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Investing

How to save a million dollars

January 30th, 2012 by

Start saving at 25 and you could retire with a cool million

 
 
 

Every year, Forbes magazine takes it upon themselves to compile a list of the world's most affluent citizens. Referred to as the "Billionaires List," this ranking now includes over 1,210 billionaires with a total net worth of more than $4.5 trillion. The top ranking Canadian on the list is David Thomson, chairman of media powerhouse Thomson Reuters. Coming in at #17, the Thomson fortune is worth nearly $23 billion and growing.

Must be nice.

Let's face it, most of us will never know what it's like to have a billion dollars. HOWEVER, with a little planning and frugality, it is possible to save a cool million by the time retirement rolls around. And the sooner you start the better, so cut up that credit card and throw away your chequebook!

The following information is adapted from an article published in Kiplinger's Personal Finance Magazine last year. While it's far from perfect (no one can predict market fluctuations), the tips provide a realistic strategy to add $1 million to your net income over time.

Start saving at 25

Saving when you're in your twenties is tough. Between student loans, housing costs, cruddy jobs and impossible-to-resist sales, saving can sometimes seem impossible. But don't give up just yet.

According to the Kiplinger article, if you're able to save approximately $286 per month beginning at the age of 25, assuming an 8% average annual return, you'll have a million bucks in the bank come retirement time. Remember, the more time you have to work with, the less money you'll need to contribute each month.

If $286 is impossible right now, don't give up. Instead, grab a calculator and start crunching some numbers. Gail Vaz-Oxlade, famed financial author and host of the popular television series Til Debt Do Us Part, says that people who start saving in their twenties can have a nice nest egg simply by saving 6% of their net (after-tax) income. Right now that might be more like $120 a month, but if you stick to that formula throughout your working life, you should have no problem investing in your future.

Other steps to help you achieve your goal

Stashing money in a shoebox beneath your bed may have worked when you were 12, but now that you're an adult it's time to start thinking about real investment opportunities. Here are some simple but sound ways to improve your portfolio and begin building your wealth:

  • Contribute to an employer pension plan

    It's tough starting at the bottom of a company and working your way up. But, as a twenty-something, chances are that's where your career path will begin. So, instead of commiserating over your piddly paycheque, start saving. Check with your human resource manager to see if your company offers a registered retirement savings plan or pension program. If they do, read up on it and see if the company matches your contributions. That's free money we're talking about, so get in there and take advantage of it.

    If your employer doesn't offer a matching plan, take matters into your own hands. Your bank can easily set up an automatic RRSP contribution on payday, so you'll never have to worry about spending your savings. Making your savings a fixed expense is the easiest way to ensure success.

  • Take stock of the stock market

    Granted, the market is in a bit of a slump these days. But you're young, and the tides are going to change. A long-term horizon means you have time to weather the storm and the ability to handle market fluctuations. Allocating your investment funds into a broad selection of stocks will help you build a strong foundation for future growth. Diversification is the key to a well-balanced portfolio approach (talk to a financial advisor for help).

  • Avoid unnecessary consumer credit

    How many credit cards do you currently have in your purse? One, two, six? If you live on a financial diet that consists largely of plastic, now's the time to make a major life change. The longer you rely on credit to fund your lifestyle, the worse off you'll be. Make the switch to a cash-only spending plan until you're able to stick to a strict budget. Spend less than you earn and then divert any extra cash you have to paying off your debt or adding to your savings.

  • Start an emergency fund

    At 25, you've got an awful lot of life ahead of you. Make sure you're prepared for both the good and the bad by building an emergency fund early. This fund should be more than just a savings account; it should contain a minimum of six months worth of living expenses, including rent, utilities, transportation, etc. This fund should only be touched in times of dire need, and no, a sale at Lululemon does not count as an emergency.

"Wealth is what you accumulate, not what you spend."

Thomas J. Stanley and William D. Danko made this insightful discovery while performing research for their book, The Millionaire Next Door. And it's true. The people driving around in fancy cars and decked in designer aren't necessarily wealthy. In fact, they're probably in financial distress due to their spending habits. If you have the money, don't waste it on frivolous things. Sure, indulge every now and then, but for the most part, spend and save your money wisely.

And so you see, becoming a millionaire isn't nearly as painful as you might think. Becoming a billionaire? Well, you'll need to ask Mr. Thomson for help with that...

 

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