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.

[Harm]

Sounds like Mr. Hagen lived like HE wanted to.

[getagrip]

Mr. Hagan lived the way he wanted, which is great and kudo's to him.

But keep in mind he is not typical, just like rich entreprenuers are not typical (most fail, usually repeatedly, or at best earn a living similar to or slightly above average incomes). He lived alone and saved alone. No wife and kids meant: no larger home and associated costs (single bedroom or efficiency apartment is plenty); no private schools or even school supplies or events to support (musical instruments, sports, etc.); no need to save or pay for college; no spending on clothing, feeding, utilities, etc. on non-income producing family members; no need for multiple cars with insurance/registration/maintenance costs which skyrocket during the teen years; no increased insurance needs to include routine medical visits or just purchasing over the counter medicines; and probably a dozen other areas where money isn't spent in support someone elses existance.

While the benefits of family and children are many, saving money isn't necessarily one of them (of course for many folks, including myself, they are a prime reason to earn money). That said, small amounts of money over time has allowed me to fund college expenses such that what I feel my fair share is covered for each child. It's allowed me to be on track, even with all the crap going on in the market, to retire comfortably in the future. So will it make you "rich". If you define rich as not having to work at an income producing job after 65 years of age while maintaining your standard of living and having supported a family and taken joy in that, than yes, it can likely do that. If you define rich as a megayacht, multimillion dollar home, chauffer driven limo, probably not.

[Sandra Dee]

I agree with the folks who would like their bank accounts to reach zero at the time of their death. Those of the Christian persuasion might recall John 10:10 - "...I am come that they might have life, and that they might have it more abundantly." - KJV Holy Bible

My desire is to live life abundantly; and to the extent possible, help others to live that way as well.

[livetozero]

"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."

The problem is you don't know when you're going to die, so you always have to keep some money on hand.

[Steve]

My neighbor was extremely frugal. Her house was in complete disrepair and a real eyesore. She didn't do anything but go to work. She died with over 2 million. Never could understand that.

[Land Man]

Invest in buying land property in Dhaka, Bangladesh. Population is so much your investment will be 10 times in 10 years.

[Chris]

The sad irony of investing is that the younger you start the better, yet planning for retirement is usually the last thing on your mind at that age.

[Justin]

I kind of laugh when people say things like "but in 30 years a million dollars won't be anywhere near as powerful as it is now".

While that's true, it'll be a LOT more powerful than $25,000, which is actually more than most Americans have saved (http://money.cnn.com/2011/03/15/retirement/retirement_confidence/index.htm).

Anyways, I find this article is encouraging. It shows that you don't have to be an entrepreneur, expert investor, or huge earner to get to the million dollar mark. While those things do help, they aren't necessary at all.

[A.J.Clark]

what type of invastment can a disable person invest in with an incme of 700.00 a month and your bills are more than your income.

[Steve]

Another thing that always seems to happen in these stories is that the person lived longer than average. That gives their investments an extra 10 years or so to compound.

Where did this guy get that first $5k? Did he save it up over a few years?

[Afford Anything]

I agree with Flexo's comments -- investing $5,000 in in 1940's is like investing a HUGE amount of money today, thanks to inflation. Also, the U.S. boomed in the period after World War II through the Internet Era, and he was able to take advantage of that growth ... he invested throughout the 1970's and 1980's. We don't know the future, so we don't know if the U.S. will maintain that same growth in the 21st century (though that's not an excuse to refrain from investing, which we all should do).

I agree with the take-away lesson: invest small amounts, regularly, over a long time, starting at a young age. I just don't think his story is necessarily replicable.

[Bryan]

I would rather spend money on myself or my partner in my younger years than donate it to Johns Hopkins when I'm dead.

[brokemf]

Investing even just small amount today will make you wealthy tomorrow..That is basic. I don't know about donations though. I know that saving money or investing in a time deposit for example will make a difference. I know because I save even cents counts. Before I realized this, I used to ask, How do i get out of debt? Now I don't have to ask that question.