity of a life time! I would put another 25k in the market, but the bank doesn’t want to lend me more money ! hahahaa!