The First Million Dollars Is the Hardest ... But Not as Hard as You Think
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 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:
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.
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.
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Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook.