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Can You Save Your Way to a $1,000,000 Dollars?

I recently had a discussion with a friend of mine on whether or not it’s possible to save your way to a million dollars or if it’s only possible to earn it. We talked about it from many angles, and yes it’s possible, but it’s very unlikely. You’ll have to live very cheaply for a long time, at least more much more cheaply than I care to.

So how did we come up with this finding? Like most of the other articles on this blog, I worked out the numbers. Today’s article is all about the numbers we worked out during that discussion. We’ll start from one angle and then work the what-if’s, how-to’s, and what-about’s after.

Ok, let’s start with a basic premise, let’s start with a salary. Where do we start here? To make things simple, let’s take the median Californian’s household salary of about $54k. Let’s assume a 25% tax rate straight off the top (which is probably lower than the actual rate, therefore working in our favor), leaving us with $40.5k in net income. Now, according to “The Wealthy Barber”, we should invest 10% of our income. Again to pad it in our favor, let’s make that 10% of gross (pre-tax income) rather than the net income. This means we will put away $5.400 a year into an investment instead of $4,050. As for the interest rate, let’s take an easy to measure interest rate, the current 30-year fixed US Treasuries rate of 5.375%/year. After 30 years, you would have $391,792.50 in your account. You’d be short about 61% of your goal of a million dollars!

Alright, now that we have a baseline, let’s start looking at these numbers in more detail, let’s change them, and let’s work with different assumptions. Ok, first, what if instead of 10% we saved 20%? What difference would that make? $783,585.05. Much closer but still over 21% short of our one million dollar goal. To make our goal of one million dollars we would need to put away $13,782.81 each year! Assuming a median income of $54k, that represents over 25% of gross income, or over 34% of net income! In other words, for ever dollar you take home after taxes, you need to put 34 cents into your investments, you need to live off of just under $27k a year. In California, assuming the rent is at least $1k a month (which is low), that means you need to live on $15k a year for everything (car, food, health, kids, entertainment, travel, etc.) for 30 years! That’s not very much, not much at all.

Ok, let’s look at it from another angle. What if we increased the interest rate to a more aggressive interest rate? Let’s take the average compound rate of return on stocks from 1802 through 1991, 7.7% per year. Assuming this rate of return with our original 10% of gross, would we make our one million dollars in 30 years? Unfortunately no, we would have made only $609,226.29, still shy over 39% of our targeted one million dollars. At that rate of return, we would need to invest $8,863.71/year, over 16% of our gross or almost 22% of our net. Although possible, I personally think that consistently investing 20% or more of the net income of the median family is probably asking for too much for the ordinary person. Investing 20% of 100k net in revenue is possible, but not for the median income family, it’s just too much.

Ok, so let’s look at it this way, assuming we want to save only 10% of our net income, the smaller of the two numbers, at the higher rate of 7.7%, then how much income would we need to produce? $88,637.11 in net income. Assuming a tax bracket of 25% again (it’s probably higher as taxes get progressively higher with additional income), then we would need to make $118,182.81 in gross yearly revenue!

The next question that comes to my mind is what interest rate would you need to earn on the median salary to have 1 million dollars after 30 years, assuming you’re putting away 10% of the net income of the median household income of $54k? You would need to earn consistently over 30 years 10.139% compounded interest a year. This is very doable, however it tells me that I most likely need to be a smart equity investor, a smart real estate investor, or start my own business. Chances are that I won’t attain my 1 million dollar mark (in today’s dollars) otherwise.

Now I can already see some of you saying that with inflation, one million dollars isn’t going to be anything in 30 years. Very true, but remember these calculations are in today’s dollars. That is, what you have in the bank (or in investments) then will buy the same amount of stuff then as it does today if you had a million dollars today. In actually, if you add inflation into the calculations, these numbers look even worse because you now have to reduce your real interest rate by 3.5% (today’s inflation rate). So if you make 7.7%, you’re actually only making 4.2%!

I can also suspect some of you will comment about increasing your income, and hence contributions, over time. Yes, that’s all true and all, and I completely agree. The thinking is that although you might not make over $100k today, you will tomorow so you should be able to play catch up by putting away bigger and bigger amounts. Yes, this is true, sort of except that there’s a catch! This is where the power of compound interest becomes very very interesting! Again, nothing speaks as well as working out the numbers, so let’s do just that.

