Why the First Million is the Hardest to Make
It's true that it's easier for the rich to get richer. That first million is by far the toughest to make. But once you're there, it gets much easier to make the next million.
When you already have money working for you, each percent of return adds more to your worth. Earning 10% on $10,000 gives you $1,000. Making 10% on $1,000,000 gives you $100,000.
Let's look at what it takes to accumulate your first million. Assume you regularly invest a monthly amount at a given return. Using the power of compounding, the table below shows you how many years it will take you to reach your first million. We'll assume you're starting from zero.
(Already have some savings? Then see our Million Dollar Savings Calculator to calculate exactly how long it will take to become a millionaire in your specific situation.)
|Years to Reach Your First Million|
You might wonder why I chose $1,500 as the last monthly contribution. That number happens to be the maximum amount an individual can contribute to their 401(k) in 2018 (post-tax reform), divided by 12 months. Putting away the maximum into your 401(k) every month while earning an annual return of 6% would make you a millionaire in less than 25 years, while investing the 401(k) max and achieving 10% annual return could get you to seven-digits in less than 19 years.
That was the hard part. As we've already mentioned, after you reach your first million it takes less time to make your second. When you start from $1 million, you can take advantage of the effect of compounding on that first $1 million.
|Years to Reach|
If you consistently put away as much as you can afford, it is possible to have $2 million in 25 years if you contribute the maximum to your 401(k) and achieve a 10% return. Even better, some companies will match some of your contribution, helping you reach your million-dollar goal even faster.
The taxman wants to help, too. He'll give you a break when you save in tax deferred accounts like 401(k)s and IRAs. If you are in the 25% marginal tax bracket and you contribute $200, your out of pocket cost is only $150. Now you have a little more money to contribute to help you become a millionaire even sooner.
The most difficult part is getting started. Once you begin, it becomes easier. So, what are you waiting for? Sign up with a low-cost online broker today to have that monthly amount taken out of your paycheck. Then increase it ever so slightly every six months until you reach the maximum contribution level. Before you know it, you will be well along your way to your first million.
Three More Ideas to Help You Reach Financial Independence:
- Free yourself from credit card debt this year. Learn how to pay 0% on your balances for up to 21 months in The 4 Best Credit Cards for Balance Transfers.
- Pay off your mortgage to free up an extra $1,000 to $2,000 every month. Check out 3 Ways to Pay Off Your Mortgage 15 Years Early.
- Shrink and eliminate your car payments. If you're paying 6% APR or more, it's time to know The Top 3 Reasons to Refinance Your Auto Loan.