Here’s the encouraging part, making that first million dollars is much easier to do today than it was even ten or fifteen years ago. You have plenty of options at your disposal with which to achieve this lofty goal, as evidenced by the increase in the number of million-dollar households in this country.
Many of these newly minted millionaires achieved their wealth by looking past the naysayers and prognosticators who claim that a million dollars is too much to save unless you begin putting money away the second you graduate from school. The fact of the matter is that such thinking is not just outdated, it’s flat out wrong in today’s financial landscape.
There are still many hurdles you will have to navigate while trying to save $1,000,000, but that goal is well within your reach. That’s not to suggest it’s going to be a cakewalk, however. While there are a few ways to get there, some will take longer than others depending on how much time you have to reach your goal. How old you are when you decide to save a million dollars will have a large impact on the path you will choose as well.
No matter when you start, there’s one step you must take if you have any hope of saving a million dollars and that’s to be proactive. Stop talking about it, stop thinking about it, and just do it.
That’s where we come in. This step-by-step guide will help you organize and plan the best path to saving a million bucks.
1. Don’t Plan Too Much
They say a goal without a plan is just a wish, and wishing for a million dollars won’t get you anywhere. Devising a smart strategy for achieving your dream makes perfect sense.
Unfortunately, many people get too wrapped up in the planning stage and forget about the more important part: the doing stage. You can plan all day long but without executing that plan, you’re no closer to a million dollars. Don’t be one of those folks who talks about what they’re going to do, instead be one of those people who actually puts their plan into action.
When it comes to planning you also want to stick to your plan once you’ve decided upon a particular course of action. Too many goals are derailed by people who divert from their original plan for whatever reason.
We all know that life has a funny habit of getting in the way of our goals. You can sabotage any savings plans you’ve made if you lose your focus. However, if you stay committed to achieving your goal and concentrate all of your efforts on getting there, you’ll save that million dollars no matter what life throws in your way.
2. Set Your Goal
You want to save a million dollars. But when do you want to reach that goal? For most people, this figure is something they want to achieve for retirement. That means the question is how long do you have to save before you need to access that money? The traditional retirement age is 65 years old, but your timeline all depends on you.
Perhaps you love what you do for a career and think you could see yourself retiring a bit later in life. Maybe you’re looking to retire early and enjoy more of your later years without the albatross of employment around your neck. Whatever your particular goals might be, you need to determine how far away you are from the age at which you would like to have a million dollars in the bank.
Using age 65 as our benchmark, you just need to consider about how old you are now and subtract accordingly. If you’re 35, then you have 30 years to save. If you’re 50, then you have 15 years before you get there.
The monetary gains you make during this time is entirely up to you. You’ll know how aggressive you need to be when it comes to squirrelling that money away in order to reach your target date in time.
3. Get Your Priorities in Order
If you’re going to be saving your money with an eye on reaching a million dollars by age 65, you’ll need to set your priorities accordingly. That means making decisions on how and when to spend your money on major expenditures over the course of your savings plan.
You first need to define what purchases are important and which items are frivolous so you can fully fund your savings. These items will likely change depending on how much (or little) time you have and how aggressive you need to be for you to reach that million dollar milestone.
This also includes the money you need to spend in order to save, namely paying down any debts you have hanging over your head. Student loans, medical expenses, credit card debt, and any other ongoing bills are only going to eat away at your nest egg. Devoting time and resources early on in your savings plan to pay these bills off is a major component towards getting your priorities in order.
The quicker you pay off your debts, the quicker you can start to save. Once you become debt free you can reprioritize your spending. Your focus can shift to saving on other living expenses like the kind of car you want to buy or where you plan on living for the foreseeable future.
As you start to bring in more income and devote more money towards your savings, then these priorities will shift once again. If your number one priority is saving a million dollars, then you may want to put away more every month instead of spending it on items that you deemed frivolous.
This step is simple. If you want to reach your ultimate goal, then you will need to adjust your spending habits. Spend conservatively and save aggressively – even if it means passing up a vacation to Mexico or forgoing a new BMW for a preowned Honda. Any pain you may feel now will be worth it when you see all of those zeroes in your bank account.
4. Invest and Take Risks
These two go hand in hand, of course. They are also critical elements of finding your way to a million dollars by your deadline. Since all investing requires some amount of risk, you need to determine how much risk you can tolerate. In other words, how much money can you stand to lose?
