HOW I SAVED $1.25 MILLION IN 5 YEARS

I started my financial independence journey in 2010 and saved $1.25 million in 5 years, reaching financial independence at the age of 30. I get asked a lot how I did it and how someone else can too, so I decided to outline the variables and scenarios that impact how fast you, depending on your income, can save $1 million. As it turns out, my $1 million savings goal wasn’t far off from the amount of money I determined I would need to retire early.

While your number will likely be different than mine (a simple calculation is to use 25x your annual expenses to determine how much you will need to retire), I’ve used $1 million as the example in this post because it’s a nice big round number, the goal I picked when I started saving, and who doesn’t want to be a millionaire?

HOW LONG WILL IT TAKE YOU TO SAVE $1 MILLION?

This all depends on how much money you are making, how much you are saving, and how much your investment grows. Here are the variables that matter most:

1. Income: How much money you are making

2. Expenses: How much money you are spending

3. Savings: How much money you are saving

4. Savings Rate: = Savings divided by income

5. Investment Growth Rate: How much your investments compound annually. For the purpose of these examples I’ve set it at 7%, but as you’ll see from my specific situation, the higher your compounding rate, the  faster you will reach 1 million.

MM Note: I tracked all of these variables daily using the Free Personal Finance Tracker Personal Capital. I’ve used the free version for over 4 years. It’s legit and you should definitely check it out. It will help you easily track your progress and identify opportunities to increase your savings rate. Start Tracking Your Net Worth For Free (ASAP)

Here’s a simple example using these variables. Trevor is making $50,000 per year after taxes and his annual expenses are $40,000, so he saves $10,000 per year and his savings rate is $10,000/$50,000, or 20% of his income. That’s a solid savings rate, but given how much money Trevor is making, it will still take him 30 years with his investments compounding 7% each year by investing in the Vanguard Total Stock Market Index Fund.

Your compounding rate has a huge impact on how fast your money will grow and for these examples, I’ve chosen 7% because it’s a more realistic and likely sustainable investment growth rate based on historical performance than the 12%+ we’ve seen over the past few years. The higher your savings rate, the faster you will be able to retire.

As you can see in the chart below, Trevor’s savings rate has a dramatic impact on how quickly he can reach $1 million. Look at the massive difference between saving 10% of his income and reaching $1 million in 39 years compared to saving 50% of his income and doing it in 19 years. Have you ever thought about how much money you should save or how your savings rate impacts the growth of your investments?

I first did this calculation back in 2011 when I started my savings journey and quickly realized that making $50,000 after taxes was going to be enough to get me to $1 million in 19 years at a 50% savings rate, but I would need to make a lot more money to do it in less than 10 years (which was my goal).

Next, I ran the same numbers with $100,000 after-tax income to see how long it would take to save $1 million. Here’s what I found. If I could make $100,000 after taxes and save 10% of my income, it would take me 30 years to reach $1 million, but if I could save 50% then I could reach $1 million in 13 years. That’s a huge difference.

And my goal to save at least $1 million in less than 10 years also made an appearance at the $100,000 after taxes income level, but I would need to have a savings rate of at least 70% in order to make it possible. Could I live on $30,000 or less – while it’s definitely possible, my target spending threshold is $50,000 per year (I find I’m able to balance my happiness per dollar ratio at this spending level). So for me living in Chicago on $30,000 would be really tough, not impossible, but tough.

Alright, so $100,000 after taxes clearly wouldn’t be enough money to get me there. Let’s take a big step up and look at the impact of savings rates on years to $1 million at the $200,000 after-tax income level. If you are making at least $200,000 per year after taxes, then saving $1 million in 5 years starts to be a legitimate possibility – if you can live on $40,000 per year and invest the difference.

Check out how fast you can reach $1 million if you are making $200,000 after taxes.

While $200,000 in after-tax income is a lot of money, if your primary focus is to make as much money as possible over a short period of time and save it, then you can dramatically shorten not only the number of years it will take you to save $1 million, but also retire a lot earlier. If you haven’t already, definitely check out my 1% early retirement strategy.