How to Become a Millionaire

When I was in middle school, my mom showed me a paper she had copied out of a magazine years before. There wasn’t a lot of content on the page, just a simple title, a brief story, and a chart. Something like this:

How to Become a Millionaire

If Jane invests $2,000 a year for eight years in her twenties, in an account that earns 12% interest, her $16,000 investment will be worth over $1 million dollars when she turns 60.

Age Contribution Ending Balance
20 2,000.00 2,235
21 2,000.00 4,734
22 2,000.00 7,526
23 2,000.00 10,646
24 2,000.00 14,134
25 2,000.00 18,032
26 2,000.00 22,389
27 2,000.00 27,259
28-59 0.00 . . .
60 0.00 1,070,457

I was astounded. (And, of course, wanted to try this savings plan for myself.)

If it was this easy, why wasn’t everyone a millionaire?

I later found out why.

Why Aren’t There More Millionaires?

  1. It’s really hard to scrounge up a spare $2,000 when you’re 20
  2. Averaging a 12% interest rate over 40 years is highly unrealistic (most financial advisors estimate a 7-8% return)
  3. Most people would rather spend their money on fun things now than save for a fun future that seems far off

Setting the impracticalities (and human nature) aside, we can still learn something from this chart about the power of compounding and how to develop a savings plan.

A More Likely Plan

First, let’s take a look at the savings plan above under more realistic circumstances. I’ve recreated the chart above with a 7% interest rate and stretched it out to age 65. Here’s what we get:

Age Contribution Ending Balance
20 2,000 2,136
21 2,000 4,416
22 2,000 6,850
23 2,000 9,450
24 2,000 12,226
25 2,000 15,190
26 2,000 18,354
27 2,000 21,733
28-64 0.00 . . .
65 0.00 262,432

With these assumptions, our total investment of $16k will be worth about $262k at age 65. That’s pretty awesome, but we’re nowhere close to being millionaires.

Plus, it still assumes we are investing $2,000 a year at a time when the majority of us are living off of student loans. Let’s try again.

A More Realistic Plan

This plan is a little more complicated, but I think it’s more attainable for the average person.

Say we scrimp and save through college and use some of that cash from graduation gifts to invest $1,000 in a retirement account the year we graduate.

The next year, we’re teaching full time and earning $35,000. Financial advisors recommend setting aside 10-15% of your income for retirement, which would be $3,500-$5,250. Let’s take the lower end of that range and say we make a $3,500 investment our first year out of college.

Then let’s assume our income increases in subsequent years and we increase our annual contributions by $1,000 each year until we are making the maximum annual contribution (currently $5,500 for IRAs) until age 27.

Now the chart looks like this:

Age Contribution Ending Balance
20 0 0
21 0 0
22 1,000 1,068
23 3,500 4,877
24 4,500 10,013
25 5,500 16,564
26 5,500 23,558
27 5,500 31,027
28-64 0 . . .
65 0 374,657

Our total investment is $25,500 and the estimated value at 65 is just under $375k. Better, but still far from millionaire status.

Millionaire Savings Plan

I think it’s safe to say it’s very hard to become a millionaire, just by investments made in your 20’s. Take a look at what happens when we keep saving into our 40’s.

If we follow the plan from above and keep investing the maximum until we’re 41 and then don’t invest another penny, the chart looks like this:

Age Contribution Ending Balance
20 0 0
21 0 0
22 1,000 1,068
23 3,500 4,877
24 4,500 10,013
25 5,500 16,564
26 5,500 23,558
27 5,500 31,027
28 5,500 39,002
29 5,500 47,517
30 5,500 56,609
31 5,500 66,317
32 5,500 76,683
33 5,500 87,751
34 5,500 99,569
35 5,500 112,188
36 5,500 125,662
37 5,500 140,049
38 5,500 155,410
39 5,500 171,812
40 5,500 189,326
41 5,500 208,026
42-64 0 . . .
65 0 1,003,265

We will have invested a total of $102,500 and at age 65, that investment will be worth $1,003,265.

BOOM. We’re millionaires! Congrats!

This is not magic. It’s compounding at work.

With time on our side and a disciplined savings plan, I really believe most people who are making a livable wage (yes, even music teachers) can plan to become millionaires.

But let’s not stop there. There’s more we can learn (and earn).

Another Lesson

By the time we’re 41, we’re in the habit of saving so we keep investing $5,500 a year until we’re 65. We will have invested a total of $234,500 and our portfolio will be worth about $1.33 million.

Not too shabby, but remember that the $102,500 we saved in our 20’s and 30’s was worth $1 million.

The additional $134,500 we saved in our 40’s, 50’s, and 60’s is is only worth about $330,000.

This is certainly not meant to deter you from saving in your 40’s and 50’s ($330k from a $134k investment is still a great return!), but to emphasize how incredibly valuable those early years are in the long-term value of your money. Time truly is our greatest asset.

But I Don’t Want to be a Millionaire

I wrote this post not because I think everyone should aspire to be “wealthy,” but because I think most of us aspire to be prepared. Believe it or not, with inflation, most of us in our 20’s and 30’s right now will need to be millionaires in order to maintain our current lifestyles in retirement. Crazy, right?

I also want to vanquish the idea that you have you have to win the lottery or create the next Facebook in order to become a millionaire. It’s not magic or luck or uncanny business acumen that produces these numbers, it’s math and a disciplined savings plan.

(If there’s any group of people who understands discipline and long-term pursuits, it’s musicians!)

They say the best time to plant a tree is 20 years ago and the second best time is today. The same could be said for retirement savings. Let’s get more millionaire music teachers!

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