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A lot of people aim to save $1 million by the time they retire. And seeing as how many people have a 40-year (or longer) career, that’s certainly doable. Accumulating $1 million by age 40 isn’t nearly as easy. But with the right savings strategy, it absolutely can be done.
The nice thing about reaching the $1 million mark by 40 is the freedom and peace of mind it gives you. Having $1 million to your name could make it possible to ditch a job or career you’re unhappy with and pursue one you’re more passionate about. It could also mean worrying less about retirement or stressing less about unplanned expenses.
Now, it’s important to be realistic about hitting $1 million by age 40. It’s doable on a decent salary, but probably not if you’re earning minimum wage. Similarly, if you earn $90,000 a year but live frugally, you can reasonably get to $1 million by 40. A $45,000 salary is well beyond minimum wage, but it’s probably not enough to save $1 million by 40. This doesn’t mean you can’t save a nice amount by that age. But you also don’t want to set yourself up for disappointment.
With all of this in mind, here’s how to grow your savings to $1 million by the time age 40 arrives.
1. Keep your largest expenses as low as possible
Housing and transportation are the two largest expenses many people pay for each month. Keeping these on the low side relative to your income could free up lots of money for your savings, making it possible to reach $1 million by age 40.
The general advice with housing is to keep your costs to 30% of your take-home pay or less. But if you’re able to spend just 12% of your income on rent, even better.
Similarly, you might need a car to commute to work and live your life. But if a vehicle with a $450 monthly payment achieves that goal, don’t sign up for one that costs $750 per month.
2. Put your savings on autopilot
Following a strict budget is a good way to save a lot of money, but it can also be stressful. If you’re already doing a good job of keeping your largest expenses low, rather than budget down to the penny, put your savings on autopilot.
Set up automatic contributions to different accounts, like savings, a brokerage account, or a retirement plan like an IRA or 401(k). Once you know these accounts are being funded, you’re more free to spend your money on expenses and leisure without having to worry about falling short of your goals.
3. Start investing your money as early as possible
You probably aren’t going to get to $1 million in savings by age 40 if you keep all of your money in the bank. But if you start investing your money early on, you may be surprised at how easy it is to get there.
Let’s say you’re able to save $2,000 a month. And before you say, “Hey, that’s impossible,” if you earn $90,000 a year, contributing $23,000 a year to max out your 401(k) may be doable if you’re taking the steps above, especially since that $23,000 goes in on a pre-tax basis.
And if you contribute a little over $1,900 (today’s max) per month to a 401(k) between ages 22 and 40, all the while generating an annual 10% return in your account, which is consistent with the stock market’s average, you’re looking at a balance of a little more than $1 million after those 18 years.
At $90,000 per year, you’re then left with $67,000 to spend on expenses, or close to $5,600 per month. And while that $5,600 is pre-tax, you may be able to make it work if you have cheap rent and drive an inexpensive car.
To be clear, saving $1 million by age 40 requires some strategy and sacrifice on your part. And yes, it does require earning a decent income. There’s no getting around that.
But if you’re earning enough to save a large chunk of your salary each year, you can set yourself up to be very wealthy by the time your 40th birthday arrives. That, in turn, could make the second half of your career less stressful.
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