How to save a million bucks

Becoming a millionaire is more painless than you think, even if you’re starting with next to nothing.

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million_dollars_322Roger Hunter is 40 years old and owns a small construction company in St. John’s. He earns about $80,000 a year. His wife Anna, 36, looks after the couple’s three children and works for the family business during the busy season, earning an extra $35,000 or so. Roger enjoys playing soccer, and he and Anna love to eat in nice restaurants, though they indulge only a few times a year. In many ways, they’re just like everyone else in their neighbourhood. Except for the fact that they’re millionaires.

Roger is the first to admit he’s no investing wizard. “I just figure if I throw enough stuff against the wall, some of it will stick.” What the Hunters have mastered is the art of saving. As soon as he started working full-time, Roger arranged automatic payroll deductions that, over the months, eventually bought him $10,000 worth of Canada Savings Bonds. Whenever his job required him to relocate, he took the moving allowance and put it in the bank. If he had a little extra cash, he called his bank and asked them to increase his mortgage payments.

Thanks to that attitude, the Hunters (whose names we’ve changed to protect their privacy) have saved more than $700,000 in their investment accounts. They paid off the mortgage on their $300,000 house in nine years, and own two rental properties, a tract of land and a motor home, with a combined value of more than $400,000. All this despite never earning a $100,000 income, until they hit that milestone last year.

When the Barenaked Ladies wrote their classic song about being rich, they didn’t call it “If I Had an Ample Nest Egg.” There’s no TV game show called “Who Wants Several Hundred Grand?” In the first Austin Powers movie, Dr. Evil didn’t obtain a nuclear warhead and hold the world ransom for 70% of his pre-retirement income. No, in our culture, the number that symbolizes real wealth is still a cool million. “I think I’ll need a million and a half to retire,” says Hunter. The couple is already there in terms of net worth, and they should have a seven-figure investment portfolio well before Roger hits 50.

At MoneySense, we’ve received many letters and emails from middle-class readers like the Hunters who have saved a million, so we thought we’d help you figure out if you could do it, too. We’re not going to pretend it’s easy—it requires a steady income, a commitment to saving, short-term sacrifices, and a smart investment strategy—but if Roger can do it, so can you. Joining the ranks of the millionaires may be a more realistic goal than you think.

Saving grace
The first secret to saving a million dollars isn’t a secret at all: spend less than you earn, then save and invest the difference. “That is so dirt simple,” says David Christianson, a financial planner and portfolio manager with Wellington West Total Wealth Management in Winnipeg. “But I work with people who have accumulated significant net worth, and most of them have accumulated it by using that formula.”

The percentage of your income you need to save depends on how much you earn, how many years you have before retirement, and what kind of return you expect on your investments. As a rule of thumb, Gail Vaz-Oxlade, financial author and host of ’Til Debt Do Us Part, says that people who start saving in their twenties can assure themselves a comfortable retirement by setting aside just 6% of their net (after-tax) income. For someone whose take-home pay is $50,000, that’s an RRSP contribution of about $250 a month.

If your heart is set on saving a million, however, you’ll likely have to sock away more: On the opposite page we’ve created a Model Millionaire and figured out how much he needs to save each year. We found that about 10% of his middle-class income should do it, if he wants to hit seven figures by age 65. That means in his thirties and forties, he’d have to save $300 to $500 a month. That’s a challenge for someone earning $50,000 or $60,000, paying off a house and raising children. But remember the part where we said this wasn’t going to be a breeze?

You can make it easier by setting up an automatic RRSP contribution on payday so you don’t have a chance to spend your savings. “Pay yourself first” has been a mantra for decades—because it works. Most people never get behind on their income taxes, mortgages or car loans because they never see the money earmarked for those purposes. Make your savings a fixed expense, too, and you’ll be well on your way to saving a million.

Living on less
When Thomas Stanley and William Danko wrote The Millionaire Next Door, they set out to examine the lifestyles of the wealthy. What they learned surprised them: the people who wore expensive suits, drove flashy cars and drank fine wine had high incomes, but they weren’t necessarily wealthy. Most of the millionaires they studied, by contrast, dressed casually, drove Chevrolets and drank Budweiser. The authors summed up their observation simply: “Wealth is what you accumulate, not what you spend.”

