On a recent Thursday night I logged into my brokerage account and saw an extra digit I’d never seen before:
When I was in my early 20s, I didn’t think becoming a millionaire at 35 was even possible. Back then I didn’t have much money, but the little extra that I did have I saved and invested. So this is proof of what can happen when you do that:
You might think when your account rolls over to seven digits that fireworks light up the sky, confetti falls, and the champagne starts flowing. I can tell you that doesn’t happen, in fact it was pretty anti-climatic. I was like, “Oh, cool,” and then went back to work.
Honestly, the financial milestone that really mattered to me was making my first $1,000 from investing. That meant my investments could make me $10,000, which meant that they could make me $25,000, and so on.
Recently, a 25-year-old reader emailed me to ask where I was financially when I was his age. If you find value in benchmarking yourself against me, and depending on your number it’s probably irrelevant, you can use this chart:
As you can see, getting to $1 million isn’t a straight line. There were numerous times when I lost a lot of money in the market. For example, before the recession in 2008 I had $175,000. Nine months later I had $120,000. When that happens it’s really scary because you think you’re never going to get that money back.
But you have two choices when the market is falling and you’re losing money. You can flee, or you can stay the course. If you let fear take ahold of you then you’re likely to make the wrong choice. Psychologically, it’s pretty normal for us to equate price volatility with risk, and ironically end up doing risky things like selling at the worst possible time.
Anyways, during the recession I remember all the talking heads saying to invest 100% in safe Treasury bills or bank CDs. For the people who took that advice they’re now earning essentially nothing on their savings that they thought would support them in retirement. If they hadn’t acted out of fear, they could have built a great retirement portfolio with low-cost index funds.
I reaped the rewards of staying the course, and now when my investments lose $70,000 in a month (which recently happened), I recognize it’s just part of the process of building wealth.
HOW LONG DOES $1 MILLION LAST
The right answer is, “It depends.” The so-called experts make us believe that we need $3 million before we can retire, to draw a reasonable $130,000 a year. So that’s a true statement if you spend $11,000 a month.
When I plug my numbers into the retirement calculator FIRECalc – yearly spending of $36,000, a $1 million portfolio, and 51 years left to live (based on the US government’s death calculator) – it tells me there’s a 98.9% chance my $1 million won’t be depleted before I die.
That means I never have to work again. Even better, there’s a few key assumptions not in this calculation:
- When my 15-year mortgage is paid off my spending decreases
- If I cohabitate my spending decreases
- I’ll probably make some money at some point during the next 51 years
- My Social Security benefits kick in at 65
What I worry about are kids and their impact on spending. I think I could raise a kid for like $85,000, but what do I know because the USDA thinks it costs up to $500,000. I just don’t know yet, but my best guess is that my finances would be okay if I didn’t work and had a kid or two.
WHAT’S THE SECRET TO BECOMING A MILLIONAIRE
I didn’t win the lottery, I didn’t inherit any money, and I didn’t start a company. If you’re in the same situation I am, then the fastest way to $1,000,000 is to earn more and spend less because those are the two levers you have control over.
I found that the best approach was to go after the big wins, not like these crazy people.
Instead of peeling bananas at the store to save $0.25, that person could be:
- Getting rid of lifestyle creep
- Earning more at their job
- Learning how to invest
- Starting a side business
Those are the big wins where a lot of money is hiding, so tackle those first before moving on to saving money in the produce aisle. Now, if you’re pulling on the earning and spending levers you’re going to want to see the results, right?
HOW TO TRACK YOUR INCOME, SPENDING, AND INVESTMENTS
I know what you’re thinking, “Boring!” Nobody wants to plug numbers into a spreadsheet. I’m a weirdo because it might just be my all-time favorite thing to do. The reason I want you to start, or try it for a month, is because I guarantee you’ll learn at least one thing about your finances that you didn’t know.
For example, in the late aughts I knew I was spending a lot but I didn’t know it was almost as much as I was earning. Through tracking my money came awareness, and that lead me to making a decision in 2010 to set a goal to become financially independent.
Not surprisingly, by decreasing my spending and increasing my income the amount of money I was saving exploded! I went from having about $10,000 a year to invest to having over $40,000.
To become financially independent you need to reach the crossover point, when you can withdraw 4% of your investments to meet your yearly expenses. That’s called the Safe Withdrawal Rate (SWR).
On average, I used to spend $4,000 a month. By decreasing my spending to $3,000 I was able to reach financial independence faster. Simply put, the higher your expenses are then the more money you’re going to need to reach the crossover point.
Convinced yet to start tracking? You can download the spreadsheet that I use and try it out for yourself. It even makes that cool chart above.
BENEFITS OF $1 MILLION
I know I’m really fortunate to call myself a millionaire. While I wasn’t excited about becoming one, it does allow me to live my life in a way that seemed impossible just a few years ago:
- I don’t have to stress about work, or layoffs, or getting fired, or office politics
- If I choose to work I can be extremely selective, only taking jobs I’m truly passionate about
- If I wake up and decide I want to take a year (or 51) off, that’s what I can do
Most importantly, I’ve learned that money is infinite. If I work I can get more of it, or I can let my $1,000,000 grow to $2,000,000. There’s always more of it out there. But time is finite. I know I have a limited number of years left, and now I have the freedom how I spend it.