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

You can learn more about that business at iselerfinancial.com, and if you have a question about money or personal finance, I would love to hear from you. Please head over to iselerfinancial.com/podcast to submit a question and I'll answer it on a future episode. A few years ago, I wrote a blog post that somewhat surprisingly, is consistently the top visited post on said blog.

The title of that post is actually how to turn $6,000 per year into a million dollars because six K 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 seven k, I thought I'd revisit this idea. I'll link to that older post in the show notes. But if you listen to this episode, you'll get the gist.

The reason this seven K 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 gonna 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 and how you work.

Sometimes that's a matter of keeping your expenses low. If you only need to spend $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, et cetera, might wanna 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 and 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 choosy about your hours or the people you work with, I consider that a win.

Okay, so onto the topic of the day, how can you turn seven K per year into a million? By the way, if you wanna try some of these calculations on your own, I'll link to a super helpful calculator from investor.gov that does exactly this kind of math. I'm actually gonna start with an option for saving a million dollars that wasn't in the original blog post, and that's just saving money in cash. Interest rates were a joke back when I wrote that piece, so I didn't even give it a second glance.

But there are currently FDIC insured banks out there that will pay you in the ballpark of 4% annual percentage yield or APY for cash in a savings account. 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 a million dollars. That actually surprised me. I kind of thought it would take you 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 in a cash account, you could save a million bucks that way. however, I don't know about you, but the jury's out on whether I actually have another 49 years ahead of me. And even if I do make it to my mid nineties, I don't really wanna wait that long to have a high degree of financial stability or independence. But I wanted to throw it out there for reference.

And who knows, maybe some enterprising teenager hears this and decides to save lots 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 JP Morgan Chase for their so-called premier savings account, you're just never gonna get there by saving cash. It would take about 142 years to get to a million dollars by saving seven K 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 seven K 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 the key to sticking with any long-term plan, I also wanna share the simplest possible way to turn $7,000 per year into a million dollars, which is 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 wanna look for when you're choosing an index fund are a, what does it track, like the s and 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 nine and 11%, depending on which sources you like. Let's split the difference and call it 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 the 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 a million dollars after around 29 years. That's still a long time, but it's not crazy. I'm reasonably confident that I'll still be alive and kicking in 29 years to enjoy that money.

And 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 really fucking simple. Put your money in the 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 can't really 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'll 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. But I've never had a million dollars before and certain parts of my life sure would be a heck of a lot easier if I did. So, while you might not sail away on your brand new yacht, 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.

More financial independence is a good goal to aim for. Okay, that's it for today. If you have any questions about today's episode, shoot me an email at podcast@Iselerfinancial.com. And if you're thinking to yourself, sure, Tim, a million dollars sounds great, but how could somebody like me save $7,000 a year? Well, that's exactly what I'm gonna address on the podcast in two weeks. Next week I'll be talking with my old band mate, Lara Hermanson.

Lara just happens to own the largest urban farming company in the US and I had a great time catching up with her, learning about how she got into the farming game in the first place, and how she learned about investing while working as a maid. Okay. It's time for disclosures. The Thing We Never Talk About is for educational and entertainment purposes only. It's not legal investment or tax advice. But everyone knows that, right?

People on the show, including the host, may have interests for or against any investments discussed, so do yourself a favor and don't make any decisions based on what you hear on this, or any podcast. If you have a money or finance question you'd like answered in a future episode, please visit Iselerfinancial.com/podcast. Again, that's Iselerfinancial.com/podcast, and Iseler is spelled I-S-E-L-E-R.

And if you like what you hear, please like and subscribe to this show wherever you get your podcasts. And you can get my insights on money and more delivered directly to your inbox by subscribing to my Keep It Easy newsletter at Iselerfinancial.com/newsletter. Thanks for listening. I appreciate you.