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Episode 2985:
Fritz Gilbert explores how small financial decisions can significantly impact long-term wealth. By harnessing the power of compound interest, even modest savings can snowball into substantial retirement funds. Whether you're just starting your career or nearing mid-life, strategic saving can transform your financial future and ultimately help you achieve that millionaire milestone.
Read along with the original article(s) here: https://www.theretirementmanifesto.com/56-so-you-want-to-be-a-millionaire/
Quotes to ponder:
"One decision, early in life, compounded over many decades, has a profound impact on your long term financial wealth."
"Recognize the impact your small purchases make when compounded over time."
"Do it long enough, aggressively enough, intentionally enough, and you will become a millionaire."
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[00:00:00] This is Optimal Finance Daily, So You Want To Be A Millionaire by Fritz Gilbert of TheRetirementManifesto.com
[00:00:08] A million dollars, a millionaire, once the dream of the lofty 1% is now a figure everyone should realistically target as a minimum prior to retirement.
[00:00:21] Today's article will focus on this once significant milestone and explain the realities of achieving it for yourself.
[00:00:30] First, a scenario for your consideration. You're 22 years old, have just started working and received a nice $20,000 sign-on bonus. Congratulations!
[00:00:42] You're now trying to decide whether you should buy that new shiny $20,000 car to celebrate your new employment.
[00:00:51] Alternatively, you could keep your college junker for a few more years, milk some life out of it and avoid the expense.
[00:00:59] What's the impact?
[00:01:00] If you don't buy the $20,000 car, but rather park the $20,000 in an investment earning an optimistic 10%, you'll be a millionaire by your mid-60s.
[00:01:13] For only $20,000 today, one decision early in life, compounded over many decades, has a profound impact on your long-term financial wealth.
[00:01:25] I'd also suggest you consider sharing this article with your kids and or grandkids.
[00:01:31] The best personal finance advice in the world is to start young.
[00:01:37] Our new employees' $20,000 would, in fact, turn into $905,186 in 40 years.
[00:01:48] Add a few more years to get to your mid-60s and you'll clear the million-dollar mark.
[00:01:54] So, you're no longer 22 years old, you argue.
[00:01:58] That's no excuse.
[00:02:00] Even if you start at 45, you could turn an achievable $10,000 investment into an additional $67,000 by the time you're 65.
[00:02:11] Do it every year and it becomes real money.
[00:02:13] While a 10% return seems to be a lofty goal, remember the average return for the S&P 500 from 1928 through 2014 is 10%.
[00:02:24] So, it is demonstrated performance on long-term investments.
[00:02:29] One trick for thinking about this.
[00:02:32] Use it to create a, how much is this really costing me factor.
[00:02:37] For example, if you're 45 years old and you want to retire at 65, you could calculate $67,275.
[00:02:47] Divide this by the initial $10,000 and you end up with 6.73.
[00:02:52] To simplify, we'll round it to 7.
[00:02:56] Now, the fun part.
[00:02:57] For anything that you spend money on, you can easily see the true cost to your future self at age 65.
[00:03:05] For example, that $20 shirt you're thinking of buying?
[00:03:08] If you choose not to buy that shirt, your future self will be $140 richer.
[00:03:15] $20 times 7.
[00:03:17] Take a minute and determine a good factor for your situation.
[00:03:21] Then think about it the next time you're tempted to buy something.
[00:03:25] Another interesting way to use this is to cut out a zero.
[00:03:29] Instead of thinking in $10,000 investments, look at it as $1,000.
[00:03:33] For every $1,000 you don't spend in a given year, you'll gain $45,259 in 40 years or $6,727 in 20 years.
[00:03:47] To achieve $1,000 per year, you'll need to find cuts in spending of only $83 a month.
[00:03:54] Cut your cable TV and you'd see that much or more every month, every year.
[00:03:59] Do it for several years, multiply by $6,727 each year, and you can see the impact that relatively small decisions can make on your net worth over time.
[00:04:12] The reality is, you'll likely need a million dollars when you retire, assuming you want to generate $40,000 per year of retirement income from your portfolio.
[00:04:22] Using the 4% rule, a portfolio of $1 million should be able to generate a cash flow of $40,000 per year in your retirement without running out of money.
[00:04:33] Side note, many planners are saying that the 4% rule is too aggressive in today's low interest rate environment,
[00:04:40] and are encouraging folks to use a more conservative 3% assumption as they put together their retirement income plan.
[00:04:46] The reality is that a million dollars ain't what it used to be.
[00:04:51] Using a handy little calculator, you can see what a million dollars in years past is worth today.
[00:04:57] Using 1963 as an example, the year of my birth,
[00:05:01] a million dollars in 1963 is, on an inflation-adjusted basis, equivalent to $7.8 million today.
[00:05:10] You don't need $7.8 million, but you should target a million dollars as an achievable goal.
[00:05:16] It sounds like a lot of money, but in reality, you need a lot of money to support your lifestyle once the paychecks stop flowing.
[00:05:24] The point is this, recognize the impact your small purchases make when compounded over time.
[00:05:31] To quote a Huffington Post article, that $5 cup of Starbucks coffee is costing your future self $225.
[00:05:40] Focus your initial efforts on your repeating expenses, like cable TV, landline phones, magazine subscriptions, etc.
[00:05:49] Track your spending for a month or two. You'll be surprised what you can find.
[00:05:54] Go on a hunt and free up whatever you can to invest on a monthly basis.
[00:05:59] Remember your factor, and be encouraged by recognizing that whatever you save is worth far more to your future self.
[00:06:07] Do it long enough, aggressively enough, intentionally enough, and you will become a millionaire.
[00:06:18] You just listened to the post titled,
[00:06:20] So You Want to Be a Millionaire? by Fritz Gilbert of theretirementmanifesto.com
[00:06:26] When I see calculations like,
[00:06:29] If you didn't spend X and you instead invested it, it will be worth Y in 30 years.
[00:06:35] I typically don't get hung up on the specific numbers.
[00:06:39] The way I see it, these statements are really trying to communicate opportunity cost and the power of compound interest to entice people to spend less and invest more.
[00:06:50] 25% of U.S. adults have no retirement savings at all.
[00:06:54] So as far as I'm concerned, encouraging people to save and invest more is a very good thing.
[00:07:00] However, I think a better way to communicate the advantages of saving and investing more isn't by contemplating how much money you'll have in the future.
[00:07:09] I think it's recognizing the benefits you can get right now.
[00:07:14] Not spending money on luxurious material possessions offers me a lot of peace of mind right now.
[00:07:21] Because I don't own a lot of expensive things.
[00:07:24] I have less things to clean, maintain, and protect.
[00:07:27] And anything lost, stolen, or damaged is really easy to replace.
[00:07:32] Furthermore, by front-loading all of my retirement savings during high-earning years relatively early in my career,
[00:07:39] I can take the foot off the gas in my 30s and enjoy working less.
[00:07:45] Same goes with keeping my overall expenses as low as possible.
[00:07:49] This allows me to work less and spend my time doing the things I really enjoy.
[00:07:54] I'm not sure delayed gratification works well for me.
[00:07:57] So if you're in the same boat, I hope considering all the ways you can benefit from spending less and investing more now is helpful.
[00:08:06] But that'll do it for today.
[00:08:08] Have a great day and weekend.
[00:08:09] And I'll be back here tomorrow where your optimal life awaits.