I Can Be A Millionaire!

Financial & Saving

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Here we discuss methods for planning and implementing a financial savings plan that will assist you in reaching your goals. This section works in concert with the rest of the site. We cover this area first as it is what most people have the most interest in. Please read the budgeting section to help you have the money to save and invest.

For good wealth management you need to have a plan to budget your income and expenses so to have some extra that you will save and invest. When we started we had little to invest so we started small using what was available through our jobs. We wanted to put our savings in something beyond a savings account that we would be tempted to access at every bump in the road. While everyone should have some liquid savings for emergencies we placed more emphasis on long term savings. Over the long run baring any catastrophe you should have both.

I had the ability to buy stock through a company sponsored stock purchase plan. It allowed me to purchase stock at least 15% less than market value at the end of each plan term 1-2 years). Another plan that we contributed to for a few years matched stock dollar for dollar. This was good while it lasted. These were good because you were required to keep the stock for 8 years.

The best plan we had available when we were getting started was the company sponsored Savings & Investment Plan (401K). It allowed us to purchase company stock, mutual funds and income funds on a per paycheck basis. The company matched 50 cents on every dollar up to 6% on my income. This results in 9% total if I put in my 6%. The maximum you could contribute was 15% up to a limit based on your yearly pay. These purchases were pretax so we were able to buy more because we were paying less income tax. For every $10 we invested we could add another $1.50 that we were not paying in taxes. So my pretax input to make the 6% maximum matching was 5%.

At the begining we started a 3% and over 10 years increased the percentage to 14%. Some years we added 2-3% others we skipped. The increases came at the time I received a raise. If Roth IRA would have been available then I would have balanced between the two. Instead we set up a traditional IRA for my wife and put in the maximum most years, further reducing our tax bill.

Examples of Investment Growth

Most want to know just how fast my money can grow. Well, it depends on many things, but to give you an idea here are some simplistic and very conservative examples that shows just how simple it can be:

Example 1:
You and your life partner are 25 years old. Your combined total income is $22,000 a year which is less than the 2001 national average of $22,851. You only have $1000 to start investing in and you can only swing 1% ($220) of your gross income per month for the first year. Each year you believe that with pay increases and better budgeting you can increase this amount by 3% each year. If your investments grow at a rate of 8% each year you would end up with $1,048,058 at age 60. In effect, you will be a millionaire if your liabilities are less than 48,000 at this time. If you have followed most of the other things we discuss and refer to on this site you should be set for the rest of your life.
To better show these growths please click on the image to the right, which shows this growth over this time period. As we do throughout this site we have included this example spreadsheet at the bottom of this page. You can plug in your own figures to see how fast money can grow for you. (If your computer does not have Excel, many libraries and schools have computers that do and allow public access at no charge.)

Example 2:
You and your life partner are the 35 years old. Your combined gross income is $70,000 a year. You have $1000 to start investing and you also can swing 1% ($700) of your gross income per month for the first year. Each year you believe that with pay increases and better budgeting you can increase this amount by 3% each year. If your investments grow at a rate of 8% each year you would end up with $1,173,970 at age 62. In effect, you will be a millionaire even if your liabilities are less than $173,000 at this time. If you have followed most of the other things we discuss and refer to on this site you should be set for the rest of your life.
As the examples above show becoming a millionaire is within the reach of most. All it takes is commitment and having a good solid plan and sticking to it. Those that say "I Can Be a Millionaire" usually can and will be.
Everyone's situation is different and while there is no one plan fits all. We want you to be encouraged and to thoroughly think out and implement your plan. The examples above can easily produce tax free income for life if most of the money is invested in to Roth IRAs by both of you.

The method we used for increasing how much we saved each year was based on how much in raises we received. If we got a 5 percent raise we would put 3 percent towards savings. This way we never got it in our pocket, so it was never missed. In years where we received a promotion or more than one raise we would put all of it towards savings. Remember the old saying "Out of sight out of mind."

What choices are available for beginning investors?

