I've written about how to become a millionaire by 30. A lot of luck, hard work, strategy, and risk are involved. Most of us will eventually become 401k millionaires by 60 if we keep contributing the maximum. However, what about becoming a millionaire by 20?
It sounds almost impossible given kids must focus on school usually until the age of 18. However, becoming a millionaire by 20 is possible if you have very involved parents who help you save, invest, and work.
In fact, the average American household is now a millionaire according to the Fed's 2022 Consumer Finance Report. But the median age in America is 39, not 20.
Let's go through a thought exercise on various ways to become a millionaire by 20. I'll use some examples to demonstrate the possibilities. Once we realize what is possible, more good things are likely to happen.
But first, let's discuss why you may want to or need to become a millionaire by 20. For those of you with young children or plan to have children, this post should be of particular interest. Or maybe, you are an enterprising young gun who already has the maturity to plan for the future!
Why Become A Millionaire By 20?
There are an endless number of reasons why you would want to become a millionaire by 20. Here are six fundamental reasons I can think of.
1) College tuition
By the time kids born today go to college, each year of tuition will cost between $70,000 – $150,000 (public – private), assuming a 6% annual growth rate for 18 years. Then there's room and board and other costs associated with college. My hope is that college won't be necessary by the year 2040, but who knows for sure.
Hence, you might want to become a 529 millionaire so you can pay for your expensive college tuition!
2) Housing costs
Housing costs have outstripped income growth by 3X since 2000. This pace will likely accelerate post-pandemic. In 2020, we saw the median home price in America rise by about 8.5% YoY.
Meanwhile, wages stayed flat or went down because the unemployment rate went way up. At a 5% annual growth rate for 20 years, the median home price in America will be roughly $725,000 by 2041. Owning your primary residence to get neutral housing inflation is a smart move.
3) Healthcare costs and freelancing.
Healthcare costs have outstripped income growth by 5.6X since 2000. This outperformance will also likely continue to grow.
The number of freelance workers will surely overtake the number of traditional workers by 2030. As a result, this means more people will have to pay 100% of their healthcare insurance premiums and costs.
4) Survive the competition
Not only are basic costs rising much faster than wages, competition is getting more fierce due to globalization. Americans must now compete with international citizens who are poorer, but much hungrier.
Meanwhile, in the quest for equality for all, the American education system is flattening the curve by doing away with entrance exams, grades, and test scores.
5) The desire to start a family and launch
Without enough money, it becomes harder to buy a home and start a family. Surging living costs is the main reason why we now have a majority of 18- to 29-year olds living with their parents.
Perhaps the percentage will tick below 50% once there is herd immunity. However, not being able to launch is one of the most disheartening things for adult children. Dependence on parents as an adult robs future happiness.
6) The desire for joy
When we are young, we are filled with hopes and dreams. But as we age, our hopes and dreams often get dashed due to the harsh realities of the world. We accept jobs that do not bring us joy because we need to pay the bills.
Over time, we slowly become bitter at society because we are forced to do things we do not want to do. By becoming a millionaire by 20, our children can pursue fulfilling work from the start. You can retire early for greater happiness.
Or you can find a job that provides more joy and meaning without always thinking about making maximum money. Working because you love what you do is so much more rewarding than working just for more money.
How To Become A Millionaire By 20
The two main ways to become a millionaire by 20 is to work and to invest. The sooner a child can work and invest, the better thanks to the power of compounding.
Working As A Child
As a general rule, the Fair Labor Standards Act sets 14 years old as the minimum age for employment, and limits the number of hours worked by minors under the age of 16.
Unfortunately, starting work as a 14-year-old is way too old to save and invest enough money to become a millionaire by 20.
I used to work at McDonald's for $4/hour at 15 years old. It was a terrible job. I spent all my money on movie tickets, bowling, and sporting equipment.
To become a millionaire by 20, kids have to start working much younger. Thankfully, there are plenty of other ways kids can earn income before the age of 14.
Some examples include:
- Selling candy to classmates
- Mowing your lawn
- Mowing neighbors' lawns
- Raking neighbors' leaves
- Tutoring other kids
- Babysitting other kids
- Modeling for your business
- Running a Youtube channel about toys
- Launching a TikTok channel about fun tricks
- Running a blog about gaming
Ideally, the source of income should come from outside the household. This way, the income pie increases instead of recirculates. But if a child can earn income outside the household and from their parents, that's great too.
