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Word Gems 

exploring self-realization, sacred personhood, and full humanity

Part II:

Yes, You Can Save $1 Million!

 

How The Average American Family

Can Save $1 Million In Only 15 Years

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The goal of accumulating $1 million should not be seen as a flight of acquisitiveness.

It takes a lot of money to maintain even a middle-class lifestyle these days. I suggest that anyone contemplating a comfortable, independent, and dignified retirement would be well advised to consider $1 million as a savings goal.

"Yeah, sure," you might be thinking, "how can I save a million bucks?"

Well, I want to encourage you with the knowledge that saving $1 million is not so unlikely as you might think.

In fact, if you don't delay and start the process today, I think you'll be surprised that this substantial savings goal is not only possible but, indeed, likely -- if you enlist the services of a certain friend.

Make the Power of Compounding Your Ally

You'll need to make friends with this force in order to reach your financial goals.

Saving money is hard for everyone - and many people are discouraged about saving for the future because it seems to be an impossible goal - but I think more people would make the sacrifice to save if they had a clear plan, one that made sense to them.

• I've written a sister-article on the subject of reducing debt, an important issue to address before fully embarking upon a wealth-building program - it would be ideal if you could read that information before continuing with this report: How The Average American Family Can Wipe Out All Of Their Debt - Credit Cards, Car Loans, and Home Mortgage - In Only 7 To 9 Years!

Yes, You Can Save $1 Million! ... if you start today, even if you can save only a very little.

I'm talking about attitude here.

Most people don't start saving because, "I just don't have any extra money to save!"

Well, here's a bit of advice: Almost everybody feels this way, no matter what their income is.

Saving is always hard - because it requires sacrificing current consumption in favor of future needs. It's hard because we have unlimited wants chasing limited resources - that's a bad match.

What I'm trying to encourage you to see is this:

Don't let lack of money stop you from starting a savings plan.

the Longest Journey Starts With A Single Step

In my debt-reduction article I discuss how to find the extra money in your budget to become debt-free. But even before you get into that, begin to save something each month. I don't care if it's 5 bucks, or one dollar, just begin the process.

Open a savings account at a bank that has no minimum balance requirement or maintaintence fee. Vanguard pays a good interest rate with no minimum balance.

Why save if you only have 5 bucks?

Because it will change your attitude.

As your savings begin to grow, you will notice, in yourself, be it ever so slight, a rising sense of independence, of autonomy, and self-respect.

And here's what will happen next.

You will like this feeling - of power over your own life. And if you catch the vision of what a measure of worldly substance might mean to your destiny, you will never want to go back to the old ways of summarily "consuming" whatever comes into your hand - you will find that saving and investing can be a lot more fun than consuming.

Your Next Move Will Surprise You...

General McClellan, during the beginning stages of the Civil War, dispatched a note to President Lincoln, assuring the Commander-in-Chief that, despite the general's do-nothing approach, "My next move will surprise you."

Lincoln, upon receiving the missive, is reported to have lamented, "Any move would surprise me!"

Well, maybe you feel something like that about your own prospects to help yourself financially. Maybe you can't quite see yourself moving on this goal.

Right now, maybe I'm more ambitious for you than you are for yourself, but I am encouraging you to start a savings program -- just start it! Even if it's $5 a month or a dollar. You'll be surprised at what happens next.

Once you taste the sweetness of even the possibility of living life on your own terms, the possibility of economic freedom -- which comes with a price-tag -- you will begin to realize a change in yourself. You will discover motivation, means, and methods previously unknown to you.

The answer to the question of how will any of this be possible for you is:

You will find a way to save more.

You will find a way to arrange your life to be able to invest more in your own future.

OK, that's my good word for the day. Read my article How The Average American Family Can Wipe Out All Of Their Debt - Credit Cards, Car Loans, and Home Mortgage - In Only 7 To 9 Years!  