Say I invest 10k in year 1 and do nothing for 10 years at 7.7%. I will end up with $100,003.52 after 30 years. Now, what if I invest $1k every year for 30 years (i.e. I invest for a total of $30k)? I will end up with only $112,819.69, a difference of about 10%! Wow! I invested 3 times as much money only to make 10% more! Catching up really didn’t help much.

Compound Interest Graph

Of course, in the example above we spread it out over 30 years. What if we do the same numbers, but over 10 years now? Get ready for a shock! For the initial $10k investment in the first year and nothing after I end up with $21,544.60. If I do the second scenario, investing $1.5k a year for 10 years, I end up with $21,706.79. I actually have to invest 50% more money to get the same final balance.

Let’s look at the effects of compound with one last example. Let’s say I have no money initially, so I invest nothing for 10 years. Then for the next 10 years I invest $2k a year, then for next 10 years after that I invest $3k a year, what will I end up with? $105,768.77! Wow! I end up with almost the exact same as if I invested $10k the first year. I have to invest a total of $50k to catch up to my initial $10k investment. 5 times as much money to end up with about the same final amount! That’s the power of compound interest!

You can play with the numbers, but you’ll find that as interest rates climb, the differences become even more staggering. Basically the idea is that you should let time be your friend. The longer you can compound a number the higher the return. Remember, compound interest is an exponential formula, so use its power to your advantage. Put as much as you can early on, it’ll make a world of difference tomorrow because its very costly to catch up later. Therefore using the argument that you’ll be making more money later and hence bigger investments is probably not a good one.

All in all, it’s possible to save a million dollars but the odds need to be in your favor. The math above assumes historical averages with median salaries. The math here does not deal with factors such as unemployment losses (you’ll probably have some bad months in your life, etc. The numbers also doesn’t deal with inflation which could substantially affect the results. Also, since these calculations don’t consider inflation, they assume that you’re gaining the full stock return which is completely untrue! For example, if you’re stocks went up say 10% this year, then you only really made 6.5% after adjustments for inflation. That’s right, you need to remove 3.5% for inflation. So for example if you had $100 invested and you made $10 for a total of $110, then you’re $110 can only buy $107 of equivalent goods as compared to your $100. As a more concrete example, if you could buy gold at $1/lbs, then in year one you could buy 100 lbs of gold. In year two gold would have gone up to $1.035/lbs because of inflation (assuming a 3.5% inflation rate), allowing you to buy only 107 lbs and not 110 lbs. This means that in reality our calculations are better than reality because we didn’t take this inflation into consideration.

Also, these calculations assume you never pay taxes on your investments. If you do pay capital appreciation taxes then the numbers change drastically. Therefore, a quick tip for this type of investing, try to pick investment vehicles that you can stay with for a longer term to avoid taxes because they can have drastic differences in these calculations as seen in my previous article on the affect of taxes on the real estate investment returns.

Now that you know most of the math what do you think? I personally don’t think it’s feasible to assume most people will be able to save and invest $1,000,000 dollars in 30 years. Not that it’s impossible, people have done it, but I don’t know that I want to live that type of financially squeezed lifestyle. Rather I think you’ll have to look at other avenues to increase your revenues (or rate of return) rather than just try to save your way to $1,000,000. You should probably look into investing wisely in equities, real estate, or building your own business. Basically, you need to look at something other than just putting money away in your mattress, because the honest truth is that in 30 years you’ll likely not have the $1,000,000 you worked so hard to save for, you’ll only have a fraction of that. I’m not saying don’t invest, I would never say that, actually I’m a very strong proponent of investing. All I’m saying is that you probably need more than just plain saving in your financial plan to get your $1,000,000.

