Fifteen years ago this month, the game show “Who Wants to Be a Millionaire” burst onto the scene and into our collective conscience. In honor of the anniversary, let’s consider some ways we can increase our chances of achieving the ever popular millionaire goal.
A million dollars today will not buy what it did in 1999. In fact you need to accumulate $1.4 million to have the same purchasing power. Whether your target is $1.0 or $1.4 million, the advice below will help you get there.
Save Early and Often
The advice to save is both simple and obvious. However, much like dieting, saving can prove more difficult than it sounds. The reality is that few of us will achieve a million dollars by winning the lottery or a game show. Most of us will need to build our wealth gradually by saving and investing. Therefore, we must make a conscious decision to live within our means. Remember, every dollar spent today is a dollar that cannot be invested to grow over time. The longer you are able to invest money, the more it can grow. And, the earlier you start, the better.
The Power of Compounding
Compounding is the result of generating earnings on previous investment earnings. The longer the time period you have for compounding, the greater the benefit.
Let’s look at a very simplified example:
We will assume you are a 20-year old who is just starting a career. You hope to retire in 40 years with that magical one million dollars. How much do you need to save per year? Assuming a 7% return per year, you would need to save $5,009 per year (approximately $420 per month) to hit your goal.
What if you decide to wait until age 30 to begin saving for retirement? Now you have only 30 years until your planned retirement. That means you would need to invest $10,586 per year ($880 per month) in order to hit your $1 million target – more than twice as much!
Missing those first ten years of saving and investing takes away a huge benefit of compounding. If you start saving at age 20, you save $200,360 over the forty-year period. If you wait and lose ten years, you need to save $317,580 over the next thirty years to achieve the million dollars by age 60.
The longer the period for investing, the less dollars you need to save to accomplish your goal.
Benefit from the Tax Code
Tax-advantaged retirement plans, like 401(k)s and IRAs, are a boon to investors. Putting your savings into these vehicles will allow your investments to compound on a tax-deferred basis until retirement. This means that the tax dollars not paid on the investment earnings remains invested and earn even more for you.
Many employers also offer matching programs for retirement contributions. That is essentially free money – take advantage!
Think Before You Spend
While few will get to a million dollars via a one-time windfall, many of us will receive financial rewards during our lifetimes. These can include raises, bonuses, or even an inheritance. If you receive any new financial benefits, use that as an opportunity to increase savings. For example, if you get a raise, use at least half to increase your 401(k) contributions or to set up a regular transfer to a brokerage account. Intentionally increasing your savings with each opportunity will add up over time.
Avoid Debt
While it is all but impossible to completely avoid debt, you should keep it to a minimum. Using debt for items of lasting and potentially increasing value is acceptable – like a home or an education. You can even make an argument to take on some debt for the purchase of a car. Beyond those items, avoid borrowing as much as possible. Debt must be paid back and that can crowd out your ability to save.
Is That Your Final Answer?
On the “Who Wants to Be a Millionaire” show, the host would always ask, “Is that your final answer?” before revealing the correct response to the question. To secure a million dollars, your final answer needs to be a concerted effort to save and invest. In the end, the path to being a millionaire is simple in concept, but can be difficult in practice. It takes time, discipline, and the willingness to delay gratification. Or, you can hope to get lucky on a game show!