How to Save a Million Dollars

So you want to be a millionaire. While that may seem like a lofty goal, it’s not as difficult as it may sound. All it requires is equal parts discipline and motivation. You’ll need discipline to change some habits. The motivation comes from having a clearly defined goal and an understanding of how money grows.  If you can put those two parts together with some money to save, you have a pretty good chance of hitting your target of saving a million dollars.

Of course, if it were actually that simple, then everyone would be doing it. Discipline and motivation are hard to come by for most people and, without that, finding the money to save is much more difficult. We could cut this really short with four sage words of advice:

Save Early and Save Often

However, aside from stating the obvious, this assumes people are automatically wired with the discipline to follow through. To establish and maintain the kind of savings habits needed to accumulate a million dollars, most people would have to change some financial behaviors.

Live Beneath Your Needs

If you ask most people who have accumulated a million dollars, they will probably tell you that the key to their success was being able to live beneath their needs. To find the money to save, it may take a combination of making more money and spending less. For many people it is easier to spend less money. If the goal is important enough, you should be willing to live in a more modest home and drive a more practical car. It means living on a strict budget and finding ways to cut spending. Changing your spending habits is the single most important financial discipline you can master.

Set a Clearly Defined Goal

Goals are what provide the motivation to act. If the goal is not clear or meaningful, it is not likely to provide real or sustained motivation. If a goal is not seen as being realistic or having tangible value, it becomes nothing more than some hopeful aspiration and that doesn’t spur motivation. It’s not enough to say “I want to save a million dollars” and have that be your goal. You need to be able to clearly envision what achieving that goal will do for you. It needs to be tangible, meaningful and purposeful if you expect to stay motivated. Something along the lines of:

I want to save a million dollars to have the financial independence I need to start my own animal hospital.

The more detail the better. You will also need to attach a time line so you have a clear target.

Understanding How Money Grows

Once you establish a clear goal, you need to determine what it will take to achieve it. There are three variables you need to manage: Savings amount, rate of return and time frame. If you know how much you are able to save each month and the time frame for achieving your goal, you need to determine what rate of return you will need to achieve.

For example: if you have a $1,500 monthly savings amount and a 20-year time frame for achieving the goal, you will need to generate a 10% return. If you want to account for taxes at a 15% rate and inflation at an average rate of 2.5%, you would need to generate an 11% return. 

That would require a fairly aggressive investment strategy, which would involve more risk than you might be willing to take. So, you can either increase the amount of your monthly savings or lengthen your time frame in order to lower your rate of return requirement. If, instead, you are able to save $2,000 a month over a 20-year period, you would only need to earn 8% on your money after taxes and inflation. That is much more reasonable and achievable with a balanced, moderate investment portfolio.

If you know the rate of return you can expect to generate and your time frame for achieving your goal you can calculate how much you need to save monthly. The following chart provides a general guide for determining the savings amount based on known rate of return and timeframe.

Monthly Savings Required to Save $1,000,000

 Based on Timeframe and Return

Source: TimeValue.com

The key take away from the chart is the value of time in achieving your goal of saving a million dollars. The longer your time frame is for achieving your goal, the less the savings amount needed. This takes us back to the sage advice to Save Early and Save Often; only now you can apply the discipline, motivation and the real numbers to actually make it happen.