Let's move on to the mechanics.

How Even Small Savings Can Become $1 Million

To offer you a glimpse of what I'm talking about, here's an eye-opening example:

save $3 per day @ 12% for 40 years = $1 million

It's amazing, isn't it.

How many people waste $3 a day? It's too bad because those little amounts could add up to a mountain of wealth over one's lifetime.

What Is Compounding, Anyway?

Let's define a few terms.

"Simple Return" vs. "Compounded Return"

Suppose you buy a 10-year $1,000 bond paying you 10% interest. You would receive $100 interest each year for 10 years offering you a total 10-year interest income of $1,000 (10 years x $100 per year).

This is an example of a "simple" return.

But a "compounded" return is different.

Consider again the situation above, but, this time, at the end of each year, the $100 will be reinvested, added to principal.

For example, at the end of year #1, $100 is added to the $1,000 principle amount allowing us to earn interest on $1,100 during year #2. This process continues for each of the 10 years.

Here's a chart to help:

$1,000 principal growing @10%

Notice that a compounded return offers you $594 more than a simple return. That's 59% more money for you! ($1,594 vs. $1,000)

So, what's compounding?

It’s money multiplying itself! Compounding is a process of generating earnings, reinvesting those earnings to generate more earnings, and on and on.

It's a snowball effect. It's what happens when you add this year's interest, dividends, or earnings to what you already have. This ever-increasing principal amount means that next year's returns will be even bigger -- and bigger the year after that.

The process can begin so slowly that we can be easily beguiled into thinking nothing important is happening. It’s sort of like David Copperfield the magician who distracts his audience with showmanship while executing his serious business of sleight-of-hand.

Compounding can be like that. The slow action at the start of the compounding process is like a magician’s smoke screens, mirrors, and fluttering doves -- all manner of distracting devices and red herrings to divert attention from the real action, that which really builds wealth.

And so often, many of us distract ourselves – we chase the latest “hot tip” from friends, the one that might double our money quickly – if we only understood where the real money is made and how the great investors do it, we would never be tempted by “hot tips.”

The Magic Multiplying Penny

Consider this example – and be amazed. It’s an extreme example of compounding but it illustrates a vital point:

Start with one penny on Day #1.

Double the amount every day for another 29 days.

On Day #2 you would have 2 cents; on Day #3, 4 cents; on Day #4, 8 cents.

How much would you have on Day #30?

Take a quick guess -- most people might guess 5 bucks, 10 bucks, something like that.

You will be more than a little surprised to learn that on Day #30 the lowly 1 cent has become $10.7 million!

doubling a penny for 30 days = $10.7 million

The process begins very slowly -- deceptively slowly.

By Day #10 you have only $10.24. Imagine that! One-third of the 30 days has gone by and you’ve earned a lousy ten bucks! – how are you ever going to make it to $10.7 million?

Even by Day #15 you would have only a pitiful $327.68 – this is not looking good.

On Day #17 you finally cross the $1000 mark with $1310.72 – but still so far away and nothing to get too excited about.

Three days later on Day #20 we have close to ten times our money -- $10,485.76. Still unbelievers with two-thirds of the time elapsed, we offer a wan smile as we contemplate the fairy tale of $10.7 million.

But suddenly things start to pop.

Four days later on Day #24 we breach the $100K barrier with $167,772.16. Wow!!

This is definitely becoming more interesting -- but with only 6 days to go, how can we hit $10.7 million?

Three days later on Day #27 we are amazed to see ourselves zoom right through the million dollar threshold – it’s now $1.3 million!

We are about to become true believers! The sun is starting to shine, birds are singing.

Day #28 hits $2.68 million.

On Day #29 it’s $5.3 million.

And, finally, we are nonplussed to discover $10.7 million on Day #30!!

As I said before:

Even Small Savings Can Become $1 Million

Here's the best example I know of regarding saving early in life -- it's the story of two young people, Jane and John.

