How you can become a millionaire saving $405 a month
Forget playing the lottery. Try this instead
There are 20.2 million millionaires in the United States, according to Credit Suisse's Global Wealth Report, and that number is climbing all the time. Joining this elite group might sound impossible to a lot of people, but it's far more accessible than many realize. Below, I'll explain how you can get there by saving just $405 a month.
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Investing is key
While investing isn't the only way to become a millionaire, it is one of the most well-traveled paths because it enables you to grow your savings at a much faster pace than they could grow if you relied exclusively upon a savings account. This is especially true for those who leave their savings invested for decades.
If you invested $405 per month for 40 years and you earned an average 7% annual rate of return during that time, you would have a little over $1 million, despite only contributing $194,400 of your own money. The remaining $805,600 would come from investment earnings.
This is just one example of how investing can help you become a millionaire, but in practice, you may need to save a little more or less each month to achieve this goal. If you only have 20 years left in the workforce, for example, you'd need to save about $1,971 per month to go from $0 to $1 million in that timespan, assuming a 7% average annual rate of return.
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You'd also need to save a little more if your average rate of return was lower. If you saved diligently over 40 years but only earned a 6% average annual rate of return, you'd need to save about $525 per month to reach $1 million.
You can't control how much your investments grow in a given year, but you can keep things moving in a positive direction by ensuring your funds are well diversified, so that a single poorly performing investment doesn't hurt your portfolio too much. You should also look for investments with low fees, so you hold onto more of the money you're earning every year.
Starting early is also key if you want to make your path to $1 million as easy as possible. The investments you make while you're young have the longest time to grow before you need to withdraw your funds, so they tend to see the most investment earnings. Your later contributions are still valuable, but you may need to set aside more per month if you have fewer years to save because you won't be able to count on as much investment earnings.
How to become a millionaire retiree
Even for investors, saving $1 million takes time, and many may not get there until retirement. If you don't anticipate using your savings before then, it makes the most sense to keep it in a retirement account.
Consider a 401(k) if your company offers one, especially if it matches some of your contributions. This reduces how much you personally need to contribute. You may put up to $19,500 in a 401(k) in 2020, or $26,000 if you're 50 or older. These limits remain the same for 2021.
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If a 401(k) isn't an option for you, you may open an IRA with any broker online. These have lower contribution limits -- $6,000 in 2020, or $7,000 if you're 50 or older -- but you have a greater variety of investment choices than you do with a 401(k).
There are usually penalties for withdrawing money from retirement accounts under age 59 1/2 unless you qualify for certain exceptions, like paying for a large medical bill. The government has waived the early withdrawal penalty for 2020 due to the pandemic, but it's likely to return in future years.
If you think you may retire before 59 1/2 or that you may want to tap some of your savings before then, stash some money in a taxable brokerage account. These accounts don't give you the same tax savings as retirement accounts, but you can withdraw your money at any time without penalty. Plus, if you hold your savings for longer than one year, your earnings become subject to long-term capital gains tax instead of income tax, and that can save you a little money.
A $1 million nest egg may sound like a lot of money, but with retirement lasting 30 years or more for some people, you may require even more than this to live comfortably. So rather than just choosing an arbitrary number for your retirement savings, make sure you base your savings goal on how much you expect to spend in retirement. Then, you can use a retirement calculator to estimate how much you must save per month and how much you'll earn in investment earnings between now and your chosen retirement date.