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Despite what you’ve heard, there is no such thing as a get rich quick scheme. Becoming wealthy takes time, patience and dedication. Ultimately, it boils down to 2 things:
- Saving and Investing
- Earning more money by developing multiple sources of income
Before you even consider setting up a savings plan, you need to get rid of your debts! It doesn’t make sense to put money aside into a savings account paying 2% per annum when you need to pay off credit card debt at 20% APR. And pay off the largest debts with the largest interest rates first!
Moving on to savings: you need to consider putting away money for your retirement and look at your options. As I am based in the UK, I put money aside in my SIPP (I personally use Hargreaves Lansdown) but if you’re based in the US, you may want to consider a 401(K) or a RothIRA, both retirement accounts where you put money aside to invest in the long term.
401k: This is an account where by you save long term until you retire. Here, you get more money from your buck because of the contribution from your employer. In this case, a portion of your pre tax income goes into your account and this is matched up to a certain amount.
RothIRA: Remember your 401k and your pre tax income? Well with the RothIRA you pay taxed income into it and no taxes when you withdraw! (Current maximum allowance is $5500 a month).
Of course you need to do something with your savings, and I recommend putting it into a low cost index fund such as one that replicates the S&P 500 for example. You may wish to consider reading my other article on index investing here….
To really leverage your potential to reach a million dollars, you really need multiple sources of income. In this day and age, you really cannot rely on just your full time job. And what should you do with this extra income? Allocate some of it into your retirement fund of course!
So can you really save yourself a million dollars until retirement? Let’s assume you are based in the UK and you earn £30,000 a year. In this case, saving 10% would give you £3000/12 equals £250 a month. Allocated to a SIPP, the UK government would top this figure up by 20% (an extra £50 a month) as a lower rate tax payer and assuming your employer contributes 6% (thus giving an extra £150 a month), the total monthly cash contribution would be £450 a month (of which you contribute £250). Let’s also assume that your salary increases in line with 2% inflation and you invest this money into a low cost index fund such as the S&P for example. Based on a 10% annual return, your final pension pot would be a cool £1.2 million after 30 years so it’s definitely doable!
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How much do you save on a regular basis? Please comment below and if you like this article, please share it on Facebook or if you wish to read it later, you can save it on Pinterest. You may also like my article on Index Investing and Paying Yourself First.