Are you the type of person who constantly strives toward becoming the next millionaire? You might think that with a frugal lifestyle and proper investing, you will obtain the status of self made millionaire excluding your retirement benefits. Sadly the truth might be, that if you are not making a lot of money, your odds of becoming an inflation adjusted millionaire aren’t very good.
An example would be an individual making $50,000 a year will probably have approximately 25% (or more) of their money going to health care and taxes, bringing their monthly take home to roughly $3,100. Depending on where you live and your lifestyle, there is a good chance that you will likely have at least a base level of expenses of roughly $1250 – $1750 (rent, food, phone, utilities, clothing, and etc.) Now of course there are exceptions to this such as living rent free with a relative, but in most scenarios, about half of your take home pay evaporates every month. If this person was a financial martyr and didn’t buy anything, take any vacations, drove an old car, etc., its reasonable to think they could scrap up $1,500 every single month.
Assuming 6.215% yearly growth, how much do you think this $1,500 a month would be in 10 years? If you said a million dollars, you are wrong. It’s a quarter of a million dollars unadjusted to inflation. Assuming 2.5% inflation, it’s only $195,299. If you continue to save $1,500 a month for the next 20 years (30 years total), you would now have $1,706,600 unadjusted for inflation, but let’s not forget capital gains taxes. If taxes remain constant, you are looking at paying about $175,000 (or more) in taxes. After taxes and again assuming 2.5% inflation, this amount would only equal $730,183 after inflation.
Even though this individual saved $1,500 a month for 360 months, they would still not have an inflation adjusted million dollars in thirty years. Imagine where you are 30 years from now. It is possible that your income has increased, but most likely your responsibilities have as well (kids, housing, etc.). Can you imagine saving $1,500 a month on a $50,000 income? I make more than $50,000 a year and I only save approximately $400 a month.
So what is the point of this article? To offer perspective on becoming a millionaire by just being frugal. Most likely most people with careers will become millionaires when including retirement accounts, pensions, social security, etc., but the idea of becoming a self made millionaire by only living frugally might not be the best approach. The best way to become a millionaire is a combination of living frugal and increasing ones income whether that be through a promotion, side business, or a spouse working.