Jane enters the work force at age 19. She scrimps and saves $2000 a year for 8 years and then becomes a stay-at-home Mom and does not put any more money away.

19-year-old John is working too -- but, you know how it is, he's a little tapped out right now [smile]. His lack of bread continues until age 27 when he finally sees that he should put a bit away for a rainy day.

John then saves $2000 a year until retirement at age 65, almost 40 years of saving.

Who will have the most money at age 65?

Of course, it'll be John, right? How could it not be John if he saves for almost 40 years while Jane saved for only 8?

Incredibly, Jane's dearest friend, Mr. Compounding, helps her win the race -- and by a wide margin!

savings compounding @ 10%

One of the major principles becomes:

• Above all, begin to save early -- especially if you can't save much.

Compounding needs time to work its magic -- time is worth much more than saving larger amounts. Yes, save a lot if you can -- but, in any case, save early!

The Rule of 72

• "I don't know what the Seven Wonders of the World are, but I know what the eighth wonder is -- compound interest."  Baron Rothschild

• "...'tis the stone that will turn all your lead into gold.... Remember that money is of a prolific generating nature. Money can beget money, and its offspring can beget more." Benjamin Franklin

Compounding is all about doubling our money.

The Rule of 72 tells us how long it takes money to double at a certain rate of return.

For example, a 5% return doubles money in 14.4 years. Divide 72 by 5 = 14.4.

A 12% return doubles money in 6 years. Divide 72 by 12 = 6.

In our example of the multiplying penny, our doubling period was one day. Of course, we can't expect a 100% daily return. But the Rule of 72 will help us find the doubling period of normal returns – and with this info it’s much easier to project how our wealth will grow.

For example, if we can earn 12% on an investment, in 25 years there will be roughly 4 doubling periods. Why? Because 72 divided by 12 = 6, that is, our money will take 6 years to double if it's growing at 12%; and there are a bit more than four 6-year periods in 25 years. This means that $100,000 left to compound for 25 years at 12% will double 4 times: $100,000 to $200,000 = 1 double; $200,000 to $400,000 = 2nd double; $400,000 to $800,000 = 3rd double; $800,000 to $1.6 million = 4th double.

We all can guess that earning 12% is better than earning 8% -- but the Rule of 72 helps us to see this in dramatic terms. Higher rates of return offer extra doubling periods over time. For example, an 8% return on $100,000 over 25 years would offer only about 3 doubles – and (see above) that one extra double, the 4th double, is worth $800,000!!

Higher-than-average rates of return – because of the extra doubling periods -- can produce gigantic results over time.

For over 30 years, the book value of Warren Buffett's holding company, Berkshire Hathaway, has grown at a 20%+ compound annual rate. A $1,000 investment in Buffett's portfolio, over 30 years, would grow to over $500,000. Now you know the secret of how Mr. Buffett found his way near to the top of the Forbes 400. Buffett is all about harnessing the power of compounding.

According to Mr. Buffett:

• The compounding earnings of one very good company can be the foundation of a family fortune. Consider the growth record of Coca-Cola: "Coke went public in 1919 at $40 per share. By the end of 1920 the market, coldly reevaluating Coke's future prospects, had battered the stock down by more than 50%, to $19.50. At yearend 1993, that single share, with dividends reinvested, was worth more than $2.1 million." [By 1997 the value of that single $40 share of 1919 had reached a value of about $5 million.] Berkshire Hathaway 1993 Annual Report

Here’s what Mr. Buffett’s partner, Charlie Munger, had to say:

• "There are huge advantages for an individual to get into a position where you make a few great investments and just sit back... it's much better to depend on compounding than on market timing.”

One more example of saving early:

Are there young children, or even a newborn, in your family? maybe, a grandchild?

• If you were to set aside $1000 growing @ 12% for that little one, in 60 years she would have $1.3 million!

"But, Wayne!

