CFO of Life #113: From $100 to $1 million - Why you can't double your way to wealth

Have you ever wished that you could just hit a few lucky investments and make $1 million overnight?

?I have and I bet that you’ve thought about it too!

?While most people dream about it, many try and fail to do it. However, even if you manage to achieve it, the chance of keeping your money for the long term can be best described by the proverb “Easy come, easy go!"?

?There are many reasons for that, from not knowing how to handle that kind of money to the greed-fuelled confirmation bias that pushes you to try to gamble for just one more double that would make you ‘extremely wealthy’.

That is why in this week's newsletter, I will break down why you can't double your way to wealth through those 5 points:

1. Why do people want to start with $100?

2. Why do people see $1m as the dream amount they want to make?

3. Why do people dream of doubling their way to $1 million?

4. Why can't you double your way to wealth?

5. What is the normal way to do this?

?If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and that you stick around for the long term!

Now, let’s get into the thick of it:

?$100 is just about a small amount that anyone can make and a small enough amount that people can afford to lose. It is also a small round number that you can visualize. Interestingly, people anchor themselves on round numbers like 100, 1,000,100,000 and so on.

?Another reason is that it makes for a hell of a story that would be hard to top up. It also makes for great social proof that you know what you are doing and becomes part of the confirmation bias that you are super lucky!?

?In the same way, people see $100 as a great starting point, $1 million is a number that they only dream about having. It is an amount that many people romanticise, and would love to have but never achieve.

?That is the allure of the big dream, the big sum of money, the unattainable riches which make you invincible to financial troubles. At the same time, it is not even enough to settle all needs or problems, it is just at the edge of starting to be enough.

?Just take into account that you need ￡1.2m to buy a decent-sized house in Zone 2 in London, which doesn't mean you will live in luxury. It is just the amount you have when you start being considered rich, but you are still poor rich. You will be able to afford a lot of things, but not everything you’ve ever wanted and needed as your needs would quite quickly evolve.

??Don't get me wrong, $1 million is a lot of money and most of us would not see that much in our bank accounts (as long as inflation doesn't go parabolic). It is a great amount of money to aim for, and a great goal just not through gambling and risking it all for the biscuit!

?To put the two things into perspective, nearly everyone can manage to scrape together $100 and would probably take the risk and gamble away towards a million. Imagine if you make it through that 0.00610% chance and get the million, how much better off you will be?

?The $100 would not set you back a lot, it can set you back a few days/weeks, but $1 million can set you up for life. It would fix a lot of your problems and make things much better. But, is that even possible?

?Many people have been lucky and won $ 1 million from the lottery, a game show or a lucky investment. More people have been unlucky and have lost it all, even if they were close to winning the big bucks! But there are a few problems that you will face along the journey of doubling your way to $1 million.

?You need to get supper lucky and place your bet 14 times in a row on red and win at the roulette table! Or you can “YOLO” the money on some exotic investments and pray that you make it 14 times in a row. While this would be hard,1/16,348 people who try would succeed, and who knows, that could be you!

?Also, to pull this off, you would need a crazy amount of risk tolerance. Just imagine how you would feel after the first 5 doubles, you would have $3,200 which is not bad at all for a quick win! On flip 10, you will have $102,400 which is where the money starts to add up and the risk becomes a lot bigger. Would you flip a coin and lose the $100k or take the chance for $200k? Even on the last flip, would you not take $819k, save it in the bank and get to $1 million within the next 3-4 years or risk going for $1.6 million but getting nothing instead?

?I would stop at the $100k as that would quickly change my life, also it is enough risk for me to take! It would minimise stresses and make life better. But can you imagine the stress you will have when you go back to $0 after having $100k or more? I don’t even want to start thinking about it.

?Another thing to consider is the taxes, even if you win $1 million, you would probably need to pay a chunk of it in taxes. In some countries, lotteries are exempt from taxes! At the same time, if you make that money from investments, you would need to pay capital gains taxes, which can easily get to 20% or more! That is something most people forget to factor in!

?Last but not least, if you want to double your way to $1 million or more, it would take a lot of patience. It is quite improbable that you will succeed on the first try, you might have to try for years and may never succeed. Or just imagine how much stress you would feel if you got to double13 and fail, you would not forget it for the rest of your life and I can bet that you don’t want to live with this thought lingering at the back of your mind!

?Now it is not all doom and gloom, there are plenty of ways you can take $100 and grow it, you just need to do it sustainably.

?And as always, there is a way to approach this madness! The approach is called the rule of 72 and it is super-duper easy to use!

?The rule of 72 tells you how many years (periods) you would need to double your investment. And the formula is quite easy: Take 72 and divide it by the percentage return expected for that period. Let me show you how many years it would take you for different % rates of return:

1% - 72 years

3% - 24 years?

5% - 14.4 years

7% - 10.3 years

8% - 9 years

9% - 8 years

10% - 7.2 years

20% - 3.6 years

30% - 2.4 years All this for 1 doubling up of your money! Now imagine, if you need to double your money 14 times! It would take you 1008 years on a 1% per year return to get to $1 million from $100, or if you are lucky and score a 30% return consistently for the next 33.6 years you will still get to the elusive $1 million. if you can make a 30% return a year consistently, do call me and I can help you get there quicker!

?I hope you are starting to see the point I am trying to make, it is super hard to take something so small as $100 and flip it to $1 million. Even if you feel lucky, you would need 14 consecutive 100% wins to make it or wait for 34 years and risk all the money you make to “Maybe” make it!

There is a way to do it which involves patience, savings and a few small lucky shots. As we have now established, it is not realistic to expect that you will double your way to $ 1 million with $100!

Next week we discuss why you can't save your way to wealth! It is the natural progression of this topic and the next part of the puzzle that would make you spot some more deviations in the plan!

Post #113 in the series CFO of Life #si #personalfinance #CFOofLife