Three Examples of Ways to Become a Millionaire Using the Time Value of Money

Most people won't become millionaires by winning the lottery, or gaining extreme fame, or inheriting a mass of wealth from a relative. So, how does the average joe become a millionaire? By using the time value of money. I wish this was taught in schools, because I didn't learn about this until I was in my 30's. This means I already lost many years of using the time value of money. So how do you save a million bucks? The following examples differ based on the initial amount of money to invest, how much is invested each period, the time of the periods such as per month or per year, the percentage rate received on the investment, how often interest is compounded, and the effect of taxes. Two websites, moneycentral.msn.com/Investor/calcs/n_savapp/main.asp , and planningtips.com/cgi-bin/savings.pl are useful to reference during this discussion, and for purposes of figuring out what to do to reach your own savings goals.

1. Start with a certain amount of money and save it for a long time. This is one way to reach the million dollar goal. Here are some specific examples:

If you start with $10,000 and you get an 10% return on your money, it will take you 46 years to reach a million dollars. (You can verify this using the planningtips.com website noted above.) This means that if you start saving this amount at age 18, when you reach 64, you will have a million dollars. One thing this savings calculator does not take into effect is taxes. So, you would have to pay the taxes separately or have this money in a retirement account in order to actually have this amount at the end of the 46 years. To figure in money lost to taxes each year, use the moneycentral.msn.com website noted above.

If you start with $20,000 and get a 10% return on your money, it will take you 39 years. This implies monthly compounding of interest. So, if you are 18 at the beginning, you will be 57 when you reach your million dollar savings.

If you start with $30, 000, with 10% and monthly interest compounding, you will reach your goal in 35 years.

If you start with $40,000, a million dollars will be reached in 32 years.

2. With no money at the beginning, invest a regular amount each month.

If you invest $200 per month, with a 10% return compounded monthly, you will have a million dollars in 37 years.

If you invest $300 per month, with the above return and compounding, you can have the million dollars in 33 years.

If you invest $400 per month, you will reach a million in 30 years.

If you invest $1000 per month, it will only take you 22 years. If you started saving at age 18, by age 40 you could have a million dollars.

3. Start with some money initially, and invest a set amount per month.

If you start with $10,000 and invest $100 per month, you will have the million dollars in 38 years.

If you start with $10,000 and invest $200 per month, your million dollars will be reached in 34 years.

If you start with $20,000 and invest $100 per month, it will take you 34 years.

If you start with $20,000 and invest $200 per month, it will be 31 years later that you will reach a million dollars.

Comparison

So which way will you go? That depends on what your finances dictate. It is interesting to compare the different savings plans from above and note the total amount invested. If you start with the $10,000 and don't invest anymore, it takes you 46 years for the million dollars. But that's all you invested. If you go the route of saving $200 per month, it takes you less time- 37 years, but your total amount invested is $88,000! ($200 per month x 12 months per year x 37 years)

Conclusion

You can visit the websites noted above and try different scenarios, such as receiving only at 8% rate of return or interest only being compounded annually. The key is to save the money and save it over time, with all of the above examples. You also have to be able to obtain a strong rate of return on your money. If you invest in certificate of deposits, you will have a guaranteed rate of return, but lower interest rate. If you invest in mutual funds, your rate of return is greater but you also incur the risk of losing your money. It will be up to you to determine what to invest in. Make sure to make wise decisions by doing a good deal of research and/or speaking to a professional.