It's easy to not bother saving or investing when a meaningfully sized nest egg -- like $1 million -- seems entirely out of reach. While the United States' average annual salary of around $50,000 is enough to get by, once all the bills are paid, there's not a whole lot of extra cash left to put toward retirement.
The thing is, it doesn't take a whole lot of money to start planting the seeds of what ends up growing into a seven-figure stash. Here's a closer look at how anyone earning an average income can become a self-made millionaire over time just by doing things anyone can do.
Baby steps... lots of baby steps
Take any hypothetical investment projections with a grain of salt. They're only based on best-guess assumptions, and everyone's situation is different. Unforeseeable setbacks are the norm anyway.
On the other hand, even a rough idea of how you can get to where you want to go is better than no plan at all; you can adjust or tweak as needed. Getting started is the hardest part.
With that as the backdrop, for the purpose of this particular exercise there's a small handful of assumptions we need to make. They are (in no particular order), that you'll be earning the S&P 500's relatively typical average return of 10% per year on your invested money, you'll be accumulating your cash in tax-deferred accounts, and your annual contribution to this investment account will remain the same from one year to the next, even if your salary changes or an unexpected expense pops up.
Given all of these assumptions, a 30-year career that ends with you retiring into a $1 million nest egg requires monthly contributions of $450, invested as soon as it's deposited. Sometimes that money may be put to work at a less-than-ideal time. By and large, though, you're better served by not waiting to invest money rather than holding out for a major market bottom.
Image source: Getty Images.
Surprised? Don't be. While $450 might not seem like a staggering figure, that's $5,400 per year, or more than 10% of your yearly salary. For most people, scraping together that sort of cash requires effort, and maybe a little sacrifice. It's worth it, though.
What if, however, that's more than you can invest every month, or even over the course of a year? Don't sweat it. If you can work for 35 years, you'd only need to come up with between $250 and $300 per month to put in the market via a tax-deferred account to get to $1 million.
Or maybe you're doing a little better than average salary-wise and have access to an extra $600 per month you won't need anytime soon. At that pace of monthly contribution, you'd reach the million-dollar mark in a little over 27 years.
If you're doing it at all, do it right
These are encouraging projections for a worker looking to enter retirement with $1 million. As was noted, it can take some smart budgeting and maybe even a bit of self-denial. But it's not out of reach.
There are some caveats, though.
Chief among these cautions is the fact that below-average returns can take a huge toll. If you'd only earned an average of 7% per year rather than 10% for the 30-year stretch in question, your cash stash would end up only being worth between $500,000 and $600,000. And even if you earned the average 10% per year but only stuck with the plan for 25 years, you'd again wind up with a much more modest figure of about $600,000. Time and good returns clearly make a huge difference, particularly when combined. You may have heard it referred to as compounding. And although it's difficult to quantify the impact, skipping a contribution in just a few of these 30 years can easily leave you short of your six-figure goal.
On that note, here's another scenario that just might inspire you to do even more than you might have been planning on doing: If you can put $500 per month into the market every month for 35 years ($50 more per month for five years longer) an average return of 10% would leave you with something on the order of $1.9 million.
Just get started somewhere right now
Again, it's just a hypothetical example, and not a tailor-made plan specifically for you. The idea is just to make it clear that you can become a millionaire even if you're miles away from being one right now. The key is using all the time you can, even if you can't put a whole lot of money to work right now. Something is better than nothing -- you can bolster the monthly contributions later. And even if you've only got a few years left before you retire or only a few extra bucks left to invest every month, you still might be surprised by what you can build if you just try.
