Who Wants to Be a Millionaire?

Mr. Dyer, Teacher Staff Writer

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“A dollar doesn’t buy what it used to.”  

Have you ever heard that statement before?  It’s true, all because of inflation (the gradual increase in the overall price of goods over time).  Go home tonight and ask your parents how much a gallon of gas cost when they were 16. I bet it was less than a dollar, or very close to it!  

So what does inflation have to do with you becoming a millionaire?  Everything! Inflation erodes the power of your savings over time and is the single most important thing to consider when saving and investing.  What can you do? Keep reading to find out the five easy steps to reaching a million and win the fight against inflation!

 

#1 – Start Early

As a teenager, you have a huge advantage over your parents, teachers, and your boss.  That advantage is time. The more time you have until retirement the more money you can amass.  Time is something we can’t make more of; we only can spend it wisely! Look at the scenario below to see the advantage of starting to save and invest early:

Scott and Nick were friends who grew up together. They both knew they needed to start thinking about the future. At age 25, Scott decided to invest $2,400 ($200 a month) every year for 40 years. He picked investment funds that averaged a 9.5% interest rate.*

Now Nick didn’t start investing until age 35. Just like Scott, he put $2,400 ($200 a month) into his investment funds every year until he turned 65. He got the same 9.5% interest rate as Scott, but he invested only for 30 years.

When both Scott and Nick turned 65, they decided to compare their investment accounts.

 

Nick (started at 35) Scott (started at 25)
Investment $2,400/year $2,400/year
Number of years investing 30 years 40 years
Interest Rate 9.5% 9.5%
Total Account Value $383,742.71 $1,019,426.64

*The stock market has a historical rate of return of 11%

Wow!  That’s over a $600,000 difference, just for starting 10 years sooner.  Imagine how big the difference could be if you started at age 17 or 18!  The key is the more time you have to allow your savings and investments to grow, the more money you’ll have in the end!  Remember, waiting just means you make less money in the end. So get moving!

 

#2 – Where to Invest

If you want to reach the million-dollar goal, you will need some help.  You can’t just put your money in a cookie jar or stuff it into your mattress.  You need to put it to work! As a teenager, start putting money into a savings account to earn a little interest.  Once you saved enough (around $1,000 or more), you should start to look into opening up an Individual Retirement Account or IRA.  When you open the IRA, you can put your money into several different kinds of mutual funds. These mutual funds will generate considerably higher returns than your basic savings account.  This is where your money really starts to grow. The mutual funds invest in hundreds of stocks, ownership in companies, to provide those high returns. They also take advantage of reinvested dividends to keep your account growing.  

Once you graduate from high school or college and you start your career, you should immediately open a 401(k) or 403(b) plan with your employer.  These accounts will empower your money to do more for you in reaching your goal.

 

#3 – Your Boss Wants to Help

 

If your job offers a 401(k) plan as part of its benefits package, your employer may offer to match your contributions up to a certain percentage of your salary. This 401(k) match can boost your retirement income by thousands of dollars, and you won’t have to pay any extra income taxes this year. Many employers choose to match employees’ contributions to their 401(k) accounts in order to incentivize retirement saving. While the money employers contribute can’t be used until retirement, this can be thousands of dollars per year, and should be taken advantage of, if offered.

That’s free money your boss is offering, not taking it could result in not achieving your financial goals later in life.  Now your employer may impose some requirements, as you need to work for them for at least 5 years or more. Offering matching contributions is one of the most desired benefits potential employees look for in an employer.

#4 – Being Disciplined

Now that you know about some of the powerful savings tools, where do you get the extra cash to invest? The first place to start is your budget. Match your monthly income with your expenses for the month. Can you cut back on your dining out? Do you really need that manicure once a week? Can you save money on your current insurance? Try shopping around for other carriers for better rates.

After you’ve extracted expenses from the budget, there are three keys to making your million dollars. First, as we already mentioned, you must take advantage of any type of employer match program. If you have a 401(k) plan at work and the employer matches up to 6% of your pay, you should contribute at least 6% of your pretax income to the plan. Second, set up your accounts on an automatic investment plan, so that a portion of each monthly income goes directly to savings. Lastly, choose your savings plans to maximize the power of your investments.

Fighting the urge to spend money on things that don’t help you get to your goal will derail you saving plan.  Having that personal discipline will allow you to reach your goals on time.

 

#5 – Reaching $1,000,000

As your income increases throughout your career, you can contribute more than the $200 a month.  This will accelerate your savings rate and enable you to reach your goal even sooner. It does take a little patience and discipline.  This is not a “get rich” model but a methodical purposeful plan to reaching your goal. In addition, who knows, when you come back for your 40-year high school reunion, you can come back as a millionaire!

 

Disclaimers and References:

As with any investment a certain level of risk exists and you could lose some or all your investments.  The past performance of any investment is not indicative of future results. To learn more about your money, enroll in a Business Education class soon!  Consult a tax professional or investment professional for full guidance and support.

 

All calculations were generated on www.sec.gov and are for descriptive purposes only.