The lesson here is that if you want to become a millionaire without a huge income, you’re not going to look like a millionaire. The Hunters are perfect examples: Roger is pretty sure his soccer teammates have little idea what he’s worth. People who save 10% of their net income aren’t typically paying $800 a month to lease an SUV, nor are they eating in restaurants three times a week. They buy what they need, and they recognize good value, but they don’t indulge every desire. This frugality comes naturally to the Hunters, but there’s hope for anyone who is truly committed to their financial goals, says Vaz-Oxlade. “There is no question that some people are born savers. However, I have gotten too many letters from too many people who were spend-crazy and who have subsequently seen the light. It’s all about prioritizing.”

One of the biggest barriers to saving a million-dollar portfolio is the priority we put on our homes. According to RBC Economics Research, owning a two-storey home costs the average Canadian household more than 46% of their pre-tax income. If you’re pouring that much into your house for 25 years or more, your chance of saving a million is vanishingly small. The goal becomes realistic, however, if you buy a home you can afford to pay off in 15 years. Once the mortgage is gone, you can redirect the payments to your RRSP and see your portfolio suddenly jump to life. (We cost out this scenario in “The Late-Blooming Millionaire,” below.)

Get time on your side
There’s no question that starting early is a huge advantage. Any online savings calculator will show that you can save a million by tucking away just $500 a month if you have 40 years to do it (assuming a 6% return). Unfortunately, life isn’t as simple as a savings calculator. “Those linear graphs that show how to achieve $1 million don’t match the human life cycle,” says Neil Murphy, a financial planner with Weigh House Investment Services in Toronto. “Your cash flow doesn’t match that. The people who are aggressively saving are usually a bit older, their kids are gone, they’re hitting their stride income-wise and their expenses are going down. But I doubt that many of them were doing massive savings in their twenties.”

If you live below your means when you’re young, concentrating on paying down debt rather than buying expensive toys, you’ll likely have little trouble applying that same discipline to retirement savings as you get older. Once you’re mortgage-free and your kids have moved out, you may well be able to save 30% or 40% of your net income during the last 15 years of your working career. But if you’re spending more than you make and continually refinancing your home to bail you out, you’re not going to suddenly morph into a super saver at age 50.

The slow-and-steady road to a million puts compounding on your side, but it does have one psychological pitfall: the finish line can seem so far away. Our Model Millionaire on page 68 starts saving 10% of his net income at 25, and two decades later his nest egg has grown to just $212,000. He’s halfway through his 40-year savings plan, and yet and he’s barely a fifth of the way to his goal. That can be awfully discouraging if you don’t understand the nature of compounding: most of the benefit comes near the end. For instance, our investor’s portfolio took 20 years to grow from zero to $212,000, but it will double in just eight more years. By the time it reaches half a million at age 55, a 6% return will be spinning off $30,000 of growth annually. That’s more than our hard-working saver contributed during his first six years.

The tipping point comes when the dollar value of your portfolio’s annual return exceeds the amount you’re contributing. At 35 years old, three-fifths of our Model Millionaire’s portfolio growth comes from contributions. Just five years later, however, the portfolio has grown to more than $115,000 and everything has changed. His portfolio’s return is now adding more to his savings every year than his contributions. Once your portfolio is working harder than you are, your goal will feel a lot closer.

Keeping more for yourself
The final piece in your million-dollar puzzle is the right investment plan. It’s possible for extreme savers and top-tier earners to amass a fortune in savings accounts and GICs. But if you’re planning to hit seven digits by saving 10% of a modest income, you’re going to need help from the markets.

Your first step is to check your expectations: if your map to a million includes 8% or 9% returns every year, you’re likely to be disappointed. True, the markets have returned more than that historically: during the 25 years ending in 2007, even T-Bills averaged almost 7%, while bonds returned close to 11% and stocks almost 12%. But that included periods of double-digit inflation and steadily declining interest rates, two things we’re not likely to see in the decade ahead. Neil Murphy says that high costs and bad decisions—things like chasing hot funds or panicking during market crashes—doom most investors to subpar returns. When he makes projections for his clients, he uses a 5% to 6% expected return for a portfolio of half equities and half bonds.

