A million bucks. Some think of it as the magic number they need to be alright. Some play the lottery in hopes of getting it. I’m here to tell you, it’s not as far fetched as it may seem.
Many people who have a million bucks didn’t get some windfall from a rich uncle or win the lottery. It takes time to build wealth. And because of the time it takes, it’s best to start like yesterday.
There’s a term that some of you may be familiar with but some may not. It’s called compound interest. Compound interest essentially grows your money faster because it not only calculates interest on your initial “principal” investment but also the accumulated interest over a period of time.
Because compound interest does what it does, its like a little machine helping your money’s money make more money. When your money’s working hard for you, instead of the other way around, that’s when you’re winning!
So I’m not just going to give you some arbitrary summary about it. I’m going to show you how if you really want to be a millionaire, here’s your opportunity.
So let’s take an individual who gets paid 35k a year salary. This individual is 33, has 0 retirement savings and starts contributing 20% of their salary to the company’s 401k. That’s 7k a year and since companies vary, we won’t even include the company match.
So that’s about $291.66 per paycheck assuming this person gets paid twice a month. Also keep in mind, contributing more to your 401k lowers your taxable income.
Now this person does this for 2 years straight and now they have 14,000 invested in their 401K. Let’s take a compound interest calculator and see how long it’ll take our mystery worker to get to a cool mill.
Try out the example below
So we’d enter 14K as the principal investment because that’s what they’ve saved thus far. Then we’ll keep them contributing the same 7k every year for annual addition. We’ll also say this person chooses an aggressive investing style which averages out to at least 8% interest they’ll earn every year for about 31 years. Hit submit.
So it will only take this person 31 years after starting at age 33 to reach 1 million. I’d say not too bad at the ripe old age of 64. We didn’t even factor in the company match and yearly raises or bonuses that can help boost this to well over a mil.
The first time I played around with the compound interest calculator, the results were staggering. I couldn’t believe how just starting 10 years earlier I could be much closer to that million bucks than I ever thought possible.
If you’d like to monkey around with this calculator and see how long it’ll take you, you can go to moneychimp.com.