Kiplinger’s Personal Finance Magazine’s February issue has suggestions for saving a million dollars, whether you’re 25, 35, 45 or 55 years old. The authors assume that you’ve already been saving money every year, but provide a strategy to add $1 million to your net worth over time.
At Age 25
* Contribute enough to your 401(k) to take advantage of the full employer matching contributions. Look at it as free money or an instant 100% return (if your employer matches your contribution dollar for dollar).
* Allocate your entire invested funds into a broad selection of stocks. A long time horizon means you have time to weather the fluctuations and risk of the stock market, but the diversification you would get from a broad-based index mutual fund will make sure you’re not overexposed in a certain stock or industry.
* Pay down credit cards. Better yet, don’t have any credit card debt in the first place. If it’s too late for that, switch to an all-cash spending plan until you’re able to spend less than you earn and divert extra cash to debt to avoid as much interest expense as possible. To get out of debt as efficiently as possible, check out the better snowball method.
* Set up an emergency fund. As I pointed out recently, an emergency fund should be more than just a savings account. However, getting several months’ worth of expenses in a liquid account is the first step. This should be a priority.
According to the Kiplinger article, if you start saving $286 per month at age 25, assuming an 8% average annual return, you will have $1 million by age 65. Having forty years to work with is helpful. The longer you wait, the more difficult it will be to reach the same goal.
When I was 25, I was working at a non-profit organization with a long commute. I was not making enough money to save $286 per month when considering rent, travel, and food expenses. While I liked working there, I was finding myself in worse financial condition each month. It took some shaking up before I was able to get myself on track.
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How to Make a Million at 25 [Kiplinger's Personal Finance]
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{ 5 comments… read them below or add one }
But assuming 3% inflation, you’ll have to save more than $900 per month to get to $1 million in purchasing power at age 65.
Great point, Lily. I bring that up all the time. $1,000,000 won’t do as much for you 40 years from now as it does now.
I hate these kind of articles (not from you, Flexo, but from pf media).
Of course if you start doing the right things earlier, you’ll have more money down the road.
The story isn’t able “How to Make a Million at 25″ — it’s about starting to save when you’re young. And doing the right things with it.
I’m 24 and my wife and I save around $1500/month. We’re on the right track. But, like Lily said, $1m in 40 years isn’t going to mean anything to us.
$1M in 40 years is equivalent to $259,500 in today’s dollars. Not rich, but better than many retirees.
Jason, if you continue to save $1,500 per month, you will have over $5.2M when you turn 64, if you earn Kiplinger’s 8% APY. That’s the equivalent of $1.3M in today’s dollars.
It is important to realize that as you get older and progress through your career (and as your salary grows with inflation) the amount you are able to save goes up drastically. Each year take at least half of any raise you get and use it to increase your retirement savings until you get to at least 10% (my goal is 20%). Then each successive year increase the dollar amount you save to maintain that percentage.
I ran the numbers for this scenario and they are pretty compelling. If you are interested I made a full post about it on my blog.