Three Examples of Ways to Become a Millionaire Using the Time Value of Money

Most people won't become millionaires by winning the lottery, or gaining extreme fame, or inheriting a mass of wealth from a relative. So, how does the average joe become a millionaire? By using the time value of money. I wish this was taught in schools, because I didn't learn about this until I was in my 30's. This means I already lost many years of using the time value of money. So how do you save a million bucks? The following examples differ based on the initial amount of money to invest, how much is invested each period, the time of the periods such as per month or per year, the percentage rate received on the investment, how often interest is compounded, and the effect of taxes. Two websites, moneycentral.msn.com/Investor/calcs/n_savapp/main.asp , and planningtips.com/cgi-bin/savings.pl are useful to reference during this discussion, and for purposes of figuring out what to do to reach your own savings goals.

1. Start with a certain amount of money and save it for a long time. This is one way to reach the million dollar goal. Here are some specific examples:

If you start with $10,000 and you get an 10% return on your money, it will take you 46 years to reach a million dollars. (You can verify this using the planningtips.com website noted above.) This means that if you start saving this amount at age 18, when you reach 64, you will have a million dollars. One thing this savings calculator does not take into effect is taxes. So, you would have to pay the taxes separately or have this money in a retirement account in order to actually have this amount at the end of the 46 years. To figure in money lost to taxes each year, use the moneycentral.msn.com website noted above.

If you start with $20,000 and get a 10% return on your money, it will take you 39 years. This implies monthly compounding of interest. So, if you are 18 at the beginning, you will be 57 when you reach your million dollar savings.

If you start with $30, 000, with 10% and monthly interest compounding, you will reach your goal in 35 years.

If you start with $40,000, a million dollars will be reached in 32 years.

2. With no money at the beginning, invest a regular amount each month.