Why Invest?

How will I possibly save $1,000,000 making $50,000/year? If I save 20% like the scientists tell me, that's $10,000/year. It would take me ONE HUNDRED YEARS to save up a million dollars. I'm already 22, so I can't retire until I'm 122?!? What if I'm dead by then!


Okay, hold up, hold up. Luckily for us, the stock market mostly solves that problem. The S&P 500 goes up by an average of 10% every year. With 10% returns, if I invested $10,000/year then I would have saved up a million dollars by.... drum-roll please... age 47!!! Yay!


Woah, woah, woah. If the average American could save up a million dollars in 25 years, then how come everyone doesn't retire at 45 or 50?



Okay, well you've discovered a few more flaws in my example above.


First, the market doesn't always return 10%. As you get older, in particular, you will probably start moving your money from stocks to bonds, because they are less volatile. Those might get you something closer to 5% returns.


And like I mentioned, the stock market is volatile. It might spike 20% one year and then lose 10% the next. The ride is not easy or straight up. Sure, you can plan to retire in 5 years, but what if there's a terrible recession and you've lost 50% of your savings?


Last but certainly not least, we have forgotten inflation. The cost of goods and services always goes up, which is why your grandparents tell stories of buying gas for 10 cents.


On average, inflation accounts for price changes of 3% per year. That means a gallon of milk that cost $1.60 this year might cost more like $1.65 next year. This might not sound like much change, but just like our 10% growth we assumed before, it really adds up.



Accounting for inflation of 3% per year, it would actually take you until age 57 to save a million dollars (not 47).


If the rate of return is lower, with average returns of 7%, then you would be working until age 72 to save $1000k. Ouch.


Age 72 isn't great, but I hope you'll notice something: In the stock market, no matter how big inflation is or how small the rate of return is, it will NEVER take you 100 years to save up $1 million. The stock market always helps your money fight inflation and grow faster than it would in a savings account.


We can trust the stock market to go up, on average, because:

  • The population of the world increases exponentially

  • The number of patents and ideas and products increases exponentially

  • Productivity increases exponentially


What would you do with a million dollars?


And use this calculator to find out when you'll get to $1 million:

https://www.bankrate.com/calculators/savings/save-million-calculator.aspx

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