Now before anybody thinks that I have lost my marbles regarding becoming a millionaire this does take some perspective. My post is not directed at someone who is 2 years from retirement and hasn’t saved anything, but really dedicated to those who are my age and younger, particularly my students.
Why a Million Dollars?
That is a good question. I think a million dollars is what a lot of people use as a bench mark for success. I mean you don’t need a million dollars to retire and be happy. My parents aren’t millionaires, but their house is paid for, my dad has a small pension, social security, and my dad saved the entire time he was with his company. Thus, I would say they are comfortable. I mean they can’t write a check tomorrow for some dream home in Florida, but they take trips to visit my brother who lives in Las Vegas, go out to dinner, and go on other outings.
Also, a million dollars is the benchmark that many financial magazines use to measure whether or not you can retire. The truth is it isn’t about how much money you have saved per se but really about how much you spend. For example, if you spend $25,000 a year you can probably “retire” with $500,000 (and yes you can live pretty well by just spending $25,000 a year). But ultimately becoming part of the 2 comma club I believe is what many people think about when think financial wealth. 20 years from now it will probably be 5 million or more, but today when I think people measure wealth they think millionaire. Certainly that is the case when you involve the politics of situations (e.g. millionaire tax).
Finally, a million dollars is in one of the best songs about money. Bare Naked Ladies “If I Had a Million Dollars” although it is 20 years old is still a song that makes you want to sing along and go out and buy a green dress, but not a real green dress because that’s cruel
Now becoming a millionaire is contingent partly at what age you start and how much you contribute. The earlier you start the easier it is. I didn’t learn that basic lesson and math so I started late and therefore must contribute more.
Before you say it can’t be done consider the math.
If a person starts saving at say the age of 22 $100 a month and does that consistently over the next 40 years, assuming they put it in a normal mutual fund (e.g. an index fund) that $100 a month consistently invested will be worth about 1.03 million. I get that calculation because the stock market has averaged about 12% over the last 90 years and 11% over the last 150 years. Now there is no guarantee that it will continue like that for the next 40 years, but I will take those odds over other investments any day of the week.
Consider that most likely someone will contribute probably much more than just $100 over the course of their working lives that $1 million will actually probably be much higher.
Now $1 million will probably be worth like $250000 today, but you have to start somewhere.
Let’s say you don’t start until you are 32 (like I did) then you will have to save $300 a month to get to that magic number of $1 million.
If you wait until 42 you will have to basically contribute $1000 per month to reach the magic number.
If you wait until 52 and 1 million is a goal to have in 10 years then you need to save $4300 a month.
So as you can see it gets progressively more expensive to save as you get older, particularly if you are starting from zero.
Of course this doesn’t include the value of your home or other property that you might own.
The Bottom Line: I am not saying that everyone should be or everyone wants to be a millionaire. But I do believe that if you start early enough you give yourself a much better chance at financial independence than if you wait. And even if you don’t think you can save $4300 or it is really late in the game saving for your future is extremely important even if it is just $100 a month. It is just that when you start early compound interest is truly one of the wonders of the world.