At the Motley Fool, we often write about the rewards that sensible investing can bring from even modest amounts of cash. I think that’s a core part of our message, as investing in the stock market really is not the preserve of the well-heeled.
Even if you have only a modest amount of cash to save each month, you can make a significant addition to your financial health later in life if you invest it over a period of decades.
But I was recently inspired by a story in the Guardian of two young people in well-paying jobs who focused everything on their goal of retiring as early as possible. Kristy Shen and Bryce Leung, both in the computer business, got their spreadsheets out and calculated how soon they might be able to retire if they put aside the usual lifestyle ambitions and maximised their long-term savings and investment.
In the end, they hit the C$1m mark (Canadian dollars, worth around £590,000), and retired in their early 30s, and their story made me wonder what could be achieved by those on decent incomes who are prepared to prioritise their long-term futures.
And judging by the 95 million cups of coffee downed by the British each year, according to the British Coffee Association, many at eye-watering coffee shop prices, I reckon there’s a lot of spare cash going around that could be put to better use.
The average UK take-home pay is around £29,600, and I’ve often heard suggestions that we should save 20% of our salaries. I think that’s a wise approach, especially if you start doing it from your first payday – if you never had it, you won’t miss it. That’s £5,920 per year. With shares having provided, according to a Barclays study, an average annual return of 4.9% above inflation for more than a century, a 6% return in these days of 2% inflation seems a fair target.
At that rate of return, it would take 42 years to accumulate a million, which sounds like a long time. But for someone just starting out in their 20s, it means becoming a millionaire retiree. And if you earn more than average, and you’re prepared to keep your lifestyle modest, you could achieve the same goal a lot sooner.
Suppose you take home 20% above the national average, but instead of saving 20% of your total income, you actually invest every additional pound over the average. That would double the amount of cash you have to invest to £11,840 per year, and it would drop your millionaire horizon to 31 years.
But young professionals often earn a lot more than that, and 50% above the average would give you a total of £20,720 every year to invest… and you could reach a million after 23 years.
To get down to the target of 20 years, you’d need to invest £26,400 per year, which on this approach (20% of average pay, plus everything above that) means you’d have to be taking home £50,080 per year, or 69% above the average.
There must be plenty of 30-year-old professionals in the country who can do that and make a million by 50, especially if they save as couples.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.