How much you need to save to become a millionaire

Saving as little as R200 a month could make you a millionaire, especially when invested in the right assets and given enough time for compound interest to work its magic. 

This is according to Debra Slabber, Portfolio Specialist Director at Morningstar Director, who said that South Africans should focus on saving first. Without savings, investment returns are impossible.  

“The magic happens when you combine saving and investing. We could call it the ‘The Ultimate Power Couple’.”

“For most individuals, the only and best way to attain financial security is to save and invest diligently and, after that, wait patiently for their money to compound over time,” Slabber said. 

“Regardless of how much you invest, if you have the patience to let your investment compound and couple that with the discipline to continue saving, you will be amazed by the power of compounding over time.”

For consumers concerned about not having any money left to save after spending, Slabber warns about the cost of everyday expenses. 

“Once you start analysing what you spend your money on, you will be surprised how small everyday expenses add up over a year. If you save as little as R200 per month, you can set yourself up to become a millionaire.”

“Many people get into the habit of saving and investing by following the basic rule of thumb – always pay yourself first and spend what is left.” 

The amount saved is more important than the returns generated, and consumers should not be discouraged from saving if their rate of return is sub-par.

“At the end of the day, money can only grow if it is saved. We all want the best-performing investment portfolio, but the reality is that performance is only one of the components of the journey to wealth creation.”

“While you can’t control how markets will perform and your investments, you can control the amount you save monthly.” 

Slabber analysed the end value of investing a certain percentage of your disposable income every year for 30 years, assuming the investor’s disposable income is R500,000 and remains unchanged for 30 years.

No tax assumptions were made to keep things simple.

“If you generate a 10% per annum return for 30 years, but you only save 1% of your disposable income, i.e. R5,000, you end up with R822,000.” 

However, if you generate an investment return of only 1% but save 10% of your disposable income, you end up with R1.7 million.

“This shows how extremely important the habit of saving is. You can end up with a 111% higher ending balance if you save 10% compared to saving only 1% – even though the annualised investment returns were 9% lower.”

The table below shows the relative importance of the amount you save versus the rate of return on your investment.

Victoria Reuvers, Managing Director at Morningstar, said that becoming a millionaire requires two simple but not easy steps – starting to save and being patient.  

Reuvers analysed the number of years it takes for an investment to reach R1 million based on two variables – your monthly contribution and the annual return thereof. 

She explained that this analysis shows that even saving R200 a month at a return of 6% per annum can build your wealth up to R1 million if you start early enough. 

“It may take you 55 years, but it proves that starting the habit of saving and being patient works.”

By saving R10,000 a month, you can reach your R1 million goal quickly, and the return on your portfolio does not materially affect the time it takes to become a millionaire.

“The power of compounding and the large contributions made all the difference.”

This illustrates the point that while performance is important, particularly when monthly contributions are small, consistency and the size of the monthly contribution matter more.

“I will agree with those who say R10,000 per month is a lot to invest, but even if you scale down to R1,000 per month, the goal of becoming a millionaire ranges from 17 to 33 years,” Reuvers said. 

While this analysis assumes that returns are achieved in a straight line, this is rarely the case. 

You’ll likely have to absorb at least one setback in your wealth journey to achieve more than cash, which can distort the outcome.

“That said, remember to focus on the long-term goal and not be deterred by short-term market movements,” she said.

“It is possible to generate R1 million in savings by changing our behaviour. It starts with the decision to save on a monthly basis with no immediate gain in sight.

“The second behavioural change is practising the discipline of delayed gratification. Waiting. Patiently. And letting the eighth wonder of the world, compound interest, work its magic.”

The table below shows how long it would take to become a millionaire depending on how much you save per month and the return on your investment.