How to Save a Million Dollars on a Modest Income

Last week I got an interesting comment from Kurt @ Money Counselor recommending a less stressful way to invest.  He recommended investing in TIPS and iBonds.  It made me wonder if I was being too aggressive with my portfolio, taking unnecessary risks.  Should I endure the ups-and-downs of the stock market or find more conservative investments?  Here is why I invest the way I do.

My Million Dollar Dream

Chocolate Millionaire

Image by Eperales

I’ve had a written goal to become a millionaire since 1992.  That was 20 years ago and I’m still a long way off.  But, I have made a lot of progress.  At my current rate of savings and return, I estimate I will have around $1.6 million saved for retirement in 20 years.  Of course, $1.6 million will only be worth around $888 thousand of today’s dollars in 2032.  But, it’s close enough to a million to make me happy and I should be able to live on it.

One important factor in reaching my million dollar retirement goal is that I must get at least a 4% average annual return from my investments.  It will take a 7.2% return to reach the projected $1.6 million.  If I average 2% return for the next 20 years, I would only end up with $817 thousand dollars.  That’s still nothing to sneeze at, but it’s shy of a million, especially after inflation.  This is why I invest primarily in stocks and mutual funds, to obtain the higher yield.

Check Out: Why I Invest in Mutual Funds

It’s Within Your Reach

I believe one of the biggest reasons there aren’t more millionaires is because most people think it’s impossible.  Whenever I talk to people about saving and investing, they don’t think they could save up a million dollars.  In their mind, millionaires are high income people and that leaves them out.  They don’t realize how much money grows over a long period of time at a decent rate of return.  They don’t realize how little money it takes with the right savings plan.

Monthly Savings Required to Become a Millionare

Rate 10 Years 20 Years 30 Years 40 Years 50 Years
10% $4,882 $1,317 $442 $158 $58
8% $5,466 $1,698 $671 $286 $126
6% $6,102 $2,164 $996 $502 $264
4% $6,791 $2,726 $1,441 $846 $524
2% $7,535 $3,392 $2,030 $1,362 $971
0% $8,333 $4,166 $2,778 $2,083 $1,667


Start Saving Now

The single most important thing anyone can do for their financial future is to start saving as soon as they start working.  Even saving a very small amount from each paycheck in your 20s makes a huge difference over the course of a career.  Waiting just five or ten years could mean you will have to save twice as much to accumulate the same amount.  I began saving and investing when I was 21 years old, even though it was just $25 per month to start.  If I had of waited until I could afford to save, I wouldn’t have my house or my million dollar dream.

Don’t despair if you are getting up there in years and haven’t started saving yet.  It’s way better to retire with a couple thousand dollars than to retire broke.  Plus, when you get in the habit of saving, you are living on less than you earn.  That means you will be able to live on a lower income more comfortably in retirement.  There really is no excuse to not save at least some portion of your income, whether you aspire to be a millionaire or not.

Be an Owner, Not a Loaner

It’s easy to see how some people become millionaires on a modest income.  They own businesses, properties and equity investments.  They are rarely the people who work for a paycheck and then put some away in a savings account.  You can become a millionaire that way, but it’s a long and drawn out process.  It’s much more profitable to own equity investments, than to loan your money to a bank and let them make all of the profit.  Owning stocks and real estate come with some big risks.  But, they also offer greater rewards.  People need those higher yields from equities to power their portfolio over the million mark.

CDs, savings accounts and treasury bonds are yielding less than the current rate of inflation right now.  It’s what I call a guaranteed money loser.  Even though they yield a small profit, you would be losing purchasing power, every month.  These kinds of investments are fine for preserving capital, but they aren’t suitable for accumulating wealth.  Unless you are nearing retirement or will need the money within a few years, being too conservative with your investments can cost you a lot of money.

It’s very difficult to save up a million dollars in TIPS, CDs or savings accounts.

The Bottom Line

The bottom line is that it’s not that hard to save up a million dollars.  In fact, that’s how most people become millionaires.  The people who run into millions rarely hang onto it.  Have faith; see yourself as a millionaire and you will likely become one.

“The amount of money you have has got nothing to do with what you earn.  People earning a million dollars a year can have no money and people earning $35,000 a year can be quite well off.  It’s not what you earn, it’s what you spend.”

Paul Clitheroe – Australian Financial Analyst

Recommended Reading

Budgets are Sexy – Done is Better than Perfect
Bruce Bucks – Don’t Chase Money
Money Cactus – What is Wealth Creation

This post was featured on the Carnival of Personal Finance over at Canadian Personal Finance Blog.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out.  It’s the best place on the web to get your financial advice.

17 comments to How to Save a Million Dollars on a Modest Income

  • Shaun @ Money Cactus

    Great post, sounds like a solid plan of attack. Completely agree about saving early and saving often. Consistency over time is the key.
    Shaun @ Money Cactus recently posted..What is Wealth CreationMy Profile

  • Bret, Your assumptions seem realistic and your path long term. Good luck, if history is any guide, you are on your way.
    Barbara Friedberg recently posted..DO BILLIONAIRES NEED AN EMERGENCY FUND?My Profile

  • Hey Brett,
    I’m pleased my comment proved worthy fodder for your post! Even as a target for pot shots! 🙂

    The comment you reference drew inspiration from a recent WSJ article–“Why Stocks Are Riskier Than You Think”–summarizing a book by a couple of academics. I’m on the list to get their book: “Risk Less and Prosper: Your Guide to Safer Investing.” Perhaps we can exchange reviews one day.

