How would you react if you suddenly became a millionaire today? Depending on when you were born, winning a million dollars might cause varying reactions. To illustrate, imagine being born in 1850 when a million dollars was worth $32.62 million in today’s money. You could live like royalty! Contrast that with today, where a million dollars might not be enough to buy a house in certain areas. Inflation reduces the value of money each passing year. This poses a problem. How do you keep track of money’s changing worth? Most people envision the material items they could buy such as a house, a car, or a boat. This article will teach you a better way to think about large sums of money by understanding how much freedom it creates. Spoiler: $1 million is worth a $40k annual salary. Keep reading to find out how.
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It’s All Relative
Every 20 years, US dollars become about half as valuable as they were before. Inflation causes everything to cost more, and people earn more. That’s why millionaires are more common today than ever. As of 2020, there were more than 56 million millionaires worldwide!
How to Measure a Million Dollars
When we think of a million dollars, we tend to think of the fancy stuff we can buy. But as mentioned, stuff becomes more expensive every year. That makes it hard to rationalize money. Next, I’ll show you two ways of thinking about money. Let’s start with the bad way:
The YOLO Path
You only live once, so you should live each day like it’s your last. You can’t take your money with you when you die, so spend it now! Here are a few ways to accomplish that:
- House – $400,000 median home price
- Car – $40,000 average price
- Clothing & Jewelry
Quality of life makes it worth living. You’ll make some great memories when you share your wealth with your friends and family. Let’s face it, all the stuff means nothing if you can’t share it with people you love. But what happens when the money runs out? A million dollars can disappear quickly. Your toys will need maintenance, and they only lose value over time. Shallow friends will lose interest when you stop paying for their drinks. How long will the impact of your charitable donations last? Does a bigger house really make your life much better? Now imagine if only there was a way to make it last forever…
The Retirement Path
You only live once, so you should safeguard your future by investing your millions. Sound boring? Don’t fall asleep just yet! You can still live it up. The secret is to rent rather than own stuff. You just need enough earnings to make payments on the stuff you use. Here’s how you do that:
Invest Your Millions
Wealthy people stay wealthy because they know how to take smart risks with their money. We have another article that explains why the stock market isn’t as scary as it seems. Now let’s compare the good and bad parts of investing:
- Investments provide income for living expenses, travel, and hobbies
- Never run out of money
- Never have to work again
- Provides jobs for others
- Freedom to decide how to spend your time
- Inheritance for your family
- You’ll have to stick to a budget (how tragic)
- Investment performance is uncertain
- You can lose your money if invested poorly
Live On Passive Income
If you invested a million dollars in the stock market, you could have around $40,000 per year in sustainable spending power. Sustainable means you can maintain your lifestyle forever, even with inflation! Here’s how that works:
- Start with a million dollars invested.
- Withdraw 4% or $40,000.
- Stocks grow 10% after one year.
- Investments are now worth $1.06 million (6% higher than last year).
- 6% increase beats 3% inflation
In reality, you can use any withdrawal rate you want, but 4% is most widely accepted in the financial community.
It’s ok to have material dreams, but now you know there’s more to wealth than owning fancy stuff. When you think of a million dollars in the future, consider needing $40,000 less per year. That means you could spend less time working and more time playing (if you choose). Contrary to popular belief, the lottery isn’t the only way to become a millionaire. If you’re in the working class, you’ll enjoy our article on how to retire in less than 15 years. Click below to share this with all the future millionaires you know!