I know, I know. Being a millionaire isn’t what it used to be. Although today’s fashion has reverted to the 1980s (what remarkable decade of fashion will be next to reappear?), the value of your money has not. One would need nearly $2 million today to have the same purchasing power as a millionaire in 1989. Yet the bar remains the same. We still see a million dollars in a magical light and strive to become a millionaire. The government even believes having a million dollars makes you a smarter and better investor. Achieve a net worth of $1 million, and you will be labeled as an accredited investor, thereby opening the door to more investment options.
I enjoy setting goals to achieve certain financial milestones, such as becoming a millionaire. There’s no special prize for becoming a millionaire, other than the government being convinced you’re not a complete idiot and can handle more complex investments. Still, any goal that aims to increase your net worth is a good one in my book. So what does it take to accumulate a million bucks? The answer is simple. Time and discipline.
The Road to $1 Million
The earlier you start saving and investing, the easier your path will be. That’s because time is your biggest ally if you start early. It can also be your greatest obstacle if you procrastinate. If you start investing $10,000 annually at the age of 22, you’ll become a millionaire by your 46th birthday. This assumes an average annual return of 10%, which is what the market has returned over the past 90 years. By the age of 59 1/2 when you can access all of your retirement accounts penalty-free, you will have amassed $4.1 million dollars.
Now let’s say you procrastinate. You’d rather live it up in your 20s before getting serious about saving. If you wait until you’re 30 to start saving, you’ll need to invest $23,000 annually to reach the same $4.1 million dollars by age 59 1/2. That means having to save 130% more to get the same result, just because you waited eight years to start saving.
Starting Early Pays Off
It seems so obvious, starting early. But so few actually do it. Straight out of college and suddenly flush with cash, most turn their focus towards accumulating stuff rather than wealth. Nice clothes, fancy cars, a huge house and tons of stuff to fill that house. Like an athlete blowing through a multi-million dollar contract, many people fresh out of college make the same poor decisions with their money. Albeit on a lesser scale. By doing this, you’re wasting the most valuable asset you have that can never be replaced… time.
What is Your Excuse?
We all have excuses for things we ought to be doing but aren’t. “I don’t have time to make it to the gym,” “Eating healthy is too expensive,” or “I don’t have enough money left over to save.” Deep down inside we know these excuses are BS, but we continue to make them anyways. It’s easy and convenient to rationalize in this way, so we do it. In reality, you do have time to go to the gym, eating healthy does not have to be expensive, and yes you do make enough money to save. It’s all about choices and the willingness to sacrifice to reach your goals.
Still don’t think you have enough money to save? Let’s look at an example. In 2016, the average college graduate made $50k right out of college. Saving $10,000 annually would be a savings rate of 20% for such a person. Regardless of student loan debt or other obligations, what is the first thing you should do? Pay yourself first! Assuming this person receives the average employer match of 3% on 401k contributions, they would only need to save $8,500 a year. Doing so in a 401k plan saves $2,125 in taxes ($8,500 x 25%). By paying him/herself first, our average college student would contribute $708 per month and would receive a match of $124 per month. The benefit of having an employer match results in only having to save 17% vs 20% of gross income.
Our average college grad, in this case, would have a take-home pay of $2,646 per month. More than enough for a 22-year-old to live off of.
Accelerate Your Timeline
In the example above, our average college grad would have an investment portfolio worth $1 million by the age of 46. To accelerate this timeline, you’ll obviously need to save more. The greater the gap between what you earn and what you spend, the more you can save. So there are two ways to boost your savings. You can earn more either by advancing in your career or by earning extra income through side hustles. Alternatively, you can decrease your spending. Move to a lower cost area, downsize your expensive house and car, etc.
As for me, I would rather focus on increasing my earnings. When you have a fixed income, you can only save so much. At some point, you won’t be able to decrease your spending any more in order to increase savings. In today’s world with the gig economy, there are so many ways to earn extra money. Turning your car into a taxi service, being a carryout delivery person, pet sitting and renting out a spare bedroom just to name a few. If you’re in a career without a lot of upside potential, there are countless opportunities to make an extra $1,000 – $2,000 per month. All it takes is a little bit of effort.
But the real gains can come from accelerating your career, thereby earning promotions and pay raises. Imagine if our average college student can advance their career quickly and start earning $75,000 a year. By not succumbing to lifestyle inflation, this person can max out 401k contributions at 18,000 annually. Additionally, after tax savings can be increased to $1,250 monthly.
Our achiever is now saving $35,250 a year ($18,000 401k, $2,250 employer match, $15,000 after-tax). With this savings rate, the achiever would reach $1 million in 13.5 years. And that assumes no additional raises. The more work you put in and money you make, the faster you reach your goal, and the fast you can achieve financial independence.
Become a Millionaire
Believe me, everyone who didn’t start saving early is kicking themselves now. I started out saving 20% of my paycheck right out of college and I now wish I would have done more. Only recently have I really kicked my savings into gear by increasing my after-tax investments. The number one recommendation I will make after paying yourself first is tracking all of your financial accounts. I began using Personal Capital earlier this year to track all of my investment accounts. It really has made a difference as I’m able to see all of my accounts in one place and track my progress towards the goals I’ve set out to achieve. If you don’t have a plan, you’re unlikely to succeed. Using software such as Personal Capital to optimize your portfolio, set financial goals, and track your progress will help you achieve those goals. The more you know about your money the better decisions you’ll be able to make!
Readers, when did you start getting serious about saving and investing? Are you boosting savings by increasing your income, reducing spending, or both? I’d love to hear your insights on making more and spending less.