How To Become a Millionaire on a Budget

Who Wants to be a Millionaire?

If you didn’t start saving for retirement yesterday, you should do it today. You may be surprised to learn how little you need to put away to be a millionaire at retirement.

For those of us starting out in our careers, being a millionaire may seem like a goal that’s so far away it may as well not exist. Fortunately, we don’t need to be John Carpenter and cruise through difficult questions on Who Wants to be a Millionaire to attain that goal.

We also don’t need to be making six figures or placing bets on Dogecoin in hopes that Elon Musk’s tweets will send it to the moon.

The two not-so-secret ingredients to achieving that milestone? Time and discipline.

Compound vs. Simple Interest

In order to better understand how time and discipline are our best friends when it comes to maximizing our investment growth, we need to understand how our money earns more money.

There are two types of interest: simple and compound. Simple interest is the type of interest we pay on a mortgage, where the interest rate is only applied to the principal balance of the account. This is why interest payments are much higher in the early years of a conventional mortgage, as the principal balance is much larger than the later years.

On the other hand, compound interest earns interest on top of the accrued interest (hence the “compounding” nature of the term). Savings accounts and investments in our work 401(k), Roth IRAs and brokerage accounts earn compound interest, where the growth of our money stacks on top continuously, “compounding” the amount of earnings we can achieve.

There’s a reason Albert Einstein called compound interest the eighth wonder of the world!

The “Time” Factor: Start Early & Don’t Look Back

How can we use compound interest to our advantage? Start saving early.

If we saved just $10 per day (equivalent to $300 per month), and earned a modest 4% inflation-adjusted return, how much money would we have at age 67 when we retire? The following graph shows what happens the longer we delay our savings.

This is where we see the time factor start to play a major role in getting us to our millionaire goal. Unsurprisingly, the effects of compound interest (as noted by the gold bars in the graph) get increasingly larger the earlier we start to save.

The “Discipline” Factor: Consistency Is Your Friend

Of course, time only works to our benefit if we are disciplined with our saving. Discipline is often considered one of the most important traits needed to build wealth, and our compound interest graph above shows why.

But just how much discipline would it take to ultimately achieve our millionaire goal? Using the same modest inflation-adjusted return projection of 4%, the illustration below shows varying dollar amounts we could save every single day to ultimately end up at $1,000,000, with the blue line indicating the number of years it would take to reach that milestone.

Here, we see the effects of compound interest most notably in the $5 per day scenario: it requires the least amount of initial investment and has the most compound growth, at the expense of taking almost 78 years to reach $1 million.

However, if we can stretch our savings to $25 per day, we can become a millionaire in 42 years. In today’s day and age, this is a pretty standard working career and will definitely require more discipline, but is absolutely achievable.

Slow & Steady Wins the Race

If there’s one lesson that you should learn from this, it’s just that: slow and steady wins in the long run. It’s not flashy and doesn’t make for very eclectic conversations around the Thanksgiving table, but that’s okay. Last time I checked, the tortoise won the race!

Human beings are creatures of habit and the sooner we can develop positive, easily repeatable habits with our finances the better off we’ll be in the long run. The graphics above are an attempt to illustrate this idea: we give up the opportunity to hit a home run in the short term to avoid striking out in the long term.

Regardless which savings path we choose to embark on, it’s just important to pick one and get started. Remember that the choice is not between $25 or $0 today: even if we save $10 per day, using the graphics above, we now know what that will look like over the course of our lives. The simpler we keep our financial lives the better off we’ll be!