With Discipline …

You have probably read on the internet numerous articles on the 5 steps that will make you a millionaire. I have come across articles that will recommend you drop out of school and start your own (very successful) company, recommend that you delay getting married later until you are 40 and even go as far as recommending to stop buying coffee. Not everyone can start another Microsoft or Walmart. Delaying a marriage until 40 won’t work for a lot of people. Quitting coffee certainly isn’t for everyone either!

There is today in the US a record number of households with a net worth 1+M$, at around 9.6M households. While this number is high, it should be higher and you should be part of it!

First of all, a millionaire is a person with a net worth of investable equity of at least one million dollars. This excludes equity in the primary residence and lifestyle assets (car, furniture,…) that can’t be invested through a broker (eg. Vanguard, Fidelity,…). To calculate your net worth of investable equity, you add up your equity positions (retirement funds, CDs, cash, …) and you substract your liabilities (credit card debt, loans, …). That is, if you had to pay back everything today, the amount of dollars you are left with that can be transferred to a bank is your total net worth of investable equity.

Now, according to that definition, the 2014 snapshot of the distribution of households’ net worth in the US is below:

Can the average American household even dream of reaching that level? Is it possible?

Answer: ‘Yes’ and ‘Yes’.

Simply put: the median US households needs to reach a Savings Rate of 15% of their after-tax income every month and invest it to reach 1M$ net worth by the time they need to retire. Investing in a low-cost index fund and a maxing out your investments in a pre-tax account such as a 401k would give the opportunity to the median household to reach 1M$ around the time they reach 67 years old.

The median household income in the US currently is 51,017$ a year. After tax, this is 44,256$. A 15% saving of that after-tax equals to a monthly 553$. Invest that amount in low cost broad market fund like Vanguard’s VTSMX (or even better VTSAX) and continue until you retire. After 34 years of contribution, based on an average return of the stock market of 8% (dividend reinvested), you are retiring with a little over 1M$.

Note how an increase of the Savings Rate to 20% reduce the required years of investment by 3.5 years or increase the final wealth by almost 30%. At a Savings Rate of 5% (which is currently the average savings rate in the US), the 1M$ mark remains completely out of reach.

The baseline for everyone should be to save 15% of their income!

Implementing a systematic investment of a fixed amount month after month will require some discipline. The same kind of discipline required to stay fit: regular, consistent and long-term.

… and Education

As we saw above, a Savings Rate of 15% would allow the US Median Household to build a 1M$ retirement nest. How does the Savings Rate compare to the level of Education, for a household above the median and using a 15% Savings Rate?

A household with 2 college degrees using the same savings rate will become millionaire 6 years earlier, after 28 years of contribution. For a household home of 2 MBA degrees? According to BusinessWeek’s estimates, that household will be millionaire 15 years earlier, after only 19 years of contribution at the same 15% savings rate.

And assuming that everyone would retire at the same age after roughly 34 years of investment:

• a household with median income, with a 15% savings rate will reach 1M$
• a household with 2 college degrees, with a 15% savings rate will reach 1.7M$
• a household with 2 MBA degrees, with a 15% savings rate will reach 4.1M$

Even if you factor in the initial cost of education and the student loans repayments that come with them, the impact on a 34 years investment is negligible!

As you can see, if you still wonder How Much Money is Enough money to retire, the Savings Rate is a very powerful tool and Education is a good way to lock it in.

Imagine what could be achieved if you had both a high level of education and a high Savings Rate? A 2-MBA household with a 40% Savings Rate would reach 1M$ in only 11 years and attain 10+M$ when they retire.

Now is the perfect time to take action!

1. Increase your Savings Rate. Spend less than you earn. Live below your means. Invest the difference. Increase your savings rate every year. 15% is the minimum to be independent upon retirement, rates of 30% or 50% or higher will only bring you either early retirement or a much more comfortable one!
2. Invest in Education. In your own. In your kids’. In your colleagues’. Go back to school. Learn that extra language, develop a new skill, get that MBA degree. Take a loan if necessary because 30 years down the road, it is totally worth it.

I would love to hear stories of readers who significantly increased their net worth either with a change of Savings Rate or going back to school, or even better a combination of both!

Nick – MoneyMiner.