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  •     Jim and Nadine Price
    · November 22nd, 2006  · 8:58 pm  · Permalink

    My wife and I are in the process of saving one million dollars in eight short years without any risk of losing a single penny of principle (I can’t bear the thought of investing and losing my hard earned money). We have a combined income of approximately 140 thousand dollars per year and live on 39 thousand dollars. The remaining money is put a saving account that currently pays 5.2 percent interest. We allow the interest to remain in the account to compound. We started this plan a little over six months ago by downsizing to a smaller home. We trimmed back in a few other areas. We sold our Lexus and purchased a chevy cobalt. We also cancelled our television cable. We have changed our eating habits too. Instead of ready made meals we cook more which has saved us several dollars. Are we suffering? No way we have everything we need and many things we want. Oh yea, we have two teenagers also and one is in college. Yes you can save your way to one million dollars.

  •     Steph
    · November 28th, 2006  · 11:06 am  · Permalink

    Hi Jim and Nadine,

    Firstly, congratulations on your success! It’s great to hear! It’s phenomenal! Very few people have the will power to control their spending like you do that make your income.

    Now without trying to take anything away from your major success and great accomplishment, one thing you have to realize is that unfortunately most people don’t have your level of income. You’ve managed to live on $39k, which is amazing! That therefore means you have $101k to save each year. Now if we take the median household income of $54k and use your level of expenses ($39k), that means they know only have $15k to save a year.

    If you look at the difference, this means that you’re able to save $101k a year versus $15k a year for the median family, assuming the same expense level (which I have to again compliment you for!). Adding taxes into the equation, this will substantially drop the amount you can save, but it should be about double that of the example I used. You are indeed very good shoppers!

    Giving these numbers, and I haven’t done the math, I’d assume it’s still not possible for the median household family to save a million dollars…

    However, going back to your particular situation, you’ve more than amplified the point! Because of your wise spending habits, you’ve shown just how important each extra dollar invested can make!!!

  •     John P.
    · February 24th, 2007  · 4:12 pm  · Permalink

    7.7% return? With very little effort and paying attention to your investments quarterly, you should be able to earn 9-11% per year. The S&P500 has been around 13% the last 5 years alone.

    Don’t forget that 401(k) and IRA investments reduce your taxable income this year. Further, there is a government program that matches dollar for dollar retirement savings for even lower incomes.

    I’ve read The Wealthy Barber in the early 1990s. It has a valuable lesson to teach, the power of compound interest. If you never take the first step, you’ll never reach your goal.

    My father was in the Air Force, so I come from the lower-middle class. They lost lots of money in real estate over the years. Fortunately, my parents instilled the need for a college education and hard work. I’ve been lucky to be sure, but not as lucky as some. After 17 years of saving and investing, I’ve almost reached a net worth of $1M and live debt free. No large inheritance made this happen and my wife doesn’t work.
    We did it, you can too. Consistency with your saving and not being too aggressive nor too conservative are the keys.

  •     Steph
    · February 27th, 2007  · 11:17 pm  · Permalink

    Hi John,

    First, I’d like to also say congratulations on your success! What can I say, I love to hear success stories. I love it when people show me wrong in these areas, it’s just the best.

    However, without trying to take anything away from your success, the 7.7% return is what the average person can expect to make based on history. I’ve personally achieved a higher return than that on a consistent basis over many years (I’ve yet to have anything lower than a double digit return in almost 10 years), but the average is the average.

    As well, as I mention to the last poster, and I don’t know if this is true in your case or not, but many people also forget that I used the median salary. If your household makes more than the median, this can quickly skew the results (as you can see in my reply to the previous comment). If you make less and manage to save a million (save, not purchase businesses, etc.), than honestly, I’m extremely impressed! This takes some considerable skill.

    In any case, I’m definitely going to say congratulations again on your success. I’m sure it was no small feat to achieve with one income, no inheritances, and so on. You definitely had to plan carefully, and execute on that plan, to get where you’re at. Congrats!

  •     DYANN
    · May 8th, 2007  · 10:22 am  · Permalink


  •     jim
    · May 25th, 2007  · 10:07 pm  · Permalink

    Buy a cheap home, as cheap as you can get and still live comfortably. I started mine at about 10% of my monthly income. furnish it with a roomate. He ended up paying almost 70% of the mortgage (sry ted). Save as much as you can. I average about 70,000 a year plumbing. Fix up your place, Pull equity out of it and keep up your credit. Buy another home. My second home is a fixer upper 3 family. Fix it up. Rent out your old place for a little more then the mortgage. In the 3 family I live in the 3rd floor apt, Its a 2 bedroom with my roomate, and the 2 tenents below me my income is 2500, and my mortgage is 1500. I’m 25. It’s possible to do. But personally I dont like waiting around for 5.25% to make me a millionaire when im 95 and on life support.

