One million dollars for many people is the ultimate retirement goal. It won’t enable a carefree life of mansions and servants, but if you accumulate a million dollars you’ll enjoy a level of financial security most people can only dream of.
If you follow the 4% rule you would be able to withdraw at least $40,000 a year during retirement and have your nest egg last for 30 years. It takes discipline, but banking seven figures by the time you are a senior citizen is far from impossible.
Consider the following:
Start saving when you are young. If you start saving $366 per month at the age of 25 and earn a 7% return (I actually currently receive 7 % on my primary bond investment), you’ll have $1 million by the time you’re 65. Saving $366 per month might seem hard when you are 25, but there are many 25 year old people that spend more than that on car notes. If you wait until you’re 30 to start and earn the same return, you’ll have to save $535 per month. Do what you can. Maybe you can only afford to save about $200 per month now. That’s better than nothing and will still make things easier down the line. It’s important to at least try to save while you’re young because, while your income might rise as you get older, so will your expenses. It can easier to save when you are single and living with a roommate than when you are married, paying a mortgage and raising a couple of children.
Take some risks while investing. It doesn’t matter how much you save, you’ll never reach $1 million if you park your money in your checking or savings account. You must invest it and earn a return. By the time you reach a million dollars, you’ll want to have contributed no more than half of it. You need the other half to come from capital gains, dividends or other returns. In today’s environment, you must take on a little risk to earn a decent return.With most CDs not even paying 1%, you’re not going to earn much there. Bonds and Treasuries aren’t much better either. Your only reasonable option is the stock market. You can invest a portion of your money in dividend-paying stocks or in bond funds. Your investment strategy will change over time depending on market conditions. Ideally, you want to find the risk and return equation that is right for you.
Practice ‘burst’ saving. Burst saving is basically anything you do to boost your savings beyond what you normally bank every month. It could be a bonus, an income tax-refund, an inheritance or any kind of sudden infusion of cash. Or you might decide that you’re going to bank your raises and live on your original salary. Banking a large amount of money can have a significant impact on your drive toward one million dollars, because it gives you leverage to earn more on your investments. If you’re typically saving $200 and suddenly inherit $10,000, it could be a massive boost toward reaching that goal. Consider the fact that, at that rate, it would normally take more than four years to save that much. If you invest a $10,000 cash infusion and it grew at a very high but possible average 7% over 30 years, its future value would be more than $76,000. That’s the way you have to think of it. If you used that $10,000 toward a down payment on a new $35,000 car, that car would be worth less than half its value in five years. Within a decade, that $10,000 would be worth nothing. Even if you only bank half of that, you’re still putting yourself years ahead of where you would be. You can do the same with raises. If you get a raise at work and start bringing home an extra $100 a week, that’s an extra $5,200 per year you could put away. If you can learn to maintain your standard of living and save raises instead of spending them, you can seriously boost your saving power.
Pay down high-cost debt. It might seem counter intuitive to stop saving money in order to reach your $1 million goal. But if you’re paying a $5,000 credit card balance at 22% APR, you’re throwing away more than $1,000 per year in interest. It might actually be beneficial to stop saving for a little while to pay down that debt. Because no matter what you invest in, you’re highly unlikely to beat that 22%. And if you’re saving $200 per month and earning 5%, you’re still losing 17% by carrying that debt. The sooner you pay it off, the less you’ll be losing in interest. The additional advantage of paying down debt is that it is a guaranteed return. The 6% you might make in the stock market is not a guarantee. In fact, you might even lose money. But when you pay down debt, you know exactly how much you’re saving in interest.
Finally, remember that saving such a large amount is a decades-long journey! Your first $100,000 is the hardest $100,000 to obtain because you have to save virtually all of it! Let’s say you have a really, really good year and earn 10% on your portfolio. If you only have $10,000, your holdings grow to something like $11,000. You’re closer, but not a lot closer to your first $100,000. But when you have $400,000 working for you, your holdings grow by $40,000, putting you well on your way to the half-million milestone. It’s not uncommon to need 10, or even 20 years, to accumulate your first $100,000, but only 10 or 20 years more to save and earn the next $900,000!
Think about it, plan for it, take action!
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