What if I don't have many years to save?

Can I still make it to $1 million?"

You have a lot of company. But, take heart to know that even if you're not far from retirement, you can still put a big dent in that $1 million.

If you start late, you might have to work a few more years to let Mr. Compounding perform his services, but you can still earn a million.

Consider this next major principle:

• If you can't save early, save as much as you can now -- and, at the highest, but safest, rate that you can find.

One academic study reports:

• A. Michael Keppler, Journal of Portfolio Management , Winter, 1991 : study of high-yield stocks in 18 different countries over 20 years, 1969 through 1989. The best investment category was the highest yielding stocks, averaging 19.08% in US dollars. The lowest yielding stocks did the poorest with a 20-year average of only 5.74%

It's best not to plan for a 19% return for 20 years -- but somewhere in the 10% to 15% range should be possible.

Editor's note: I recall a comment from Forbes money manager, David Dreman, a wise man, who said, to the effect, "It's far easier to achieve a 12% return than most people think. It's also far more difficult than people know to earn more than that consistently." Why is it not so hard to hit 12%? If you stay with good quality companies whose cash dividend yields are around 5% or 6%, now you're already half way there. And if you're choosing good companies with decent earnings, say, about 5% to 7% a year, which is not uncommon, this means that the share price, on average, will rise about 5% to 7% a year. It's called total return: dividend plus earnings-driven share-price appreciation, and there's your 12% a year.

Let's look at what different rates of return might do for you over different time periods.

We'll assume that you'll be saving $1,000 per month. If you can save $2000, double the final result -- if you're saving $500 a month, divide the end result by 2.

Saving $1,000 a month

As you can see from the chart, $1,000 per month equals $1 million in about 20 years.

To reach the goal in 15 years, save $2000 a month.

In my article, How The Average American Family Can Wipe Out All Of Their Debt - Credit Cards, Car Loans, and Home Mortgage - In Only 7 To 9 Years,  I explain how it's quite possible, with diligence and effort, to create an "extra" $2,000 per month for you to save.

That might seem unlikely to you now, but, with some cost-cutting plus elimination of debt, you can free-up that $2,000 in your budget, which will form the basis of amassing $1 million for yourself in 15 years!

• Apotheosis: Morphing yourself into a financially independent new you! 
   

The ancient Greeks had a special word, apotheosis, for their idea of ultimate success in life. For them, nothing could be greater than for a mortal to be elevated to the status of Olympian godhood.

Now I'm not suggesting that one day your friends will visit you on Mt. Olympus. I'm talking about apotheosis American-style, the transforming of yourself from what may be today's modest means and circumstance into the beginnings of formidable wealth.

Could it happen? You bet.

All it takes is a disciplined savings program, Mr. Compounding -- and throw in 10, or 20, or 30 years of good effort -- and apotheosis will be yours. You will find yourself in a financially elevated position, the sweet fruit of years of work and saving, all of which will ever-after separate you from those who made other choices in life.

My advice, especially to young adults, is to put "financial freedom" at the top of your "to buy" list.

We are all tempted to splurge on that new car or fancy stereo system or cruise to the Bahamas. But I encourage you to buy freedom first. Be happy with a decent used car and save two-thirds the price of a new one; forget Bermuda (for now) and take a walk in the park or read a good book.

Above all, avoid poverty-producing credit card debt. Consider "lottery-ticket" a dirty word. Follow your savings plan like a strict cult religion [smile].

Decide how much you want to have in 15 or 20 or 30 years, enough to win for yourself financial independence. Invest at least 10% of your income, and work with your budget to eventually save 20% or more of what you earn.

It's quite possible.

Whether you are 25 -- or staring at age 65 coming up fast -- start your savings plan today!

Yes, today! ... because weeks and months matter when it comes to our very good friend Mr. Compounding, and he has no sense of humor about procrastination.

Yes! You Can Save $1 Million!