Saving a million dollar is not a big deal. You just need to save $1,000… a thousand times. Whether or not that will be enough for retirement is another story. At 4% safe withdrawal rate, the million you are going to save will generate $40,000 yearly to cover your expenses. That should be amply sufficient if your mortgage is paid off and your kids out of the house, but that is not a lot if you still have these expenses.
Anyway, back to our million. Saving a million is daunting. Like, running a marathon scary. But if you break your big goal into a much more achievable $1,000, then it is starting to look more realistic. How often exactly do you need to save $1,000? Well, if you are 25, and plan on retiring at age 60, you have 35 years in front of you. 420 months. Saving $1,000 a month will only give you $420,000. That won’t cut it. You need your money to work extra hard for you. You must invest the money and get better returns.
But in the meanwhile, to stay motivated, let’s celebrate the first milestone, and your very first $1,000 saved. Because we are trying to get into good money habits, saving your first $1,000 shouldn’t be that difficult. You can have a look at your expenses and spot where you are wasting money.
- Are you bringing your lunch to work?
- Using your car as little as possible?
- Do you have the lowest rate on your mortgage, credit cards and loans?
- Are you resourceful when spending money, looking for bargains or ways to get things for free?
- Do you get value out of everything you buy?
After you have transferred your debt to a lower interest deal, canceled your cable and gym membership if you don’t use them, and brown bagged your lunch, you should find more breathing room in your budget. Maybe the first thousand is there already. Now you can invest your $1,000 and watch them grow.
So we have $1,000. At an average of 8% over 35 years, it will grow to $16,400. That’s 16 thousands out of the 1,000 we need. 984 to go. Thank goodness we have 35 years.
Let’s try to invest $100 per month for the first five years.
- $1,200 invested for 34 years will turn into $18,200
- for 33 years, you’ll have $16,800
- $15,500 for 32 years
- $14,300 for 31 years
- and $13,200 for 30 years
Yay, we have now saved $78,000! Plus our initial $16,400, our nest egg is almost at six figures, $94,400. And don’t tell me it is hard to find $100 a month to invest between the ages of 25 and 30. You can cut down on the partying a little bit, use your raises at work and live on last year’s income, keep living with roommates to save at least $200 a month on rent, etc. The first thing you should do when you start investing, is actually maxing out your 401k, or at least taking advantage of your company match. If they match your $100/month, you now have the opportunity to get almost $200,000 in your nest egg.
That is, if you don’t invest one cent after age 30. But since we still have 800 thousands to go to reach our million dollar goal, we need to keep going. With only 30 years to keep saving and investing, growing a $800,000 nest egg will require a $520 monthly sacrifice on your part. We’re stepping things up. But by this time, you will be making way more money at work than when you started, and investing $6,000 a year can be done without too much effort if you once more enjoy some company match. A 3% match on a $50,000 income is $1,500, or 25% of your savings needs accounted for. Add to that the tax saving, and your paycheck should be reduced only by $320 or so.
That is $10 a day, not so bad to retire a millionaire isn’t it?
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.