Investing As A Child
There are three main ways a child can invest.
1) 529 College savings plan. All contributions are usually made by parents and grandparents without the child having to work. Although, you can always make a work agreement. We must concede that a 529 savings plan is part of a child's net worth given an education is a young person's most valuable asset.
2) Roth IRA. All contributions must come from qualified earned income by the child. Making money from washing the dishes at home doesn't count. Opening up a Roth IRA for a child is an absolute must.
3) Custodial investment account. Contributions can come from earned income and parents. Parents have full control until adulthood. If you're going to open up a Roth IRA for your child, then you might as well open up a custodial investment account as well.
How Much To Make To Become A Millionaire By 20
Now that we know about the various sources of income and ways to invest, all that's left is calculating how much money a child needs to make at what age to become a millionaire by 20.
Let's go through a couple tax-efficient ways.
Millionaire By 20 Starting From Birth
Ideally, your child should start making money and investing at age 0. This way, he or she will have 20 years of compound investment growth.
Step #1: Start a business, have a business, or be a sole proprietor. If you don't have a business, I would start a website because it's cheap and easy to do. Today, there are endless ways to make lots of money online.
Step #2: Put your baby or kid to work as a model for marketing material. There are parenting websites, baby care websites, Youtube channels focused on childcare, toys, puzzles, games, family finance, and so much more. Any business that is baby-related that generates income should work. However, always double check with your CPA. Here's a fun summer job I did with my children, which doesn't count as earned income.
Step #3: Pay your child the maximum Roth IRA contribution limit ($6,000 in 2022). If your child is working extra hard, then pay more up to the individual standard deduction limit ($12,950 for 2022). $6,000 would go into a Roth IRA, and $6,950 would go into a custodial investment account.
Step #4: Open a custodial investment account for your hard-working child. Contribute the standard deduction limit minus the Roth IRA limit each year.
Step #5: Choose your child's investments. Let's assume 100% goes into an S&P 500 index that earns 8% on average for 20 years.
Step #6: Each parent contributes the maximum gift tax exclusion amount to their child's 529 plan each year. For 2022, two parents will thereby contribute a combined $32,000.
Step #7: Choose the 529 investment plan. The most common investment type is a target date plan that goes increasingly into bonds over time. Let's say the annual return on the target date fund is just 3% for the next 20 years.
Step #8: Calculate the returns!
- Roth IRA Returns: $6,000 a year at 8% a year for 20 years = $296,537
- Custodial Investment Account Return: $6,550 a year at 8% a year for 20 years = $343,489
- 529 Plan Returns: $30,000 a year at 3% a year for 18 years followed by two years of 3% compound growth with no contributions = $818,739
Child's net worth at age 20 = $1,458,765
Obviously, earning and investing starting at birth is the most aggressive assumption. Not all parents have a business, will start a website, or become a sole proprietor. Paying a child up to the standard deduction limit may not be feasible either.
But at least the return assumptions of 8% and 3% are reasonable. The 529 plan accounts for 56% of the total net worth at age 20. Leaving $640,026 to spend however the young adult wishes after college.
Millionaire By 20 Starting From Age 8
By age 8, regular kids should have the wherewithal to make money through a side hustle. Developing a work ethic at age 8 will help the kid for the rest of their adult life. Further, they will better appreciate the value of money. If parents then teach their children about investing, it's going to be a win all around.
Step #1: Ideally, have a business in a higher tax bracket that pays your child an earned income. The idea is to transfer a portion of your business's higher-taxed income to a lower or no tax income to your child.
Step #2: In addition to earning income from your business, encourage your kid to also earn income from outside the household. My favorite is doing yard work for all the neighbors because that's what I did growing up.
Step #3: With a strong work ethic, your 8-year-old also generates income up to the standard deduction limit. Let's say it's $12,950 a year. The income is split between the Roth IRA maximum and custodial investment account.
Step #4: Two parents start contributing the gift tax exemption maximum of $16,000 each to your child's 529 plan starting at age 8.
Step #5: 100% of the money in the Roth IRA and custodial investment account is invested in an S&P 500 index that generates an 8% return for 12 years. 100% of the money in the 529 plan is invested in a target-date fund that generates 5% a year for 12 years.