  •     Steph
    · May 29th, 2007  · 10:22 pm  · Permalink

    Thanks Jim for sharing your story! It’s great to hear people succeeding!

  •     Phil
    · August 2nd, 2007  · 12:49 pm  · Permalink

    I worked for a data processing firm for 10 years straight out of college. They offered a 401k plan with a 50% match. I always put the maximum into it they allowed and always picked the most aggressive growth fund they offered. I quit the firm after 10 years and rolled the $100,000 I had built up in it into an extremely aggressive growth fund with an excellent long term track record. That was 11 years ago.

    On July 2nd of this year my mutual company informed me that my account had surpassed one million dollars. My salary was never anything spectacular, it averaged 50,000 dollars a year, yet I managed to become a millionaire by the age of 45, and thats after losing half of my savings in the dot.com crash.

  •     Steph
    · August 4th, 2007  · 5:03 pm  · Permalink

    Hi Phil,

    That’s great news!!! Congratulations on your success!

    Do you mind if I also ask what percentage of your income you put away each month? I know it would be a great tip for others reading here to know what percentage of their income it takes to achieve the success you did.

  •     Phil
    · August 5th, 2007  · 9:38 pm  · Permalink

    While working for the data processing firm I always tried to put away a minimum of 15%. After leaving that firm I started tracking my monthly bills and knew what bills would come in on what paychecks. I would put aside enough to pay the bills and some extra for other living expenses and then invested the rest of my paycheck. This is known as the “Pay Yourself First” method of investing.

    I attribute two things to my financial success.

    One, I was lucky enought to read the book
    The Millionaire Next Door” many years ago and I live by its tenets.

    Two, I realized early on that Americans are constantly bombarded with marketing in every shape and form to get them to spend their paychecks on things they don’t need. I never saw any reason to throw my money away on overpriced designer clothing or fancy cars or overpriced, overhyped cell-phones, etc. Most of the stuff you see on TV you don’t need. Its just another expense. Would you be happier with the latest $500.00 cell phone or the fact that if you lost your job tomorrow you could still live quite nicely for years without having to worry about paying your bills? I prefer the later…

  •     Steph
    · August 8th, 2007  · 8:35 pm  · Permalink

    Hi Phil,

    Thanks for the great details! It’s great to hear you were able to put away as much as 15% of your income.

    And that’s a great book you mentioned. The same people wrote another follow-up book called The Millionaire Mind which was also very good. Not as good as the original, but very good. I actually read them back to back myself (I only discovered them sometime after they were both released).

    And you’re absolutely right about spending beyond your means. It happens a lot. I know I’ve been guilty of it more than I’d like to admit. And don’t let anyone tell you that you became a millionaire because of luck, it takes a lot of effort and will power to maintain that kind of spending control.

  •     Pat
    · December 1st, 2009  · 4:11 pm  · Permalink

    This was a great read. Including everyone’s comments. I’m only 19, but I’m really going to try and start putting money away every paycheck. If I start now, hopefully I will develop a habit of doing it, and continually put money away to try and reach the million dollar goal.

  •     Josh
    · April 1st, 2010  · 1:18 pm  · Permalink

    Good thread. However, I’d like to point out that having a million dollars in a retirement account is not the same thing as having a million dollars. Your friendly Uncle Sam has a claim on that money, and you can bet he’ll be taking his 25%. If you also have an Uncle “Cal,” as I do, then it’s more like 35%. So a million bucks in an IRA or a 401k for me is really more like $650k. If you believe, as I do, that taxes are going much higher in the next 30 years, then it might make more sense to forego the current tax savings of the retirement plans and pay your taxes now. Then at least you know where you stand.

  •     TJ
    · June 10th, 2010  · 6:12 pm  · Permalink

    I wonder how all those who had their money in the market, and were gloating like those who responded to this article in 2007, are doing today. “With very little effort….” Please. Look where the acceptance of excessive returns got us.

    Great read. Too bad there are many who are quick to marginalize your realistic figures and approach.

