Outside the Box: How saving $1,000 per year can make you a millionaire

However, in addition to those very real needs, you also have a very real opportunity.

I’m going to show you how to accumulate money in a way most people can accomplish: If you start early, by setting aside less than $100 a month and investing it wisely, you can retire with millions. Think about $100 a month. That’s less than $25 a week. If you’re ready to seize an opportunity, it shouldn’t be too daunting to squeeze that much from a budget.

Read: 3 financial planning actions you should be focused on right now

In today’s world, that can still be a squeeze. But in the long run, the payoff will leave you with no doubt that it was worth it. I’ll illustrate how this would have worked out if you had begun saving this modest amount at the start of 1970. The numbers assume you increased your savings by 3% each year to factor in an assumed inflation rate.

To understand the two tables in this article, remember that your wealth comes from two sources: Your savings and your earnings.

In the early years of a program like this, your own savings will do the heavy lifting of building your wealth. In the later years, that burden falls (very heavily, it turns out) to the earnings from the portfolio.

The two tables show returns for four equity portfolios:

• The Standard & Poor’s 500 Index SPX, +1.75%

• The equity part of the world-wide Ultimate Buy and Hold Strategy

• A four-fund portfolio of value stocks

• An aggressive one-fund portfolio of small-cap value stocks

• A U.S.-only four-fund combination.

Table 1 shows the first 10 years of this program. Your annual contributions went up a little bit each year, reaching $1,305 in 1979. That’s $108.75 a month, or about $25 a week, so it should not have been a major burden.

Table 1: All-equity results of the first 10 years of savings 1970-1979

*See definitions at bottom of article

You will of course note the significant differences in the outcomes of these various portfolios. Nobody could have predicted differences outcomes in advance.

But it was thoroughly predictable that in the first 10 years, your savings would make up much of your wealth. In these four scenarios, your savings accounted for anywhere from 34% (small-cap value) to 71% (S&P 500) of your wealth at the end of 1979.

Read: COVID-19 crisis sparks ‘early retirement’ wave

If you look only that far, you might think saving and investing money was not everything it was cracked up to be. You certainly had no reason to think you were on your way to millions.

Now, let’s fast-forward 20 years, assuming you continued to save every month, adjusting upward annually by 3%.

Table 2: All-equity results of first 30 years of savings 1970-1999

*See definitions at bottom of article

What a difference another 20 years makes. This is why you should keep going instead of giving up in discouragement after the early years don’t seem to be doing so much for you. Obviously, your wealth by this time has increased far beyond your own contributions, which make up anywhere from 4.5% (small-cap value) to 7% (S&P 500) of your wealth.

After 40 years, your own contributions account for 2% (small-cap value) to 11% (S&P 500) of your wealth.

Stated another way and using the four-fund combo as the example:

• After 10 years, your savings were worth $2.15 for every dollar you had put in.

• After 20 years, your savings were worth $4.85 per dollar of your own money.

• After 30 years, your savings were worth $16.43 for every dollar you had put in.

If we carried this out another 10 years, the growth became much less spectacular, as the decade of 2000-2009 contained two nasty bear markets (each of which removed more than half the value of the S&P 500) and only the beginnings of recovery from the second of them. By the end of 2009, your nest egg was worth $16.97 for every dollar you had contributed.

However, and this could not have been plausibly predicted, the following decade was pretty much a non -stop bull market.

By the end of 2019, your wealth in the four-fund combo would have been worth $4,170,219, or $37.30 for every dollar of your own money.

All this happened as you were saving fairly modest amounts of money over the years.

As the figures from the two most recent decades show, the ups and downs in the market make a huge difference to investors who have saved. But in the early years, the amount of your savings will have the biggest impact on your wealth.

This simple (but not necessarily obvious) fact bolsters the recommendation of many financial advisers to take more risks when you’re young.

In the early years, your contributions make the big difference. When a bear market depresses stock prices, your regular contributions let you buy long-term assets at lower prices. These tables only recite the results over these specific periods. But if you want to see the year-by year details, you’re in luck.

On this page of my website you will find links to tables for each of these strategies, complete with year-by year figures. All the data I’ve used is historical, and the past won’t repeat itself with any precision.

But I don’t know any reason to doubt that a well-allocated equity portfolio will continue to turn modest, steady savings into big numbers.

If you haven’t started saving yet, this is the perfect time. If you’re saving regularly and sometimes feel discouraged as you wait for the ultimate payoff, look again at Table 2. A future like that could be waiting for you

Here are the details of the strategies used in the tables above:

• Ultimate Buy and Hold equity portfolio consists of 10 equally-weighted asset classes: the S&P 500, U.S. large-cap value, U.S. small-cap blend, U.S. small-cap value, U.S. REITs, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value, and emerging markets. (For details, check here.)

• All-value portfolio consists of four equally weighted asset classes: U.S. large-cap value, U.S. small-cap value, international large-cap value, and international small-cap value.

• Small-cap value holds just one asset classes: U.S. small-cap value.

• The four-fund combo is made up of four U.S. asset classes, equally weighted: large-cap blend, large-cap value, small-cap blend, and small-cap value.

If you’re saving — or think you should save — for retirement, check out my podcast for more on this important topic.

Join me for a virtual presentation on 12 $1 million decisions guaranteed to change your financial future and Chris Pedersen will present 2 Funds for Life.

Richard Buck contributed to this article.