One of the best ways to conquer the one-two punch of high fees and self-destructive behaviour is to adopt the Couch Potato investment strategy. Low-cost index funds or exchange-traded funds (ETFs) are the best way to capture your fair share of the returns the markets deliver. A Couch Potato portfolio can easily cost less than 0.5% a year in fees if you manage it yourself in a discount brokerage account.

Have no illusions here: fees can destroy your returns and easily derail your million-dollar journey. Canadians pay some of the highest investing costs in the world: annual fees of 2% to 3% aren’t unusual. If our Model Millionaire has his annualized return reduced from 6% to 4% because of mutual fund expenses or other fees, he’ll fall well short of his million-dollar goal with just $672,000. Ask yourself whether it makes sense to put up all of the capital and assume all of the risk, while reaping only two-thirds of the return. If you don’t end up being a millionaire, you can be sure your investment adviser will.

The million-dollar question
We hope we’ve shown you that saving a million bucks is a realistic goal for disciplined investors with a good (though not enormous) income, and several decades to make it happen. The question you need to ask yourself now is more introspective: is it worth it? Like any sacrifice, your long-term savings plan should be done with a higher purpose. Your ultimate goal, after all, is supposed to be happiness.

A funny thing can happen on the way to the Millionaire’s Club. People who spend their whole lives scrimping and saving suddenly find themselves having to draw down their portfolio when they retire, and it doesn’t come naturally. “I would bet that for 25% of our clients each year, our job is helping convince them that they can spend more money,” says Christianson. “People who are good at saving often have trouble letting go.”

Living frugally, paying off your debt and saving for retirement should be everyone’s financial goal. But if you’re turned off by the idea of scrimping for decades just so you can call yourself a millionaire, that’s fine. “Don’t start with the end result, start with the process,” says Vaz-Oxlade. “It’s less about a magic number and more about you deciding where you want to be, where you are now, and how you are going to close the gap.”

Now there’s advice that’s worth a million bucks.

The model millionaire

Like a robot programmed to save, you contribute 10% of your net (after tax) income to your RRSP fromage 25 until age 65, and you turbocharge your savings by reinvesting your RRSP tax refund every year. You’re comfortable with a balanced portfolio of stocks and bonds designed to achieve an annualized return of 6%.

Age Earned annual income Net annual after-tax income Monthly RRSP Contributions Annual RRSP tax refund (reinvested) RRSP value at year end
25 $40,000 $32,945 $275 $861 $4,156
35 $53,757 $42,125 $351 $1,324 $70,944
45 $72,244 $54,488 $454 $1,907 $211,701
55 $97,090 $69,780 $581 $2,295 $491,116
65 $130,482 $89,380 $745 $3,968 $1,028,151

The super-safe saver

You can’t get a return of 6% without risk. If you’re the ultraconservative type of sticks to GICs and other safe investments, you may have to save a quarter of your net income to retire a millionaire. Here we assume you’re maxing out your RRSP every year, so your annual contribution is 18% of earned income to a maximum of $22,000. (Since you’re using up all your RRSP contribution room, you can’t reinvest the tax refund.) We assume a low-risk annualized return of 3.5%

Age Earned annual income Net annual after-tax income Monthly RRSP Contributions Annual RRSP tax refund (reinvested) RRSP value at year end
25 $40,000 $32,945 $600 $0 $7,200
35 $53,757 $42,125 $806 $0 $109,060
45 $72,244 $54,488 $1,084 $0 $286,757
55 $97,090 $69,780 $1,456 $0 $583,130
65 $130,482 $89,380 $1,833 $0 $1,060,161

76 comments on “How to save a million bucks

  1. Pingback: Recommended Reading: China, Save a Million Dollars, « Tiny Potato

  2. Considering that they are earning more than $120,000 a year, I don't think they are in much of a financial bind. How many Canadians are earning that sort of money?

    Reply

    • lots of people make that kind of money.

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      • Right………….more like YEAH RIGHT!

