Welcome to another lesson in the Math of Interest series! In this post we're going to look at the monthly and daily amounts needed to raise $1,000,000. That's right...
Monthly amounts for $1,000,000
The first graphic shows the monthly contribution amount required to reach $1,000,000 with a given return and time period, assuming monthly compounding and one contribution per month. The second graphic shows the total dollars invested during that time period.
Consider the example of 40 years with 7% return annually. If you were to invest $380.98 per month (approx. $12.70 per day) from age 22 to 62, you would have invested about $183,000 and grown it passively to over $1,000,000. That means you'd end up with more than 5x the cash you actually put in. Dang... go you!
You'll notice that the higher the rate and the more time you have, the less you need to invest to reach $1,000,000. Visually in the table, the further down and to the right you go, the smaller the number you'll find.
Consider someone who wants $1,000,000 at retirement, currently has nothing saved, and is targeting retirement in 20 years (first row). If they can only earn 5% during that time period, they'd need to invest $583,894, or nearly $30,000 per year.
In the opposite corner of the table, you can see that you could reach $1,000,000 if you invested just $57.72 per month for 50 years and earned 10% per year (about $700 investment per year). After 50 years you'd have 29x the amount you put in. Whoa.
Time is a powerful wealth building tool, so take advantage of it even if you don't have much extra cash right now.
Daily amounts for $1,000,000
Let's look at the 40 years, 7% earnings example from a daily lens. If you can manage to set aside $12.70 per day and earn 7% annually, your account would be worth $1,000,000 after 40 years. So, how do you scrape together $12.70 per day? For some people, that's literally just making lunch and coffee at home. For others, it's ditching a car payment. Maybe it's some combination of reductions in cell phone bill, nonessential shopping, utilities, screen time, entertainment, and/or internet.
In the comments, how do you think you could save an extra $12.70 per day?
Some people will tell you to expect 10% returns on average, and if that was the case you'd need just $5.27 per day to be a millionaire in 40 years (yes, about the cost of a specialty coffee). I think 10% returns are totally possible, but not guaranteed. I consider the Hierarchy of Control when making my financial plans. I have no control over actual market performance, so I use more conservative estimates than people who try to upsell their own strategies. We have much more control over when we start investing (a.k.a. time in the market), how often we invest, and how we manage our spending to ensure we have funds available to invest. Focus on that, assume decent investment performance, and be pleasantly surprised if you end up with more than planned.
Wrapping up
Hate to be a bummer, but just a reminder that the purchasing power of $1,000,000 will likely decline over time due to inflation. Now you know how fictional 1960s supervillain Dr. Evil felt when he was unfrozen in the 1990s, and his adversaries laughed at his petty ransom proposal. But don't start thinking this makes investing less worthwhile; if anything, it shows how important it is to invest and outpace inflation.
Every little bit counts. Time in the market and controlling your living expenses are the best way to ensure you have enough saved to retire. Don't be afraid to start small - now you know how it can add up.
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