Who would turn down a million dollars? Itís unlikely anyone would shut the door in the face of the man with the big check, but too many people fail to realize how they can make their own million dollars without waiting on the lottery or a sweepstakes to deliver it. Because weíre young, we are in the best position of all to make a million. And we might even be able to do it before we hit forty.
The Power of Investments
You might have heard about stock markets and other financial mumbo jumbo like bonds, funds and CDs, but unless you have a reason to pay attention you probably just turned up your iPod when that sort of talk started. Without getting into too much gory detail, stocks, bonds, CDs, funds, and a savings accounts are all pretty much the same thing to people like us Ė ways to save and invest money.
There is a difference between saving and investing, by the way. I can save money by collecting all my spare change and throwing it in a jar. In one month I might save $18 by collecting the change that I donít normally do anything with. If I leave it in the jar for the next year, Iíll still have $18 Ė although hopefully Iím still adding to it with more change every day.
But to invest that $18, I have to put it somewhere that pays me money. A bank savings account pays me money to put my money there. The money they pay me is called interest, and I can put my $18 in the bank and make 3% in interest. Complicated? Not really. I just walk into a bank, ask to open a new account, and give the banker my $18. She puts it in the bank, and I walk home knowing my money is going to make me rich(er).
So how long will it take to become rich on my pocket change? A long time. But, leaving that $18 in the bank for a year would get me $18.55. So by doing nothing, I make less than a dollar. But remember, leaving the $18 in the jar got me nothing at all. This way I get a candy bar for my efforts at least.
Making a Million
So how does all this explain how I can make a million dollars? If I invest $18 one time and wait for it to grow, it would take 365 years to reach $1,000,000. Thatís not the kind of time frame youíre looking for unless you want your great-great-great-grandkids to spend your money. To save money faster, you need to be saving money on a regular basis.
Letís say you save $18 a month in change now, but if you take a bit out of your allowance or babysitting money you could save $25 a month. If you put $25 a month into a savings account at 3%, it will take 154 years to make a million. Thatís better, but still not good enough.
Right now $25 might be as much as you can save each month. But if you start saving $250 a month in about ten years when you have a ďrealĒ job, youíll make your million in 79 years. You can throw yourself one heck of a funeral on that! $25 now and $250 in ten years is easy to save. But to make yourself money faster, you should find something better than a basic savings account. If you open another kind of savings account in ten years with a higher interest rate, you can save even faster.
Letís make your million by the time you turn 40. Pretend youíre 14-years-old now. You invest $25 a month starting this month in a savings account until youíve reached $1000. Youíll hit $1,000 in that savings account at 3% interest when youíre 17, by the way.
Move the $1,000 to a better savings instrument like a mutual fund that pays 7% in interest instead of 3%. Remember, interest is the free money you make when you invest your savings. Keep investing $25 a month until you hit 24 or so. At that point youíll have about $4,300. Then bump your savings up to $350 a month when you graduate from college and get a ďrealĒ job. After five years youíll have $31,000 in your account.
At this point youíre 29 years old and ready to make your million. Plus you should have a pretty good job and maybe a few raises since college. You have about $31,000 in the bank. To bring that number up to $1,000,000 by the time youíre forty, you just need to invest about $4,600 a month to make it happen. Ouch. Unless you have a great job, thatís a pretty high amount to part with every month.
Alright, so maybe a few of us out there will be millionaires at 40. But the rest of us will just bump our investment up to $500 at 29 and leave it there. Weíll reach our million at the age of 60 or so. That still gives up plenty of time to spend our fortune and plenty of money to make life nice until then Ė assuming we use our great educations to get us a good job some day. Study up and start saving!