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How to Make a Million Dollars Print E-mail
(12 votes, average 4.08 out of 5)
Personal Finance - Investing
Written by livecheap staff   

So you want to make a million dollars?  Well for most of us, the real goal will be to SAVE a million dollars.  Of course, it isn't what it used to be.   Not so long ago, it used to be considered wealth but these days it only qualifies as being well off. These days, if you have to live off of it and you want it to last, you're not going to have a house in the south of France and an ocean-front condo in Bal Harbor.  If you have that kind of cash in the bank, you'd be lucky to earn $35,000 a year in interest.  Even if that kind of money doesn't let you live in the lap of luxury, with a million dollars saved in the bank, you'll definitely have enormous options in life.  If you want to flip your slave-driving boss the bird, having a liquid million is a goal worth attaining.  So it's worth reviewing the math behind saving $1 million because it's a goal that is achievable on a middle-class income.  Making a million dollars, that's not hard, its keeping it that's the real struggle.

Unless you are a Wall Street trader, Fortune 500 CEO, or a professional sports athlete, it's unlikely that you are ever going to get paid that kind of cash in a single year.  Very few wage earners manage to reach that magic number by stuffing hundred dollar bills under the mattress. It's more likely that they managed that impressive feat with the benefit of capital appreciation along the way. An there's a simple recipe that works for the vast majority of people.

  1. Save $7,000 to $15,000 a year
  2. Invest it in the stock market
  3. Wait a long time and avoid taxes along the way

For most of us, it will take 20 to 30 years of disciplined savings to get to be a millionaire. Returns vary, but over the long haul, investing in the stock market has returned about 10% not accounting for inflation.  If you invest in small caps you can expect a higher return and if you invested in bonds/low risk companies, you could expect a lower return (albeit with more risk).

Let's assume that we are living sensibly, have good income and save $1,000 a month.  If we stick it under the mattress, it would take us 83 years to hit our goal.  While life expectancies are going up, you would have to live to a hundred and work for 80 years  to save up that kind of money.  But if you manage to get a 10% return on your investments.  So your first $12,000 will be worth $13,200 after a year and $14,520 after two.  (For more on compounding, read Compounding: Your Best Friend or Worst Enemy).

If you did this for 20 years and invested an additional $12K each year, you would have about $750K.  And if you did it for 25 years, you would have about $1.3 million and exceed your goal. To figure out how much money you end up with if you invest a fixed amount every month, you can use the following table.  It gives you a multiple that you use to see how your investment will appreciate depending on the the length of time you let it sit and the rate of return.

Investment Return Rate
Years 0.0% 5.0% 7.5% 10.0% 12.5% 15.0%
10 10.0 13.2 15.2 17.5 20.2 23.5
15 15.0 22.7 28.1 35 43.7 54.7
20 20.0 34.7 46.6 63 85.9 117.8
25 25.0 50.1 73.1 108.2 162 244.7
30 30.0 67.1 103.6 162.4 257 409.3


So for instance, if you are able to save $5,000 each year for 30 years and get a 10% return on your money, simply multiply $5000  by the multiple on the table and you'll should end up with $812,000.  A glance at the lower right hand side of the table gives you an idea how very wealthy people can get so darn rich.  If you are able to invest $25,000 a year and get a 15% rate of return for 30 years, you are looking at roughly $10 million dollars!

So if you have aspirations to accumulate wealth over the long haul, use this table to motivate you to save your pennies each year and invest them very wisely in stocks and real estate and you'll end up with some pretty spectacular results.

There are obviously some considerations here such as capital gains taxes, inflation, and fees, but you can adjust these to your circumstances. Carry this table in your pocket just to remind you that it doesn't take magic to get to save a million - it just takes discipline.

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Omiewon  - The general assumption is 10% |2010-09-26 21:12:06
Ben, not sure why you are focusing in on 15% when the article clearly says that the assumption is 10% not accounting for inflation which IS the long term stock market average.

You take a 10 year period of time where it is absolutely true that the stock market has not returned anything. You could also have taken the prior ten years which had massive, unsustainable gains. Of course, there are a lot of people who invested in the stock market over the 10 years and made a killing too. Many people invested outside the U.S. or into companies that were growing their earnings. And many people got out of the market in 1999 and re-entered when valuations plummeted. Lots of people can understand when things are just out of whack.

As far as 15%, that is the upper reaches over the long term, but many people achieve those returns by investing in situations where they can leverage their unique knowledge.

The funny thing about investing is that when the returns are poor, people always expect them to stay that way and they don't touch the market. In 1999, everything was the opposite, it was Dow 40,000 here we come and of course, we get 10 years of no growth.

ben  - my point exactly |2010-09-27 07:59:05

Thanks for the reply. I think you helped make my point, which is basically that a 'regular joe' investor can't make this happen. I chose the last decade because I didn't want to cherry-pick great times vs bad times - just the most recent data. Yes, some people have made a killing, had impeccable timing and invested overseas at the perfect moment, but that's not the status quo.

You have to agree that you dont know a single person, let alone many many people, who can consistently produce 10% or even 5% gains year after year for a 30 year period compounded. If it were that easy then we would have a baby boom generation who are sitting on massive piles of cash, who also happened to be investing during some of the best years in our history. Instead we have boomers that are seriously worried about their future, many of whom have delayed retirement or just cannot retire at all. As someone in my mid-30's I want to plan my future in a more realistic fashion.

The absolute BEST advice from this article is to SAVE. Moving all that cash around trying to get unrealistic returns is a dangerous game. If I were providing advice to someone who is just starting out, I would tell them to live on 3/4 of their post-tax income and save the other 1/4 into something extremely safe and secure, not expecting much more than beating inflation by a couple points. Once they have a decent size nest-egg built up, then I would suggest putting some small portion of that into higher risk investments.

That's truly the only way to ensure you have something substantial left when you decide not to work anymore, and over the course of an entire career, you WILL live well and retire a millionaire.
ben  - good luck on your 15% |2010-09-25 08:24:05
Listen, I am all for saving and investing, but this article is a little unrealistic. You are summing that every penny saved is being invested at a incredible rate of 15%. You atre not factoring in taxes on those gains, diversified investments, etc. Yes, it is possible to make an investement here or there that will net 15-20% over the year, but those tend to be higher risk. And, as you get older, you'd rather not put all your money into volatile equities, but rather bonds and annuities which provide a significantly lower return in exchange for safety.

I would love to see a follow up to this article that would break down some typical 15% investments that could be counted on for retirement planning. Or lets just invest the money in the stock market of the worlds strongest economy - the US stock market. Lets see how someone would have done investing exactly 10 years ago to today.

Let me save you some time: 0%.
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