The goal of many people is to have a $1,000,000 net worth but the amount seems staggering and unreachable. I am here to tell you that it is just not true. With the proper time and dedication, a $1,000,000 net worth can be yours!
Start Early
The most important thing you can do to get to your $1,000,000 goal is to start as early as you can. Compounding takes time. Starting at age 21 will be a lot easy than starting at age 40 which is significantly easier than starting at 50. But just because you haven’t started yet doesn’t mean you can’t get there. I love looking at the numbers so lets dive into some examples.
The Goal and Assumptions
So the goal is obviously $1,000,000. We will assume you want $1,000,000 the day before your 65th birthday. One of the biggest assumptions is the rate of return and we will estimate that at 7%. That is much lower than the average return of the market but I like being conservative. The higher rate you get, the lower monthly savings amount you will need to get that $1,000,000 goal.
We will look at this problem from the view of someone on their 21st birthday, 25th birthday, 30th, 40th, and 50th birthday. This will give you a good spread of timelines and show you how you need to start saving as soon as possible to make things easier for you.
21 Years Old
Happy birthday and what a milestone! 21 years old today! Lucky for you, you have been reading Dead Debt and know you need to start investing now to make sure your future is secure! But how much do you need to save for that coveted $1,000,000?
The answer: $284 a month. Investing $284 a month at a return of 7% will net you $1,000,000 the month before you turn 65. That doesn’t seem too bad, right? Unfortunately, most of us aren’t 21 anymore. So lets look at other examples and see why compounding is best when you start early.
25 Years Old
You have been in the workforce for a few years now. Adulting is starting to make some sense but you know you need to start investing now due to the amazing personal finance blogs you have been reading. You want to get to $1,000,000 but what should you invest monthly, you wonder?
The answer? $381 a month until your 65th birthday. That’s not terrible. But you can already see the effects of compounding at work. $381 is $97 more a month than you would need to contribute if you started at 25 compared to 21. How much worse do you think it gets? Let’s find out!
30 Years Old
Now you have been in the workforce for quite a while. During your 20’s you decided to use your salary and live it up! You had fun times but unfortunately have nothing saved in your investment portfolio. But you are now determined to change that! Good for you! I am proud. Again, you want to have $1,000,000 by 65. So what do you need to do?
You can definitely still make it to your goal. It will just take more work. $175 more a month in work compared to the 25 year old. Starting at age 30, it will take monthly investments of $556 to get you to your goal. Doable? Yes. Ideal? Nope. But it could definitely be worse.
40 Years Old
You have just turned 40 years old. You have always wanted to save and reach millionaire status but never thought you could realistically do it. Now you have been doing some reading and see that, thanks to compounding, it really is possible. You have decided to start! Better late than never! You ask yourself, “How much do I need to save each month?” Let’s look!
$1,235 a month. We are now starting to get to the point where it will take large chunks of your monthly earnings to get to the $1,000,000 mark. It isn’t impossible, but it is now much harder to reach. Things, of course, only get worse from here.
50 Years Old
You are celebrating your 50th birthday and wonder how has time passed so fast? It seems like yesterday you were 21 and ready to conquer the world. You kids are now almost grown and ready to move on but one goal you made many years ago still hasn’t been started: Having $1,000,000 by 65. You haven’t worked on that goal at all, focusing on living your life to the fullest over the past years. It is time for that to change. What do you need to do?
Starting at age 50, you now need to save a whopping $3,155 a month to get to $1,000,000 by 65. Over 11 times more a month than if you started when you turned 21. Nothing is impossible, but you have a lot of work ahead of you to get there.
Time is of the Essence
Time is a valuable thing. Especially when it comes to compounding. Just look at the chart above. Start at age 21, you only need to contribute $284 a month to get to your goal. Start at age 50, you must contribute over $3,000. That is quite the difference. But what about the total investment needed? Starting almost 30 years earlier must add up with how much you are contributing in total, right?
Wrong. The above chart shows it all. In orange, you have the total amount you would contribute towards your investments between your start date and age 65. Starting at age 21, and with monthly contributions of $284, you would contribute slightly less than $150,000 and end up with $1,000,000. Compounding at its finest! If you start at 50, you will need to contribute over half of the $1,000,000 to get to your goal. Those are still some great investment gains, but I’d take the over $850,000 in investment gains when you start at 21.
Rate of Return Changes Everything
Remember the scenarios above. They assumed a rate of return of 7%. I believe this to be a reasonably expectation of the market going forward. Yes, the market has returned roughly 10% throughout history but that is before adjusting for inflation, which is around 2%-3% annually. The inflation, along with the uncertainty we are currently experiencing leads me to believe 7% is a conservative number. It may be way off, but only time will tell! If you believe you will receive a higher rate of return, the numbers in the above scenarios will be high. For example, with a 9% rate of return, you would need to make monthly contributions of $148 starting at 21 to get to your $1,000,000 by 65 goal. The $284 will get you almost $2,000,000 at a 9% rate of return.
If you get closer to that 9% then fantastic! You will be way farther ahead than you dreamed of. Of course the opposite could hold true as well. With a 5% rate of return, you will need to save $521 a month. That is a huge difference for only a few percent! Another reason why you need to be careful of investment fees which can drain your savings and I recommend using low-cost index funds as your investment vehicle.
$1,000,000 Goal
The goal of a $1,000,000 nest egg is a great goal to have for everyone. If you are just starting out on your journey, it can seem daunting, but given time, you will be able to get there. Start at 21, and you need to save less than $10 a day to get there. That is the price of going out to lunch. So start getting after that goal. You have the power, take control of your financial life and seize the moment!
Any advice for a 31 and 37 year old couple with three kids and neverending medical bills? (We’ve been hitting our $8-$10k out of pocket max for medical bills for 5 years running…) I’m home with the kids basically stuck until this whole covid restrictions pass because wearing a mask makes my blackout spells worse. I miss working and feeling like I’m actually contributing) Back up a few years…
We had savings, $14,000, when we bought our house which we put $8k down on. Naturally, it came out of our savings. Medical bills have not only wiped our savings, but also forced us to take on a ton of debt in order to stay caught up (very counterproductive… I know…) We then almost lost our house just before last Christmas (which we stupidly continued to use the remaining credit we have in order to give our kids a “Christmas” and not have to tell them Santa isn’t real yet). In order to save our house, my husband tapped into his only other source of savings, his 401k, which is now only at $8k (he contributes the highest his company matches, 4%, so that’s good…) Since, we have been stuck in a cycle of making payments on the credit cards, but using the “freed up debt” to buy groceries and pay bills. Not to mention to big debt we’ve wracked up on home repairs that we couldn’t afford since our savings was drained… Home Depot credit card… Do not recommend! This cycle is killing us. We used to be so financially stable. I keep using our tax returns to pay down debts but it’s literally just impossible to keep up with at this point. I feel like our only option is to sell or house and use the equity (if it’ll still for enough) to pay off more debt.
It just doesn’t make sense to me to sell my secured debt for to pay off unsecured debt.
I know everyone has very unique financial situations and there isn’t clear answers for anything, but maybe this story will help inspire new blog posts. I like your blog, thank you for it.
To any young 20 year olds out there, do start saving as young as you can because if we didn’t do the same, we would be in a much worse position than we are in right now. I started falling apart at the ripe old age of 28!