The number “one billion” is almost too big to grasp. 1,000,000,000 — a one followed by 9 zeroes. To me, one million is the biggest number that still seems to make sense. If you make $100,000, as one of the top 10% of income earners in the US, a million is about your salary times ten. If you’re part of the rest of the 90% of American workers, a million might be your salary times 20 or more. But one million dollars seems within reach.
A billion, though, is one thousand times bigger than one million. That means that if you make $100,000, a billion is your salary times 10,000. If you saved every dollar you made under your mattress, it would take ten thousand years to save a billion (and you’d probably have a very lumpy mattress, though you wouldn’t mind because by then you’d be quite dead). Running these figures on my calculator got me wondering, how hard is it to save a billion dollars?
Let’s assume you make $1,000,000 a year. One million dollars, even. Congratulations! You have worked hard and landed a really great job. That puts you easily in the top 1% of US income earners. Now that you’ve joined the ranks of the millionaires, you want to work your way up to billionaire. How hard can it be?
People in different income brackets tend to save different percentages of their income, which makes sense. If you need to spend everything you make just for day-to-day living, you can’t save much. In 2018, the average American only saved 5% of their income. (Keep in mind this is an average, so the top 10% may be throwing the numbers off a bit.) But the top 1% — which is you, if you earn $1 million a year — save about 38%. That comes out to $380,000 a year. If you take that savings and stuff it in your mattress, you’ll have a billion dollars in only 2,632 years!
Of course, in the real world, people invest their savings. Interest from investments makes wealth grow faster, and the more money you have, the faster it accumulates. The U.S. Securities and Exchange Commission has a very nice compound interest calculator which allows you to calculate all sorts of different investment scenarios. If you want more information on compound interest and how it works, the Motley Fool has a good explanation.
Most CDs, bonds, and savings accounts for people willing to deposit large amounts of money have an annual interest rate between 2–3%. But if you’re willing to invest in some riskier things like real estate and the stock market, you can get a better rate of return. For this exercise, I’m going to assume you’re a really savvy (and lucky) investor and you’ve got a good, diversified portfolio with some high risk, some low risk, and an annual rate of return of 10%. That’s really good! Now let’s plug those numbers into the compound interest calculator.
If you’re saving $380,000 of your income every year, that’s $31,667 every month. So, with
- $31,667 initial investment
- $31,667 contributed monthly
- 10% annual interest rate compounded monthly
It will only take you 56 years to become a billionaire! (If the interest is compounded annually, it will take 59 years.)
Of course, for less blue-sky scenarios, it will take longer. If you can only afford to save $10,000 a month and your rate of return is a still respectable but not amazing 5%, it will take 121 years to become a billionaire. If you’re making $100,000 a year and saving 10% of your salary, that becomes 93 years with a 10% rate of return and 171 years with 5%. For everyone with less than a million dollars in annual income, we’ll just have to hope that human life expectancy gets a lot better, and soon!
Hopefully, this exercise has put into perspective just how much money a billion dollars is, and how difficult it is to accumulate that much wealth. You’ll notice in the compound interest calculator that if you start with more money, it takes less time to reach a billion. If you start with a $5,000,000 investment using the million-dollar-income scenario above, it takes a short 48 years to become a billionaire. This is why money accumulated and passed down over generations is so important in creating wealth.
News stories that talk about billions and trillions of dollars can be hard to wrap your mind around, but now you’ve got a way to put all that money into context. Just remember that a billion dollars is ten thousand times $100K. Then, think about how much money you make relative to $100K, and maybe how long it might take to save up a billion dollars, and the massive amounts of money will seem, well, still massive, but at least understandably so.
I'm an expert in finance and wealth accumulation, and I can confidently say that the article you provided touches upon some crucial concepts related to money, income, savings, and wealth. The author delves into the vastness of the number "one billion" and breaks it down in a way that makes it more relatable for the average person. Let's dissect the key concepts discussed:
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Magnitude of One Billion: The article rightly emphasizes the enormity of one billion by comparing it to one million. It illustrates the significant difference in scale, making it clear that a billion is a thousand times larger than a million. This provides readers with a tangible perspective on just how substantial a billion dollars is.
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Income Levels and Savings: The article addresses income levels in the U.S., specifically focusing on the top 1% of earners who make $1 million a year. It highlights the savings habits of different income brackets, with the top 1% saving about 38% of their income, leading to a substantial annual savings of $380,000.
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Time to Accumulate a Billion Dollars: The author explores the hypothetical scenario of saving money under a mattress, providing a humorous but insightful calculation. By using the average savings rate and a conservative approach, it estimates the time it would take to accumulate a billion dollars. The article then introduces the impact of investing and compound interest on wealth accumulation.
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Compound Interest and Investment Scenarios: The discussion on compound interest introduces the role of investments in accelerating wealth growth. It mentions different investment options, such as CDs, bonds, savings accounts, real estate, and the stock market. The assumption of a 10% annual rate of return demonstrates the potential benefits of savvy investing.
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Impact of Starting Amount on Wealth Accumulation: The article concludes by highlighting the significance of starting with more money and how it accelerates the process of becoming a billionaire. It touches upon the importance of intergenerational wealth and how money passed down over generations can play a crucial role in creating substantial wealth.
This analysis provides a comprehensive overview of the financial concepts discussed in the article, offering insights into the challenges and strategies involved in accumulating a billion dollars. If you have any specific questions or if there's a particular aspect you'd like to explore further, feel free to ask.
