The Difference Between $1 and $1Million is Not $999,999

The days of tucking away dollar after dollar has far been over for those who have ‘greener’ grass than the rest of us. I’d say it’s not for lack of trying, effort or intent that so many of us fall from having a savings account that’s larger than the pile of debt we have to pay off. The difference between success and ‘getting by’ may very well be the few percentage differences we gain on our investments.

I’d be remiss in telling you that investments are the answer; however, investments are part of the answer. Combining financial well-being and decision making into your life, plus investing wisely, will genuinely steward you into a heftier future bank account versus not doing so.

So let’s get to the punchline. One dollar today is not, and will not be equal to a dollar tomorrow. A dollar today is worth more than a dollar a year from now because of its ability to generate income, interest and/or opportunity. By and large, a dollar that sits in a CD at a bank will make you roughly 1% for every year you hold, considering average bank deposit rates in 2014; Parallel to that, that same dollar in a brokered investment account can make you (on average, S&P Historical) 10% for every year you hold.  Of course, the major difference between these two is the fact that you can stand to lose your entire dollar if you decide to invest versus having it insured in a bank deposit.

So what really is the difference between $1 and $1 Million? In the instance of a 35 year old person, your $999,999 may look a lot more like $93,662.94*. Of course this depends on a lot of things, but one thing is for sure, the earlier you start investing your money, the stronger your returns have the potential of becoming. Let’s identify a few factors that will increase your future piggy bank. Think of it this way, you can increase ANY of these levers and it will generate much more income for you in the long run.

·         Time (how long you are invested for)

·         Dollars invested (how much you are investing)

·         Contribution rate (how much are you adding per year)

·         Return rate (how much you are making on your investments each year)

But wait, you don’t have $93,662 to invest in today... How do you get there? Utilize your current contributions to get you up to speed. You are allowed to contribute up to $17,500 per year into your 401k. So let’s take this $93,662 and rework it backwards. With the same assumption of 7% annual returns and your company matches 100% of the first 3% of your contributions, you could start from $0 and be at the $93,662 by the end of 13 years if you were a person making $50,000 a year making 6% contributions to your 401k. Although this may sound like a lot, it certainly is a sacrifice that you could make for the betterment of your financial future; especially if you haven't started just yet. You have nowhere to go, but up.

Also, if you’re 60 years old and are staring blankly at the screen, start doing research on ‘catch-up contributions’. This will give you a great understanding on how you can start building your nest egg up to help transition you to retirement. The government understands that some of us were not in a position to maximize our investment returns in the past, but has enabled individuals to make the best of what they do have, today.

Have questions? Get started now by emailing me at tom@exploringalpha.com. 

No money, no obligation, just answers.

*Assuming annual returns of 7% over 35 years (to the age of 70 for retirement)