Saving your way to riches

Posted by roslimh

November 3rd, 2009

Hey, hope you get my point yesterday on how to become a full-time freelancer and today I would like to share with you how to become rich! Actually saving is the best way to become rich. According to several surveys in the US, most millionaires are not made by winning the lottery, a brilliant business idea or through inheritance. Most do it the steady way via disciplined savings and investing. But how hard it is to achieve a million this way?

Let’s say you start with nothing in the bank and put away RM1,000 a month. With income increases and bonuses, let’s assume you add to the savings at the rate of 5% a year. After one year, you would be putting away an average of RM1,050 a month. With an average return of 8% per annum, you would hit TM1 million mark in a little under 22 years.

But then, here’s the bad news. In 22 years, your million would be worth about RM340,000, given an inflation rate of 5% per year.

The good news is, given that the assumptions are right, your second million will be much easier to achieve. If the rate of savings remains, the second million would be made in another seven years. The third million, you would make in another four years. Even if you stop contributing after you reach the first million, the second million would be made in nine years, less than half the time it took to accumulate the first million.

If you had put away RM1,000 a month without increasing your savings, you would go from zero to RM1 million in 26 years and to RM 2 million in 35 years.

So, most of the effort is spent in accumulating that first million. Once you get to that level, the magic of compounding, and the opportunities that will open up to you, will help you get to that second million and third million. They say the rich get richer, and that is really true.