As Millennials, we have an inherent connection to the word "million." We were brought up in a new millennium and can recall the ball dropping, as every clock and calendar changed from 1999 to 2000.
For the first time in US history, it was possible to make a million dollars without curing cancer.
One of our fictional idols, Jay Gatsby, would be worth around $35 million in today's currency, but that comes out to only a little more than $1.5 million, back in his day.
If you went to a private college, it was assumed your parents were worth at least $1 million. But, we will be the first generation in which even a million may not be enough.
To quote whomever Justin Timberlake played in "The Social Network," "A million dollars isn't cool, you know what's cool? A billion dollars."
Unfortunately, many of us won't be cool. A billion dollars is still a crazy-huge amount of money. However, we can all be millionaires. It won't be quick and it won't be easy, but it's pure math. All you have to do is play the game called "compounding interest."
The one thing every Millennial has on his or her side is time. Whether you use it as a blessing or curse is up to you. From the words of the great Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t… pays it.”
When it comes to the future value or possible future value of your savings or investments, all you need are three variables: years until retirement (65 minus your age), investment return and free cash.
Free cash is how much money you have left after paying the bills. Bills and cost of living are considered to be rent or mortgage, utilities, food, gas, insurance and taxes. Bills don’t include bar nights, nightclubs, Starbucks, Rolexes or new clothes, as those are considered extraneous spendings.
Understanding the importance of drafting a budget that creates free cash is the first step toward becoming a millionaire. Here's how much free cash you should aim to budget for:
- A 20-year-old is investing in a portfolio aimed to provide 8 percent annualized return. How much does he or she need to save per month to become a millionaire by age 65? Answer: $189.59
- A 25-year-old is investing in a portfolio aimed to provide 8 percent annualized return. How much does he or she need to save per month to become a millionaire by age 65? Answer: $286.45
- A 30-year-old is investing in a portfolio aimed to provide 8 percent annualized return. How much does he or she need to save per month to become a millionaire at 65? $435.94
Do you see the difference between starting today versus starting in five or 10 years from now? The amount you would need to save starting now is practically a weekly bar tab. What can you give up today to ensure you have the future you want tomorrow?
I already know what you are saying: "This looks great on paper, but how does it hold up in the real world?" That is the hard part.
Friends ask you to go for a drink, significant others ask for a getaway, your car breaks down, your rent goes up, you are sick of eating grilled chicken every day. The list goes on and on forever, and your FOMO radar is off the charts.
But, a well placed "no thanks" can determine whether you live a life of debt-ridden poverty or the life of a true millionaire.
A life is built on the day-to-day activities — the small things, the habits and the values.
It's about the checking of prices at the grocery store before you buy, the skipping the Thursday night happy hour because the specials are better Friday and the daily gym sesh.
A life isn’t built upon a winning lottery ticket, a home run or luck. What kind of life are you building for yourself?
PS: If you want to play with some more variables (extra investment return, early retirement, already have a savings account balance), you can find a tool to help you HERE.