Have you ever wondered how long it would actually take you to save $1 million? The steps to becoming a millionaire are not as difficult as you might think. Be sure to head over to How To Become a Millionaire in 9 Simple Steps to find out exactly what you need to do to save that first million.
But now for the important question: How long will it actually take you?
This post will outline just how long your journey will take to become a millionaire.
Contents and Quick Links
How long do you want to take?
First things first, the number of years it takes you save that $1 million is completely dependent upon how much money you can save every month. This is why it is so important to track your spending, create a budget and then find ways to cut back on your monthly expenses. The more you put away, the faster your journey to becoming a millionaire.
Check out the FREE Resource Library for some workbooks and worksheets to help you with this process.
Compounding interest is your friend
As you think about your desired timeline, remember that the longer you are willing to take, the less money you have to save every month.
If you want to be a millionaire in just 10 years, you will need to save over $5,500 every month. However, if you are willing to take a bit longer, like 30 years, you only need to save around $850 a month. This is much more manageable, thanks to compounding interest. Personally, I find it much easier to cut back on my major household expenses in order to easily shave off $850/month in spending. It’s a bit harder to figure out how to make an extra $5,500 every month!
Not convinced you can find a way to save $850? Check out How To Save Money On Your Biggest Household Expenses.
What is compounding interest?
You know compounding interest is awesome. But what is it and how to do make it happen?
When you save $1000 in an investment account that earns a 5% rate of return, then after one year you will have $1000 + ($1000*5%). That’s $1000 plus an additional 5%, for a total of $1050.
Assuming you don’t touch your savings/investment account, next year you have not just $100, you have $105 that will earn that 5% return. At year 2 you have $1050 + ($1050*5%). Every year that you leave that investment untouched, your interest earnings will also earn interest.
This effect of interest earning interest starts slow but then gains momentum.
Here’s a nice visual of what compounding interest looks like compared to plain old interest, from The Calculator Site.
How long it will take you to become a millionaire
Now for the actual numbers!
If you are curious as to how I calculated the numbers, you can read about the compounding interest formula from my favorite financial calculator website, The Calculator Site.
First, a graph and table of how many years it will take to save $1 million depending on how much you save every month. This data accounts for a 3% rate of inflation and provides the time it takes if you earn an average 5%, 7% or 10% interest rate on your investment.
The next graph does not account for inflation. The numbers are essentially the same, however it doesn’t take nearly as long. While the savings may be $1 million, the value of that million in the future is significantly less.
For easy reference, I’ve also included the table of data used to create the above graphs.
Historical interest rates
I used a range of interest rates because this varies depending on the market and how aggressively or conservatively you chose to invest. The often recommended advice is to start saving more aggressively when you are younger (and able to offset larger losses), then shift to invest more conservatively as you approach retirement age.
The average rate of return of the S&P 500 (a collection of 500 stocks, chosen to reflect the stock market as a whole and therefore a representation of the US economy) since inception is 10%. This of course fluctuates greatly over the years, but when investments are left alone over a long period of time, 10% is the historical average return you would expect to see.
This number is often already adjusted for inflation, which makes it approximately 7%.
One way to invest would be to put all of your money in the stock market and assume a rate of return around 7%. There are actually any number of other investment vehicles, which will vary the average rate of return that you would personally anticipate. The more aggressive you chose to invest, the higher the rate of return, but the greater the chance of losing money.
I’ve included a list of the assumptions I made in calculating how long it will take you to save $1 million. As you will see, there are many factors that will determine your personal journey, and each adjustment you make can have a significant impact on the end result.
Interest is compounded yearly rather than monthly
This was done to simplify the math, but if your investment compounds more frequently, your savings will grow quicker. Here’s an example of how much you will have saved after 5 years if 5% interest is compounded either once a year or every month:
- $0 initial savings
- 5% interest is earned on savings
- $500 monthly contribution
Total after 5 years if compounded yearly: $34,045
Total after 5 years if compounded monthly: $34,145
After 5 years you will have an extra $100 if interest is compounded more frequently.
Monthly contributions remain the same
To make the math easy, I assumed that every monthly contribution is the same as the last one. This means that if you start saving $100 when you are 22 years old, your contribution will still only be $100 when you are 55. This is (hopefully) very unrealistic.
As you earn more income over time, you should also be increasing your contributions. I’ll use the same example from above to demonstrate the benefit of increasing your contributions over time, based on the typical “cost of living” annual raise.
- $0 initial savings
- 5% interest rate
- Compounded monthly
- $500 monthly contribution
- Contributions increase by 3% per year
Total after 5 years without increasing contributions: $34,145
Total after 5 years with a 3% contribution increase every year: $36,149
If you increase your contributions by just 3% every year, you will be able to save an additional $2,000 after just 5 years. Imagine what that would look like after 30 years! (Alright, I’ll just tell you. You’d have an additional $176,500 in savings!)
