Becoming a millionaire is an achievement that could make your life in retirement a lot easier. But is it too lofty and impossible if you’re starting from scratch?
Saving this amount of money will probably be hard if you don’t invest. And using the stock market can help you get there with a lot less money or time than you may think.
Different ways you can get there
How much you accumulate in 30 years will mostly depend on two things: what you can save each year and the rate of return you receive. You can see below how much you would need in annual contributions to grow your accounts to $1 million at different rates of return.
|Rate of Return||Asset Allocation||Annual Amount Invested||Final Balance|
|8.7%||50% stocks/50% bonds||$7,500||$1,050,904|
The role that your asset allocation plays
Your asset allocation model is your mix of stocks and bonds. Stocks are considered riskier than bonds so you’ll get compensated for having a larger percentage of equities in your portfolio with a higher rate of return. You can see below how your accounts would’ve performed on average, in the best year, and in the worst year with different asset allocation models between 1926 and 2020.
|Scenario||100% bonds||50% stocks/50% bonds||100% stocks|
|Average rate of return||6.1%||8.7%||10.3%|
Because you’re making more on average, the more stocks you hold, the less money you need to invest each year. But stocks will also have bigger extremes of gains and losses in bull and bear markets. It will probably be easy holding stocks in good years and fun watching your accounts grow. But that feeling might get scarier when you start losing money.
Your accounts growing over time will depend on how consistently you make contributions and stay invested. And this ability could come down to how well you can withstand these losses. If losing 40% of your money makes you not want to invest, you should consider a more conservative portfolio.
Ways you can increase your annual contributions
Now you know how much you need to invest if you want to retire with $1 million. But what should you do if coming up with that amount each year is difficult? The best way of finding out if you’re really stretched is by creating a budget. This process will start by identifying your monthly spending habits. How much of your outflows each month are things that are needs like your rent versus things that are wants like dining out?
You can also look for ways of cutting variable expenses. Your monthly car insurance bill probably won’t change from month to month but cutting back on the amount of driving you do could help you lower automobile-related expenses like gas and repairs.
After doing your budget, hopefully you’ve come up with some ways that you can save more, but it’s possible that you don’t. Another way you can generate more money for saving is by working more. If you work at a job where you’re paid hourly, increasing your hours could bring in extra income that can be directed toward your investment accounts.
If you’re salaried, you can ask for a pay raise, look for higher-paying work, or consider working another job or gig work in your spare time. You also have the option of delaying an important goal like retirement so that you have more time for saving.
Accumulating $1 million isn’t an easy task, but it can be done. And probably with less money than you assumed. But two of the most important things you can do in your quest to become a millionaire are giving yourself enough time and being consistent.
View more information: https://www.fool.com/investing/2021/08/05/how-to-go-from-broke-to-1-million-in-only-30-years/