Who Wants To Be A Millionaire?

32458698_sThe kids love it when Jill goes out at night and I am in charge. The other night, I was in charge of it all, homework, cooking supper and making sure the kids were in bed by 8. Jill does not often trust me with performing these tasks; she even made a delicious lasagna for us (so really, I didn’t need to cook supper, just warm it up). After the kids “promised” (I have heard that one before) that their homework was done, we watched some TV.
Phoebe was in charge of the clicker. As she channel surfed, we came across an episode of “Who Wants to Be a Millionaire?” Remember that show? You know, the one with Regis, the one that has “lifelines” and the “final answer?” I didn’t even know it was still on the air.
I told the girls that I remembered back when the first person on that show finally won a million bucks. It was a big deal, when he gave his “final answer” and became a millionaire in that moment. The girls started talking about how they want to win a million dollars; how cool it would be to be a multimillionaire, or as my Sophie calls it, a gazillionaire.
I sat there on the couch, just thinking about an article I read about becoming a millionaire through a retirement planning strategy. It outlined the amount a person would need to save each month, based on his or her relative age and a 6 percent yearly return, to become a millionaire by age 65.
So, I decided to pause the show for what I tell my kids is a “life lesson” moment; they all roll their eyes at me of course. Anyway, I explained to the kids that the earlier they begin to save, the less they would need to save per month to become a millionaire. In fact, I explained to them that if they each start saving when they are 20 years old, they would each need to save $361 a month to be a millionaire by age 65 (I did not get into the assumptions outlined above with them). I told them that if they wait until they are 25 to start saving, that number jumps to $499, but if they do not start until age 40, well, that monthly number almost triples, to $1,435.
I’ve said it before and I’ll say it again: the most valuable asset in retirement planning is time. The earlier we start, the more successful we are in the long run. The obvious reason for this is that by saving sooner, there are more monthly periods to save, so the percentage of each monthly budget needed to put toward retirement is lower.
But there’s another reason why it is so beneficial to start saving as early as possible. That’s the concept of compounding interest. Compound interest is interest earned not only on the principal of an investment, but on the on the interest already earned on that principal, and then interest on that interest, and so on and so on. Albert Einstein had an interesting way to look at compounding interest. He said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Beyond simply starting early, there are a few other things that you can do to reach that $1 million mark even sooner, especially for those who are just at the beginning of your careers.
One of the most important things to do is to create a budget (I know, you Cutter Family Finance readers have heard me say that many times before). Outline monthly expenses, define discretionary income, and plan to put a specific amount towards retirement every month. And always pay yourself first! When your salary goes up, your retirement contributions should go up as well. At age 25, retirement can seem like a lifetime away, while that concert or that trip to Cabo is just a few weeks out, but do not be short sighted. It takes discipline and dedication, but building a retirement savings contribution into your monthly budget can help even the youngest of investors stay on track to financial success.
Once you start putting that money away, resist the temptation to borrow against it. Even if there is no upfront penalty for withdrawing, if you borrow against your savings, you miss out on the opportunity for that cash to earn compound interest and you could lose the chance to capture valuable market gains.
You should also take advantage of any company plan as early, as often, and as fully as possible. If your company offers a plan, contributing to it is a great way to get started. If the plan offers a company match, that’s free money! You should try to contribute the full amount the company will match. If your company does not offer a specific plan for employees, you can always take the initiative, and contribute to an IRA.
Lastly, it’s important to remember that financial planning is not a “set it and forget it” strategy. Do not create your budget and then stick your head in the sand for the next 45 years. As your financial situation changes, as the market changes, as your goals change, you should be updating your financial plan. Schedule an annual review with a financial planner to make sure you are getting the most from your strategy and are on track to meet your defined goals.
After realizing that we were an hour past their bedtime, I finished our conversation by explaining to my girls that with a little foresight and a bit of dedication, becoming a millionaire does not need to be a pipe dream. It may not be as instantaneous as it is on television, there won’t be any theme music, and certainly no confetti falling from the sky, but a well-planned financial strategy that includes saving at a young age, should be everyone’s “final answer.”
Now you can see why Jill does not trust me with the evening tasks. That’s okay. There is an inherent “don’t ask, don’t tell” policy between the kids and me. Mom doesn’t ask, they don’t tell. Perfect!
Be vigilant and stay alert because you deserve more.