The choices are endless, but we believe to cover the ones that make the most sense for most people. But, if are more adventurous, please feel free to explore, as the rewards can be great. If you are new to investing, or want to know about the terms we use here I highly suggest you pick up a copy of "Getting started in Stocks" by Alvin D. Hall. It covers the terminology and covers the basics of investing including mutual funds.
Our thoughts are that the more we can save tax free the better. We believe that the majority of our long term (20+ years) investments should be in a tax sheltered accounts like 401ks and IRAs with low cost providers like Fidelity or Vanguard. For medium term (5 to 20 years) should be in taxable brokerage accounts with low cost providers like Fidelity or Vanguard. The idea is start with the long term account now and as your situation improves; add to your holdings with a taxable account to handle savings for home, college and other large expenses without ever, ever touching the long term accounts for any reason. I can not tell you how many of my coworkers ended up working longer, because they could not keep from borrowing from their 401k plan.
If you have a 401k plan at work that matches funds with what you invest, then this should be your first choice. Any time someone wants to give you money, take it! Be watchful of 401ks that require investment in company stock only. No matter how good your company is, it is not wise to keep all of your eggs (money) in one basket. Depending on your age and your risk tolerance should determine just how diversified your investments should be. Believe me when I say a lot of people in the last few years have found just how risk tolerant they really were. The better 401ks allow varied investments over a wide range. Many however restrict you to mutual funds only. To round out your investments we suggest that some or all of your investments beyond the matching funds should be placed in IRA brokerage accounts with a low cost provider. Once you are putting the maximum in your IRAs then go back to the 401k and keep increasing your investment to the maximum that is allowed or what your budget can stand. Remember the faster you save the sooner you can be a millionaire.

Which type of IRA is for you? That is a difficult question to answer. The answer depends on your situation. If you are not self-employed then you should look at a Roth IRA, as it not only grows tax free, but when you go to take the money out it comes out tax free. A fact that the government can raise taxes after you retire can greatly affect your income. With some or all of your retirement income coming from tax free sources softens this negative effect. Many people today want to maintain or improve their standard of living upon retirement so a Roth works well in that situation. If you feel that you would prefer to defer taxes while you are working and that you will be in a lower tax bracket upon retirement then a traditional IRA is for you.
If you are self-employed you should look at a SEP or SIMPLE IRA as they let you shelter a good amount of money. But, do not forget the Roth as many can contribute to those in addition to these, thus increasing your savings capabilities.
If you are approaching 50 be aware that the maximum limits for IRAs increase significantly and you should plan accordingly to take the most advantage of that. Many people like me have taken early retirement and have started businesses that allow for many extra tax deductions and allow investment in SEPs or SIMPLE IRAs.
Some ask us, in a down market like we have seen the last few years, where do I invest my money safely. When you invest in the long term you should be less concerned about short of small downturns. But remember this; you are the only one that cares about your money. Do not let any financial advisor tell you different. If you are like a lot of people who sat by their phone waiting for the call from them to tell them it is time to get out, never got that call. Only you can say when it is time to get out or change your investments to soften the blow. I strongly suggest that you take the time to educate yourself in balancing your investments and how to set stops (points to move your investments from growth to income). People in this last downturn that took the bull by the horns and moved from mainly stocks to bonds or mortgage based securities did quite well. Next time it may be different, it is up to you to decide and make that move before it is too late.

References:
Below are items and tools regarding finances and saving. We state throughout the site that you should not rely on any one information source when it comes to your financial health. Please use these tools and references as they can give you another perspective and more detailed information. To assist you we have included links to amazon.com so that can purchase the books and programs we recommend. Just click on the image, link or button.

Excel Spreadsheet Used in Example 1 Above

Getting Started in Stocks

Suggested Reference Web Links:

Our online store

http://www.rothira.com Roth IRA Information Site

http://www.fidelity.com Fidelity Investments

http://www.vanguard.com Vanguard Mutual Funds

http://www.stockcharts.com Stock Charting