How to be a Millionaire by 40 – Teaching Kids to Build Wealth

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Are you a millionaire? At some point in the not so distant future, my wife and I will likely cross that 7 figure net worth threshold. That mark won’t get us to full financial independence, but it will be a big step towards our ultimate goal.

Based on our savings rate and investment strategy, we could possibly reach millionaire status by the time I turn 50. There is probably a much better chance we will hit that mark by the time I turn 55. At some point it will happen.

Looking back at the past 20+ years of my adult working career, I can’t help but think we could have easily reached $1,000,000 in assets by the time I turned 40.

A few small changes in our savings rate and investment strategy would have almost guaranteed we’d be talking about reaching $2 million in assets right now instead of $1 million.

Since I can’t repeat the past financial mistakes that were made … I can focus on teaching my kids how to be a millionaire by 40 instead.

Today I would like to share a scenario I plan to use with my children over the next couple of years on how they all can one day have $1 million by age 40.

How to be a Millionaire by 40

Learning the tools of how to be a millionaire by 40 is not too difficult.

The first concept to learn is how compounding interest works. And how powerful a tool it can be in building wealth. The more you save and invest and the earlier you start … the more exponential growth you will see with your assets.

It is also important to learn ways to invest … such as the stock market. That is the method we use in our example below, but it isn’t the only option. Real estate for example is another tool that could be used among others.

Let’s start by looking at a compound interest calculation.

Compound Interest Calculation

To teach my kids how to be a millionaire by 40, they will need to understand the power of compounding interest. Using the Compound Interest Calculator published on Nerd Wallet, we are able to get at just above $1 million in assets (or savings) within 22 years of investing.

Here are the variables used to run our millionaire calculation –

• Initial Balance – $500
• Monthly Investments – $1,500
• Investment Time Frame – 22 years
• Interest Rate – 8.0%

Note – assets compound annually using the interest calculator

Future Balance at Age 40 – $1,001,544

This is simply one option to reach a million dollars by age 40. However, it isn’t the only method for hitting that amount of wealth.

The intent of working through this calculation with my kids is to show them the power of compounding interest over time. It is critical that they start building wealth early in their adult lives … like as soon as they turn 18.

That wealth building starts with savings.

Looking at the example above, we made several assumptions which we will cover a little bit more in depth below.

Compound Interest Variables

In the $1,000,000 compound interest calculation above, we made several assumptions … some of which are highly unlikely.

For example, we are assuming our kids can invest $1,500 every month into the stock market. That is the equivalent of $18,000 per year.

Starting out at 18 or 19 years old … that is going to be tough. Also considering the likelihood each will be in college the first couple of years … that amount of savings (and investing) will be very difficult.

The #1 goal for our kids their first 4 or 5 years after high school is to graduate with a 4-year college degree debt free. If they can do that, then their wealth building may start around age 22 or 23.

The calculation also assumes a $500 initial investment to start at age 18.

This shouldn’t be an issue … as long as paying for college comes first.

Our oldest son (who is currently 15) already has about $3,000 saved up from working summer jobs. We would expect our other two kids to also be in a good starting spot in the future for the initial investment.

We are also using 22 years as the investment time frame for these dollars.

That would be the equivalent of investing between the ages of 18 to 40. Or if they start at age 22 (after college), then they would finish investing at 44.

Finally, we are using an 8.0% average interest rate. It could be 4% or 5% (or lower). Or our savings rate could also be above 10%?

It seems like 7% – 8% is a good average interest number to use for a two decade investment horizon. So that is what we went with.

Again, this is just a scenario that we are using to make them understand the true power of compounding interest.

Speaking of which … if they could hold out until the age of 50, they would be in even better shape with their portfolio … which I have highlighted below.

Investing for Another 5 to 10 Years

Using the same data above, we expanded the compound interest calculation out to investing for 27 years straight. This assumes all the same metrics, except they would be investing $18,000 per year for another 5 years.

Here are the variables used to run our millionaire at 45 calculation –

• Initial Balance – $500
• Monthly Investments – $1,500
• Investment Time Frame – 27 years
• Interest Rate – 8.0%

In just 5 short years, they could increase their assets by another $500,000!

Future Balance at Age 45 – $1,577,196

But what if they could get by letting their assets grow until age 50? So now they would be investing for 32 years straight with no changes to their strategy.

Here are the variables used to run our millionaire at 50 calculation –

• Initial Balance – $500
• Monthly Investments – $1,500
• Investment Time Frame – 32 years
• Interest Rate – 8.0%

Waiting another 5 years would push their total assets up by almost $900,000! How crazy is that?

Future Balance at Age 50 – $2,423,017

Our kids real life wealth building will probably look nothing like this. Maybe they will build a $1,000,000 portfolio by age 35? Or maybe not until age 55?

Maybe they will be able to invest a lot more and hit $5 million in assets or $10 million? I have no idea?

But I feel it is my wife and I’s responsibility to educate them on the power of compounding interest. And giving them the tools they need to reach financial independence much sooner than we did.

Types of Investment Accounts

We’ve talked a lot about one method for building $1 million in wealth. But we haven’t discussed the tools to make this happen … other than leveraging compounding interest.

The tools I am talking about are the types of accounts, which could include – IRA, Roth IRA, brokerage account, 401k, etc.

I will save the details for another future post … but my recommendation for my kids is to first invest in any retirement account at their work that gives them a company match. We want them to max out any possible free money they could get from their company.

Next, I would like to see them invest into a Roth IRA up to the yearly max (currently at $6,500). As long as they are optimizing their income and don’t need to lower their gross income for taxes … I would like to see them optimize for future taxes by investing in a Roth account.

Like I said before, I’ll cover this in more detail … but the Roth assets can grow and be withdrawn tax free.

Once they hit the max on their Roth accounts, then my suggestion is to invest the remainder in a taxable brokerage account. I believe it is good to focus on both pre-tax and post-tax accounts when building wealth.

Types of Investments

The other important tool my kids will need to understand are the types of investments they can use like – stocks, low cost index funds, ETF’s, etc.

My wife and I invest in individual stocks for our dividend income portfolio. We also invest in low cost index funds, ETF’s, and a bond index fund.

To keep things simple, my suggestion for my kids starting out would be to invest in a low cost index fund like VTSAX or equivalent. If at some point they are interested in building a dividend income stream … then my suggestion would be to start looking at dividend stocks.

But starting out I think simple is better.

One last thing … any retirement account investments through an employer may not offer low cost index funds. So they would need to choose the best investment option available with the lowest fee’s for those accounts.

Other Factors to Consider When Raising Kids to be Millionaires

The examples above are a good tool to help teach my children about building wealth. It all starts with saving a good percentage of your income and investing it.

So what do my kids (or yours) need to do to have a good savings rate … once they start earning income?

Here is a list of things I plan to teach my kids when the time comes … about how to widen the gap between their income and expenses. That gap can then be invested to accelerate their wealth building.

• graduate college debt free – we don’t want any student loans getting in the way
• house hack early on – either living back home or using one of many house hacking methods to limit housing expenses
• limit transportation costs – living close to their job, leveraging public transportation, etc.
• saving 50% of their income – start out by always saving 50% of their income
• tax optimization – optimize their income based on current tax law

Using some or all of the concepts described above can give anyone the power to become a millionaire by the age of 40.

I hope to continue teaching my kids to build wealth by being smart and making small calculated moves that will put them in position to reach financial independence.

How do you teach your children or anyone else the concepts of building wealth?