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Flawed Concept - Start Young, Save, and Become a Millionaire


"Starting with $10,000 and retiring a millionaire" – This is what one article claims is easy to do. You just need the right ingredients. First, you start saving at a young age. Second, you earn 7% compounded annually (which they call the 7% solution), and, just like that, you are a millionaire.


Yes, this is the financial writing today that websites feature as financial education. I call it pop culture finance. They are catchy, entertaining ideas that read well and are designed to lure the reader in. However, from an education standpoint, they leave the reader with the wrong impression of how money really works. This is problematic considering this is how so many people gain their financial education today. They actually pay writers to write this stuff. Here are some fatal flaws with this article.

  • Growing money requires five components, not just saving money– All you have to do to get to a successful retirement is save x percent. It is a little more complicated than saving your way to retirement. It requires planning, saving, investing, risk management, and tracking. The concept of savings is only a starting place to reaching financial goals. It is not the main reason for success, as implied in the article.

  • $372,430 – That is today's value of 1 million dollars in 40 years using inflation. If you were to take an income off of that amount, you would be living off of $18,600 in today's dollars. To truly be a millionaire, you would need to accumulate $2.685 million. There should be many millionaires born in the next 40 years; however, it will not mean much.


  • 7% compound return – This is the assumption that they use as their "solution." A compound return is one that happens year in and year out. It is not even remotely realistic. In a perfectly normal world, that fantasy might come true. Compound returns are not realistic, like an average return.

  • Inflation-adjusted returns – They claim a 7% inflation-adjusted return. In other words, you would need to return 9 to 10% every year. That requires you to take a lot of risks and is an aggressive target. The financial services industry errantly throws around the ability to make 10% a year as if everyone should be doing it. That is far from reality.


Here are a few quotes from the experts in the article:


"It's less about where the money is invested and more about your ability to be disciplined." It is all about where the money is invested. Investments based upon the risk that you are taking and your ability to manage that risk drive success long-term.


"There's a reason why Albert Einstein called compounding the most powerful force in the universe." It is the most potent force in the financial world and would be the magic bullet if you could get a 7% inflation-adjusted return year in and year out. It only is probably more realistic when you consider 4 to 5% (not even considering inflation) or so.

The reality is that people learn about money on the fly. They get their education from websites and magazines that are filled with pop culture finance. Make your decisions only on reliable assumptions. To do so, you have to strive to get a real education about how money works. Look for the other side of the story. The reality is somewhere in the middle.

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