Again, you can answer this question best after considering how much time you have to get to your goal. If you’re 35 years old, then you have more leeway to make risky investments than if you’re 50. This way, if you do lose money on a gamble, then you will have time to recoup those loses. If you only have a few years before you plan to retire then you’ll need to think long and hard about risky investments.
Obviously, you don’t want to lose any of your capital no matter your age. Understanding that you may see setbacks along the way is not just possible, but probable. You will undoubtedly have good weeks and bad, but analyzing your current situation will help you decide what course of action to take.
Investing money into the stock market is one of the most common methods of earning money for your retirement account. Deciding on which investments to make can be a challenge, particularly because the market can fluctuate drastically.
The past performance of an investment isn’t necessarily a strong indicator of how it will it perform going forward. You may think you can save some money on management fees and try your hand at picking stocks that will yield tremendous returns. Unfortunately, this will most likely end with a confusing or nonexistent strategy that will only hurt your chances of saving one million dollars. Instead, hire an expert financial adviser to assist you along the way to minimize your losses and see a larger return on your investment.
The size of your return will also be affected by the length of time in which your money stays in any particular investment. The longer you hang around; the more money you could potentially earn on your initial capital.
Most investors who want to play the market put their money in stocks and bonds, each of which has shown various rates of return over time. For stocks, the average rate of return going back over the past two decades has been approximately 8%. That number factors in the highs and lows when the market was both soaring and struggling. Analysts have said today’s average 8% return is much lower then historical trends. Over the last 50 years the average return on stocks was closer to 12%.
In contrast, bonds are a considered safe investment, which means they have as lower return on investment. While you may not get rich quick investing in bonds, you also won’t likely lose much money either. Over the past 20 years, bonds have averaged around 5% return and are best suited either for that don’t want to risk losing their nest egg as they approach or enjoy their retirement or for risk-averse investors that have time to play the long game.
5. Identify Every Opportunity
Diversification is a significant component of smart investing. If you plan on saving a million dollars sooner than later, you want to find enough varied investment opportunities to ensure that your portfolio is always making some money.
A diversified portfolio brings together a list of investments that includes not only stocks and bonds but other investments such as commodities, cash, funds, real estate, and other investment vehicles. This strategy will give you a range of asset options with various rates of return.
If everything you own is too similar in terms of performance and industry, then you’re putting all of your eggs in one basket. When you have a variety of investments at different levels of performance and return then you’ve protected yourself and your money. This way if one portion of your portfolio loses value then other areas won’t suffer the same fate. In fact, they could even be thriving and can mitigate some of the damage from your losses.
Consider, for example, an investment in oil. While yes, there is always a demand for oil and it seems as though the price of gas is always on the rise, political instability anywhere in the world can force prices to drop. Crude oil has fallen from a high of nearly $115/barrel down to its current price of approximately $40/barrel over the past five years. Without a diversified portfolio you would have lost nearly all of your money.
That’s not smart investing and you haven’t identified every opportunity available to you. Some of those opportunities might come with higher risk, but you balance it out with some safer bets so you don’t lose all of your money in one fell swoop.
6. Find Low Risk Investment Opportunities
Investments that require a small amount of risk with a high upside for reward are great to incorporate into your portfolio. These opportunities can make any risk averse savers feel a whole lot better about investing money while still earning some return.
Luckily, you have a myriad of choices before you in which to invest your capital without having to worry about losing much of it as the market rises and falls. Money market funds are one of the best investments to make because you are almost assured that you’ll never lose your initial capital and still see a healthy return. The lowest a share will ever fall is usually one dollar.
In addition to money market funds, certificates of deposit (CD) are another low risk, high reward investment option that you can explore to help you reach your million dollar goal. In fact, a CD is the best investment opportunity for those who want a safe and secure place for their money while still delivering a consistent return.
You can purchase a certificate of deposit through a broker or most banks and credit unions and you decide on the length of your term. No matter what you settle on in that department, you will receive a fixed interest rate for the duration of that term as it will never change or decrease. As with most investing instruments, the longer you keep your money in the CD, the more of a return you stand to receive.
