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How can you define a rich person? What should be the criteria? I think the definition depends on the person, the place, the surroundings, and the economic condition.
I’d like to think a rich person is someone who is not worried about his family’s financial health if he is to lose his regular income right now.
We migrated from India, been living working, and saving in the USA for the last 15 years. We now have enough money to live retired life back in India. So, if we go back to India now, we will be called rich.
But we do not have enough savings yet to retire in the USA.
By this definition of being rich, let’s start today’s blog.
You can be rich in various ways, by winning the lottery, by working hard at multiple jobs, by a marriage with a rich person, by inheriting an estate, etc.
But the best way and the sure-shot way is to grow your wealth over time. Time and discipline alone will make you rich one day.
The discipline part is the habit of saving a part of your income. The discipline is to constantly work towards earning more income and investing in better assets over time.
Saving one Hour Per Day
You can be rich by just saving 1 hour of your wage every day. Spend the rest of the income as per your wish. I want to thank David Bach for guiding me toward this simple calculation.
The average hourly wage in America is $18.5 and by all means, I will assume your hourly wage is more than $20. For calculation’s sake, I will assume your wage to be $20 per hour.
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$20 per day by you+ $20 per day by your spouse = $40 per day of saving 1 year saving is $40 * 365 = $14,600 |
Now use a compound interest calculator.
A compound interest calculator determines the value of your future wealth. Compound interest is described as ‘interest over interest’, calculated using A = P(1+r/n)(NT), where ‘A’ refers to the formula for compound interest. ‘P’ refers to the amount of principal investment; ‘r’ refers to the interest rate (decimal); n pertains to how many times the interest is compounded per period.
By using a compound interest calculator, you can plan an appropriate saving strategy. In this way, you can maximize your wealth. The compound interest concept adds the accumulated interest back to its principal sum, the interest earned over that interest.
You are millionaires in 25 years. (7% is a historical gain in the stock index per year).
There is more fun to it, if you get a 2% yearly increment of wage, you can be a millionaire in 22 years.
Wait, there’s more to it if you invest this money in a 401(k) plan (retirement saving) and your company matches only 2% of your contribution. You can be a millionaire in just 17 years!
Set automatic withdrawal from the checking account
Now, before you start finding ways to save $40 per day from household income, set the automatic withdrawal of $600 each month from your and your spouse’s checking accounts.
Get it deposited into a pre-tax (401 k) plan. If you exhaust the limit and still have money left to invest, put it in IRA/Roth IRA.
I was thanking David for the guide below, to make you understand what you need to do to save 1 hour of your wage.
He talked about saving 10% of your income by setting up auto-withdrawal so that as soon as it comes to your bank account, it goes beyond your reach.
The moral of the story is it’s not hard to become rich, a disciplined life, coupled with restrained spending, will make you rich one day. How soon it will happen depends on how hard you want it.
Alternatively, if saving an hour of wage is not possible to accomplish every day, you may think of extending work hours by an hour or taking up a side job for a couple of hours.
You can start a home-based business as well. There are various ways of earning extra through online businesses. You can start a home-based business as well.
How to derive the starting figure
The big challenge is, if you do not know your billing rate, then how can you determine what’s exactly your hourly wage?
The easiest is to divide your gross pay by 2080 if you work 40 hours a week. That is 40 times 52.
If you work fewer or more hours (sometimes overtime is paid to the employees), you can multiply your weekly hours by 52 and determine the yearly hours.
If you make $100,000 a year, your hourly wage rate is $100,000/2080= $48
So you should save 48X30= $1,442 a month.
Finding Ways to save that much money
As we discussed above, automatic investment from your checking account is the best option.
Mentally adjust yourself so that your pay is reduced and you have to live by the residual income. You need to also have buy-in from your family members.
The discussion will be tough, no doubt. Always remember the result of it all.
Other ways are to get involved in a second job or take up some gigs in your otherwise ‘free’ time.
Extra income from a side hustle can add wiggle room to your budget.
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I think you should defnitely do the calculations without adding the spouse income. Because that technically would make you half a millionaire in that time. Also you have to think of us single people and married ones who may retire without a spouse because of divorce, etc.
Other than that the guide sounds pretty good.
If you are single income and living alone you might not need $1M. Otherwise, if you are not single and living on one pay check, you need to do two things 1) Increase your earning 2) saving more than 1hr of wage.
What if the person is a single parent. Single doesn’t mean they aren’t taking care of someone. Could be a child, parent etc.
That is good information. Even if you just saved one persons wage per day, you would be in a great situation. It is hard to imagine how much $20 can add up over a period of time if you are diligent and do it consistently.
Thanks for the info. I need to get hot on this!
This is known as power of compounding returns Fred. You hit it correct consistency and diligence are the keys
This is a great argument for saving, simplified and clear. I agree…unfortunately, I do not get paid for my job as a SAHM….
SF you are in B school now, you will earn handsome in next few years. Your hourly wage at that time will compensate for no income situation now. You be rich even if you start late
There are THREE reasons people take up blogging, the third is to vent LOL I love just letting it all out there 😉
HS
venting is what we do by writing stuff and commenting on others. you got a point bud!
