The First Million Dollars Is the Hardest ... But Not as Hard as You Think

First Million Dollars
First Million Dollars

There's an old saying about making money that "the first million is the hardest." That may seem pretty obvious, even to those of us who haven't reached millionaire status yet.

Eye-rolling aside, however, it's instructive to examine what it takes to reach that first seven-figure milestone using specific dollar amounts and investing returns. And it's really fascinating to see how quickly one can get to that second million-dollar mark.

Let's start with what you've got and see how far it can take you.

Everyone Plays by the Same Rules

There are three key tools at your disposal to help you build wealth. They are:

  • The cash you invest

  • The growth rate of the investments you own

  • The ability to reinvest the dividends that your investments generate

For that first tool to do you any good, you need to be willing and able to structure your life to have cash available to invest in the first place. Obviously, heirs and Facebook founders have a good leg up on the rest of us in terms of cash on hand. But we've all got to start somewhere. So see what you can scrounge up.

For the other two -- well, it almost goes without saying that the more you've already got socked away, the more these factors help get your fortune growing.

Turn $20 a Day into $2 Million

Say you can come up with $600 a month -- about $20 a day -- to invest. If you reliably sock that money away over a 40-year career, you could end up with a bit over $2 million, assuming 8 percent annual returns.

While that rate of return may sound a bit steep, if it comes in the form of 6 percent growth and 2 percent dividends that are reinvested, it starts looking more attainable. Absolutely key to your success, though, is an "all of the above" approach: Invest the cash, let it grow, and reinvest the dividends along the way. The chart below shows how the three work together:

Power of Compounding
Power of Compounding

Source: Author's calculations.

Here, again, you see the "all of the above" approach in action:

  • You can end up with nearly twice as much if you reinvest, rather than spend, your dividends.

  • A total cash commitment of around $250,000 over your career could wind up around eight times that size.

  • The earlier you start, the more time acts as your friend.

The cash you add to your nest egg does much of the work to get you started. But along the way toward that $1 million milestone, your invested cash starts doing most of the work for you.

Just look at how much longer it takes to go from $0 to $1 million than it does to go from $1 million to $2 million. Your first million in this scenario takes a few decades to reach. That second million? It takes less than one decade.

Getting Started -- with a Boost

If you haven't been investing before, coming up with that $600 a month may seem daunting. Fortunately, you probably don't have to come up with that full amount from your own pocket to put that kind of cash to work for you. If you're able to invest through a traditional 401(k) plan at work, Uncle Sam and your boss may very well chip in to help you out.

• Uncle Sam: When you contribute to your traditional 401(k) plan, every dollar you put into the plan reduces the wages that are reported for federal income tax purposes. In effect, if you're in the 25 percent tax bracket, it's as if you kick in $0.75 out of your pocket and Uncle Sam kicks in the other $0.25 of every dollar you invest.

• Your boss: While it's not mandatory, many companies offer 401(k) matches. In a matching program, the company agrees to contribute to your 401(k) plan alongside you. Formulas vary, but a typical match level is 50 percent of your contribution, up to some cap based on your salary.

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Put those two factors together, and it gets much easier to come up with that $600 monthly investment. If your boss matches 50 percent of your contribution, it only takes $400 from you to hit that total. And since Uncle Sam is willing to forgo his 25 percent of the money you contribute, that $400 only costs you $300 out of pocket. In essence, to get $600 invested, it only depletes your pocketbook by $300.

That works out to a $10-a-day out-of-pocket sacrifice that, in the end, could net you a multimillion-dollar nest egg.

Remember, time is an important factor in any investing plan. The longer you wait to get started, the less time your money has to work for you, and the more of your own cash you need to put up to wind up in the same place at the end of your working life.

You now know how to get there. So start making your money work for you today so that it has ample time to do the heavy lifting down the road.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically undersaving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. I urge you to learn about The Shocking Can't-Miss Truth About Your Retirement.

Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook