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
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|
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
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.