Unfortunately in 25 years a million dollars won’t be worth much anymore. 🙂
$14,600 per year is a great saving rate.
then probably you need to save more or find ways to earn more, which I know you are doing any way.
Your argument assumes the hourly wage remains the same but, considering your argument for inflation, so the wage increases meaning the hourly rate increases. (Takes a breath) Therefore you are left with more money in the bank than the $14,600.
That’s a great tip SB – I’ve never looked at it like this. I’ll have to look into the easiest way to do this when I get a chance.
Thanks jeff! The mission of my blog is to make finance easy. 😉
I really like savings guides that highlight the simplicity of accumulating wealth. A simple plan and commitment are the two essential elements to be successful. It doesn’t have to be complicated and I think this plan shows that.
There you go Hunter. Personal finance is easy, we the people make it tough like all other simple things
Automating savings is very effective, isn’t it? Great illustration!
in-deed, thanks for commenting
I agree with FYSA, can’t assume two incomes for the calculation, but nice idea 🙂 The idea has some valid points. Thanks for sharing.
as i replied to FSYA, again stating the same thing, if you are on single income you have to have supplement income or you have to save more. This article is a guide to show how discipline can make you richer.
Thank you so much for comments
I liked your article is an interesting calculation, thanks to google I found you
Thanks DJ, glad you liked
I love the idea of another way to look at saving. Although in our case, my husband is the only worker, makes less than $20 an hour and if we were to save 1 hour of wages per day, we would have to only do it for work days. Still, it’s a fun new way to look at things. 🙂
You at least can save your extra income, can’t you? You should have some blog income which could be more than $20 per day.
Also…the calculation is just if you also work on weekends, otherwise it will actually be 40 x 5 working days per week x 52 working weeks per year.
Your advice about saving is a formula that 90 percent of the working population knows very well
However most of people in need are people who make the minimum wage more like a realistic 8.75 per hour leaving no room for savings and most of this people they work
about 14 hours a day including weekends and they barely make ends meat leaving no room to work extra hours, plus these people have cut expenses to barebone how can this people make or save money? we need an advice more like the magical pill or a miracle because we do not see the light at the end of the tunnel at all.
Yes the formula works but 1 million is not that much in 25 years, its not even much now if you want to live well. If you want to live well I would focus more on 4 million in savings in 25 years which would be about 1.5 million today with current inflation rates.
David Bach was one of the first personal finance authors I ever read. He definitely opened my mind to automating things and cutting back on things I didn’t need. One thing I wanted to mention about this calcuation is it doesn’t account for taxes on your hourly wage or when you withdraw from your investment account.
Well, this looks like a nice and simple solution if you look at it from the perspective of just one simple number $20 per day. It looks that simple, if you put it that way. If however you look at it on a monthly basis and let’s say we have 20 working days in a month then you have to save $400 monthly (800 with your spouse). If your budget is tight, you may have issues finding that money in your budget. I am saving only roughly 300 a month for retirement only because I do not have more available, although I save more money, but those other savings have their purpose already (taxes, annual dues, Christmas gifts, homeowners insurance (paid annually) and many other savings). It is same deceptive illusion as saying you can save only $1 daily and double your contribution every day. the word “1 dollar” looks like a piece of cake until you realize that it actually isn’t that easy and simple when you must double it every day. But then you will be a multimillionaire in one month!
I didn’t get very far because the math is all screwed up from the beginning. Who works 365 days a year?
You would be better served making this calculation [ hourly wage * 2080 / 8 ] or simply 12.5% of salary. If you are wondering a 40 hour work week equates to 2080 hours.
From the parts I did read, this article makes way too many assumptions that are never mentioned, making it hard to truly educate those who less knowledgeable about personal finance. Lastly 12.5% won’t make many people rich at all, but it’ll “eventually” make you financially independent “if” all goes to plan but doesn’t leave much room for error especially since you’ll be well over 50 before accumulating wealth.
The effort is noted.
Wow! You must be a math nerd. Thanks for your effort to make things easier to understand. I’ll try to append the article with this information
The numbers that he had used were just quick, simple, rounded ones, I’m assuming, to show how-with just a simple daily savings-everyone of us can accumulate a cool million dollars in roughly 15 years by following the formula that he had just used.
David Bach was one of the first personal finance authors I ever read. He definitely opened my mind to automating things and cutting back on things I didn’t need. One thing I wanted to mention about this calcuation is it a doesn’t account for taxes on your hourly wage or when you withdraw from your investment account.
I love this idea!
For those in the comments saying that this would be a financial hardship, you can also try the One Penny a Day Challenge.
You can Google it, and I’m sure there’s some infographics on Pinterest, but basically, it’s saving X on day X of the year.
So, on January 1st, you’d set aside $0.01, on February 1st, $0.32 (because it’s the 32nd day of the year) and on December 31st $3.65.
Doing this definitely won’t make you rich-rich, but is a way to still save up close to $700 without feeling like you’re shooting yourself in the foot.
Thanks for sharing. This is an excellent way towards saving without feeling pain.
Most of us want to save money so we can build wealth and plan for the future. We have goals we want to reach (like traveling) or things we want to buy (like a dream home). However, this can seem impossible when you’re surviving on low income.