Five Ways To Save Money – To Be A Millionaire

Reaching a cool million is still a major goal for many people. There’s plenty of advice out there on how to reach the $1 million target from self-made millionaires, self proclaimed investment gurus and unfortunately, many unscrupulous people looking to take advantage of your emotions.

These Five Ways to Save tips are about being realistic when it comes to achieving your goal or reaching $1 million. They do not take into account the effect of tax or recommend one investment asset over another. They simply break down the facts to give you a practical guide of reaching the majic $1 million.

Note: You will find the calculator Savings Goals on the Calculators Page to be a great help to highlight what you can do to become a millionaire

1.    Understand the numbers

Let’s start right at the beginning. If you saved just $1.00 per day, it would take 1 million days to reach a $1 million if you didn’t receive any investment earnings along the way. This is the equivalent to 143,000 weeks and 2,738 years! Therefore, to reach a $1 million before retirement, you’re going to have to seriously consider how much you can save and understand the benefit of receiving some investment earnings.

Table 1 shown below, highlights how many years it will take to reach $1 million based upon regular monthly savings and different constant investment earning rates. For example, if you saved $100 per month and earned interest of 10.0%, it will take 46 years to achieve your goal of being a millionaire.

Table 1 – Monthly Savings and Investment Earnings required to reach a $1 million in Years -Starting balance of zero

2.    Invest windfalls when you can

Table 2 shown below highlights the benefit of investing a ‘windfall’; in this example the windfall is $100,000. This highlights a few critical points:

• By starting with $100,00o and adding $100 each month, with earnings 10%, you get to $1 million in 23 years. Half the time of starting with nothing!
• The time frames are more closely grouped together (less variable). This is due to the earnings on $100,000 making a significant contribution year in year out on top of your normal monthly contribution. Important, the number of years in the chart, has been rounded to the ‘nearest year’.
• The ‘snowball’ effect of ‘compound interest’ is more clearly seen in this table below. Essentially, compound interest is the benefit of interest on interest. There are notes at the end of this article describing this effect further.

Table 2 -Monthly Savings and Investment Earnings required to reach $1 million in Years – Starting balance of $100,000

Note: The number of years has been rounded to the nearest year. For example, 15 years and 7 months = 16 years

3.    Have you considered inflation?

One million might sound like a big goal but after inflation being taken into account, the real value (purchasing power) of one million is dramatically reduced. To put this into perspective, $1 million in 10 years time, will have the equivalent value of $744,094 today assuming an inflation rate of 3%,

4.    Be careful chasing investment earnings

The above tables highlight the benefit of gaining high investment earnings. However, chasing higher earnings will mean taking greater risks and we have all seen where that can lead to with the like shares and property asset values collapsing in recent years.

As a rule of thumb, the longer the time frame you have without needing access to your savings, the more risk you can afford to take with assets like shares and property. Please refer to Investment Risk – What is It?  This will help explain connection between investments returns and investment risk.

5.    Improve your chances of reaching $1 million

The following are good old fashioned, common sense tips. If followed, they will help remove your reliance on risking your savings for higher investment returns to reach a million.

• Education - Knowledge is power. It helps to get better-paid jobs and make better decisions.
• A penny saved is a penny earned - Every penny saved is like interest in the bank. By saving more, you become less reliant upon investment earnings
• Avoid scams - While warnings about scams are constantly in the news, people still keep falling for them and losing their hard earned savings. Remember these two things: 1- if you don’t understand it, don’t do it and 2- if it sounds too good to be true, it probably is
• Be weary of putting all your eggs in the one basket - Diversifying investments into different asset sectors by having a mix of shares, property and cash investments can reduce your overall investment risk
• Be extra careful with debt - Remember that debt needs to be repaid with interest. Debts get many people into trouble so be careful with all types, be they: Credit Cards, Mortgages or Investment Loans. Always make sure that firstly you can afford the debt, and secondly you minimise the risks of carrying that debt, for example, by protecting your salary with insurance.

Your new best friend should be – Compound Interest. This is interest on interest and it works works like this. You start with a lump sum of say $100 and earn 10% interest, this equals $10 in interest to you and your new total is $110. You now invest the new amount ($110) and earn another 10%, and you now earn $11. ($110 at 10% = $11).  This keeps repeating itself and creates a snowballing effect.

It is alleged that Albert Einstein once described Compound Interest as ‘the most powerful force in the universe.”  We hope that after reading this article, you will also agree that compound interest is a ‘powerful force’ that can help you to reach your savings goals.

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