An annual inflation rate of 3%
Inflation is the increase in how much things cost over time. This means that what used to cost $5 just 25 years ago actually costs $8.59 today.
When it comes to planning for retirement, it’s important to account for inflation. If in 25 years you finally reach the millionaire milestone, it’s time to celebrate. However, it’s important to understand that this $1 million is actually only worth $477,605. That is hugely disappointing. Devastating when it means that you don’t get to retire when you thought you would.
You will actually need to save just over $2 million in order to have the equivalent value of $1 million today.
Therefore, I ran the numbers both ways, either with an annual rate of inflation of 3% or, for celebrating the actual millionaire mark, I also calculated how long it will take if you keep everything in today’s dollars.
What we learn from the numbers
There are two major takeaways that we learn from the numbers.
The longer you are willing to take, the less you need to save
First, thanks to compounding interest, you really don’t have to save a lot of money every month to reach a million dollars. It might take some time to build up speed, but once it does, your savings will grow without much help from you. As an example, if you save $500 per month and see a 5% return on your investments, you will reach $1 million in just under 46 years. But how much of that comes from compounding interest? A whopping $724,000. Just think about that for a moment. Every year you deposit $6,000. After 46 years, you only had to contribute $276,000 of that one million dollars.
However, if you start late and want to become a millionaire in just 18 years, you’ll have to save $3,000 every single month. By the time you have the full $1 million, you had to contribute $648,000.
Once you are good at saving, the math is dependent upon your ability to save, not your rate of return
The other interesting information we gain from looking at the graph is that the more you save, the less it matters what your rate of return is. If all you can save is $100 a month, how you invest matters. You will shave 30.4 years off your millionaire journey if you earn 10% interest instead of just 5%.
However, if you are a rockstar earner and saver and want to accelerate your journey by saving $3,000 every month, you will only shave off 6 years by earning 10% interest instead of 5%.
What does this mean? The more you save, the less reliant you are on your investment returns. Your savings growth is more dependent upon the actual amount that you are saving.
It also means that the difference between saving $200 and $600 a month is huge (26 years). But, the difference between saving $2,000 and $3,000 a month is less dramatic (6 years).
The moral of the story
If you earn a lower income and aren’t able to save very much money each month, every little additional contribution you can make leads to accelerated progress. Saying no to the daily latte and optimizing your budget will have a larger impact on determining how long it will take you to reach the million dollar mark.
Tip: Read about how much that daily latte, and other spending habits, really effect your financial future at The True Cost of Your Daily Latte.
However, if you are a big earner and can save a significant percentage of your income, the interest rewards are less relevant. Progress is more dependent upon your ability to save since each dollar invested represents a larger percentage of the total savings goal.
If you want to save to become a millionaire, the best thing you can do is focus on increasing your savings rate by increasing your income while also lowering your expenses.
Do you need to be a millionaire?
Reaching that million dollar mark is certainly an impressive achievement, but is it really necessary? Perhaps not.
Fist of all, what does one million dollars mean to you? How will you use it and how will it change your life? If you’re going to the effort of consistently saving, most likely it means something more than bragging rights and flashy spending.
One million dollars in savings probably means reassurance and freedom from feeling so dependent upon your paycheck.
The amount you need in savings in order to achieve financial independence and early retirement depends on your monthly spending. If you make $70,000 annually and save 50% of that, your monthly expenses are $35,000. You don’t need to assume that in order to retire you must replace your full income. You only need the $35,000.
How do you replace that $35,000? Check out How To Calculate Your Savings Rate – And Why You Need To to learn more about how to determine what you need to save in order to retire.
A good rule of thumb is to save 25 times your monthly expenses in order to safely withdraw 4% of your savings. This allows you to draw from your interest earnings while still leaving your full savings untouched and accounting for ups and downs in the market.
If you need $35,000 in living expenses, you will need to save 25 x $35,000, or $875,000. Notice that this is less than $1 million!
Before you feel defeated that it will take too long to save a full million dollars, run the numbers and determine how much you really need.
How long it will take you to save $1 million depends on how aggressively you can save.
The higher your savings rate, the faster it will take you to not just reach $1 million, but more importantly, the faster you can achieve financial independence.
Some important things to remember along your journey to becoming a millionaire:
- Compounding interest is your friend. The longer you are willing to take, the less you need to save every month. This means that regardless of income level, you can achieve millionaire status.
- Don’t forget to account for inflation, $1 million tomorrow will not carry the same spending power as $1 million today.
- If you want to continue making progress over the years, continue to improve your savings rate and focus on increasing your monthly contributions.
- Save everything extra. Save your tax return, bonuses and raise increases. Resist giving into lifestyle inflation as your income grows.