1 + 1 ALWAYS Equals 2

Many of us struggle with personal finances. We think that "If I can just make more money, the problem will fix itself". Unfortunately, in most cases the math (income) is not the problem. Financial health can be obtained at almost any income level if the habits of the income earner support financial health. Don't believe me? Let's take a closer look.

The Bureau of Labor and Statistics states the in Q1 2020, the median weekly income is about $1,054 per week for men and $852 for women. Annualized, that converts to $54,808 per year and for women$44,304. At these income levels, any person can become a millionaire by retirement age, over the life of a standard career, with minimal regular cost of living increases. And this person becomes a millionaire not by working multiple jobs, or overtime, or selling plasma on the weekends…this person becomes a millionaire by simply practicing fiscal responsibility.

Using a quick Time Value of Money calculator that I built, let’s compare some values. Let’s assume the following:

• A person makes $40,000 per year

• Receives 2.5% annual raise

• Contributes 15% to 401K on day one of their career

• Receives a 5% 401K match from employer

• Average stock market performance of 8% growth per year

With these assumptions, and even at a starting salary BELOW the median income, this person will become a millionaire in year 29 of his or her career. After year 30, the 401K balance would be $1.15 million. No extraordinary raises, no promotions, no patents or inventions…by simply coming to work, not getting fired (lol), and being responsible, this person can become one of the wealthiest humans on earth (2019 Credit Suisse global wealth report states that it takes approximately $1 mil in net worth to be in the top 1% of global wealth holders). By the way, $40K per year was my starting salary when I started as a temp worker in my corporate career, although I wasn’t smart enough to contribute 15% to my 401K at that time ☹.

Using the same assumptions, if this rather unspectacular employee was to have a starting salary of $50,000, they would achieve millionaire status in year 26, and 30-year value of $1.49 million.

At $60,000 starting salary (9% and 35% above the median income for men and women, respectively) millionaire status is achieved in year 24 with a 30-year balance of $1.73 million. For reference, once I transitioned from a temp employee to full time, my starting salary was very close to this value. Note that in this scenario, it takes 24 years to achieve the first million, and just over 7 years to achieve the second million (due to compounding…more on that in a later blog). Successful folks always say that the first million is the hardest…the math supports it!

Now remember, this person has received no extraordinary raises; only a standard 2.5% annual cost of living increase over the life of his/her career. Imagine if this person decides to perform at a high level and receives a few promotions, larger raises, etc. The compounded impact of those larger income increases, decreases the years required to obtain millionaire status. Take me for example: Since 2010, I have received an annual increase, or “raise” of 18.1% per year…far better than the 2.5% used in the aforementioned calculations. This is due to performance increases, promotions, and education increases over that span. While I don’t know if this level of increase is sustainable going forward, I know that the impact of those increases has drastically reduced the years required for me to achieve millionaire status (on paper of course).

That said, financial health is not nearly as dependent on income as one might think. It is the habits, best practices and discipline that allow us all to achieve financial well-being, and it is literally within everyone’s grasp…if we can only GET OUT OF OUR OWN WAY.

Now…if my cost of living has increased by 18.1% along with my income, then I am failing to reap the true benefits of the additional income that I have obtained…but we

will tackle that ideology in another blog 😊.

I have attached the excel calculator I created for these assumptions. Feel free to play around with it. Just input a starting salary in the yellow cell (F2) and click enter...the math will change accordingly. Column P "Yearly 401K Balance" will show you when millionaire status is achieved (and automatically highlight in green), with the year to the left. There are 2 calculations, one with 401K employer match and one without.