by Jordan Wathen | May 20, 2019
Millionaires don't budget to save, they save first and spend on what's left. Here's how much you'll have to save each year to become a millionaire.
Becoming a millionaire in the United States isn't easy, but it isn't necessarily hard either. By establishing good budgeting habits early, many middle-class Americans could wind up as millionaires by letting the power of compounding turn small amounts of money into large sums over time.
There is no way around it: To become a millionaire, you must save a small amount of money for a long period of time or save massive amounts of money for a short period of time. The former is much easier than the latter, but it requires changing how you view your money, and your budget.
Millionaires aren't what you see depicted in Hollywood. Few of them fly to work in helicopters or throw parties on their yachts. Most millionaires are everyday people who range from blue collar workers who earn "average" incomes, to executives and business people who earn impressive sums each year. But all millionaires have one thing in common: They put savings first.
This is something that current and future millionaires understand that non-millionaires do not: Becoming a millionaire is a function of basic math. Small sums of money, when set aside and invested regularly, turn into large amounts of money.
Consider this: In 2018, many baby-faced 22-year old college graduates entered the workforce for the first time, earning an average of $50,000 per year. If they were to save just 10% of their pre-tax incomes into a 401(k), individual retirement account (IRA), or another retirement plan, and earn a reasonable annual return of 7%, on average, they would become millionaires after a 35-year working career.
Keep in mind, this doesn't include the value of any real estate, jewelry, artwork, or other valuable assets this person will inevitably accumulate over time. It just includes the value of a retirement account, nothing more, nothing less.
Of course, some raises along the way help -- I assumed their incomes would increase at a rate of about 3% per year, in line with historical inflation rates -- but the real heavy lifting is accomplished by the compounding value of the investment account over time, not how much they earn or even how much they save.
Just 12 years after entering the workforce, the amount of money this saver earns from gains on his or her investments ($7,231) would exceed the contributions made that year ($6,921). At this point, the saver is earning more from their past savings than they are regularly setting aside. In the final year, this model person would earn more from their investment gains than they earned going to work from January to June!
Budgeting your way to wealth is very hard to do because it's hard to spend your way into savings. Most people are hardwired to favor the immediate gratification of using their income to purchase expensive cars, homes, and vacations over setting aside money for an eventual retirement.
Instead, people who want to become millionaires should work backwards, saving to reach their goals, and living on the remainder. How much you need to save to become a millionaire depends on two variables: the returns you'll earn on your investments, as well as the amount of time you have to save.
The table below shows you how much you need to save each year in order to achieve a $1,000,000 balance in your retirement account. The longer you can save and the higher the return you earn on your money, the less money you need to save to become a millionaire.
|Annual savings required to reach a $1 million account balance by time and annual return|
|Years/Annual return||6% annual return||7% annual return||8% annual return|
Data source: Author calculations.
The way to read this table is that someone who wants to have a $1 million account balance would have to save $177,396 per year at a 6% annual return to achieve that goal in just five years. However, those who are more realistic about their savings goals can achieve the same $1 million account balance by saving $12,649 per year for 30 years at the same 6% annual rate of return.
Knowing how much you should set aside to become a millionaire is only half the equation. The other part is actually saving and investing the money on a regular basis. You can take a lot of the headache out of saving for the future by automating your savings and making automatic contributions to a retirement account.
Here are two of the best ways to start automating your savings:
With these two accounts, anyone who is truly dedicated to becoming a millionaire could easily become one, provided they are serious about saving and do it for long enough that the power of compounding turns meager sums into millions of dollars.
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