Congratulations, class of 2016! Your graduation is quite an accomplishment, and it's a sure sign that you can get things done when you put your mind and heart to it. That perseverance will serve you well in your future. In particular, it will be a key driver in your ability to become a multimillionaire by the end of your career.
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As you're starting out in life, you may not have much experience or a particularly high income, but what you do have going for you is time. A little bit of money, consistently invested in decent stocks every paycheck throughout your career, can propel you to multimillionaire status. As a young graduate, you have a once-in-a-lifetime chance to get yourself started on the most straightforward path to get you there, and that chance starts now.
Your straightforward path to $2 million Because you're young, compounding can work for you over decades, providing you an amazing lifetime return on your investments. The table below shows how much you need to save every month to wind up with $2 million by age 67, depending on the age you start and the average rate of return you earn along the way:
Table calculations by the author.
Three things should immediately pop out at you when you look at that table:
First, check out how quickly the monthly amount you have to sock away grows when you move farther down the table. That should show you how important it is for you to start saving now, while you're still young enough for compounding to work its magic.
The longer you wait, the more expensive it will be for you to reach that $2 million mark. If you think it's tough to come up with $173 per month now as a recent graduate, imagine trying to come up with nearly $2,100 per month at age 45 just to have a chance of winding up in the same place.
Second, check out how quickly the monthly amount you have to save grows when you move farther to the right in the table. That should show you how important it is for you to invest in stocks for the long term returns they can provide. While there are no guarantees in investing and stock market returns can be incredibly volatile, over the long run, stocks have returned around 10% annually.
Even if you don't think stocks will return as much in the future as they have in the past, it's a lot easier to save a little bit more now when you're young instead of having to sock away a whole lot more later. As a bonus, if you invest as though you'll really only get 6% or 8% annual returns but stocks do wind up returning closer to 10%, you'll hit multimillionaire status that much sooner.
Third, realize that the stock-focused potential returns in the top couple of rows of that table are really likely within your reach, even as a new hire. $173 per month is less than $6 per day, and even $447 per month is under $15 per day. If you've been living like a broke college student, then you're already used to making your money stretch. Keep your other costs down as you set up your life as an independent adult, and you can free up the cash to invest to make yourself a multimillionaire.
You don't have to do it on your own Perhaps best of all, you don't have to come up with all that cash entirely on your own. Your boss and Uncle Sam may very well be willing to chip in to help you along the way.
Here's how Uncle Sam will help: Money you sock away in a qualified retirement account like a 401(k) or an IRA will compound for you tax-deferred. In a traditional style plan, you might even get a tax deduction on your contribution, while in a Roth style plan, you could take your money out completely tax free in retirement.
Here's how your boss might help: If your boss offers a 401(k) or similar plan, it might come with a match. A match is additional money your boss kicks in above and beyond your contribution, as an incentive for you to participate. Matches vary by company, but a typical match is $0.50 for every $1.00 you sock away, up to some percentage of your salary.
In addition, you can make contributions to your employer-sponsored plan directly out of your paycheck. You'll quickly find that you don't miss money you never see, but that money still works on your behalf.
Between the tax benefits and possibility of an employer match for contributing to your retirement plan, you just might find you only need to sock away half of the amount out of your own pocket. So yes that means that if:
- You start young enough,
- Earn historical stock market returns,
- Keep at it throughout your entire career, and
- Have a decent match on your traditional 401(k) plan ...
... you might be able to wind up a multimillionaire by sacrificing less than $100 a month out of your own pocket.
Want to be a multimillionaire? Start today The incredible opportunity that you have to become a multimillionaire with such a small investment is available to you only because you're young. Take advantage of it now -- preferably starting with your next paycheck -- and no matter where you end up in life, you'll be incredibly glad you did. Miss your chance by waiting too long, and it's gone forever. So get started now, while the opportunity is still there for you.
The article Class of 2016: Here's How You Can Become a Multimillionaire originally appeared on Fool.com.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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