Saving money is a great way to reach your financial goals , but some plans are better than others.
For example, you may have $2,000 you want to use as seed money to start a savings or investment plan to help you down the road.
But then what? Here are a few scenarios that can get you to $1 million, but some may not add up compared to others.
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Investing $2,000 but nothing else at 10% for 25 years
So what happens if you just want to invest $2,000 and let the returns build over 25 years?
It sounds like an easy plan to set it and forget it in something like the S&P 500, which has had an annualized average return of 10% since 1957.
But it won’t come close to reaching $1 million, giving you a balance of only $21,669 at the end of 25 years.
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Investing $2,000 but nothing else at 20% for 25 years
If you invest $2,000 in something that can earn you 20% for 25 years, you’ll still fall short, reaching only $190,792 after 25 years.
Another thing to consider with that scenario is how unrealistic it is to earn a 20% annual return on your investment.
Warren Buffett, considered a legendary investor, has had an annualized return of around 20% with Berkshire Hathaway since 1965. A typical investor rarely makes that much.
Let’s look at more practical ways to reach $1 million.
1. Investing $2,000 plus $850 monthly at 10% for 25 years
One way to help you build up your initial $2,000 is to also add principal, or extra cash, to your initial investment. This can allow your base amount of money to grow and earn more interest.
If you have $2,000 and then add $850 each month with a 10% annual return similar to the S&P 500, you could end up with $1,024,809.
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2. Investing $2,000 plus $1,500 monthly at 10% for 20 years
There are other ways to potentially meet your goal, such as investing more each month but for a shorter period.
Raising the amount you put away each month to $1,500 while also cutting back contributions to 20 years will still get you to your goal with $1,044,405 in the bank.
3. Investing $2,000 plus $2,625 monthly at 10% for 15 years
FIRE, which stands for Financial Independence, Retire Early, could be a good goal if you’re aggressive with your savings. Perhaps you could even retire in only 15 years.
If you take command of your savings, it may be the right goal for you. At the end of 15 years, you could reach $1,009,188.
4. Investing $2,000 plus $1,150 monthly at 8% for 25 years
The S&P; 500 historically has an average annual return rate of around 10%, but some years can be better than others, and you may not get a consistent return quite that high.
Factor in market volatility and consider an 8% return rate instead. If you put in an additional $1,150 each month for 25 years, you can still achieve your $1 million goal by reaching $1,022,559.
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5. Investing $2,000 plus $1,820 monthly at 8% for 20 years
You could be more conservative with your estimates for your annual rate of return while also bumping up your monthly contributions.
Expect to reach $1,008,763 if you put an additional $1,820 in each month for 20 years at an 8% interest rate to get you to your goal.
6. Investing $2,000 plus $3,050 monthly at 8% for 15 years
FIRE could also work if you estimate a lower return rate for your cash over a shorter period if you increase your monthly contribution.
Put in $3,050 per month along with your seed money of $2,000, and have it earn an 8% rate for 15 years. You’ll make your $1 million goal with a balance of $1,000,112.
Bottom line
The key to saving successfully is crafting a personalized plan. This might involve setting ambitious investment goals or adjusting your approach based on life changes.
Remember, the best strategy is the one that empowers you to build wealth and achieve your financial dreams.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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