As I stated in my first post, the ultimate goal of my writing is to help you – the Millennial – become a Millionaire. So, how do you go from a Millennial to a Millionaire? The best way to start is to DIY invest in an employer-sponsored 401(k). Let’s start with an example here.
EXAMPLE: You start your career at age 22 with a Fortune 500 company. You start to invest in your employer-sponsored 401(k) account immediately. You average $47,000 your whole career. Each paycheck you contribute 8% of your income, and your employer makes a 7.5% matching contribution on your behalf. Between the ages of 22 (when you start working) and 67 (when you retire), your 401(k) balance grows to almost $3,200,000!
Wow, amazing! How did that $47K per year amass to $3.2M in 45 years? Here are the three DIY ingredients that took your modest income to a huge net worth:
- Invest early and consistently. You started to invest at age 22, right out of college at your first job. You made a conscious choice to prioritize your future financial self and you consistently contributed 8% of your income each year to your 401(k) for 45 years. This long period of time helped your money to compound. Compounding is when your money makes money on itself and more and more earnings. The more time you have to invest, the more time you leave your money to the power of compounding.
- Contribute up and beyond your company match. You contributed beyond your company match at 8% of your annual income. One of the benefits of a 401(k) is usually an employer will provide a matching contribution, which is free money deposited into your 401(k). In this case, your employer made a 7.5% matching contribution. Make sure to contribute at least or beyond your employer’s matching contribution so that more money goes into your 401(k) each year.
- Invest in the stock market in your 20s/30s. Let’s assume you build a 401(k) portfolio that is appropriately allocated toward the stock market (a.k.a. equities). Equities have historically returned 8%. Because you took the calculated risk to invest your hard-earned money appropriately in the stock market, your are able to reap the benefits of a higher return over that time. Appropriately allocate risk in your 401(k) portfolio, leaning more towards stocks in your 20s/30s to get a higher return on your investments.
If you follow these three steps, you’re well on your way to significant wealth. Additionally, wealth building in an employer-sponsored 401(k) is a great starting point to your personal DIY investing journey. In my upcoming book on DIY 401(k) investing, I will explore more of how to take advantage of these 3 ingredients to help you confidently and competently grow your wealth over the long-term.
Want to learn more? Pick up a copy of my book …
From Millennial to Millionaire: DIY 401(k) – 5 Do-It-Yourself Steps for the Digital Generation to Design and Manage their 401(k) on Amazon.