You’ll hear me talking about saving money over, and over, and over again. It’s because that’s where many Americans get stuck in getting their finances on track. Learning how to keep money in your pocket is an integral part of wealth-building, it’s true. But frugal as you may be, it simply is not enough. You can save 50 cents of every dollar you get (assuming you’re mortal and need to eat), but that will not make you financially secure. In fact, saving money alone can leave you with less than what you saved. It’s absolutely necessary that you make your money work for you.
Many people use the million dollar threshold as a metric for wealth. We’ll also use it here, for illustrative purposes.
Do you know what it actually takes to be a millionaire? Say you’ve been the King/Queen Of Frugal, and you’ve significantly cut your spending. You have an extra $1000 monthly that you can save. You’ve built your emergency fund, but you don’t know how to invest, so you continue putting that $1000 away into savings. We’ve seen how inflation will kill your purchasing power in a savings account, but even if we leave that out, how long will it take to save a million dollars?
The answer is 63 years.
Using a savings account or other low yield, “safe space” for your money is going to take you just about your entire adult life, maybe longer, to save a million dollars. If you’re old enough to be reading this investment blog and you’re just now thinking about it, you’re probably a little late getting started. But wait, don’t start feeling bad. I have good news. Here’s what happens when you save that same $1000 monthly, and then instead of letting it lose value in a savings account or CD, you make it do some heavy lifting.
That brings you down to just under 25 years. Way more doable, don’t you agree? Imagine if you can save more or get even average returns. Or there’s one of those beautiful market dips that allows you (or your investment advisor) to buy wonderful companies at fair prices. Having a million dollar liquid net worth doesn’t seem quite so unattainable.
This is what I mean when I harp about “putting your money to work for you”. Being wealthy doesn’t generally come from shoving your cash into a mattress. It’s true that you must learn how to live within your means and save money before you can invest, but that’s just the beginning. Appropriate risksmust be taken in order to be successful. You must make money on your money in order to be financially free. To get a better understanding of the concept of investing, check out When Life Hands You Lemons: A Tale For Beginning Investors, then 10 Steps To Start Investing.