If you ask many individuals how much money they wish they had, a million dollars is their magic number. There is advice on the internet about how you–with patience, time, and dedication–could save a million dollars. Some claim it’s as simple as giving up your morning coffee. This contributor to Millennial Money says he did it in five years. So is it possible? Take a good look at your situation and see what it would take to achieve this goal.
Before you start investing and setting up retirement accounts, you’ll have to do a little bit of work. There are three steps we would recommend before you start.
- The first step is to choose a number – in this case, we’ll say $1,000,000,000.
- Gain an accurate understanding of your income, expenses, savings, and rate of return on investments. Track your spending for at least six months, track your income, and review all bank and investment statements.
- Now do the math. You can use a calculator such as this one from Bankrate. You can either figure out how long it will take you to save to your goal at your current rate; or you can pick a goal date–say, the date you want to retire–and work backward.
You might end this exercise feeling frustrated. Maybe you discovered it will take you 105 years, at your current rate, to save a million dollars. Don’t lose hope. You’ve already taken a huge step toward better money management simply by assessing your situation. Now start looking for ways to save.
Know Why You Want to Save a Million Dollars
This might sound like a no-brainer. But truly consider what you want to achieve. Justin McCurry explained to MSNBC how he and his wife retired in their thirties, with two kids, because he changed his mindset. He started focusing on financial independence rather than money for money’s sake. Then he and his family took a good, hard look at how they wanted to live in retirement. At the time of the interview, they had more than a million dollars in their retirement portfolio and lived on about $40,000 a year.
Keys to Saving
Don’t Put Off Saving
Obviously, the earlier you start saving, the sooner you reach your goal. Yet some people avoid saving seriously and figure they’ll start once they get a better paying job or achieve some other milestone. Anyone can save something, even a tiny amount, and work up. Whether you’re still in college or retirement is creeping up on you, save now.
Make Sure You’re Vested in Your 401(k) and Max Out Your Contributions
The amount you add to your retirement fund each month can make or break your goal. Some suggest saving a minimum of 10 percent, even though 401(k) retirement plans typically require contributions as little as three percent. Add as much as necessary for your employer to fully match the company’s contribution. Then, make sure that you can take it with you if you move on from that job. That could mean staying at a company a little longer than you want but reaping additional rewards.
Keys to Investing
Calibrate Your Risk to Your Timeframe
A financial adviser can help you decide, based on your age and comfort level, how much risk to take with your investments. If you must save a certain amount of money by a certain date, such as retirement, your risk tolerance will be low. Younger people like the “Millennial Millionaire,” referenced above, might opt for riskier choices. He says, for example, that he invests about 50% of his portfolio in individual companies’ stocks. He has been lucky! Even he suggests that beginner investors should keep stock investments under 10%.
Find the Best Interest Rates
If you’re getting less than one percent interest on your savings accounts, shop around. As U.S. News and World Report notes, you might have to move your account to another bank to get a higher yield. In addition, consider a short-term certificate of deposit (CD), which tends to get a higher interest rate than a regular savings account. Ask your bank about other opportunities. Some offer cash-back incentives and other perks, depending on how much you keep in your accounts.
Is a Million Dollars Really a Million Dollars?
You can save a million dollars and still not have a million dollars at the end — at least not the same value as today’s million. Inflation marches ever onward. So figure out how predicted inflationary increases affect your bottom line. Also, consider factors like where you will live when you reach your goal. Will it be a place with a higher or lower cost of living than where you are now? Will you be in the same career? Will you have a family? Things don’t always go according to plan but plan what you can. In order to achieve your savings dreams, you’ll need to get serious about planning.
If you’re looking for advice on your savings and investment strategy, accounting, and auditing, or even tax preparation, we would be glad to help you get comfortable with those things.