3 Simple Ways to Save $1 million in 10 Years
We've seen lots of stories about people becoming millionaires by the age of 40 or paying off $100,000 in debt in three years, but how often do you get tips to save one million dollars in ten years (or less). This is critical information for most Americans because we procrastinate on saving until we literally have only five years left until we start collecting social security. That's when we have our "oh, crap, I'm old and I haven't prepared" epiphany. We can feel hopeless and paralized at that moment or we can take our destiny into our own hands and do what it takes to become a millionaire in five years. Others are doing it, and maybe, you can too.
We've been doing some research and it turns out that it is simple (not easy), and conveniently it can be done in three simple steps...again, not easy, but simple.
1. Figure out exactly how much money you need to live comfortably.
WomensMoney.org offers their mentees a great Money Finder System, but essentially it's just a tool to track your spending. If you're serious about saving $1 million in ten years, then you are going to need some sort of tracking system. You need to track every penny you spend and all your bills.
Once you have your spending tracked (honestly), then you need to remove ALL debt payments including credit card, car, mortgage from that spending because having $1 million dollars in cash means you don't have debt that counter balances your true net worth. This is a debt-free million we're talking about.
Now, that you know your annual true spending, you can calculate how much you need to live on annually. Add 10% to that for inconvenient and unexpected expenses.
2. Cut spending where you can, and power pay that debt off
Look at your spending (that you've been tracking) and determine what you really need. Evaluate each expense. Does it make you happy to have this expense? Does this expense serve your future or your health or some other need? If it doesn't do any of that, then why are you keeping it? What would life be like if you ended or lowered this monthly expense? For example, if you are paying $1500 a month for a mortgage on a four bedroom house close to town, what would happen if you sold your house and moved to a three bedroom house further from town where the mortgage payment may only be $750 a month? Or better yet, can you sell your current house and buy a smaller house for cash and eliminate a mortgage payment completely? Don't be afraid to make significant lifestyle choices that may look weird to outsiders.
Use all the money you can save to use the snowball debt pay off method. Pay off EVERYTHING. If you can find you can pay off $300,000 in debt in five years, then guess what, you can save another $300,000 plus in the five years after without any additional effort.
TIP: A great way to stay motivated to paying off your debt is to plan for how you will be making money once your debt is paid off. See step 3.
3. Put money towards investments
Now that you're already in the habit of taking extra money aside for a goal (paying off debt), it's an easy transition to put that money into investments. The trick is to find a method that you can feel confident with and that can get you to $1 million in the time you've allotted. It's critical to be educated and prepared so you don't fall for a money-making scam.
The greatest thing about investing in being debt free is that you can take that time to learn and make a plan. There are a LOT of FREE financial education programs to learn about investing. If you get a sales pitch at the end of the free "educational" program, then it's time to look around and verify, verify, verify the information. Talk to multiple financial advisors for their opinions and plan ideas.
Let's get back to that example of paying off $300,000 in debt in five years. In that example, you eventually got to the point of paying $5,000 a month to be debt free (surprising, isn't it). Now that you are debt free, you can invest that $5,000 a month and accumulate almost $1MM in 11 years at a 7% rate of return. You can accelerate your path to $1 million if you sell your house.
If you want to do more of the work than passively investing in a diversified investment bucket, you can invest in real estate - land, home flipping or rentals. If you want to accelerate your path, you may also choose to invest in a riskier stock portfolio.
The final and most important question is this - Do you need $1 million to afford a comfortable lifestyle in retirement? Maybe. Maybe not. Most people look to the 4% rule to calculate their retirement need. The 4% rule is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. This rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that allows funds to be withdrawn for a number of years. The 4% rate is considered a "safe" rate, with the withdrawals consisting primarily of interest and dividends.