There’s nothing much better than looking down at your net worth statement and realizing you have a million bucks.
The best part about becoming rich is the freedom it provides. You can stop working and start improving your handicap. You can work part-time and dedicate your mental energy making sure your kids don’t end up like delinquents. Or you can change your job in favor of something more fulfilling. Hell, you can even keep on plugging away at work while continuing to throw money on the pile. I’m a fan of that last thing, but whatever floats your boat.
The point always remains the same. Financial independence gives you freedom. That’s the important part. Whatever you may choose to do with that freedom is up to you. Hire a bunch of hookers for all I care.
There just remains one question. Just how much do you have to save to get there? Is it achievable in just a few years, or will it take decades to get there?
Let’s take a closer look at how far away from financial freedom you are.
Let’s start with the most pessimistic of all scenarios. You’re the average millennial who’s scared to death of the stock market, so you keep your money in a “high interest” account paying a whole 1.5% interest. WOWZA YOU’LL BE RICH IN NO TIME JUST KIDDING.
Table me up, yo.
|Annual Savings||Time To Hit $1M (1.5%)|
There are a couple of things to take away from this part. First, it is entirely possible to save your way to becoming a millionaire if you make a lot of money and live frugally. Lots of people have done so, including these ones.
If you don’t have the ability to save a lot of money, you’re either going to have to start taking risks or hope you live to be 120. Also by that point enterprising high school kids will end up being millionaires thanks to inflation.
How about if you earn a very modest return?
Earning 4% annually
Let’s do the same exercise again, except we’ll assume a 4% return going forward instead of 1.5%. It’s very possible to earn that much these days using a combination of high quality corporate bonds and a basket of preferred shares. No stock market risk required.
|Annual Savings||Time to Hit $1 Million (4%)|
As you can see, earning a modest return matters way more over long periods of time. Somebody can put away $5k a year and end up a millionaire during a normal human lifespan. If you can put away $20,000 per year, you’re looking at a comfortable early retirement.
This area is where a lot of investors end up. They’re good at saving but bad at actually investing over the long-term. They chase returns or put their money in expensive funds or whatever. So they earn something, but nothing close to the kinds of returns buy and hold investors get.
Earning 7% annually
Let’s do it again, this time assuming somebody sticks all of their money in index funds and earns 7% per year, which is pretty much the general consensus for equity returns over time. (I’m not so cheery, btw)
|Annual Savings||Time to Hit $1 million (7%)|
Now we truly start to see the power of long-term investing. It took a saver earning 1.5% 93 years to turn $5,000 per year into a million bucks. Somebody who invests that money at 7% annually can do it in less than 40 years. That’s very much achievable in any investor’s lifetime.
You’ll notice it really doesn’t make much of a difference if you put away $100,000 a year. You can become a millionaire in 9.33 years earning 1.5% on your money. You can do it in 7.5 years if you earn 7%. The difference is only two years.
And finally, let’s see how long it’ll take you to become a millionaire if you earn 10% a year on your money. This is my own personal goal.
Earning 10% annually
One more time, kids.
|Amount Saved||Time to Hit $1 Million (10%)|
And the same trend continues. The higher the return, the greater impact it has to small amounts of money invested over time. The person saving six figures a year becomes a millionaire six months faster earning 10% versus 7%.
This is the end
You might say this millionaire study is a little flawed. I didn’t look at taxes or investing costs or even tell you guys how in the actual hell you might be able to invest your money to return 10% a year.
But the lessons are still pretty valuable. It shows just how important investing over the long-term is for those people who can’t put away $50,000 or $100,000 per year. They need to earn a decent return on their money, while the super saver doesn’t have to worry so much. The act of saving is doing the heavy lifting.
There are huge advantages to saving a lot, however. If you become a millionaire by 35 and just let that money compound at 7% for the next 30 years, you’ll end up with $7.6 million without adding another nickel to the pile.