Many people dream of retiring as a millionaire yet they give up on this dream because they think it’s difficult to achieve. But what if I told you that having RM1 million for your retirement isn’t as hard as you think?
Achieving any financial goal takes specifying your goal, then developing and sticking to the right financial habits as early as possible, and then staying the course. Here we’ll guide you on how to reach the RM1 million mark by the time you’re 65.
Set your goal
With every financial plan, you need to set a goal with two pieces of information:
1) How much money you want to have and
2) by when you want to get to this amount.
In this case, you want RM1 million dollars by age 65. Once we have this, we can figure out how much we need to save each month, what to do with that savings, and how to make sure we stick to the plan.
Start saving as early as you can
The first step to reaching your financial goal is to start saving consistently as early as you can. To be consistent, create and stay in control of your budget. Since you have a specific goal in mind, you’re motivated to stick to a clear savings plan that fits into your budget seamlessly.
When creating a budget, assess how you spend your money every month. By doing this, you’ll know when you’re spending excessively. Find places in your budget to cut back on, such as reducing your rent or giving up an expensive coffee addiction. It’s money you could be putting towards your future, and it all adds up over time.
Saving part of your monthly salary early on in your financial journey also allows you to leverage on the power of compounding interest, which means you won’t need to save as much in the long term to reach your financial goals.
The power of compound interest
Once you start saving, you’ll see how your savings can grow exponentially over time just by taking advantage of compounding interest.
For instance, if you save RM6,0000 per year (or RM500 every month) and earn a 2% interest on your savings, at the end of Year 1, you would have RM6,055. In the next year, you will earn interest not just on the initial RM6,000 you saved but also on the additional RM55 you earned in Year 1. This takes your savings value to RM12,233 at the end of Year 2, thanks to compound interest. In Year 2, you actually earned RM233 in interest, and if you continued saving consistently, you’ll earn a total interest of RM535 in Year 3 and these earnings will continue to accrue over time as you save consistently every year.
Now, if you started saving RM500 every month starting at 25 years old, what would those savings get you in 40 years?
If you were to stash RM500 in cash every month for 40 years under your bed, that would leave you with RM240,000 (excluding inflation). However, if you put that money in a savings account that earns 2%, you’d have RM367,218 after 40 years. That’s an extra RM127,218 in your retirement fund just from a 2% interest!
Though, here we’re talking about getting to RM1 million by age 65, so how do we bridge the huge gap of RM632,782 to reach RM1 million when we’ve only saved RM367,782?
Invest your savings
Instead of just keeping your money in a 2% savings account, get your RM500 per month to work harder for you by investing it. For a long-term financial objective, such as retirement, investing your savings amplifies the power of compound interest. With time on your side, you can afford to take a little bit more risk. If you were to invest that RM500 each month in a balanced portfolio that generates 6% return, at age 25, your money can grow to RM1 million by the time you’re 65 years old. If you wait until you’re 35 to start saving monthly, you’ll need to save more than double that amount. If you wait until you’re 45, you’re looking at saving more than RM2,000 per month to get to RM1 million.
By saving and investing early, you can put less money upfront each month towards your retirement in the long term. If you started saving RM500 every month for 40 years, you only have to put up a total capital of RM235,200 whereas if you waited until you’re 55 years old, you’d have to invest RM5,404 each month, or RM648,480 in total. In other words, saving earlier actually saves you more money in the long term.
Compound interest really is that powerful.
The key takeaways here are 1) you need to save as early as possible and as consistently as possible, and 2) you need to invest those savings. The longer you put off saving and investing, the less time compound interest can work for you to get to RM1 million, and the more expensive your retirement will be.
Make sure you invest consistently
It’s easy to come up with excuses not to invest your savings; you want to go on a holiday, you have car repairs or an unexpected visit to the doctor. But these excuses are just that; excuses. You should already have an emergency fund so nothing comes in the way of your investment each month. Otherwise, you’re pushing off your retirement, or at least making it less comfortable.
You can keep yourself in check by automating your investment. This way you don’t have to remember to invest each month. Set up a standing instruction to put money into an investment account right when your income comes into your bank account every month.
Being consistent in investing also means staying the course. It can feel discouraging to invest when the markets seem volatile but these ups and downs are a normal part of long-term investing. By staying the course and investing consistently, you’ll be able to dollar-cost average your investments and reach your retirement goal in the long term.
Saving now means paying for a better future. So, will you retire as a millionaire?
Head on to StashAway’s website to find out more today. There’s even a special promotion for Graduan readers! As always, please conduct your own research before investing.