The numbers tell us that, compounded over time, it actually takes very little money invested to grow to $1,000,000. Over the 40 years from January 1975- January 2015 the market has averaged an annual return of ~11.9% with dividends reinvested (~8.68% if you spent your dividends along the way)*. At that rate just $12,000 invested in the S&P 500 stocks in 1975 would be worth over a cool million ($1,077,485) today. Don’t have $12,000 lying around? That’s OK. If you started in January 1975 and invested $130 per month ($1,560 a year) by January 2015 you would have had $985,102**. Not quite a million, but not a handful of mud either. Want nothing less than the full million? Kicking it up an extra $20 to $150 per month, $1,800 a year would have gotten you to $1,136,656**. Your million plus a new Tesla and Corvette.
Let’s consider an example. Suppose you make $25,000 per year and you decide you want to be financially independent. Following some of the examples here you organize your life in such a fashion as to live on $12,500. That’s a 50% saving rate. Two important things immediately happen. You’ve reduced your needs and you’ve created a source of cash with which to invest. Now let’s use our calculators to play with some scenarios. Assuming you’ll be financially independent when you can live on 4% of your net worth each year, you’ll need $312,500 ($312,500 x 4% = $12,500). Investing your $12,500 each year in VTSAX and assuming the 11.9% annual return of the market over the last 40 years, you are there ($317,175) in ~11.5 years.*** At this point suppose you say, “OK I’m done with saving and I’m going to double my spending and spend my full earned $25,000 from now on. But I’ll leave my $312,500 nest egg alone.” In 10 short years it will have grown to $961,946*** without you having to add a single dime. That amount yields $38,478 a year at a 4% withdrawal rate. You can now not only quit working, you can give yourself a (rather substantial) raise.