In the next 2 months I’ll reach a significant financial milestone: my first million (PHP-wise, that is). To be more precise, that’s a million in liquidable assets, so that figure excludes non-performing assets, pensions, insurances (including mixed insurance/investment), real estate, etc. After all, cash is king.
It will have taken me almost 3 years to get to that milestone. There’s a saying that the first million is the hardest. If that really is the case, the next and each subsequent million should be easier and faster to attain thanks to my current portfolio base. But did I get to that first million the right way? How effective as a leveraging means is my current portfolio?
Here’s the breakdown of my projected portfolio in the upcoming 2 months. The sections on the left (stocks, balanced and equity UITFs) are volatile investments and account for 57% of the pie. Though high-risk, it’s from my equity-based investments where I have seen relatively high returns, and an average of 12% a year is probably a conservative estimate. Plus, 12% will be easier to break down as 1% interest a month for our calculations below.
Now, assuming I arrived at my 1M PHP through pure active income, it meant a monthly savings of 27,778 PHP over 3 years. Avoiding any real investments (i.e., anything except traditional savings or taping my cash under the toilet), it would take exactly another 3 years to get to 2M PHP. On the other hand, allocating 57% of that (15,833 PHP) to equity investments each month, the progression starts to look like this:
|End of Month||Equity Savings|
|1||570,000 (1.01) + 15,833 (1.00)|
|2||570,000 (1.02) + 15,833 (1.01) + 15,833 (1.00)|
|3||570,000 (1.02) + 15,833 (1.02) + 15,833 (1.01) + 15,833 (1.00)|
|4||570,000 (1.02) + 15,833 (1.03) + 15,833 (1.02) + 15,833 (1.01) + 15,833 (1.00)|
from which we end up with this equation:
Total equity investments at end of month n = 570,000(1+(0.01n)) + 15,833((n-1) + 0.01((n-1)(n-2)/2))
Finally, assuming I get a measly 3% annual growth from the remaining 43% of my investments, we get the following table:
This means I should expect to hit 2M PHP at the end of the 28th month, or 8 months faster than the first million. Otherwise, it means my investments are underperforming. Proceeding down the table, we see that 3M PHP will come in at 24 months (wk 52), 4M PHP at 22 months (wk 74), 5M PHP at 20 months (wk 94), and finally 6M PHP at 19 months (wk 113).
That last one means it would take me almost a decade to halve the time it took me to earn my first million. That could be good or bad depending on your own expectations, but in my case it’s not enough to meet my goals. Mrs. Bookworm shared with you in this post that my 10-year target is to hit 250k SGD or about 8M PHP. Halving my million-earning time from 3 years to 1.5 years in a decade will still leave me 1.6M PHP short of my target at the end of 10 years.
This shows the importance of assessing your investments at the earliest time. By playing around with the distribution of my portfolio, I can know what mix can get me to 8M PHP in 10 years:
|Equity Inv %||Monthly Contribution to Equity||Total Portfolio after 10 Years|
Based on the equity allocation rule of thumb from CNN Money, I should stay between 60% and 70% over the next 10 years. Say I up my ratio from 57% to 65% and keep it there over the next 10 years, that translates to just a little over a hundred grand in extra savings, still 1.5M short of 8M PHP.
Of course if you can’t get enough passive income going, the alternative is to increase your active income. This last table shows how increasing my monthly contribution by around 8.5k will allow me to reach my goal.
|Monthly Contribution||Equity Allocation at 65%||Total Portfolio after 10 years|
Granted, we’ve done a lot of oversimplification in this analysis, but at the end of all this number crunching it’s nice to be able to capture the state of my finances in some sort of mission statement like this, and you should try making one for yours too:
At an allocation mix of 65-35, with equity investments earning 12% simple annual interest and the remaining savings earning 3% simple annual interest, and a monthly active income of 36.3k PHP, I can achieve my goal of 8M PHP in 10 years.