Becoming a Millionaire -- A Real-Life Example

Here's a real-life example of how an average person can become a millionaire from personal finance author Ric Edelman:

There’s a fella you probably never heard of. His name is Karl Hagen. Karl recently passed away at the age of 89. For 36 years, Karl worked at the Potomac Electric Power Company (PEPCO) near Washington, D.C.

He lived a modest, solitary life. Although he was known for being frugal, he did indulge in a few passions. He liked to travel. He painted watercolors. He read a lot. He engaged in ballroom dancing. And he invested in stocks and bonds.

When he died, Karl left a total of $3 million to Johns Hopkins University, the National Air and Space Museum, and the National Geographic Society. How was a PEPCO sign and equipment paint shop foreman able to amass millions of dollars?

According to press reports, he began investing back in the 1940s by putting $5,000 into stocks. Throughout his life he continued to buy stocks. That’s all it took to amass millions.

Stories like this pop up periodically, and they all have one thing in common: Each person invested small amounts of money over long periods of time. That is perhaps the undisputed certain way to accumulate wealth. Yet, this message gets over-looked by investors seeking hot tips.

The guaranteed road to wealth is simply to buy stocks on a regular basis with very small amounts of money—and to do it for a long time. Every person in this country can become a millionaire. It’s up to you to make it happen.

Now let me say:

1. No, a million dollars isn't what it used to be -- but it's more than the vast majority of people have. Besides, a million dollars in the right country is like ten million in the U.S.

2. I agree with Ric 100%. As I've said before, a small amount of money over a long period of time is a sure way to wealth.

Comments

[Flexo]

Adjusted for inflation, $5,000 in 1940 is equivalent to $66,500 today. $66,500 is no small amount of money now, and -- though I wasn't alive -- $5,000 was no small amount of money in 1940. The average salary at the time was $1,300, so he invested 3.8 times the average salary in that first year.

Investing $5,000 now might set you on the path to becoming a multi-millionaire in the year 2070, and you'll be better off than if you hadn't, but $1,000,000 won't go so far in 2070 based on historical inflation.

To get that same purchasing/giving power in 2070 that this guy has today, you'd have to start investing with $66,500 according to inflation or assuming the average salary today is $30,000, the same factor of 3.8 would require an initial investment of $114,000.

1940 average salary info: http://kclibrary.nhmccd.edu/decade40.html

[Flexo]

And what you say about $1M outside the U.S. being equivalent to $10M inside the U.S. says a lot about what has to happen. Earn our money here, and use it somewhere else -- some emerging market somewhere -- to make the most of its value.

[srh]

This guy exemplifies some of my fears about those of us interested in building a large nestegg through high savings rates. (And I'm a big proponent of high savings rates, BTW).

He died at age 89 with $3M. I'm sure the beneficiaries appreciated the money, but I hope when my wife and I retire we're able to enjoy spending the money we saved. My goal is to die right as my bank account reaches $0.

It's an interesting read, though. I agree with Flexo's comments above -- the article doesn't take inflation into account, and that makes this figure appear a little more unachievable for us working stiffs, but it's still inspirational.

[FMF]

If you have a way to make sure you die right as your account reaches $0, please share it with the rest of us. We'd love to know how to do it.

Our personal plan is to save enough to live comfortably (not lavishly), leave enough for our kids (who will hopefully be grown/educated by then) to help them out a bit, and leave the rest to charity.

[srh]

Dieing when your account reaches $0 is easy. Getting your account to reach $0 when you die is hard :).

I can do the former (though I hope I never have to!) but I agree that the latter is the real trick.

Most extreme savers I've known started with the idea of funding a comfortable early retirement, but for a few saving became an end unto itself. If one's goal is to amass wealth to pass on to heirs, that can probably be a rewarding experience. But I just hope that this fellow wasn't living like a miser until age 89, trying to save that one last dollar.

[James]

Bob Carlson advocates pretty much the same approach in his book Eight Steps to Seven Figures. What he argues is that consistent investments of small amounts of money in quality stocks can eventually lead to large amounts of money over time.

In contrast, people like Stanly and Danko argue that wealth is obtained primarily through building a successful and profitable business. The respondents in their data viewed the stock market as merely a place to hold the wealth generated by their business.

I guess what I'm saying is that although the post is an interesting one, it seems far from clear which modality is the best for building wealth.

Best,

James

[Adventures In Money Making]

"My goal is to die right as my bank account reaches $0."

maybe you can use your last $100 to have someone shoot you! just kidding. ;-)

good post!

[Dr. Artfredo C. Abella Ph.D. (Los Angeles, California.)]

