I have this crazy goal: I want to save a million rand in five years.
I want it because… well I’m impatient and I think I can.
This was an article that I came across in Business Tech. It posed the question of how much you need to put away to save a million by the time you retire.
The most interesting part was this table that compared different starting ages and amounts to save.
What I like about it is the reassurance that, as a young person, you hardly need to save anything to ensure a million rand at the end of your working life —R180 a month. R86 481 in total. The total you need to save for your lifetime is less than many entry-level jobs pay in one year.
For the price of a bad date, once a month for the rest of your working life, you can save your way to a million rand. That’s kinda cool.
The other thing I like about this chart is that, after a couple of seconds of looking at the table, your eye starts jumping to and fro between the numbers. You try to calculate what’s the most you can afford per month to get to a million as quickly as possible.
A million alone may not hack it
But why try to get to a million as quickly as possible? Why not save small, save early, and blow the rest living it up?
Well, a couple of reasons – 1) you can’t retire on a million rand a month unless you can live on 40k a year in the year 2059, and 2) INFLATION.
Why just R40 000? FIRE math.
The 4% Rule says that in order to preserve that R1 million principal and make sure your money lasts the rest of your life, you’d have to withdraw just 4% of it every year. Maybe even less, after a dismal year in the market.
That’s 40k a year, about R3 300 a month, in forty years time. Even if a million is still a hearty number in forty years, what’s it going to be 30 years after that, at the end of your lifetime? Inflation – you gotta watch it.
Also, if your lifestyle somehow costs you R40 000 a year or you can make it on the current government social security pension of R1780 a month then you are a Level 20 Frugal-Druid and I have nothing to teach you about managing money.
Why not have a million AND time?
The third reason is: Compound Interest. The faster you can get to 1 million, the faster you can get to the NEXT million.
“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do — if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”Charles Munger
The principle the Charles Munger quote refers to is what I think of as The Tipping Point.
For South Africans, I think we can safely assume that equivalent number to $100 000 is roughly 1.3 or 1.4 million in the current exchange rate . But the number itself is fluid. I prefer to think of my personal tipping point as the moment at which your investment earnings begin to overtake your annual contribution amount.
I have a goal to save a million rand because it’s a nice round number. It’s an audacious f-you number. It’s a number I have never ever in my life thought possible for me to attain.
With my current portfolio, that would require me to shovel R120 000 a year into the market for at least five years. If I were starting from zero, it would take me seven years.
My aim for a million is to allow my portfolio to start picking up the kind of momentum I want to see. It’s a short-term period of focusing hard to essentially gain another equivalent persons income.
And the crazy part about that data? ONLY TWO YEARS LATER I would have hit my next million. How insane is that?
Here’s the tipping-point idea in a very different scenario. Say we could only start investing R200 a month, and managed to up that by 10% per year.
Isn’t that cool? Ten years in, your investments are doing some serious heavy-lifting in your portfolio. By the next year, they’re way overtaking your expanding contributions and the gap only grows from there.
The more audacious the goal, the softer the landing.
Now, this is all lovely to imagine and dream about, but R120k a year is not guaranteed. I’m still a freelancer after all. The leap of faith here is not so much the amount of money as the regularity of money. It goes against everything my career has taught me about earning.
120k is not impossible, given where I’m at in my career and personal life (what else am I gonna do, have a destination wedding?) but there’s no telling what disasters, life changes and expenses lie in the next five years. There’s also no telling what income raises, opportunities and windfalls may come my way. I’m pretty sure I’ll get a good helping of both scenarios and, on average, save a quite abit of money.
Having a big round number to hit and a loose-ish time period to hit it in will keep me on track if I have big jumps in earning over that period.
Like I said – aiming toward a million isn’t about having a million. It’s about having an audacious goal and trusting in the power of compound interest.
Article reposted with permission from Drawing Money.