Have you ever thought about how much you need to save to be a millionaire in 5 years? Or maybe you’ve recently bought a home or are looking at buying one soon. Either way, it’s important for you to consider what will happen if the value of your home decreases over the next 5 years. There are plenty of people out there that worry about this scenario.
How much would you need to save per month to be a millionaire in 5 years? It sounds like a common question that you might hear from peers or that comes up when discussing financial goals for the future. So how much money should you be saving each month to reach your million-dollar goal in 50 months?
$1 Million the Hard Way
Let’s say you want to become a millionaire in five years. If you’re starting from scratch, online millionaire calculators (which return a variety of results given the same inputs) estimate that you’ll need to save anywhere from $13,000 to $15,500 a month and invest it wisely enough to earn an average of 10% a year. That means taking calculated risks, diversifying, and avoiding investment fees such as loads and broker commissions.
Obviously, in order to regularly save this much money each month, you’ll need to have a fantastic income. At the low end, to meet the $13,000 a month savings goal, you’d probably need to make around $265,000 annually. The specific number will vary considerably depending on your income tax situation, but the point is that it’s high.https://d241ad90e1bf63c9e99295ebce50fdc9.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
According to the salary calculator at PaycheckCity.com, if you make $265,000 a year, are single, claim two exemptions on your federal tax return, and live in one of the nine states with no state income tax, you’d take home around $185,000 a year, or about $15,400 a month. Saving $13,000 would leave you with $2,400 a month to meet all your expenses—a perfectly reasonable number for many singles, and even some couples.
If you’re willing to be extremely frugal—let’s say you can get by on a mere $700 a month—will it make a big difference? In this case, not really. You’d still need to make almost $250,000 a year.
If you’re in a committed relationship, however, things get a little easier. You can get away with making around $132,500 a year then, as long as your significant other can make up the difference and is on board with your savings plan. Of course, then you’ll have to share your millionaire status.
$1 Million the Easy Way
A short-term plan for creating wealth certainly includes these personality traits, but it often includes factors such as timing, luck, and/or possessing an incredibly valuable idea and knowing how to implement and market it. If you know you’re closer to average, consider a more traditional, more attainable approach.
The longer-term road to wealth involves such time-honored tactics as avoiding consumer debt, diversifying your investments, minimizing your investment fees, tax planning, minimizing housing expenses, and, for two-earner households, living on one income.
Putting aside someone’s $40,000 in take-home pay every year—and earning that 10% return as described above—will get you to millionaire status in about 15 years. Halve those savings and you’re still only looking at 20 years. It will take more work for sure, but it’s a lot faster than 51.
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.
Start Saving Early
The easiest way to build your savings is to start early. Doing so lets you take advantage of the power of compounding. Say you’re 20 years old. If you contribute $6,000 to an individual retirement account (IRA) every year ($500 a month) for 40 years, your total investment would be $240,000.
But because of the power of compounding, your investment would grow to more than $1.37 million, assuming a 7% return. And you’d be a millionaire by age 57, just by saving $500 a month.
Save 15% of Your Income—or More
The personal savings rate is the percentage of income left over after people spend money and pay taxes. That rate reached 12.4% in May 2021, according to data from the Bureau of Economic Analysis (BEA).1 According to experts, that’s not enough to save for retirement, let alone for anyone trying to become a millionaire.
Exactly how much should you save? Although there’s no correct answer here, most financial planners say that, depending on your age, you should save at least 15% of your annual gross income if you’re aiming for a nest egg for retirement.2 This figure may sound unattainable for many, but in reality, it’s not. Suppose your employer matches contributions of up to 6% of your salary, you need to save only 9%.
Don’t Give In to Lifestyle Inflation
Lifestyle inflation happens when you spend more money just because you have more to spend. Say you live in a comfortable apartment in a great location for $1,000 a month. You get a raise at work and move to a better apartment that costs $1,500 a month. Did you really need to move?
If you want to become a millionaire, resist the urge to give in to lifestyle inflation. Instead of spending more—just because you can—save and invest more. You’ll reach your financial goals a lot faster.
Increase your income
It tends to be easier to increase your income than reduce your expenses. You can only cut your expenses so much without drastically adjusting your lifestyle. Yet, there are many opportunities to boost your income.
If you are employed, talk to your boss about a raise. Sometimes, it just requires a conversation about the value you bring to the organization. When you discuss your career with your boss, you’ll know where you stand and come away with a game plan to boost your paycheck. If there aren’t opportunities at your current job, start searching for a new one that offers a higher wage or the opportunity for promotions.
Your job isn’t the only way to increase your income. Side hustles are a great way to supplement your income in your spare time. Many side hustles, like driving for a rideshare company or making grocery deliveries, don’t require a huge time commitment. You can even learn how to make $1,000 a day if you strategically stack your side hustles.
Building passive income is the best way to boost your income in the long term. Passive income is money you earn that isn’t tied to the number of hours you work. Passive income strategies include:
- Selling an eBook or a course on a topic that you are an expert in
- Purchasing rental properties and hiring a property manager
- Investing in stocks, bonds, and mutual funds
- Affiliate marketing through your website or social media
There are a lot of ways to earn passive income. Although some can take time to ramp up, once they’re in motion, you’ll make money even when you’re not working.
Pro-tip: When leveraging the reach of your social media, consider how you can make money on Instagram.
Pay off your debt
Becoming a millionaire isn’t just about having a portfolio with $1 million in it. It is also about boosting your net worth. Net worth is the amount left over when you subtract what you owe from what you own.
Every dollar of debt that you pay off not only increases your net worth, but it also saves you from paying interest to a lender. That savings can then be invested toward your goal of becoming a millionaire. So work toward eliminating things like student loans and credit card debt.
Max out your retirement contributions each year
The government encourages people to invest for their retirement by giving valuable tax breaks on retirement accounts. The best way to take advantage of these programs is by maxing them out each and every year. This ensures that as much of your money as possible is receiving these tax advantages.
Because the tax advantages are so powerful, there are limits to how much you can invest in your retirement accounts each year. In 2020, Traditional and Roth IRA limits are $6,000 per year ($7,000 if over the age of 50), and company retirement plans are $19,500 ($26,000 if over 50).
Conclusion
So you want to be a millionaire in five years, but how much do you need to save to make it happen? This is a very important question and in this video I break down the different ways you could approach this. Being a millionaire has always been a dream for many people, and now that is possible by saving little money. The secret to becoming a millionaire in lot less time than you think.