It’s easy to make a million dollars...
... If you are patient.
It’s hard to make a million dollars if you’re a human though, because there’s always “a new thing” that makes it really difficult to be, well… patient.
There’s always something new that we want or need to buy and we can tell ourselves, “I’ll start saving in the future”… but what about when the future arrives?
If a person saves $500 per month and gets a 7.5% return for 40 years, they will end up with a little over $1.5m (it’s $1,511,911 to be precise).
That could mean someone saves from the age of 19 – 58 or it could be from age 31 – 70, it really doesn’t matter.
The problem is, humans don’t tend to think quite like that because life happens. Let’s like at an example of a typical person, called Bob.
Bob wants to save some of his money for the future. It’s not clear what, but he knows that saving is important because his parents always saved and everyone else seems to do it.
Bob is 23 years old and makes good enough money that he can save $1,000 per month. After 8 years of investing his savings in an evidence-based portfolio, Bob has just under $131,000.
That’s pretty good. Bob is on track, right?
Well, it depends on the choices Bob makes in the future, because it’s not over.
After 8 years, Bob is 31 years old and thinks “Maybe I want to buy a house…”
And you know what? That’s just what Bob does. He buys a property.
But in order to have enough deposit, Bob has to withdraw all his investment savings, so he goes back to $0, and then starts over. It doesn’t seem like a big deal, because Bob tells himself that he’s a good saver and and he’ll get pay rises so he can save even more in the future. It won’t be hard to make it up.
Maybe that’s all true (maybe it’s not), but let’s see what that 8-year difference makes in Bob’s future.
If Bob kept saving all the way until age 65, without ever withdrawing for his deposit, he’d have a tad over $3.5M ($3,537,347).
Instead, Bob withdrew at 31 and started over, so he’ll still be ok because he can save and he knows he’ll earn more. Afterall, how much is he missing out on from those 8 years? Maybe a little.
Well… maybe a lot more than a little. Bob’s final balance of saving from 31-65 will be $1,872,939, which is $1,664,407 less, compared to saving from age 23-65.
Basically, Bob will have half as much money in retirement for withdrawing his early years of saving.
That's how taking early withdrawals hurts your future and this is just one quick example, that shows why it’s important to let your wealth compound, uninterrupted for as long as you possibly can. A little withdrawal can have a big effect.
Of course buying a house is a big decision and most people that can, choose to do it at some point, but just be aware that using your savings and wealth for one thing can come at the expense of something else (such as your future, having security or choices, being financially independent sooner, travel, etc).
If you’re wondering what a practical solution it, it’s quite simple.
Nothing. All you have to do is nothing.
Don’t withdraw.
Set aside some money and savings that can be used for things through your life, but make sure you keep some buckets of money that are protected and only used for the long-term stuff.
If you never touch the long-term buckets of money, then they grow more than you can imagine because the human brain thinks about things in straight lines. We can do the math for 8 + 8 + 8 + 8 + 8. Human brains don’t naturally calculate compounding, so it’s hard to quickly answer what is 8 x 8 x 8 x 8 x 8.
Just remember, dollars that are used today for something, are dollars that you can’t use later for anything. In other words:
“You get the chicken by hatching the egg, not by smashing it” – Arnold Glasglow
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