A million dollars is a lot of money. Of course, due to the effects of inflation, a million dollars doesn’t go as far as it used to, but it’s a nice round number and an excellent initial goal for anyone trying to obtain financial independence. If you manage to save up $1 million in liquid assets by age 40, you will be doing well.
Millionaire by 40 is achievable
Although saving up a million dollars by age 40 sounds like a formidable task, it’s actually quite reasonable if you obtain a marketable skill and start saving as soon as possible. Let’s look at the math.
Choose your education carefully
Suppose you attend your state university and complete a degree in accounting. You paid for the degree yourself and didn’t work during school, so you have $40,000 in student loan debt along with your diploma. Notice that this is becoming the norm.
Get out of debt
Your first task is to get out of debt. Suppose your salary at your first job at age 22 is around $50,000. You will pay around $10,000 in federal taxes (Social Security, Medicare, and federal income taxes), which leaves a take-home pay of around $40,000. You’re single and don’t need the fanciest apartment in the city, so you live on $25,000 per year and knock out your loans in 3 years. Good work!
Another person enters the picture
At age 25, now debt free, you get married. Your significant other followed a similar path, perhaps pursuing a degree in nursing. You both have some years of experience, so your salaries increase to $60,000 per year. Combined, your household income is now $120,000 per year. Starting at age 25, you each max out your 401k’s ($18,000 /year/person) and Roth IRAs ($5500/year/person). Therefore, you’re saving $47,000 per year for 15 years (age 25 to age 40).
Since you are maxing out your 401k’s, your taxable income is only $84,000 and now you are married filing jointly, so you are paying around $18,000 in federal taxes. That leaves approximately $55,000 per year for living expenses, which incidentally is around the average household spending.
Saving early and often brings big rewards
After saving $47,000 per year for 15 years and investing it in something simple like a target date fund that might return a conservative 4% above inflation, you will have $1 million.
Of course, this scenario is highly simplified. It ignores state income taxes and assumes that your salary doesn’t increase at all over those 15 years (unlikely). It also assumes that both you and your significant other will continue to work during those years. The math would be more challenging if kids and a stay-at-home spouse enter into the picture.
Nonetheless, this exercise shows the value in getting your financial act together early in life and contributing a reasonable amount each year.
If you’re reading this in high school or college, congratulations. You can be a millionaire by 40.
If you’re reading this at 40 and you have nothing saved, it’s never too late. You can go back and get a marketable skill and the math will work the same way, albeit delayed by around 20 years. Millionaire by 60 isn’t so bad either. After all, the average retirement savings at age 60 is around $150,000.
Becoming a millionaire by 40 is not a pipe dream. It is entirely possible if you gain a marketable skill, get out of debt, live a modest lifestyle, and max out your 401k’s and Roth IRA’s. Plan for success and then go out and get it.