Most personal finance experts say to save at least 10 percent of your income. That’s good advice. You’ll retire comfortably. But what would happen if you saved 50 percent?
The median household income in the U.S. for 2016 was $59,039, according to the Federal Reserve Bank of St. Louis. And according to the OECD Better Life Index, the average household net-adjusted disposable income in the United States comes out to $44,049. In an average household, 50 percent of your income would equal $20,677.50 per year.
How to Become a Millionaire From Nothing: Doing the Math
Let’s assume that you begin investing this amount at age 25. You keep investing the exact same amount until you’re age 65. To give you a frame of reference, that’s about the same age as Arnold Schwarzenegger, Meryl Streep, John Travolta, and Liam Neeson.
In the likely — though not guaranteed — scenario of your rate of return being eight percent by investing in the stock market, how much will you be worth by saving 50 percent of your income? $5,785,189.13. That is five million, seven-hundred-eighty-five thousand, one-hundred-eighty-nine dollars and a lucky thirteen cents. Congratulations — you’re a multimillionaire.
Turning Theory Into Reality
Now that I’ve got you motivated, let’s see how a person can actually save 50 percent of his or her income in order to realize this kind of wealth. In fact, I save more than 50 percent of my income. It sounds difficult, but it’s not.
The first step is to get your fixed expenses as low as possible. Challenge everything. Make sure that you’re getting the lowest rate on your car, health insurance, and rent. Do you really need Netflix and Hulu Plus? And what about your super-sized apartment? Make a list of your needs versus your wants. It's eye-opening.
Is shopping at Walmart or Target really that bad? I shop at Walmart most of the time, but I do it early in the morning. Turns out, Walmart isn’t too unpleasant when there aren’t crowds.
Also cut out unnecessary spending. This includes things like ordering takeout on a whim or buying random stuff on Amazon because you're bored.
After taking these steps, what's your savings rate? If you have a decent income, it should now be at least 50 percent. If you’re still having a hard time saving that much — even after you’ve cut your fixed costs and frivolous expenses — it’s time to earn more. Once you begin earning more, save half automatically. This way you never get used to an inflated lifestyle. Cut down expenses. Make it a habit. After all, all habits are hard to break.