What does it take to get $1,000,000 in the bank? For some it seems like an unrealistic pipe dream – created by financial planners who would have you believe anything less will lead to an impoverished retirement. For others, $1,000,000 is just one step along the way towards growing fantastic wealth over a lifetime.
I will start by pointing out that what matters most is not the amount you save, but your contentment with what you have, and a motivation to live within your means to improve your own financial peace over time.
That said, the fascination with the term ‘millionaire’ has been around for hundreds of years. The concept was first used in print in 1786 by Thomas Jefferson when he wrote of the French: “The poorest labourer stood on equal ground with the wealthiest Millionary”. Over the years the term ‘millionaire’ was used to describe the wealthy, those with significant discretionary means, and those targeted by luxury brands. What is interesting is that even though this round dollar figure still identifies the wealthy (it remains a niche only 0.15% of the world’s population attains), it is becoming less relevant as a definition of wealth in western society given less than $500,000 was required to purchase similar value thirty years ago, due to inflation.
Even so, there are only about 10 million individuals who technically qualify as millionaires today and it remains a financial goal that retains some level of mystique. This, even though few self-identify, celebrate or even know when they pass through the mark themselves.
How do you get there? Spending less than you earn helps. If a 25-year old is able to save $379 every month for 40 years earning on average 7% after tax (or in tax-deferred accounts) they will have accumulated $1,000,000. If they start at the age of 30 and tuck away $1,000 a month at 7% they will get to $1,000,000 before they hit the age of 58.
And if you want to teach the power of compound interest to a teenager, tell a 15-year old that if they put away $20.55 a week for 60 years – they too will accumulate that same $1,000,000.
Don’t forget that one of the best ‘forced savings’ programs available is owning your own home. Having a mortgage (whether you know it or not) is a great tool to ‘pay yourself first’ since some of each payment is going towards the principal amount owing, and over time the house will be paid for. While this equity won’t help with day-to-day expenses in your earning years, it is a great buffer for your later years when health care costs may sky-rocket just as you are needing to downsize or move into an assisted-care living facility.
Here is an easy rule to help you calculate how your money can grow, and perhaps motivate you towards your longer term financial goals: The rule of 72.
Simply take 72 and divide it by the interest rate you expect to earn, and this is the approximate number of years it will take to double it. From there it is easy to double the number again and again in the same number of years to have you understand the 8th wonder of the world: compound interest.
It’s actually a great way to teach children about the power of saving. I was in grade four when my Grandfather sat me down and had me do this mental math. And it won’t surprise you to know that a saver was created that day!
Here’s an example:
Using an interest rate of 8%, take 72 and divide it by 8: It will take roughly 9 years to double a single deposit, 20 years to double it again, 30 years to double it again, and so on. Using this math, over 45 years, $10 can become $320 by doubling $10 five times. The actual result is $319.20, so it’s a very good estimation rule.
Everyone has a goal. It might be an educational credential, a career aspiration, a retirement age or a round financial net worth target – or all four! Once you have a goal, your ability to achieve it will depend on the path you set, your motivation and the expert advice you seek. Be sure to build some flexibility in too, as life has many detours that usually results in something other than a straight line.