How much do you need to save to be a millionaire in 5 years? That’s an interesting question. The first thing you notice is that there are two numbers, one above the other.
How much money do you need to save to be a millionaire in five years? That’s what most people wonder when they’re setting financial goals, but it doesn’t have to be this complicated.
$1 Million the Harder Way
Of course, $132,500 (or $265,000) might seem attainable (or like pocket change) for some C-level executives, but according to PayScale.com, the median salary for workers with 20 or more years of experience was a mere $71,578 in July 2009. And it’s still only $125,166 for the average CFO with the same amount of experience. Becoming a millionaire in the short-term, therefore, requires a more ambitious strategy than steadily collecting a well-deserved paycheck.
Alan Corey, author of “A Million Bucks by 30” (2007), claims to have made a million dollars in seven years while earning a salary that more of us can relate to: $40,000 to $50,000 a year. He happened to put some of the money he saved while living very frugally in New York City in the right place (real estate) at the right time (the expansion of the most recent real-estate bubble). Of course, he also had some of the most important personality traits of success: determination, a strong work ethic, confidence, and a willingness to make some extreme sacrifices.
How to Become a Millionaire
You don’t need a six-figure job or family money to become a millionaire. Instead, you need to start saving early and be mindful of every dollar you spend. Here are some tips for building that million you need to retire in style or to retire early.
Avoid Unnecessary Spending and Debt
Stop buying things you don’t need. Before you tap your card, ask yourself the following:
- “Is this something I really need?”
- “Do I have something similar already?”
- “Do I want this more than I want to become a millionaire?”
Every dollar you spend on something you don’t need is one less dollar you can invest. Here’s a reality check. If you invest an extra $25 a week for those same 40 years, you would end up with an additional $277,693.
Can you cut $25 of unnecessary spending out of your weekly budget? Maybe, maybe not. But if you can, it will go a long way toward helping you reach your $1 million goals.
Make More Money
Granted, this is easier said than done. If you don’t make enough to stash 15% of your income, it will be difficult to become a millionaire. But you do have a few options available to you, such as:
- Asking for a pay increase (if you think you’re due for one)
- Working extra hours
- Getting a second job
- Getting training to increase your earnings potential
Additional training pays off the most in the long run. Let’s say you’re a Licensed Practical Nurse (LPN). The median income is $48,820 per year in 2020.3 Registered nurses, on the other hand, earn about $80,010 a year—over $30,000 more.4 Of course, it takes one to three years longer to become an RN.4 But that extra money every year can really help you reach your financial goals—especially if one of them is to become a millionaire.
Get Help if You Need It
Planning for retirement can be very stressful, partly because of all the investment options available not to mention all the unknowns that await you. In fact, as many as 60% of working people said they feel uneasy about retirement planning. It’s no wonder that 25% of Americans say they’re confident that they’re doing what they need to when it comes to retirement planning.5
That’s why it’s so important to get help from a professional. Only 29% of Americans reported working with a financial adviser while 65% said they aren’t getting any financial advice.6 Unless you’re a financial rock star, it’s worth the money to work with a qualified financial adviser.
An adviser can help you choose investments, set up a budget, and make plans to reach your goals. And once you’re ready to start spending some of that money, they can help you make it last.
Create a financial plan
Financial freedom starts with financial planning. Your plan should include where you’re at today, what your goal is, and how you’ll get there. Your financial plan should be written down with clear milestones of how much you want to have saved and by what date.
At each milestone, you’ll be able to assess your progress and make choices depending on whether you’re ahead of or behind the plan. You can adjust any of these factors:
- The deadline to reach your goal
- Your goal amount
- How much you’re saving each month
- The risk level of your investment portfolio
If you’re ahead of plan, you might scale back how much you save and enjoy life a little more today. If you’re behind, it could be time to buckle down and learn some ways to make money while while also reducing your expenses.
Live below your means
Living below your means is when your take-home pay is higher than your monthly expenses and you have money left over. The more you live below your means, the more money you have to put toward your financial goals. Review where you’re spending your money each month right now, and decide whether those expenses are worth more to you than your goal of becoming a millionaire.
If your spending and financial goals aren’t in alignment, you can quickly cut expenses with these two strategies:
- Lower your housing expenses. Get a roommate, move someplace less expensive, or return home to live with your parents.
- Negotiate your bills. There are a lot of ways to lower your bills. Call your current providers and ask for discounts, shop around to find even lower prices, or use a service like Truebill to get your bills lowered for you.
Understand the power of compound interest
Albert Einstein once called compound interest the eighth wonder of the world. When interest is compounded, the amount of interest you earned during a given time period is added to your balance, and that new total (original balance + interest) becomes your new interest-earning balance.
For example, this is what it would look like if you started with $1,000 and earned 10% interest per year (which is the average stock market return for the past 90 years), compounded annually:
| Balance | Interest earned that year | Total interest earned | |
| Starting balance | $1,000 | – | – |
| After one year | $1,100 | $100 | $100 |
| After two years | $1,210 | $110 | $210 |
| After three years | $1,331 | $121 | $331 |
| After four years | $1,464 | $133 | $464 |
| After five years | $1,611 | $146 | $611 |
At the end of five years, you’ll have earned $611 in interest. As you can see, the interest that you earn continues to grow because the interest you’ve earned in prior years is now also earning interest.
Choose the right investing brokerage
After you’ve maxed out your retirement accounts, you’ll want to choose a brokerage account. This will allow you to continue investing your way to having $1 million by buying stocks, bonds, mutual funds, and ETFs.
When selecting a brokerage account, look for one that offers reduced maintenance and trading fees. Many companies have eliminated fees for online trading. If you’re unsure of where to begin investing, consider starting with an online service. Companies like Acorns, M1 Finance, and Stash offer simple investing platforms that make it easy for beginners to get started in the stock market.
Automate your savings and investing
Once your accounts are established, automate your saving and investing. This way you never forget to put that money aside and you can focus your mental energy on finding more ways to save and make money instead.
How much money to invest each month to become a millionaire
The investment path to becoming a millionaire depends on a few factors. First, your time horizon, or the length of time you’ll leave your money invested in the stock market. The second is how much you’ll contribute to your portfolio each month. Lastly, you’ll take into account the average annual growth.
Grow’s retirement calculator estimates that over time you should see an average annual growth of 5% to 10%, adjusted for inflation. A conservative estimate is 5% to 6%, while some experts say you can safely use 8%, which has been roughly the compound annual growth rate of the S&P 500 since 1980.
Here’s how the math to become a millionaire shakes out if you contribute to your investment portfolio with every biweekly paycheck and assume 6% annual growth.
- To become a millionaire in 40 years, you would have to invest roughly $232 with every paycheck. That works out to a bit more than $6,000 per year.
- To become a millionaire in 30 years, you would have to invest $460 with every paycheck. That works out to a bit less than $12,000 per year.
- To become a millionaire in 20 years, you would have to invest about $1,000 with every paycheck. That works out to about $26,000 per year.
Conclusion
If you want to retire a millionaire, you’ll need to start saving and investing early. But how much do you need to save in order to have $1 million by the time you are 65 years old?