A Million-Dollar Blueprint for a 25 Year-Old

Young Boy Wearing Business Suit and Jet Pack Flies

Topic: Wealth Planning

Devin Crago, CFA

January 17, 2019

Image used with permission: iStock/RichVintage


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A Million-Dollar Blueprint for a 25 Year-Old

Over the course of your life, you’ll earn a certain amount of money. You may earn money through an atypical career. For example, you may be born with the talent of Lady Gaga and become an international sensation. Or you may become a star of the silver screen or, more recently, YouTube.

But for most of you, stardom won’t be in the cards. Instead, you’ll have a good old-fashioned job (with hourly wages or salary), or you’ll start your own business.

You can divide this income-generation potential into pieces (see the left column in the chart below). At the bottom is what you can make exclusively from your physical labour. Above that is your earning potential (typically more) if you pursue a college or university degree. You may take it a step further and tack on a graduate degree or professional designation, which may allow you to earn even more.

Just how high this income column goes will depend on your work ethic, education, natural level of talent, skill set, career choice, and success in building your career or business. Of course, good and bad fortune will play their parts as well.

But what are you going to do with the money you earn?

In simple terms, you’ll take your income and split it in two: one portion you’re going to spend to support your current lifestyle (light green); the other you’re going to save to support your future lifestyle and retirement (dark green).

Income Split

The amount you spend has a lot to do with personal choices. Some expenditures (e.g., buying food, paying for transportation, and subscribing to Netflix) are the unavoidable consequence of a living a modern life. Other expenditures (e.g., visiting the dentist or the doctor and buying your significant other a birthday present) can only be ignored at your peril. But the rest are choices. Some people spend a lot; some spend a little.

Those who earn a lot and spend a little end up with a taller column of savings. This is where the magic happens. Savings is the part you can grow—by investing—into a much larger amount.

You have an advantage when you’re young; you have lots of time. With time, you can compound your investment returns over many years (see the arrow moving up and to the right).

The following simple but powerful chart demonstrates the power of starting to save and invest early, harnessing the power of compounding, and ending up ahead of the game. Using a few simple but realistic assumptions(1), it shows that if you start at age 25 you end up with a lot more than someone who starts a decade later at age 35.

Savings

So start thinking now about building your “income column” several storeys high. If you watch your spending, you’ll definitely have more savings to invest, and could end up with twice the amount of money through compounding returns. And you don’t need Lady Gaga’s talent to do that.

(1)  The projection assumes an after-tax annualized return of 5% on investments. For simplicity it is assumed that $7,450 is invested per year in both scenarios.

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