  •     Tracee
    · June 27th, 2010  · 2:06 am  · Permalink

    One factor you forgot to account for is time. For those of us in our early twenties, we can stretch out the time table to 40 years and see a huge difference. It takes $8,555 annually to create a million dollars in thirty years (at 7.7%), while investing $7,500 annually for 40 years actually generates 2 million! Just like waiting to start saving really harms your final investment number, saving for an additional ten years really multiplies your savings.

    Yes, inflation will ensure that a million then is not the same as a million now, but it’s still a good goal to strive for. Good article!

  •     Alexios
    · September 10th, 2010  · 12:15 am  · Permalink

    Hey there!

    I am able to save 35,000 to 40,000 dollars in cash every year how long would it take me to invest to make 500k and does it have to be a 30 year plan or do I have to keep my money in it for a period of time? Thanks!

  •     anthony
    · April 26th, 2011  · 8:47 am  · Permalink

    I earn 70k gross with my full time job I earn about 15k at my part time job I am very conservative but horrible with numbers and knowledge such as the powers of compund interest long story short I’m old school you save your money under your matress I am asking for help. My total expenses come to about 1800.00 dollars a month I generally have about 2k a month. In extra income I can save however the bank is not paying interest so no benefits there. I also have a 401k plan that I contribute the min. Amount to get the state match I pay 150.00 the state match 75.00 total of 225.00 per month with avg. Of 9% interest. Can any of you number guru’s help me out? Its 2011 …my goal is to earm a million dollars by time I am 50 I am 38 now

  •     Steph
    · April 27th, 2011  · 3:45 pm  · Permalink

    Hi Josh,

    That’s a really good point. Having $1 million in a retirement account is not the same as you haven’t been taxed on that money. Whether or not you’ll be taxed more later is hard to say because in the meantime you earn interest on that money. Not only that, but you should also consider that you’re deferring your taxes on your highest income to what will most likely be your lowest income.

    With that in mind, it would be better to say at least $1.25 million in a retirement account or $1 million in the bank.

  •     Steph
    · April 27th, 2011  · 3:49 pm  · Permalink

    Hi Tracee,

    You are right, I just went with the assumption that most 20’somethings don’t have that kind of money to spare. I know when I was in my 20’s I had little extra money. I had to save for a down payment on my mortgage, I had to pay my student loans. Not only that, but because you’re starting out everything is more expensive. You have no furniture, etc. As well, this is generally when you’re less careful with your money, so you spend more.

    But it’s not just that, it’s also the time in your life when you make the least amount of money. It’s also the time when everything is generally more expensive. Car insurance premiums are higher. Any kinds of loans are more expensive because you have little to no history. And so on.

    But if you can do it in your 20’s, then my hat goes off to you! Congratulations!! You’re ahead of me at that time.

  •     Steph
    · April 27th, 2011  · 3:51 pm  · Permalink

    Hi Alexios,

    You’d have to do the math, but it wouldn’t take very long. Probably around 10 years. The key is can you continue to save that much year over year? If you can, my congratulations to you as well.

  •     Steph
    · April 27th, 2011  · 9:44 pm  · Permalink

    Hi Anthony,

    If I’m reading your comment correctly, you’re asking if by saving $225/month you will have $1 million in 12 years at 9% interest? I hate to say this, but unfortunately I don’t need to do the math to know that it’s not going to happen…

  •     Amanda
    · December 10th, 2011  · 5:06 pm  · Permalink

    I am a 26 year old mother of five small children, and I have two very irresponsible younger brothers who I can’t count on to take care of our parents in their elder years. I am currently working on putting money aside at a rate of 10k a year starting this year. A late start is better than no start at all. My dad is looking to retire in 5 years, and according to my mother, has very little money to survive on when he does. She says he has roughly 150k to retire on. I don’t know what that’ll be in 5 years from now, but I know enough to know it won’t be enough for them to survive on….

    I dont necessarily have to be a millionaire, I just want to live comfortably and start teaching my children that their futures are what they have to worry about. The here and now is precisely that, here and now. There are always unforeseen things in life that we are generally unprepared for. I’d like my children to be prepared, even if its just with money my husband and I leave behind for them when we’re gone.

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