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        • More like the average household income is close to that in Canada. Consider all the unionized employees collecting overtime, trades people, government workers and two income families. Rich Albertans alone make this a reasonable estimate of a family income in Canada

          Reply

  3. this article says that dont live that life . become a millionair and to the grave yard.US is in the highest debts in the world minus period . yet the richest . a human should live that life today now .

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    • Yes work hard and save a million bucks by retirement, so that one can call oneself a millionaire because
      it is a cool thing to be. Then figure how many more years you have to live (that is assuming you are still alive
      at 65) and adjust your spending accordingly so that you get to spend it all. And you might also want to think
      about how much of the very hard earned retirement savings are going to go back to the revenue agency in taxes
      during your retirement years … THINK ABOUT THAT.
      Let have some really honest financial analysts for a change. Thank you.

      Reply

  4. Excellent article. Have used a similar approach successfully to achieve early retirement at age 50. It is possible to expedite becoming a Millionaire through good investment approaches while eliminating expensive fees associated with Mutuals funds & Investments advisors

    Also to add to prior posting that income taxes are an important factor to consider & can be minimized by good financial tax planning by structuring a retirement Portfolio to minimize taxes such as use of REITs and Cdn Dividend stocks, etc. outside of an RRSP.

    Reply

  5. Treating myself to a nice dinner a few times a year and being frugal the rest of my life doesn't sound like a very enjoyable way to spend life. To each their own, but I'm enjoying my money while I am young and healthy enough to have fun with it.

    Reply

    • It seems like people aren't reading the article carefully. Nobody said anything about a nice dinner "a few times a year." They just don't waste their money 3 times a week (which could mean 6 dinners a month!). And they don't appear to be overly frugal – you make it sound like they live in short term deprivation in order to be secure down the road (in fact, it sounds like you're rationalizing your own poor spending habits). People who have solid savings plans are less stressed and their marriages and realtionships last longer. It's a no brainer. And, unlike the comments above, many Canadian households to have combined incomes of over $120K. Of course many don't, but articles like this can't address every financial demographic.

      Reply

      • Correct! I invest about $6,000 per year, but have done that every year since 25 and will have about 1.2 million in todays dollars when I retire. I also have a nice home which will be paid off before 65 and worth about $525,000 in todays money. I do this as the sole income earner and about $80,000 per year (now, when I started at 25 I was making about $25,000 per year). People need to educate themselves about the magic of compound interest.

        Reply

        • Way to go Tim! I’m just getting started myself. I have a few thousand in a 401K, and a few more dollars in stocks and emergency savings. I’m going to ramp up my savings over the next few months, though because I had an emergency and my emergency funds were depleted. Gotta replenish that. Anyway, I just want to say that it doesn’t take a lot to be able to to save up. It just takes smart budgeting and a defensive financial attitude. I am a full-time graduate student, and the sole bread-winner in my household of 3 with a $30K salary from my fellowship. It’s not a lot, but I am able to pay all my bills, I don’t live in a dump (2 -story town house with a fireplace, screened porch, 3 bedrooms, etc), my son participates in 2 sports, I have 2 cats, I don’t get government assistance, and I am STILL able to save. The first thing I let go was my low deductible on car insurance. Saved up about $1000, then increased my deductible to that amount. Insurance rate went from $100/month to $35/month, and the other $65 goes into my savings. That’s just one small example of having a defensive financial strategy. So, for people saying it’s not possible, I say that it’s because you aren’t trying to make it possible.

          Reply

  6. I paid off my $400K house in 6 years and I don't make $120K. I wouldn't get too excited if I were them.

    Reply

    • From my calculations you would have to pay $66666.00 dollars a year. My next question is what did you live on?

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    • what did you live on, hand outs from the food bank and salvation army! i find that hard to believe. Do you live some where south and grow all your own food?

      Reply

      • Just beacuse the house is $400,000 does not mean he took out a $400,000 loan……

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        • He obviously had a windfall (inheritance or lottery or insurance settlement) but is too coy to state that.

          Reply

    • Well Done ! Congrats .

