Start Saving Now to Become A Millionaire – Part 2
Last week I introduced a chart showing a couple different retirement account stories and how Consistent Claire became a millionaire by the age of 65. This week I want to show you how this is possible for anyone, including you.
Investing for retirement is not complicated but most people just don’t do it until it’s too late. There are three factors that go into the equation for making you a millionaire: when you start investing, how much you are investing, and the savings rate. These three together can make or break your retirement and are the key factors in the compounding effect. In this article, we are going to focus on just the first two, when you start and how much. Next week we will talk about the savings rate.
Let’s jump back to the chart that we talked about last week.
Now, I realize I didn’t give you any of the data points behind these people and that was done on purpose. What you should get from this graph, even at just a quick glance, is that you want to be Consistent Claire. All four of these people had the same 45 years of opportunity to invest and they all received the same rate of return on their investments of 6% so why does Claire have double the money than everyone else? Here is a breakdown of how they did it.
This chart has a lot going on so let’s just start with the first three rows. Delayed Danny started investing at the age of 30 and quit when he was 45, for a total of 15 years. This is what I believe the average American’s account would look like. They realize they are behind, attempt to play catch up, and then just stop. The worst-case scenario, and what I think is the second most common trend today, is being Late Laurie. That is, you start investing when you’re 50 because you realize that you don’t have enough in savings, then try to retire at 65 like everyone else. Before we get into the other two people, I want to examine their last two rows more closely. Both Danny and Laurie invested around $85,000 over a 15 year period but why does Danny have almost $300,000 more than Laurie? The answer is simply time. This is where one of the factors that we mentioned earlier comes into play: WHEN you start investing. All Danny did was give his account time to grow where Laurie did not. Because of that, she will be working way past 65 years old.
Compounding Interest
Einstein once said, “Compounding interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” If one of the smartest men in the history believes this, it’s a safe bet you should as well. Investing for retirement all comes down to using compounding interest to your full advantage. Now I don’t want to dive headfirst into the math, but if you do check out this article on the Get Rich Slowly Blog. I do however want to show you how it works.
Say you have $1,000 and that $1,000 makes 6% interest in a retirement account. At the end of the year, you would have $1,060. The next year it again makes 6% so your total after 2 years would be $1,124. Remember, you’ve done nothing here except invest that $1,000. Now, when you do this over 30, 40, or even 50 years, that money will continue to grow off of itself at 6%. That is the power of compounding. If you left that $1,000 in an account for 30 years, you would have a total of $5,743 and all you had to do was take the first step to invest.
An analogy for this is when you were little and building a snowman in the winter time. You would start with a small snowball and roll it around the yard until it grew bigger and bigger. That’s what you need to do with your money.
How to Be Consistent Claire.
How did Claire do it? She had the same exact time frame as everyone else, but her retirement account is worth more than double everyone else’s. Well, as her names states, she was consistent. Being consistent and having patience is the name of the game. There is no other way to do it. Claire started investing when she was 20 and did it until she was 50. She ‘invested’ 30 years of her time and over $150,000 but she turned that into almost a million dollars.
Late Laurie only invested $88,000 but because she didn’t start early, her retirement account was worth around $800,000 less!
Wrapping it Up
Starting early is what it’s all about. It doesn’t matter if you only have $500, invest it! Opening up an account and knowing exactly how much you need to save is something we will talk about in the weeks to come but for now, I hope you understand how important this really is.
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