March 17, 2020
By Mitchell Jones
One million dollars. I used to think this was an impossibly large number. Being from a humble Ohio upbringing, this type of wealth sounded like something that could only be achieved by business titans, beneficiaries of large inheritances, and sports stars. However, an internship in finance opened my eyes to see that this was far from the truth.
33% of millionaires have never made six figures in a year, and 69% of millionaires have averaged less than $100,000 in income over the course of their career. By all accounts, these people were normal folks. Not business titans, beneficiaries of large inheritances, or sports stars. What separates these people from so many of us are small decisions they make that turn into very large outcomes.
Most of these people followed the same set of principles in order to create their wealth. It is one of the best kept secrets in the world, and it shouldn't be that way any longer. This article highlights the two key things normal people — or smart Investors — do to make their millions.
Smart Investors save at least 20% of their earned income. Not only do they save it, but they save it in retirement accounts like 401(k)s. The reason this matters is that retirement accounts typically give more interest than savings accounts. Most savings accounts give you less than 1% interest, while retirement accounts typically return anywhere from 7-12%. This matters because that percentage compounds over time (read this if you need a refresher on why compound interest is so important). Meaning the money you make from interest, makes you more money from interest. Not only do these accounts give good investment returns, but they also are tax advantaged, meaning you save money on your taxes as well.
To top it off, some employers even offer a contribution match for every dollar you put in. You can think of it as free money they are giving you to encourage long term investing. If I can stress one thing, do not sleep on the impact of walking away from something like a $1,500 employer match. Assuming 7% return from your retirement account each year, $1,500 in free money today becomes $15,000 in 30 years. Remember, that is $15,000 dollars you get for doing absolutely nothing. If you do not think you have enough money to cover your daily expenses and get the match, there are great services that give you an advance just so you can put money in your 401(k). Whatever you do, make sure to contribute enough money to your retirement accounts to get your match. It is literally the easiest investment return you will ever get.
Smart investors also follow another important principle for wealth building — they started saving early. The most important factor for creating wealth is letting it collect compound interest. The chart to the right shows that if you start saving earlier, you can contribute significantly less money and still end up with more in retirement. This is why Albert Einstein called compound interest the 8th wonder of the world.
The key is to make sure you save money in accounts that collect compound interest. The typical savings account doesn't collect much interest, so by leaving your money in one you won’t be taking advantage of much compounding. This is where the combination of stashing away money in retirement accounts and doing it early is so powerful. You get great return, potential free money from your employer, and you get years of compounding interest.
This is the secret to how normal people accumulate million dollar wealth. Smart investors are disciplined with their earnings, and they recognize that time is literally money. They use time and retirement accounts to their advantage, and they do not compromise on saving.
Hopefully this article opens your eyes like mine were years ago. It's never too late to begin saving and investing. If you don't think you can afford to set aside money for the long term, remember that even the smallest amount can grow large with compound interest. If your employer offers a 401(k) match, make sure you take advantage of the free money. Simply contributing enough to get it every year can get you in good shape for retirement. If you can't afford to put in enough money to get the match, there are companies that will give you money in the short term to help reach it.
Wealth generation is something we all deserve, so make today the day you become a smart investor.
Thanks for reading friends, and happy investing!