How you can get on track to save your first million

The first million is the hardest. Just like you had a hard time saving that first $1,000, but somehow getting to $2,000 was less of a stretch. The problem is, you need to save and invest $1,000 a thousand times to get to a million. And by that time, a million won’t buy as much due to inflation. But I digress. Let’s keep our eyes on the prize and see how we can save a million dollars.

How can you get on track to save your first million dollars?

This is a post from Pauline of InvestmentZen.com. I had the pleasure of meeting her in San Diego at FinCon this year.

1. Make it your #1 goal.

To save a million dollars, you’ll need to sacrifice a lot, during an extended period of time. Like a long-term diet, it won’t work unless you’re really motivated. So picture the end goal.

What does it look like? What will make you happy once you have seven digits in your bank account?

For some, it’s knowing you can sleep soundly at night, knowing you don’t owe anyone anything. For others, it’s a chance to stop working full-time, and spend more time with their families. Or go into a field they love, that pays less. Travel the world, go back to school, play golf, give to charity, be with the grandkids,… you name it.

Your dream is unique but you must have one for the sacrifice to have meaning.

2. Prepare yourself physically.

Sounds like a weird step? You wouldn’t want to become a millionaire at 50, only to die of a heart attack at 52 would you? You are your most valuable asset. Chances are, if you’re disciplined enough to diligently save a big chunk of your income for decades, you’re also the kind of person who makes their bed and exercises.

If you aren’t, get to it. Motivated individuals are more likely to get a promotion at work (see step 3), or at least be more productive and have more free time to enjoy whatever they’re passionate about. Think of yourself as an athlete. You’re embarking on a long and arduous journey. You won’t make it unless you’re fit.

Being in better shape means spending less on junk food, alcohol, cigarettes… and down the road on medical bills. And even antidepressants and psychiatrists since you’ll love your life and yourself. All of which will boost your savings rate and get you closer to that million.

3. Maximize your earnings.

In order to become a millionaire, if you’re saving 20% of your income, you need to make $5,000,000. Even if you’re able to save 80% of your income, you will still need to make $1,250,000. If you make $50,000 a year, it will take 25 years. If you make $125,000, it will take 10 years. Simple math.

And it’s much simpler to save 50% of a $125,000 income than half a $25,000 income. So you need more money. How do you go about that?

• Ask for a raise. That simple. If you’re good at your job, your boss will rather pay you a little more than see you go.
• Look around. Changing companies generally makes it easier to get a big salary bump.
• Hustle on the side. Tutor, walk dogs, teach beach volley, sell bottled water in the park, etc. There are tons of ways to make a little extra money.
• Start your own business. A few hours in the evening, until you are confident you can leave your day job and make more. Or keep both.

If you’re living on $40,000 out of college, making $50,000 the next year, and able to keep your budget, you’ll be able to save $10,000 without any lifestyle change. And there’s no ceiling to improving your earnings.

4. Prioritize your spending.

There are two sides to the millionaire equation, earn more and spend less.

Because making six figures won’t cut it if you spend more than you earn. If you read books like The Millionaire Next Door, you’ll realize most millionaires are about value when it comes to spending money.

They’ll be happy to spend on durable items that will give them a low-cost per use. A solid car. Great kitchenware. Toolboxes with a lifetime warranty. Things they’ll use over and over again. On the other hand, they’ll be pinching pennies when it comes to items that don’t add value to their daily life. They’ll get rid of cable, gym memberships and daily lattes. And keep just one or two things they really enjoy, with a small “no questions asked” allowance.

You can’t afford to buy it all. You have to prioritize and conscientiously decide where you want to spend your money.

Most items in your budget can be reduced. Nights out with friends? Do a potluck dinner instead. Books? Go to the library. By choosing the convenience of a restaurant or a book download, you pay a hefty price. You could eat for a week with the price of one take-out dinner if you cooked from scratch. But with convenience, you’re paying for time now, instead of buying time later.

Compounded, the 10 minutes you saved by not cooking that night, which cost you $20 worth of take-out, would turn into $330 in 35 years (at 8% return), which should easily buy you 24 hours of free time. Would you rather have 10 minutes today or 24 hours down the road?

5. Get the best returns possible.

• Invest $500 a month at 4% annually, and it will take you 51 years to become a millionaire.
• Invest at 8% annually, and it will only take you 34 years.

Would you rather work and save for 17 more years, or enjoy life ASAP? Yeah, me too. Don’t be fooled by the promises of consistent double digit returns, they don’t exist. But the S&P500 and other index funds have offered solid returns for decades. There will be market dips. Keep investing. There will be rallies. Don’t sell. Just max out your 401k, your IRA, and other tax deferred accounts, with every paycheck. If your employer matches part of your contributions, that’s free money. The tax benefit will also shave years off your goal.

$500 a month is $6,000 a year. If your employer matches up to $3,000, that is $9,000 invested. And the $6,000 will be taken from your gross paycheck, so if you are in the 25% tax bracket, that only means $4,500 out of pocket for you to invest $9,000. You can’t beat that kind of instant return. $9,000 a year at 8% will turn into $1,000,000 in 29 years. We just saved ourselves 5 more years.

And our total out of pocket was only $9,000 x 30 = $270,000. 75% of the work was made by compound interest.

Saving a million isn’t an easy task, but if you get into the habit of saving and investing most of your extra money, it can be achieved earlier than you think.