Step #6: Calculate the returns!
- Roth IRA Returns: $6,000 a year at 8% a year for 12 years = $122,971
- Custodial Investment Account Return: $6,950 a year at 8% a year for 12 years = $142,422
- 529 Plan Returns: $32,000 a year at 5% a year for 12 years = $534,815
Child's net worth at age 20 = $800,208
Need To Make More Money
Unfortunately, starting at age 8 with these types of contributions and investment returns leaves your child $199,792 short of being a millionaire. But having $800,208 is still pretty good by age 20.
There's enough in the 529 plan to fully pay for college. And, having over $250,000 in investments is enough for a down payment on a nice home.
Given it's harder to predict investment returns, the easiest way for this “late bloomer” to become a millionaire starting at age 8 is to earn more.
Who knows the future of federal marginal income tax rates. However, if your 8-year-old can start making an additional $12,000 or more a year after tax from age 8 to 20 ($24,950 a year versus $12,950 a year), then their Roth IRA and custodial investment account will grow to $511,357 (vs $265,393), assuming an 8% annual return.
In addition to earning more, the parents and the child can try to lobby the grandparents to contribute more to his 529 plan as well. Bumping up the annual 529 contribution to $48,000 from $32,000 could generate an extra ~$267,408 in wealth over 12 years. However, there's a risk of contributing too much to a 529 plan since it only has a specific use.
The final way an 8-year-old child can become a millionaire by 20 is to take more investment risk. Instead of buying a vanilla index fund, you can buy individual stocks that have the potential to grow at a much faster rate. For example, at a 15% versus 8% compound annual return, the child's Roth IRA grows to $200,000 instead of just $122,971.
Millionaire By 20 Through Real Estate
Real estate is my favorite investment class to build wealth. However, owning real estate is quite difficult for young people under 20 due to the required downpayment. Further, you need to be of legal age 18 to own physical real estate.
Therefore, the easiest way to become a millionaire by 20 through real estate is having your Roth IRA or custodial investment account own publicly traded REITs or real estate companies.
My favorite real estate crowdfunding platform is Fundrise. Fundrise is the pioneer of the private eREIT asset class for ordinary investors to gain diversified real estate exposure across the country. It has over 400,000 investors and runs over $3.3 billion in assets.
Young Millionaires Are A Reality
There are many ways to become a millionaire by 20. You can play around with a compound interest calculator and come up with different scenarios.
If you think my assumptions are too aggressive, then you've got to expand your mind. There are kids on Youtube earning tens of thousands a year. One 9-year-old, by the name of Ryan Kaji, supposedly made around $30 million in 2020 off his Youtube toys review channel!
And here we are, only talking about making $12,950 – $24,950 a year in earned income + generous 529 contributions.
The earnings potential for young online entrepreneurs is enormous. Unfortunately, too many people don't bother to try. Which is actually great for those who do try.
If there is one demographic that can harness technology and the internet the most, it's the young.
Millionaire By 20 Net Worth Composition
Making a kid a millionaire by 20 might be met with disdain. However, it may be necessary to create 529 plan millionaires simply due to the skyrocketing cost of college.
Besides, you're never going to tell any of your parent friends that you're secretly setting up your kids for life! Stealth wealth is more important today than ever before.
In my above examples, it is the 529 plan that makes up most of your child's millionaire status by age 20 ($818K in example one and $534K in example two). And most, if not all of the 529 plan will be used to pay for your child's education.
You might argue that including a 529 plan in your child's net worth is wrong. However, I argue that getting a good education before 20 is the most important asset a child can have.
In both examples, after using up the 529 plan, the child doesn't have a million left over to spend. But what is left ($265K – $640K) is plenty for a house, car, wedding, and more.
Of course, there's no need to make your child a millionaire by 20. Finding a way for your kids to graduate college debt-free is a triumph in itself. Instead of having $250,000+ in a Roth IRA and/or custodial investment account by 20, having just $50,000 – $100,000 would help a lot.
To get to $50,000 – $100,000 would require your child to only earn between $3,000 to $6,000 a year for 12 years starting at age 8. This income level is certainly doable with proper parental guidance.
Parents Are The Secret Weapon To Millionaire Progeny
Let's be frank. It's hard enough to become a millionaire at a young age. It's virtually impossible to be a millionaire by 20 without the guidance and help from parents.
