From Rags to Riches

When I was young, a wise man, an experienced person if you will, told me the secret to accumulating one million dollars.

As a kid, you think there is no way I could accumulate that much money. The number is just too big to grasp. The wise man said, save five dollars a month or whatever you can put back. He even went through the math showing me how it accumulated. It started making sense but as a kid, you want to spend your money on things like toys and having fun. There is something to that as well. Kids should have fun and learn to spend/save money for the things in life they want. As I look back on the experience, I think to myself, he wasn't talking about putting back all the money I make in a month from mowing yards, doing chores for my parents, etc. He was just saying put back a portion of the money. Say you started saving five dollars every month as a ten year old kid. Here is what you would have accumulated by the age of 18: $5 * 12 months * 8 years = $480. You're thinking that's not a million dollars :) The wise man also told me to put the money in a savings account that gives a percentage of money back each month. One that you keep adding money to and not taking any out. That is how you get your million. It takes much longer and much more than five dollars a month to make a million but I bet its less than you think. The problem is making enough money to do it.

There is a complex formula for this but let's say you get 1.09% every month on the money you have deposited in the savings account. The amount after 8 years at five dollars would be roughly $854. Doesn't seem like much huh? With the same interest rate and time, if you added $1000 each month, the amount would be roughly $170,841. That means for 8 years (96 months) you saved $96,000 and the interest you accumulated was $74,841. Now here is how you make your million. It takes 20 years at close to $1000 a month. You invest around $240,000 over 20 years and you get a little over one million dollars :)

I told you it takes much more time and money to get your million but I bet you are surprised that it can be done in 20 years. If you have disciplined parents and they did that from the time you were born until you were 20, you would be set. Then you do the same thing for your next twenty years of life and you may not even have to work. If you divide a million by 20 years, you can pay yourself $50,000 each year. Subtract $12,000 that you will put back into savings. You would have $38,000 a year to live on. That is a good sum of money to live off of for not working at all.

Now the bad news. You have to pay your taxes on the interest you make. Banks typically only insure up to a quarter of a million dollars. Parents typically are in debt up to their ears paying off college loans and credit cards maxed out from being young and stupid... its the American way. As a young person reading this blog, you can change your family's future debt by not following your parent's way of life in pursuit of the American dream.

There are many budget programs out there. I highly advise getting one, creating a budget and sticking to it. I have a budget program I wrote in the Java programming language.

I wrote it because I was chasing the American dream and the start-up company I worked for laid off most of their employees and eventually went bankrupt. I was out of a job for three months. The budget program shows your income on one side and your debt on the other. By clicking a report button it shows the difference in what you make versus what you owe each month. On the debt side don't forget to include groceries, gas, entertainment, car maintenance, etc. Once you know the difference, you can plan to start paying money into a savings account each month. If you find that you owe more than you make, remove things you don't need such as mobile phones, satellite tv, etc. What?? Phone?? Tv?? Are you crazy?? I will admit that sounds crazy but you have to do something to get yourself out of debt and sacrifices must be made.

Teachers have a 403b savings plan similar to a 401k but much more interesting. With the 403b plan, you save a percentage of your paycheck each month and hopefully your employer matches what you put back. Then the plan allows you to borrow from the accumulated amount. You pay yourself back monthly into that account. So let's say you borrowed from the account to pay off a maxed out credit card. No not so you can start charging on the card again. You cancel the credit card afterward! The money you borrowed from your account is removed and the credit card goes away. You start paying yourself back, say $100 a month. That amount plus your normal 403b accumulation starts going into your account. When you pay yourself back in full, its like you never borrowed any money to pay off that card. The drawback of this plan is that you can only borrow a couple times a year. Other than that it is an excellent plan. I wish the government would use that plan to pay off the deficit.

I wrote a program that imitated this plan but excluded the payback and how many times I could borrow from my account. My idea was to get rid of each debt, each monthly payment. Let's say you have three credit cards, each of which you pay $100 a month to. That's $300 a month out of your pocket. So what you do is save a certain amount of money each month while you continue to pay on the credit cards. The program I wrote would calculate how many months it would take to pay off each debt. Each time you pay off a debt, you get to use the monthly payment you were making to the credit card (debt) to add to the amount you save each month. So, if you set yourself up to pay $100 to savings each month, then once you paid off the first credit card, you would be able to start saving $200 each month. Then after you pay off the second debt, you can add the next $100. You are now saving $300 a month! I naturally named this program ByeByeDebt. It is written in the C# programming language. Once you get the small credit cards knocked out, then you can start working on the large loans including college, car, house, etc. And after each payoff, you just add the amount you were paying to what you save each month. If you remain very disciplined and stick to the plan without adding more debt, (something I myself have been unable to do), you could pay off a $120,000 house in five or six years.