What would you do if you had a million dollars? Sure, you could do all of the silly things mentioned in the BNL Song. Most people would say they’d go on vacation or buy a fancy car or two. While a million dollars is not that big a sum anymore, it is still a substantial amount? How substantial?
Well, let’s say you are working an upper middle class job and earning about $80,000 per year. If you had $1 million invested in a set of mutual funds, you could withdraw about $80,000 per year from the funds without the balance going down (on average- some years you’d make more and some years you’d make less), even taking inflation into account (the return on stocks is between 10 and 15%, so figure you could take 8%, leaving the rest to deal with inflation). This means that you could retire and still receive the same income without working another day in your life.
Maybe you don’t want to retire though. With $1 million in the bank, you have an effective income of about $160,000 per year, $80,000 from salary and $80,000 from interest and capital gains. Because a lot of the money in capital gains would be growing tax deferred (you wouldn’t owe taxes unless you sold the shares or the mutual fund you were holding did so and distributed the earnings – or reinvested them for you). You could therefore receive $160,000 per year effectively but not pay taxes on part of the income for years until you sold the funds. If you die, much of the money could even be left to heirs without ever paying taxes on it. That’s better than a $160,000 salary.
With that extra income you could take a lavish $20,000 vacation each year and still reinvest $40,000. You could buy a house for someone every couple of years. You could pay the salaries for a couple of people at a local non-profit. You could send a child to a private school and pay cash each year, all without seeing your principle value decrease.
If you decided to simply live on your salary and reinvest it all, you would have $2 million in only about 7 years. Then $4 million seven years after that. It grows fast – getting the first million is the hardest part.
So what’s the point of this rambling post? There are two, actually. The first is that it is worth the sacrifices in the beginning to save and build your pipelines. At first others around you will seem to be better off and living the good life, but if you wait you’ll have all that they have and more. Plus, you won’t need to work for any of it while they’ll need to work extra to pay for the interest on the credit cards and home equity loans they used to pay for their lifestyle.
The other point is that if you invest your millions, rather than spend it all as many lottery winners do, you can have your cake and eat it too. Even if you blow your entire year’s earnings travelling the world or giving out $100 gifts to strangers at Christmas time (and how cool would that be), you’ll have another $80,000 sitting there waiting for you the next year. That’s how people who stay rich do it.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.