How To Turn $7k/Year Into $1 Million

A few years ago I wrote a post that, somewhat surprisingly, is consistently the top visited post on this blog. The title of that post is actually how to turn $6,000 per year into $1 million because $6k was the maximum IRA contribution allowed when I wrote it. So, since the topic is clearly popular and the IRA max contribution has been bumped up to $7k, I thought I’d revisit this idea.

And the reason this $7,000 into $1 million conversation is important is because, regardless of how old you are or what stage your career is at, I want you to be thinking about financial independence. That term gets thrown around as a modern substitute for retirement, especially in the context of the so-called FIRE movement, which stands for Financial Independence, Retire Early. 

Now, as Yogi Berra once said, a nickel ain’t worth a dime anymore. And, inflation being what it is, a million bucks ain’t what it used to be. But a million bucks is still a heck of a lot of money—and certainly a heck of a lot better than nothing. So for this conversation, we’re going to think of financial independence not in the context of getting rich and retiring early, but instead in terms of increasing your ability to choose when & how you work. 

Sometimes that’s a matter of keeping your expenses low. If you only need $2,000 per month to live a happy life, your obligation to work is pretty manageable. But another way to increase your ability to choose when and how to work is having enough money that you know you’ll be fine if you decide to work a little bit less.

Of course, that doesn’t mean you have to stop working. Some people, like authors, musicians, filmmakers, etc., might want to keep working forever. That’s totally fine. Not everyone needs to plan for a conventional retirement. But what I DO want everyone to plan for is to save & invest in order to build some meaningful degree of financial independence. If that means you still have to work, but you get to be more choosey about your hours or the people you work with, I consider that a win.

So on to the topic of the day: how can you turn $7k per year into $1 million? (BTW, if you want to try some of these calculations on your own, here's a super helpful calculator from investor.gov that does exactly this kind of math.)

I’m actually going to start with an option for saving $1 million that wasn’t in that original blog post: just saving money in cash. Interest rates were a joke when I wrote that piece so I didn’t even give cash a second glance. But there are currently FDIC insured accounts out there that will pay you in the ballpark of 4% Annual Percentage Yield (APY) for saving cash. So rather than poo-poo the idea, I thought I’d run it up the flagpole and see what I found. 

If you save $7,000 per year in an FDIC insured account with a 4% interest rate, it would take you 49 years to get to $1 million. That actually surprised me! I kind of thought it would take a lifetime or more to save that much in cash. So it’s not totally out of the question that if you can get a 4% APY or better on a cash account, you could save a million bucks that way.

However, I don’t know about you, but jury’s out on whether I have another 49 years ahead of me. And even if I do make it to my mid-90s, I don’t really want to wait that long to have a high degree of financial stability and independence. But I wanted to throw it out there for reference and who knows – maybe some enterprising teenager reads this and decides to save a lot of money the safe way.

In contrast, if you’re only getting the 0.02% APY quoted by a big bank whose name rhymes with Chase for their so-called Premier Savings account, you’re just never going to get there by saving cash. It would take about 142 years to get to $1 million by saving $7k per year in that kind of account. 

So for everyone who hopes to move things along at a faster clip, we need to look at investing your money. If you want your money to grow significantly faster than inflation, you just have to suck it up and accept the extra risk associated with investing in favor of your long-term financial health.

BUT that doesn’t mean you need to be some kind of investing genius or even invest all that much money each year. Again, we’re talking about $7k per year and, while that’s certainly a lot to some people, it’s not an insane amount of money. And because I think simplicity is key to sticking with any long term plan, I also want to share the simplest possible way to turn $7k per year into a million dollars: by investing in low-cost index funds in a retirement account.

A low-cost index fund lets you buy hundreds or even thousands of publicly traded companies in one super convenient package. A company called Vanguard pioneered index funds, but I’m generally sort of brand agnostic. But some things you want to look for when choosing an index fund are: a) what does it track, like the S&P 500 for example; b) what’s the reputation of the fund issuer, have they been around a long time, what do people say on Reddit or whatever; and c) look for funds with low expense ratios. The expense ratio is what the mutual fund company charges for managing the fund, and lower fees mean that more of the money stays in your account.

The US stock market historically has an average annualized return of somewhere between 9-11%, depending on which sources you like. Let’s split the difference and call it a 10% average annual return. Now, that doesn’t mean that the actual return is going to be 10% each year. There are zero guarantees in investing and, truthfully, the actual returns in any given year are almost never the same as the average. Some years it’s up, some years it’s down, but – statistics being what they are – the longer your time horizon, the more things approach that average.

If you invest $7,000 per year in a low-cost US stock market index fund in your IRA and we assume a 10% average annual rate of return, you should have $1 million after around 29 years. That’s still a long time, but not crazy. I’m reasonably confident that I’ll still be alive and kicking in 29 years to enjoy that money. If you happen to be younger than me, all the better!

And one thing to consider is that the calculations I’m using are based on the assumption that you’re starting from zero. If you already have some amount of money invested – even if it’s a small amount – you should do better than that 29 year prediction.

The thing I like best about this scenario is that it’s incredibly simple. Put money in your IRA, use that money to buy a low-cost index fund, rinse and repeat. That’s it. You can let time do the heavy lifting for you. And that’s due to the power of compounding growth, which starts off slow but then begins to take off exponentially if you can stick with it for a long time. You really can’t beat it in terms of results relative to effort.

Now, I’m not saying that if you max out your IRA every year then you will retire to a life of luxury. Like I said, a million bucks ain’t what it used to be. And, of course, it bears repeating that there are no guarantees in investing. So while you might not sail away on your brand new yacht by maxing out your IRA each year, you should at least be able to increase your financial independence in a meaningful way.

And I think that’s worth doing, even if you don’t have a huge income, even if you have a weird job, even if you’re excited about the idea of working forever. Financial independence is a good goal to aim for.

If you want to have a conversation about investing for the long-term, hit me up. This email address is always checked by yours truly.

Thanks,

Timothy Iseler, CFP®

Founder & Lead Advisor

Iseler Financial, LLC | Durham NC | (919) 666-7604

Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.