What You Need to Know to Make a Million Dollars
Who wouldn’t want to be a millionaire? We all have a goal of becoming financially independent at some point in our lives, and while it might take more than a million dollars to achieve that, it’s a pretty good start. The fact of the matter is that anyone can save a million dollars, though the longer you have to save the easier the task. All it requires is discipline, patience and motivation. And yes, it also requires the money to set aside each month. But once you know how much you need to save and how realistic the goal really is, the motivation will come.
If you are already saving for the future, getting to a million dollars will be that much easier because you have established the habit. If you’re starting from scratch, your first challenge will be in developing the habit. But, no matter where you are, the absolute key is to start saving and then to save often. That will make it very difficult to fail.
How Your Money Grows
When saving for a future goal, you need to know what it will take to achieve it. If you start out with a fixed monthly savings amount, you need to know what kind of return on your money you’ll need in order to achieve your goal within a desired time frame; or, if you want to know how much you need to save each month based on an assumed rate of return. Either way, you are dealing with several factors that will determine how much you need to save, or what rate of return you’ll need to earn, or how long it will take to achieve your goal.
By the way, you can easily access a savings calculator online that will allow you to input your own assumptions for these factors, but it is important to understand how they work and how they impact each other.
This is, essentially, your starting point. You may be starting with an amount already saved, or you may be starting from scratch. Either way, this will determine how much you need to save.
In doing your budget, you may have already determined how much you are able to save each month; so all you need to know is how much you need to earn on your investments to achieve your goal. But, if the required rate of return is unreasonable or involves taking more risk than you can take, you may have to find a way to increase your savings amount if you expect to achieve your goal within your desired time frame; or you may have to extend your timeframe.
Conversely, if your are dead set on your timeframe and you are willing to assume that your money can earn a certain rate of return throughout that timeframe, these factors will determine how much you will need to save each month. It then becomes your responsibility to budget for that savings amount.
Rate of return and Risk
This is probably the most difficult factor to determine, but it is also the most critical. It really all comes down to risk and how much of it you can tolerate or are willing to take. It’s vitally important to realize that the returns you earn on your money are inextricably linked to risk. The more risk you can take, the higher the returns you should expect. So, risk isn’t necessarily bad if you know how to manage it. And there are specific strategies that can be used to mitigate risk while achieving higher returns.
The keys to minimizing risk are:
- Creating an asset allocation comprised of a big basket of stocks and bonds and not trying to pick individual winners.
- Diversifying your portfolio across many different sectors of the economy and across many parts of the globe.
- Rebalancing your portfolio each year by selling securities that outperformed and buying more of those that underperformed. This will enable to maintain the asset mix that fits your risk tolerance and your investment objective.
When you monitor your portfolio, and repeat these steps each year, you’ll be able to capture all of the returns the market has to offer with minimal volatility.
Note: If you want to factor in inflation, which is a good idea, you would simply reduce your expected rate of return by an assumed rate of inflation. For example, if you expect to earn 8 percent on your money, and you expect inflation to average 3.5 percent throughout your timeframe, your assumed rate of return would be 5.5 percent. It may mean having to increase your savings amount or lengthening your timeframe, but it will give you a more realistic projection.
We’ve already discussed the value of time. There truly is a “cost of waiting” you incur when you put off your savings. The less time you have the more expensive your goals become. However, with savings, it’s never too late to start.
If you have a set timeframe, you will need to adjust your monthly savings amount and/or your rate of return based on the number of years you have to save. If you know how much you want to save and you expect to earn a certain rate of return, these factors will determine how long it will take to achieve your goal.
The following chart illustrates how your timeframe and your investment return impacts the “cost” of accumulating $1 million:
Saving $1 Million
|Rate||10 Yrs.||20 Yrs.||30 Yrs.||40 Yrs.||50 Yrs.|
Your goal is the future value you are seeking to create. Using the example of saving a million dollars, that is the future value of what you currently have and what you will be saving over time. When planning your financial future, you need to know the total cost of your goals. For some people, a million dollars wouldn’t be enough to maintain the life style they envision in retirement. Confidence comes from knowing you will have enough to sustain your idea of a good life for the rest of your life; so “the number” should be based on what it will take to do that. It could be a million, or it could be $3 million; whatever is determined, that becomes your target.
Yes, anyone can become a millionaire – at least anyone who has a plan and the discipline to stick with it. The only thing standing in the way of you becoming one is your lack of action. Remember, time is your most valuable asset. Use it wisely.
The views expressed herein are those of Small Business Resources, as of the date above and are subject to change. This publication is for informational purposes only and should not be construed as a recommendation for any specific insurance product or service. Information has been collected from sources believed to be reliable, but has not been verified for accuracy. These views and opinions do not necessarily represent those of Bryn Mawr Trust, its directors, officers, affiliates, and/or any/all of the contributors to this site. It does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not endorse any third-party companies, products, or services described herein and assume no liability for your use of this information.