Have you ever wondered if you’d be a millionaire? I certainly didn’t. But it happened—and much faster than I could have imagined. No, I didn’t strike it rich over night with the lottery, exit from a startup, inheritance, or bitcoin. I attribute it to several things: high savings rate, consistently investing, high income, luck, but mostly a shift in mindset—from linear savings to compounding returns, from only working for money to also making my money work for me.

What I learned through this process is that most Americans can do it too. In this post, I will break down different income levels and how they can each build up a nest egg of $1M. I must mention that I’m not a financial adviser, so this is purely for entertainment purposes.

I’m a stocks guy, so I will focus on how to reach $1M through the US stock markets.

The average American household makes roughly $60,000 a year. If they lived in a state like CA where state income taxes are high, they will pay around $10,000 in total taxes, which will leave them with $50,000 per year. If they are able to invest $9,000 of that, per year, this is what they would have at the end of 26 years:

$1,080,899 bucks!

Below is a chart that shows the different contribution levels and how they progress over a 40-year period (assuming a 10% rate of return which is the average annual returns for the S&P 500 over the last 90 years):

Figure 1.1 - These calculations are using a 10% rate of return which is the average annual returns for the S&P 500 over the last 90 years.

As seen in Figure 1.1, if one were to contribute $9,000/year they will reach $100,000 in networth after ~7.5 years. And they will make their second $100,000 (that is from $100k to $200k) in only ~4 years after that…the third $100,000 in 3 years after that…and the tenth $100,000 in less than 1 year!

At that rate, the first million dollars will take 26 years to make. However, the second million dollars will only take 6 years. Isn’t that amazing?! In 32 years, the person contributing $9,000/year will be a multi-millionaire!

But it gets even better! That same person can stop contributing $9,000/year after the 26th year and still be a multi-millionaire.

This is the power of compounding. It allows most of us to live the American dream with just a relatively small contribution each year.

Finally, if you’re able to hit the coveted $100,000/year in savings, you’ll be ballin’ in no time. These folks generally make around $300,000/year, give $100k to the gov’t, spend $100k, and save/invest the last $100k. The jobs that can pay this high are usually one of the following: doctors, lawyers, engineers, sales reps, executives, business owners, and bankers. They are in the top 5% of income earners in America.

The good news is you don’t need to be making that big of an income to become extremely rich. It just takes a little longer :).

At this point, you're probably wondering what do I invest in. I invest in VTSAX, which is Vanguard's index fund and it tracks all 3700+ publicly traded companies in the United States. In other words, it mimicks the US stock market. Imagine buying 1 stock that gives you a tiny piece of ownership of all the public American companies.

Now that we see the math and know what to invest in to track the US stock market, what are the actions that one would need to take to control the situation as much as possible?

Understand your OWN numbers

It’s immensely important to understand your own situation. No matter how much you make, if you don’t see where you are on the number line, it’ll make goal-setting meaningless. You must know your current net worth, monthly expenditures, yearly income, and yearly rate of return on your investments. If you don’t know, please figure it out tonight!

I have a spreadsheet with macros that I have built to track most of this for me, which I will share soon. For networth tracking, I use mint.com. And I use Vanguard / TD Ameritrade to track my rate of return on my investments.

Budget

There are multiple ways in which you can budget, but the point is, know and control how much you spend. Make sure you’re responsible and spend in a way that will leave you with at least 15% of your income to invest. If you are having trouble with this, go watch some Dave Ramsey OR wait for my article on how I “budget.” (EDIT: you can read about how I budget here)

Consistently invest

The key to making this work is to consistently invest. I invest the same amount of money each month, every month. This is called Dollar Cost Averaging. When the market is up or when the market is down. When I want to go on a vacation or when I’m getting that big year-end bonus. I invest no matter what. In a future blog, I will go through how I personally ensure that I invest the minimum amount into the stock market every year.

Track your progress

You need to track your progress at least on a yearly basis to understand how you’re doing. This is a good time to review the rate of returns on your investments; make different investment choices; recompute timelines; and update yearly projected expenses. This is also a good time to double-check your assumptions. If you plan your future using the 10% figure as your rate of return (RoR) for a short span of time (e.g. 5 years) you may be disappointed. Simply because the time horizon is too short. All of my calculations uses a RoR of 8%, even though the market has been averaging 12% returns for the last 11 years. It’s better to be conservative with estimates than it is to be optimistic.

As I alluded to before, I have a spreadsheet that tracks my progress. I have macros that will compute my expected networth for the current day of viewing and the delta (difference) in actual vs expected. This serves as a barometer for how I’m doing. It’s not actionable data in the daily context, but it provides a good baseline for yearly financial planning. Also, it keeps me focused, but not everyone will find it fun like I do.

Constantly learn and adjust

$1M is a great start, but probably not enough to retire early if you’re a millennial. Tax laws change all the time, markets have wild fluctuations, your financial independence number may change, you get married, you have kids, etc. These will all have a significant impact on your financial future. If you do this right, once you hit a certain threshold in networth, learning to manage your finances will end up paying out way more than your day job…even if you’re a doctor pulling in $1M per year.

I know that I have left out a lot of details, such as cost-of-living increases, weddings, daycare, cars, home ownership, pay increases, dual-income families vs single-income families…life in general. But the variance of those factors is too much to address in a blogpost. I will be happy to address specific situations in the comment section down below!

Good luck on your journey to $1,000,000 and beyond!

Real estate is good alternative, but there are a lot of risks associated with it and requires much more education and preparation before you can take action. For a simple guy like myself, stocks is the way to go. And, based on history, also yields the best results.