Before I get to this simple trick to start you on your path to saving $1 million, I’ll begin by notating that it has long been thought your overall investment return is the most important factor in determining your financial success. Yet, there is the old saving adage “You can’t invest what you don’t have”. So, there are clearly two separate schools of thought at work and both are integral pieces. Of course, your rate of return has big implications so choosing the appropriate investment vehicle/strategy is paramount. 

I’ll sort through the fluff on your behalf to enable you to pursue wealthy living on an easier path.

Here is a chart I put together detailing an estimated annual investment rate of return from 1%-10%, and savings that equate to $100-$1,000 per month, which is summed into a yearly total. While saving $1k/month is out of reach for many households, saving $100/month is attainable for the majority of people. 

 

Note: The chart is a linear estimate with no down years, assumes no inflation, taxes, nor investment fees, and compounds the return annually.

Chart Highlights

I’ve highlighted some interesting facts from this chart. Note the 2 squares in light green. The person who saves the least($100/month) and earns the highest return(10%), has $218k after 30 years while the person who saves the most($1k/month) and earns the least (1%), has nearly double with $433k after 30 years.

What’s also interesting is that saving $500/month, or $6k per year, while realizing a 1% investment return actually nets you a very similar amount as the same person saving $100/month, but realizing a 10% investment return each year. If you study the chart further, you’ll notice that simply saving more has considerably larger effects on your end result than a higher investment return. 

Let’s say Person A saves $100/mth, while Person B saves $200/mth and both have a 1% return. Person B has increased their savings rate 100% and ends up with $86k. That means Person A has to increase their rate of return by 600%(to 6%) in order to beat the simple math of doubling the amount saved each month by Person B.   This shows saving has a profound impact on the amount of wealth you accumulate in your life. As they say, “Money makes more money“.

What if you manage to make it right in the middle with a 5% investment return while saving $500/month(($6k/year)? You end up with a very respectable $424,565 after 30 years(yellow square).

Now to reach millionaire status you need a combination of saving at least $500/month while realizing a 10% annual return or saving at least $1,000/month while realizing a 6% annual return.  These are all highlighted in dark green and will potentially land you in the coveted $1 million club after 30+ years.

Our middle of the road saver who socks away $500/month while earning the 10% return will contribute roughly $180k, but ends up with $1,091,661 after 30 years as the power of compounding returns goes to work for you. Phrased differently, they only needed to provide 16-17% of the capital necessary to be a millionaire.  

Better yet, you generally don’t have to save all this money on your own. The most common example would be any employer matching contributions to a 401(k) plan, stock grants, or profit sharing benefit.  If your employer offers either benefit, you should take advantage. Or at least stick around long enough to qualify for free money. After all, it’s more money in your pocket as a reward for being a great employee.

So how can you take action?

Simple. You just need to set aside one of the desired amounts and begin investing at your targeted rate of return. That’s the whole trick in a nutshell!

Now what that really entails is executing the following:

  1. Review your monthly income and expenses(try Valor Advisers Free Expense Tracker)
  2. Determine what amount you can reasonably set aside
  3. Setup automatic transfer from your bank account on pay day to your investment account
  4. Ensure the funds are invested at your target risk level while letting time and compound interest work for you.

Of course, you may look at your expenses and say ” Well, geeze, I have no money left after I pay my bills”. This is where a financial professional can really add value. For example, at Valor Advisers I take an outside view of your expenses and help identify areas to save money you might not have known were possible. I have a conversation with all my clients about what they spend money on, why, and what is/is not important to them.  Then we develop a plan to start saving money each month, and I start investing funds in a strategy tailored to you. 

While the trick above is easy and simplistic, it still requires you stick to some type of plan.  As with any plan, execution is key. So, here are some basic time-tested principles anyone can do to get started.

  • Live below your means. AKA don’t spend everything you earn.
  • Don’t worry about keeping up with the “Jone’s”
  • Realize it’s ok to say “no” to things that aren’t worth your time and/or money
  • Stay disciplined
  • Focus on doing what’s good for you!

So, what are you waiting for!? Start saving and investing today!!!

 

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