Parents are responsible for:
- Educating children about investing
- Encouraging children to work hard and never give up
- Having a business to be able to pay their children from the business
- Setting up a Roth IRA, custodial investment account, and 529 plan
- Developing relationships in the neighborhood to find job opportunities for their kids
- Making sure their kids don't blow their money on useless things once they become adults
- Teaching children about the harsh realities of the world
Therefore, before you can make your child a millionaire, it may be best to first put on your seatbelt and make yourself a millionaire. Thanks to inflation, $3 million is the new $1 million.
Even if you aren't a millionaire before you embark on the journey of making your kids millionaires, at least educate yourself on all the fundamentals of personal finance. Here's my free newsletter if you're interested in getting smart about money.
By the time your kids become millionaires, you will likely become one as well!
As a parent, the most exciting thing is seeing what your kids can do 100% on their own after so much work and education. If you've got your kids working since a young age, there's a much lower risk they turn out to be spoiled brats.
If I Was A Millionaire By 20
I'd like to think that if I had a millionaire dollar net worth by junior year in college, I'd invest it all. At the time, I was addicted to trading my $3,000 portfolio online.
There's no way I would blow my money on unnecessary things if I had spent over a decade working minimum wage jobs as a kid.
However, I also clearly remember going to Atlantic City my senior year to gamble and party with my friends. Having so much money back then may have led me to a gambling addiction. Who knows!
The one thing I do know is that I would have upgraded my old Toyota Corolla hatchback to a Mustang 5.0 GT. That car's engine rumbled so beautifully. I would have also eaten out more and got a Motorola Startac phone with a great cellular plan.
Would Invest Aggressively
Despite having a million dollars by 20, I still would have gone to work in finance. Instead of investing only $3,000 in VCSY, a Chinese internet stock in 2000, I would have invested at least $30,000. The $30,000 would have then turned into $1.5 million instead of just $150,000. Then I would have at least $2.4 million by age 23!
With some of the proceeds, I would have bought a $795,000 two bedroom, two bathroom, 1,350 soft, double balcony condo facing Madison Square Park. I really wanted to back in 2000, but I didn't have enough money. Today, it would be worth over $2 million.
When you come from a rich family, it's so much easier to take career and investment risk. Just look at the backgrounds of Bill Gates, Warren Buffett, and other billionaires.
When failure means taking a break at your parent's multi-million dollar vacation property before trying another venture, chances are higher you'll succeed compared to the person who can never afford to try at all.
Therefore, I'm pretty sure I would have started something entrepreneurial in my 20s as well. Ever since I was in middle school, I wanted to be an entrepreneur because all the wealthiest kids I knew came from families that started businesses.
Better late than never!
Keep Track Of Your Money
If you want to become a millionaire at any age, you must keep track of your money. The easiest way to do so that's also free is with Empower. Empower is the web's best free financial tool to track your wealth, analyze your investments, and plan for retirement.
The better you can optimize your finances, the better you can optimize your finances. As you get wealthier, you'll find that your net worth will get more complicated with various types of investment options.
I've used Empower since 2012 and have seen my net worth grow by 7X since. There's no better free wealth management tool.
Become A Millionaire Through Real Estate
One of the easiest ways to become a millionaire is through real estate. With real estate, you benefit from capital appreciation and rent appreciation. Further, you can make big gains thanks to leverage.
By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate roughly $150,000 a year of my $300,000 a year passive income.
Currently, I'm actively investing in real estate crowdfunding to diversify and earn income 100% passively. I have invested $810,000 in 18 real estate crowdfunding opportunities across the country so far. I plan to invest over $1 million over the next five years.
Best Private Real Estate Investing Platforms
Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 400,000+ investors.
The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
Invest In Private Growth Business
Finally, millionaires have a larger percentage of their net worth in private business and investments in private businesses. When you own your private business you make money from your salary and the growth of your company equity.
If you don't want to build a business, check out the Innovation Fund, a venture capital fund which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence private businesses, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
See the growing navy blue bar below that represents business interests. The richer you are, the more business interests (private equity) you own!
How To Become Millionaire By 20 is a FS original post. It's possible if you have the right household and the right parents! I plan to write a new book about making your first million with Portfolio Penguin. Stay tuned!