    I understand the compelling argument you and others make for stock investing. And I do own stocks–about 20% of our financial assets. So I’m not a total crank. 🙂

    I think you’d agree that a key element underpinning the argument is this: “Based on history.” But how different is Wall Street and the stock exchanges and financial instruments and the global financial system today compared to say 10, 20, 50, or 100 years ago, the periods over which stocks reputedly have outperformed? As I’ve written about on my blog, when a game’s rules change significantly (and for the worse, with respect to riskiness, imo), at some point it seems to me that past results become meaningless with respect to future expectations, no?

    Thanks for your post, and I really enjoy your blog.
    Kurt @ Money Counselor recently posted..Make Money From Your CarMy Profile

    • No potshots whatsoever Kurt. I am always open to good comments and financial advice, which is one of the reasons I started this blog. Thanks for inspiring last week’s post.

      I wanted to explain my investment goals and strategy to help others who wish to accumulate wealth. I also want my readers to know I’m not just handing out recycled advice, I’m actually doing this and have been for 26 years.

      I do think stocks are riskier than ever and I don’t believe the future returns will rival those of the past couple of decades. I have lamented this in a number of my recent posts.

      However, the Fed policy of ridiculously low interest rates is hurting bond and CD investors. This strategy didn’t work too well for Japan and I don’t think it will work well for the US either.
      Bret recently posted..2012 looks like a Good Year for the Stock MarketMy Profile

  • Bret,
    Only teasing about the ‘pot shots.’ Your post is respectful and well reasoned.

  • Well said. To get to a million on a modest income, investing in stocks is essential. I have been investing in mutual funds for about 12 years. One could easily argue that the last 12 years have been the worst and most volatile in generations, with the dot-com and housing bubbles both bursting. Even though the market has been a mess, I’m averaging over 10% over those 12 years. (The 7.2% you require should be easy to achieve.) At that 10% rate of return, I’ll be a millionare before age 64 with an investment of just under $500 a month. If I can do it while raising a family and earning less than the median income, nearly anyone can. I’ll never understand why so few try.
    Marc Bastien recently posted..Budgeting 101My Profile

    • Thanks for stopping by Marc.

      You have done great to average 10% over the last decade in your mututal funds. Some of my funds from T. Rowe Price did almost that well. I used to target a return of 10% as my goal. But, I have lowered it to 7.2%, based on recent performance and market conditions.
      Bret recently posted..What I Learned from my First JobMy Profile

    • “I’ll never understand why so few try.”

      This used to puzzle me as well. It’s very simple to accumulate wealth; people just have to do it. But, they don’t.

      After talking to a lot of people and trying to encourage everyone I know to invest, I see a couple of patterns.

      1. Some people don’t want to manage their finances. (Laziness)

      2. Some want to spend all of their money. (Consumerism)

      3. Some don’t believe it’s possible. (Lack of Faith)

      4. Some think it will be too difficult. (Fear & Doubt)

      I don’t judge anyone for their financial choices. It’s their life and money to do with as they wish. When I hear the reasons why they don’t save and invest, they generally fall into one of those four categories.
      Bret recently posted..How to Save a Million Dollars on a Modest IncomeMy Profile

  • PK

    Bret, has your goal since 1992 always been a round “$1,000,000” or are you also scaling your target for inflation? In the words or Yogi Berra, “the future ain’t what it used to be”.

    Using CPI, you’re looking at $1.65 million as of February.
    PK recently posted..Lottery WinningsMy Profile

    • That’s a great question Paul.

      One million dollars has a huge psychological meaning to me and many other Americans. That is still my written goal. When I set that goal in 1992, it didn’t seem possible, based on my income and savings rate. But, I went for it anyway and now I’m slowly reeling it in. There is a lot of power in writing down your goals and reviewing them regularly, even if they don’t seem possible at the time.

      From a more practical standpoint, it won’t be easy to retire on the proceeds from a million dollars, based on today’s inflation and interest rates. I would feel much more comfortable with $2-10 million. Once again, this doesn’t seem possible at my current income and savings. But, I don’t have anything to lose, so I’m going for it.
      Bret recently posted..How to Balance Time and MoneyMy Profile

  • Brett, I doff my hat to you for staying the course since 1992! It is not easy to come across such focus and consistency. You will surely get there. Personally, I feel there is a faster (but riskier) way, via entrepreneurship, as one of your plans. Security – fixed income, growth – stocks etc, rich – start your own business. This can go on side by side, and if one fails, you are not back to ground zero
    Usiere @Financial Freedom Inspiration recently posted..Wetin You Carry?My Profile

    • Thanks for stopping by Usiere.

      I agree with you 100%. I have had a number of side-businesses over the years, but I still haven’t found the right model for my next one. I don’t make much from this blog, so I have decided I need something with better income potential. Having a goal and a dream is the first step. Now, I just need to find the product or service to start my business.
      Bret recently posted..The Stock Market makes a ComebackMy Profile

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