Growing your Net Worth

I find it interesting to read about how ordinary working people can accumulate significant wealth over the years. I found two interesting articles about growing one's Net Worth the old-fashioned way: by saving steadily and allowing enough time for the power of compounding to work.

The first article, How to Save $1 Million for Retirement is from The Wall Street Journal Online and is written by Jonathan Clements. It says that the critical milestone is accumulating savings equal to two times your annual income. It has the following quote from a financial adviser:

What many investors fail to understand is that, once they reach a certain level of assets, most of the savings should come from investment growth. The breakthrough occurs at around two times your income. [This is] the crossover point, where the biggest driver of your portfolio's growth is now investment earnings, not the actual dollars you're socking away.

How long does it take to reach this goal? According to the article, if you have savings of two times your annual income in your early 40s, you are in pretty good shape. In my opinion, this may be appropriate for someone planning to retire at 65, but those who want to retire earlier will need to do somewhat better than that.

One of the better-known yardsticks for wealth accumulation is the one given in The Millionaire Next Door,one of my favorite personal finance books. According to this so-called MND formula, to be considered wealthy your Net Worth must be at least this: your annual income multiplied by your age, and divided by 10. This sets up a much more aggressive goal, namely, 4 times your annual income by the time you are forty.

The second article, Your First Million is the Toughest by Chuck Saletta at the Motley Fool, illustrates the power of compounding in another way. It shows that for someone who contributes $1000 every month to a retirement account, it would take about 25 years to accumulate the first million, but only 8 years for the second million, and 5 years for the third million (this assumes 8% investment returns yearly).

For someone with a target of saving $3 million, most of the effort is in getting to that first million. Once you hit that milestone, compounding really takes over to help you reach your ultimate goal. In fact, once you reach $1 million, you can scale back your monthly contributions from $1000 down to $100, and still reach the $2 million and $3 million targets in almost the same time.

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Kevin said...

On the subject of compounding.....

Ferotal said...

This is giving me more knowledge about investment. So I won't become the foolish one who don't understand how this strategy to become success in investment just in hand. You need to be clever on timing and this is not a gambling or something like that you just need more strategy to win and having sharp perception to knowing the best moment to spend your money and make it grow.