Now this may sound a bit far-fetched, but believe me, the math on this adds up.
This works by the magic of compound interest, whereby you reinvest your savings over a long period of time. As your savings grow over time, this compounds into bigger savings, which then earn increasing amounts of interest each year.
To reach over a million dollars, you would need to be already spending around $7 a day (every day) on coffee. For many people that’s realistic if they’re buying 2 coffees a day.
After one year that’s $2,555. If you invest what you would be spending and get a return of 7% for 50 years you will end up with $1,111,389.
$127,750 of that will be your own contributions (that you would be spending on coffee), but $983,639 would be earned on interest!
The key variables are
- how much you spend per year on coffee
- the interest rate or return you are getting
- how long you are getting interest for
If you feel these figures are not realistic for you then note that even $3 per day at 7% interest becomes 233,902 after 40 years.
It’s worth pointing out that all these calculations are in today’s dollars. You will still need to allow for inflation.
To work out what works for yourself there are lots of compound interest calculators online, but you can see a really simple one with a great visualisation on the Australian government’s Money Smart website.
Where the heck are you going to get 7% interest besides a Roth IRA?
That sounds terrific. Now could someone point me to where I could safely invest at a rate of 7%? Isn’t that unrealistically high?