Reaching a cool $1 million is a major financial goal that many people aspire to, and for very good reason.
While being a millionaire doesn’t necessarily guarantee you financial success for life, having access to that kind of coin certainly provides a measure of stability and freedom.
So Colin Williams from humblesavers.com.au offers a few simple, realistic savings tips to help you achieve this very goal.
“If you saved just $1 per day, it would take one million days to reach a $1 million if you didn’t receive any investment earnings along the way. This is the equivalent to 143,000 weeks and 2,738 years!” he says.
Therefore, to reach a bank balance of $1 million before retirement, you’re going to have to seriously consider how much you can save and understand the benefit of receiving some investment earnings.
“These tips obviously don’t take into account the effect of tax, or recommend one investment asset over another,” he points out. “They simply break down the facts to give you a practical guide of reaching the magic $1 million mark.”
Tip # 1: Commit to a savings plan
Ideally, you want to kick off your savings regime with a decent deposit of $10,000 or more, but even $500 or $1,000 is a great place to start. Whatever your original bank balance, the important thing is to commit to a regular savings plan – whether it’s weekly, fortnightly or monthly – to ensure your balance continues to grow.
Tip # 2: Leverage compounding interest
Make sure you park your funds in a savings account that takes advantage of the snowball effect of compound interest. “Essentially, compound interest is the benefit of interest on interest,” Williams says. “It works like this. You start with a lump sum of say $100 and earn 10% interest, which equals $10 in interest to you. Your new total is $110. You now invest the new amount ($110) and earn another 10%, earning $11 ($110 at 10% = $11). This keeps repeating itself and creates a snowballing effect.”
Tip #3: Consider your risk profile
Chasing higher earnings can result in profitable lump sums that boost your account balance, but it will mean taking greater risks. “We have all seen where that can lead to, with some share and property asset values collapsing in recent years,” Williams says. “As a rule of thumb, the longer the time frame you have without needing access to your savings, the more risk you can afford to take with assets like shares and property.” Ultimately, however, you need to settle on a level of risk that you’re comfortable with – which means it may take a little longer to reach your goal.
Tip #4: Don’t forget inflation
While inflation will impact the real future value (or purchasing power) of your $1 million, it may also have the impact of increasing your income and thus helping you reach seven figures even sooner. An inflation rate of 3% sees an average annual income of $60,000 increase by around $1,800 in one year, which is extra money in the bank earning interest, thereby inching you one step closer to the magic million.
Tip #5: Be weary of putting all your eggs in one basket
“Diversifying investments into different asset sectors by having a mix of shares, property and cash investments can reduce your overall investment risk,” Williams says. And remember that slow and steady wins the race: “While warnings about scams are constantly in the news, people still keep falling for them and losing their hard earned savings. Remember these two things: one, if you don’t understand it, don’t do it, and two, if it sounds too good to be true, it probably is.”