Building a £1m savings pot might seem like an unrealistic target, but it is achievable if you’re willing to take the time to put in place a strict savings and investing plan.
You don’t need to win the lottery or cut your expenses to zero, all you need to do is make sure you spend less than you earn.
The first step on your journey to a million is to compile a personal budget. This is the first but often the hardest step because you have to take an objective look at your finances and decide what’s needed and what can be cut.
To grow your savings pot, you must be spending less than you earn, so reducing unneeded costs and budgeting is critical. If you have any credit card debt, building a budget so you can pay this debt off before you start saving is best.
Staying on course
When you have a budget and a set savings target, the next step is to make sure you keep to your plan. No matter how much you’re putting away every month, it’s imperative to remember that it takes time to build your wealth and what may not seem like much today, can become a life-changing sum over time.
For example, even if you save just £100 a month and earn a 5% p.a. return on your money, over 40 years you’ll have a savings pot of £150,000.
The emergency fund
Once you start saving you, need to make sure you keep at it, and you don’t dip into the pot for everyday expenses. This is where it pays to have an ’emergency fund’ to protect against unforeseen developments. The emergency fund is step three of the plan to make a million by retirement.
Invest for growth
Step four is to make your money work for you through investing.
By investing you can achieve a much higher rate of return than just having cash alone. Using the example above, £100 saved and invested in an index tracker fund returning 8% p.a. (the average FTSE 250 return for the past two decades) for 40 years would be worth £337,000 at the end of the period, more than double the original figure.
Patience is a virtue
The final step to making a million is to wait. Time is the investor’s best friend, and you should never underestimate the power time can have on your wealth and returns.
Unfortunately, most investors ruin their returns by ignoring this advice, as sitting around waiting is boring. It’s difficult to resist the urge to trade.
But sitting around doing nothing is exactly what you should do. Stocks have produced a return of around 8% p.a. for the past few decades and to mirror these returns, all you have to do is buy a low-cost index fund and wait. Indeed, as noted above, £100 a month invested at a rate of 8% for 40 years will be worth £337,000 at the end of the period. £200 a month at the same rate and time frame will grow to £671,000 and £300 per month will turn into £1.07m.
All you have to do to reach this target is make sure you stick to your budget, achieve your savings goals and resist the urge to play around with your investments.
Time to start saving?
Making a million for retirement is easy if you know how and get started early.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.