At some point, most everyone harbors fantasy about being a millionaire. What most people don’t realize, however, is that nearly any frugally minded person, regardless of income, has the potential to reach seven figures.
I believe just about anyone can pare down to a $20,000 annual budget, not to mention become happier and healthier for having done so. Once this goal is reached, it becomes all about how much you earn. The following data represent the number of years people living on $20,000/yr and earning various incomes will have until they are millionaires. These numbers are based on a couple of assumptions- first, that every saved dollar is invested; and second, that these investments will yield a 5% annual return. Keep in mind, 5% would be an extremely modest rate of return for any balanced index fund portfolio. The “Years Until $1,000,000″ decrease sharply with higher percentage gains.
|Amount Earned*||Amount Spent||Annual Savings||Years Until $1,000,000**|
*After taxes. Inflation not taken into consideration. Hopefully earnings will rise concurrently with inflation, although this may not prove to be the case.
**Assuming a 5% annual return on investment
***The median annual personal income in the US is just under $45,000 (~$38,000 after taxes), so most people would fall either in this row or the one directly above/beneath it.
Being a millionaire will be really awesome.
At a 5% return on investment you’d be earning $50,000/yr while sitting on your couch. But you wouldn’t sit on your couch, of course. You’d travel the world, learn to speak seven languages, read the entire Russian literary canon, build custom-made homes, or something of that nature. If freedom is all about owning the hours of your day, nobody is more liberated than a millionaire.
As if this wasn’t enough good news already, you don’t even need to become a millionaire if you don’t want to. Maintain your $20,000/yr. spending habits, and you only need to reach $500,000 to be totally financially independent. Your 5% return would give you the $20,000/year you’d need to live on, and you would never even have to touch your principal (this number takes into account the taxes you’ll have to pay on your investment income). In other words, the average American earning $38,000 after taxes and spending $20,000 annually would be able to retire after only 18 years.
There is a tiny revolution happening in the world of personal finance. People are starting to realize that earning more money does not need to result in spending more in turn. Thousands of people are learning just how fully one can live on only $20,000 (or less) per year. These are the folks who will be retired at the age of 45 (or sooner), a full two decades before most of their peers. It is they, not the guy driving a $50,000 car he bought on credit, who will be the envy of the neighborhood.
The good life is not about owning things, it’s about owning your time. The less we spend, the sooner we take the reigns.