Monday, 8 May 2017

Can You Become a Millionaire Earning $30,000 a Year?

Can People With Modest Incomes Become Millionaires?

By Paula Pant

Updated April 10, 2017

Can you become a millionaire if you only earn $30,000 per year?

Yes, absolutely. Here’s how.

Start Investing Early

At age 25, you begin earning $30,000 annually. That’s an income of $2,500 per month, before taxes and deductions.

You save $458.33 per month, and spend the other $2,000. (Remember, this is a savings rate of less than 20 percent of your gross income).

Your savings of $458.33 per month amounts to $5,500 per year.

You put that money in a Roth individual retirement account, also known as a Roth IRA.

($5,500 is the maximum that you’re allowed to contribute to a Roth IRA per year, based on 2016 rules. Learn more about Roth IRA’s here.)

You put the money into a passively-managed index fund that tracks the Dow Jones Industrial Average.

There's Nothing Fancy About It

In other words, you’re not doing any fancy, advanced investing. You’re not day-trading or stock-picking or betting on the Next Big Thing. You're not flipping houses or starting companies or buying Apple stock.

You're not doing anything sophisticated or time-consuming or risky. You’re just tracking the broad, overall market through a low-fee index fund: the simplest type of investing that you can do.

You don’t touch your money. You never withdraw it. You just let it sit there, reinvesting its own dividends, and enjoying the power of compound interest.

Your money grows at 7 percent annually. Guess what? Within 38 years, by the time you’re 63, you’ll have a nest egg of $1 million.

Can you believe that? By saving only $458 per month — which is the amount that some people spend on their car payment — you can grow a million-dollar nest egg by the time you retire.

Stepping Up Your Savings

Okay, what if you earn $40,000 per year? Can you bump up your savings a bit more, and start putting aside $600 per month?

If you do, you’ll shave 3 years off the amount of time it takes you to become a millionaire. Rather than becoming a millionaire in 37 years, you’ll reach your goal in 34 years. That means you can celebrate your 60th birthday, millionaire-style, if you start when you’re 25. Not only will you retire as a millionaire, you'll also potentially be able to retire early!

At $600 per month, you’re saving only 18 percent of your gross income. If you can bump your savings rate up by another 2 percent — to a rate of $667 per month — you’ll shave yet another two years off your timeline. You’ll be a millionaire by age 58 if you start at 25.

Isn’t it stunning what a small bump in your savings rate — just an extra $60 or $70 per month — can do?

This effect is the result of compound interest, which is the term that describes your interest and gains accumulating its own interest. The longer you stay invested, the more compound interest works on your behalf. That’s why its a great idea to start saving for retirement when you’re young.