When purchasing a CD, you should consider the terms. If you don’t let the account mature and withdraw your money early then you could be subject to financial penalties. However, if you wait until the term expires you are guaranteed to receive all of your initial capital in full along with the interest that accrued while your money was parked with your financial organization.
Finally, some prospective millionaires consider municipal bonds to diversify their portfolio. These are issued by state governments as a way to borrow money for much needed programs and projects. It’s a loan for cash that you lend to the state. Not only are these investment vehicles exempt from most federal and state taxes, but you should expect to see a positive return since there is almost no risk of default on the part of the borrower.
7. Maximize Your 401(k)
If you already contribute to a 401(k) then you know how important this can be towards getting to your million-dollar goal. Employer-sponsored 401(k)s allow you to put a portion of your pre-tax paycheck into a savings account. Some employers will even match those contributions by adding the same amount to your fund, up to a certain limit.
If your company has such an arrangement, then you must start to take advantage of this benefit immediately. It’s basically free money that can go towards accumulating that million dollars. Some companies will set a maximum amount to their contribution – often up to 2% or 4% of your gross salary.
If you don’t have access to a 401(k), then look into putting your money into an Individual Retirement Account (IRA). This is another tax-deductible savings vehicle that you can open up on your own. One thing to keep in mind, no matter which way you go, is that the more money you can put into the account each month, the quicker you can get to your goal.
For example, if you are 35 years old earning $40,000 annually and contribute 5% of your pay check to a 401(k), then, with an average return rate of 7%, that money will be worth more than $275,000 by the time you are ready to retire. If you increase your contributions to 6%, or only an extra $400 per year, your savings will be worth almost $350,000 when you retire.
This will take you a long way towards reaching your million dollar goal. You’ll be able to get there even sooner if you capitalize on any additional contributions your employer makes towards your retirement as well. Saving a million dollars is tough, and you are going to need all the help you can get.
8. Open a Health Savings Account
As we get older, our health can begin to fail. When it does, those treatments and medicines are going to cost money — that money that you’ve put away in a bid to reach a million dollars by the time you’re set to retire. Nothing can clean out your nest egg faster than medical costs, especially those associated with the many conditions and illnesses one might encounter in their twilight years.
Investing the maximum amount as allowed by law into a health savings account can serve as a separate savings in the event you do fall ill. This way you will have money to pay medical bills while protecting your million dollar retirement fund.
9. Determine Your Monthly Savings
Once you’ve got your diversified portfolio up and running, you can begin to make some calculations as you track the gains and losses on your returns. The more aggressive you are about risk the more you could stand to make. Your monthly savings will be more manageable to handle each month even at a conservative rate of return at around 6%.
Let’s say you start saving early 25 years of age. That gives you about 40 years to hit your target of a million dollars by the time you reach age 65. At a return of around 6% you would need to put away $522 a month. That’s not chump change but it can make the task much more manageable than if you start ten years later.
If you start saving at 35, then you’ll need to save $1,021 per month to reach your goal. Again, not out of reach but much more than the alternative. Waiting until age 45 brings that number up even more with $2,195 becoming the amount you need to put away every month until you hit 65.
Put your savings off even longer and the number turns daunting and unattainable. If you wait until just ten years before retirement to start saving, you’ll need to save $6,125 each month. These numbers are merely for illustrative purposes, of course. Your numbers may vary based on your rate of return and other factors.
Our Final Thoughts
There’s a reason they say that making the first million is always the hardest. It’s a large number that takes a lot of planning and smart strategizing to achieve. As you can see, the earlier you start the better your chances of reaching your goal.
These steps are a good start to getting an effective plan in place towards banking a million dollars, but there are others you can take as well. One such step is to wait on claiming Social Security benefits for as long as you can.
Once you hit age 62 you can start taking that money, but if you wait you can earn more per month until age 70 when you would receive the maximum amount allowed. This obviously wouldn’t take effect until much later in your life and right before your deadline approaches, but hey, money is money no matter when you receive it.
That extra income may just be the final contribution you need to get you over the finish line. The longer you wait the more you can get, so another idea to help you save a million dollars is to push out your deadline by a few years. Instead of setting 65 as your retirement age, give it a few more years until age 70. This way you can not only claim the full benefit of your Social Security but you have a few more years to sock away that monthly saving number. Five extra years will bring that number down some, no matter when you decide to start saving.
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