      Reply

  7. Yes, everybody is right. But we have to live life a little also. Vacations, eating out. Its only one life we have and we take that for granted trying to save millions. So do both save but take your kids to disneyland, go for that nice dinner and movie out. when am i doing that when im 70?? enjoy life from young not from old.

    Reply

  8. This is good basic advise on planning and saving for a good life. The keys are live within your means (spend less than you make); retire debt as quickly as it's practical (good debit only applies to assets that appreciate); and it's not how much you make it's how much you keep.

    For all the twenty and thirty somethings; many of friends used to think I wasn't living by not spending for winter vacations, BMWs etc…. no one has that opinion now in our mid forties as they struggle with debt and low savings, and reality of retirement.

    Reply

  9. You have over simplified the issue. I follow many of these savings trends however like most people watched 1/3 of my gross investment wealth get flushed in the current stock crisis. Yes realestate would have been a nice insulation but most of us do not want to be slum loards. I was basing my 1mil goal on a 6% return after 15 years I now have a 4% net with little hope of the markets rebounding to 70's levels to off set the loss. Their is a whole generation of us who followed the rules and got the shaft on both ends, a 17.75% student loan for 7 yrs and a -2% investment return on the other end with a moderate investment profile. It would be nice to get some useful investment advice instead of this retreaded dribble. Which way is the energy sector going? which countries outside canada are rebounding faster, what investments to aviod to insulate against the euro effect, what is a good return in todays market, etc

    Reply

    • Wekk said John

      Reply

    • Yes John you followed the rules and it did not work well for you. That's because the markets do not follow
      the rules. It is more like jungle law … march into it at your own risk.

      I would like to suggest that it is not a good idea to have a million dollars in your retirement fund. Period.
      Don't waste your life trying to achieve this goal. Live your life now not 20-30 years into the future. A future that
      you don't even know you are going to have. The time-value of your own life is far more important than all the
      money you will accumulate.
      I am not suggesting not to save. By all means save for a rainy day. Have money in your RSP. Own your own home. Move into other investments. Diversify. Do not get fooled by the tax refund you get each time you make an RSP contribution.

      Reply

  10. Really? The make that much money and the managed to save some. Wow! How about us normal people who make less the he does annually as a family? Shouldnt the story be about a family who makes about $50,000 a year and still be able to save?

    Reply

    • A loaf of bread costs $3.00 now? and in 45 years time it will cost ??? BUT if you don’t save you will never (barring good fortune) ever be self sufficient, never mind have a million dollars. No, I read Rich Man Poor Man in my early sixties when I was all but broke. It took me 10 years to make the first $million, cautiously. (Having spent the first 40 years of my working life living it up on the edge, one paycheck from broke.) The secret is buying assets with a positive cash flow. No personal debt! and an understanding partner.

      Reply

  11. I make $40,000 a year. CDN Government wouldn't let me work for a year and a half by the time the immigration applications were approved. In that time, with my wife losing her job and the job market being poor, we managed to rack up credit card debt and still trying to get rid of it for the last 5 years. All i see is my debt increasing no matter what way I use to try pay it off. I have a rent bill of $1015 a month but apparently can't afford a mortgage? We've seen houses where we would be paying $800 a month including taxes.
    Where's the topics on how to get out of situations the government helped get us into?

    Reply

    • I have read many articles like that in Money Sense mag, you just have to look for them. They are there and very helpful

      Reply

  12. td i am 55 years old how can i save a million dollars till retirement when I am only making 11,000 a year on which I plan to retire at 60

    Reply

    • invest in lottomax, 6/49, keno.

      Reply

  13. I just say that "Balance your life" with some reachable goals according to your income, family size and lifestyle. Sometime you have to tweak little bit to reach your dream goals as long as you don't put too much dent in your current lifestyle and family requirements.

