A million dollars is a lot of money. Of course, due to the effects of inflation, a million dollars doesn’t go as far as it used to, but it’s a nice round number and an excellent initial goal for anyone trying to obtain financial independence. If you manage to save up $1 million in liquid assets by age 40, you will be doing well.
Millionaire by 40 is achievable
Although saving up a million dollars by age 40 sounds like a formidable task, it’s actually quite reasonable if you obtain a marketable skill and start saving as soon as possible. Let’s look at the math.
Choose your education carefully
Suppose you attend your state university and complete a degree in accounting. You paid for the degree yourself and didn’t work during school, so you have $40,000 in student loan debt along with your diploma. Notice that this is becoming the norm.
Get out of debt
Your first task is to get out of debt. Suppose your salary at your first job at age 22 is around $50,000. You will pay around $10,000 in federal taxes (Social Security, Medicare, and federal income taxes), which leaves a take-home pay of around $40,000. You’re single and don’t need the fanciest apartment in the city, so you live on $25,000 per year and knock out your loans in 3 years. Good work!
Another person enters the picture
At age 25, now debt free, you get married. Your significant other followed a similar path, perhaps pursuing a degree in nursing. You both have some years of experience, so your salaries increase to $60,000 per year. Combined, your household income is now $120,000 per year. Starting at age 25, you each max out your 401k’s ($18,000 /year/person) and Roth IRAs ($5500/year/person). Therefore, you’re saving $47,000 per year for 15 years (age 25 to age 40).
Since you are maxing out your 401k’s, your taxable income is only $84,000 and now you are married filing jointly, so you are paying around $18,000 in federal taxes. That leaves approximately $55,000 per year for living expenses, which incidentally is around the average household spending.
Saving early and often brings big rewards
After saving $47,000 per year for 15 years and investing it in something simple like a target date fund that might return a conservative 4% above inflation, you will have $1 million.
Caveats
Of course, this scenario is highly simplified. It ignores state income taxes and assumes that your salary doesn’t increase at all over those 15 years (unlikely). It also assumes that both you and your significant other will continue to work during those years. The math would be more challenging if kids and a stay-at-home spouse enter into the picture.
Nonetheless, this exercise shows the value in getting your financial act together early in life and contributing a reasonable amount each year.
Take Action
If you’re reading this in high school or college, congratulations. You can be a millionaire by 40.
If you’re reading this at 40 and you have nothing saved, it’s never too late. You can go back and get a marketable skill and the math will work the same way, albeit delayed by around 20 years. Millionaire by 60 isn’t so bad either. After all, the average retirement savings at age 60 is around $150,000.
Summary
Becoming a millionaire by 40 is not a pipe dream. It is entirely possible if you gain a marketable skill, get out of debt, live a modest lifestyle, and max out your 401k’s and Roth IRA’s. Plan for success and then go out and get it.
Nice article and a great goal for people to strive for. $1M produces 40K a year or so and that can allow some options. Some might like to change careers, take time off, travel, spend more time with kids, etc. Having that much cash or cash flow provides options and choices.
Reaching that milestone in a medical career is particularly easy given the (so far) high incomes provided. A decent automated savings program and simple investment strategy should get virtually everybody there.
For those in medicine, millionaire by 40 might be a more challenging goal due to the debt load and significantly delayed earnings. For a typical physician with $200,000 in debt and a $250,000 income starting at age 32 after residency, you would pay around $70,000 in taxes if married. That would leave $180,000 per year take-home pay. If you live on $60,000 per year, you could pay off your debt in 2 years at age 34. That would leave 6 years of saving $120,000 per year, which at real return of 4% would only yield $800,000. If you get out of residency earlier, earn a larger income, have less debt, have a spouse which earns a significant income, or invest during a significant bull market, you might be able to become a millionaire by 40. As I understand, both Physician on Fire and White Coat Investor were both millionaires (or multimillionaires) by age 40.
The original working title for The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing was Millionaire by 40. That’s why the first three chapters are so focused on millionaires. My blog readers who reviewed the manuscript talked me into the more boring (but better for branding and selling books) title above.
My wife and I actually hit the 7 figure mark when I was 38 and she was 35. That was 7 years out of residency for me, and I averaged an income of $180K over those 7 years. I think our net worth was a very low 5 figure amount upon residency graduation.
There’s a lot that goes into reaching a net worth of $1 Million that someone contemplating it might not consider:
1) Your savings
2) The earnings on your savings
3) Paying off debt
4) Appreciation of assets
5) Development of a business
It really starts snowballing after a while, but getting back to even is huge and so is that first $10k and $100K. All of a sudden your money starts working just as hard as you do.
Money works hard, but I’m still struck by how much money you actually have to save to make any sort of real money. At a dividend yield of 2%, you need nearly $3 million to spin off a typical middle class $60,000 income. A physician income would require over $10 million.
A better strategy is to do what you have done and create a business that earns a much higher yield per dollar invested. That’s the American dream for sure.
Great post! I think it’s important to get yourself together young. It really does make a difference. I always say forget the fancy clothes, cars and homes. Get the money first and then you can do what you want.
Thanks,
GBM