This is a guest post from Pauline of InvestmentZen.com. Pauline is a blogging buddy of several years. Enjoy!
When we talk about saving for retirement, a number that comes back often is $1,000,000.
“I want to retire a millionaire”.
“You need at least a million to live well”.
“I couldn’t sleep at night if I had less than a million”.
But how exactly do you save seven figures over the course of your career?
Well, today, I have good news if you are in your 20s or 30s – time is on your side, and achieving a million dollar net worth by the time you retire is not as complicated as it seems.
The Math of a Million
Assuming an average market return of 8% per year, saving a million dollars will take:
- 42 years if you save $250 per month
- 34 years if you save $500 per month
- 26 years if you save $1,000 per month
The 42 years solution really only works if you are 23 and plan on working until you are 65. Not my thing, and likely not where you are at. On the other hand, saving $1,000 a month is a bit steep if you have not managed to save a whole lot of money thus far. In your late 20s or early 30s, you probably have a ton of other expenses, day care if you are starting a family, student loans to pay off, etc. Finding $1,000 extra every single month in your budget is pretty hard.
So let’s focus on saving $500 per month for the next 34 years. If you are 28, you could be a millionaire at 62.
How to Invest $500 per Month
There are three ways to invest an extra $500 every month:
- Lower your expenses and invest the difference
- Earn more and invest the extra money
- Use tax breaks and company matches to fund part of the difference
The company match is actually one of the easiest ways to find “free” money if you are not yet taking advantage of it. With the median American income around $55,000, a 3% company match on your 401k contributions means $1,650 a year extra to boost your nest egg. That is over three months worth of savings we just took care of. By investing in a 401k, you are also saving on taxes. And if you pick a low cost robo-advisor, the fees should stay low, allowing your contributions to grow nicely, and compound over the course of 34 years.
Most importantly, forget about your investments! Actively managed funds rarely perform better than index funds, and the odds are even slimmer the longer you keep your index. So stick to easy and focus on making more, and living on less.
Make More, Live on Less
Once you become really mindful about your spending, what it actually costs you to buy that thing you’ve used twice, or that shirt that still has a tag on it in your closet, the waste in your life will appear so obvious you will wonder how you got this far without noticing. Americans throw out a third of the food they buy on average. How do you compare? Do you try to fix things before you replace them? Do you have fewer outfits you wear all the time?
Living on less doesn’t mean depriving yourself, it means making a conscious choice every time you open your wallet. Do I need this? Will I get my money’s worth? How long did I have to work to afford it? Am I paying the lowest price possible?
Every $1 you save is actually $1.40 or so you don’t need to earn gross. If we are targeting a $1,000,000 net worth, your nest egg will generate $40,000 per year of passive income for you to live on. So every $100 you save is a day you won’t have to work in the future. Picture 55 year old you. On your way to becoming a millionaire, with plenty of free time to enjoy your hobbies and your family. Or are you putting on your McD uniform and getting ready to mop floors for your second shift of the day because you didn’t plan ahead?
Meanwhile, you can argue that the budget belt is as tight as it gets. Well, that means it’s time to earn more money. Change jobs, educate yourself to get a better paying one, ask for a promotion, hustle on the side… whatever it takes. Put everything towards your investments, unless you have high interest debt (such as credit cards or personal loans), in which case get rid of that first, then keep making the same payments into your investment accounts.
You Can Do It
Personal finance is boring. We, like health coaches, keep telling you to tighten the belt and get disciplined. But you know you should eat healthy even if you’re overweight. The same goes for money. And the consequences can be just as serious if you don’t plan ahead. Finding $500 a month today is much easier than having to find $2,000 in your mid 40s because you haven’t saved anything. Now go get that million!