The typical example of karl Hagen accumulating $ 3 million Dollars for a period of 36 years investing in stocks is a laudable example of American thrift and frugality. The road to wealth is always equated in terms of time invested and the frequency and consistency of investing in stocks, bonds or mutual funds. Money is like seed if we want to let it grow then we have to invest time and nurture it. Cultivate the ground, water it, fertilize it and for all you know after two decades or three your money will turn into a full blown tree providing you the fruits of its labor. Even compound interest let alone untouch will grow beyond our wildest imagination. The only necessity that one needs is the ability to delay our instant gratification for a greater price or project. Remember the story of the three peasant working and holding bricks when asked what they were doing, the first man said I am making an oven, the second man said I am making a wall so I need these bricks but the third man said: Sire in this site will erect the biggest cathedral that men has ever seen in New York City and today that dream came into realization after three decades of constructing the New York cathedral it was finally completed because of the dream of that third man. So which of the three men would we prefer to emulate is our choice to make. I would say if you want to become a millionaire the first ingredient is time, the second is being frugal, the third is saving it and the last one is invest it in stocks. Who knows lady luck will hand you in the Forbes Park list of Who's who are the millionaires in the world.

[Walter Thatcher]

Very good post. Getting rich is simple, but it won't happen overnight and it requires disciplined saving and investing. Once you rid yourself of a get rich quick mentality, then you can stop wasting time and money trying to find the next Microsoft or lucrative pyramid scheme.

[Ken F.]

I suspect that I will wind up much like Karl Hagen. I am 44 years old, and have savings and investments of $1.1 million. I own my condo free and clear, and have no debts except for some credit card balances that I payoff each month. My plan is to leave my 9-to-5 job in under 4 years, by which time I will have over $1.5 million in savings and investments at my current rate of accumulation. At that point, I will be free to pursue my interests which may or may not include steady employment. How did I build this wealth? Here were the key ingredients: (1) I did receive $400K in inheritances in the 2001-2003 period, which provided a solid boost (2) I have tracked every dollar that has passed through my hands for the last 15 years using Quicken personal finance software, (3) I have had steady employment (20 years with one company) and my salary has progressed to just over $100K per year, (4) I live well within my means, saving 50% of my take-home pay and fully funding my 401-K and IRA, and (5) I avoid borrowing money at all costs, saving substantial interest expenses that most people pay.

[financial freedom]

Yes. I believe in regular investing too and re-investing all the money that I have earned from dividends again to earn more dividends (and the process goes on). Will I succeed? Only time will tell as the recent downturn in the stock market has made my portfolio decrease quite alot.

[HeavyLee]

I think Edelman's comments are missing one small, but very important, thing:
"The guaranteed road to wealth is simply to **find successful, historically-proven, companies and** buy stocks on a regular basis with very small amounts of money—and to do it for a long time. Every person in this country can become a millionaire. It’s up to you to make it happen."

[Seeking Lemonade]

>>He lived a modest, solitary life.
Meaning, he was single. He wasn't married.

[Chris]

For the record, the vast majority of millionaires are MARRIED..

[Ray]

The power of compound and dollar cost averaging!Only if everyone could understand these two simple concepts.

[Joe]

The vast majority of millionaires may be married, but that is because the vast majority of PEOPLE are married. I would venture a greater percentage of single people are millionaires than those who are married.

[LoveThoseChildren]

We are married, have a small 401K account, a house and land, but we have chosen to invest in our children!

Yes, we have 9, yes 9 children! We do live debt free except our house, and have already paid down the mortgage by making extra payments.

You know when people say "I wouldn't trade my child for a million bucks." Well, we already have 9 million bucks!

We are quite rich eh?

[Lee]

Ok ok I know this is an old post, but it's a brilliant bit of advice. In fact, this has solidified my resolve to actually invest in the stock market. Not for short term gains, but long-term growth. If I do it regularly for the next 30 years, maybe I can get to retire comfortably at 50!

Cheers for this. I needed the nudge.

[Lawrence]

I'd prefer to enjoy my money and not have to live extremely frugal just so that I can give away all of my hard earned money when I die.

[Pugs135]

Lawrence,
Maybe we can do both. I'm trying. I have a pension and pay extra into it as well as a few other retirement accounts, yet I own a house and other nice things. I wish I avoided credit cards in my earlier years. Hopefully that is something I can teach my kids. (I wouldn't mind passing them each a nice chunk of cash as well)

[Kim_Mango]

I'm not so sure I need a million dollars, but it would be nice to know that I have a comfortable cushion. What's important to me is to have a job I love. I want to die happy, not necessarily rich.