    Reply

  14. I agree with RC, also being an inmigrant myself, we are engineers and yet are doing construction jobs and cleaning jobs, between paying daycare and food and rent and car, we at the end of the month owe money, we always are short about 200 dollars or so, and when we can pay the credit card a little bit one month it goes away the next. we never travel and never go to restaurants, we don't even see our family, and by the way we are not refugees, we managed to save money to come to canada and shelled out more than 40000 on coming here… I whish they made an article on how to get out of this mess, and at least get to save some money or to at least not owe each month…

    Reply

  15. Whether you think the story is plausible or not, or whether you make as much as they do, or not, I think there are lessons to be learned from the article. The biggie: Spend less than you make. I know people who make lots more $$ than those people mentioned, and they still haven't learned that big lesson, and are in debt just as much as people who make less than them. It's not about how much you make, it's about how much you save.
    And, I agree, people need to enjoy life, but without an attached price to pay at a later date when/if all that fun has put you into debt.
    My motto is… to quote Sheryl Crow…"It's not having what you want; It's wanting what you've got".

    Reply

  16. Everyone's situatiion is different, I agree with leaving within your means , but I dont understand how these people save 1 million bucks and they are in there forties with kids. I just had my first child and looking at the cost of day care and in floored at how much it costs. 200-250 a week! how are you supposed to save with these type of expenses. Everyone must be an expert because I Just dont see how these people can do this on combined salary of 120,000 .

    Reply

  17. Everyone's situatiion is different, I agree with living within your means , but I dont understand how these people save 1 million bucks and they are in there forties with kids. I just had my first child and looking at the cost of day care and in floored at how much it costs. 200-250 a week! how are you supposed to save with these type of expenses. Everyone must be an expert because I Just dont see how these people can do this on combined salary of 120,000

    Reply

  18. Tom,
    There are plenty who already achieved this or in the process of doing similar.
    Here's one good example. http://www.milliondollarjourney.com
    The blogger (FrugalTrader) shares his progress with the online community.

    Reply

  19. I save 60-70% of my income each month, I do not plan to wait till I am 65 to achieve '1million'… In 40 years that will be worth nothing. People that are my age (mid twenties), should be trying to save around 3kk by the time they are in their 60's.

    People may say easier said than done, but in my case it is easier to just do it, than to sit around all day talking about how you want to save more.
    Get out of debt, and live within your means, and save.

    Reply

  20. This can be done…..
    First, stop procrasting and making excuses and start saving NOW!
    Second, stop spending and start clearing debt.

    Years ago, only people who needed cel phones for business had them, now everyone has one(except me), they also have HDTV, the fastest internet, TV on demand, practically everything they sell they have.

    How did my generation survive without cel phones? Only the super rich or businesses had the "brick".

    Make some scarifices instead of excuses.

    We lived and travelled regularly, but only after we paid our savings and investment plans first. Many of our friends are in the same earning bracket as us but are not in the same savings,investment and retirement bracket as us. Mostly because they think they have all the time in the world, and fill every "want" the minute it enters their mind.

    Anyways, good luck to all…………….or like us, make your own luck.

    Reply

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  23. u people need a check up,80k a year alot of people do not make that,so how do u expect people to make 1 million when there earnings are so low,they can bareley make ends meet? There is still a recession going on
    you just can't see it. food prices rising,companies closing,clothing costs rising, wake up and smell the coffee.
    look at the welfare rolls,unemployment, where are the new jobs? manufacturing has gone offshore.

    Reply

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  50. All of this is assuming nobody with a tea towel and a fan belt on their head flies a jetliner into a skyscraper and destroys the economy. 6% yearly return avg. is a pipe dream in the new economy. Liquid assets are the only investment. Cash-on-hand is always better than the banks. Just ask Bernie Madoff.

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  51. GIC rates have fallen quite a bit from 2010. You can’t use 3.5% anymore. The highest GIC rates are 5 years at 2.5% to 2.7%. The only thing close to 3.5% that has some government backing is provincial zero coupon bonds at 3.35%.

    You could use corporate zero coupon bonds that have 4% to 5% yields but they are not government backed. There are MIC’s, mortgage investment corporations that pay 8% to 12% for 1, 2 year terms but are even more risky as Canadian real estate is at an all time high.

    It is 5 years later and most countries and their banks keep cutting interest rates. I don’t see how much people could save close to $1,000,000 in 25, 30, 35 years unless they save their maximum RRSP’s, TFSA’s and don’t care so much for the interest rate they are getting.

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