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So you want to be a millionaire? Save, save, save.

The first million is the hardest to make but it gets easier after that. There are three important things to learn- start saving (the earlier the better), save a big percentage of your income, and investment returns don't matter as much as your saving rate. 

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    Making your first million is the hardest but if you start saving a significant portion of your income at an earlier stage, you could reach the line quicker. After the first one, it gets easier.
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Recently I fielded an interesting question from a young investor: “How can an average college grad accumulate $1 million?”

Now, $1 million is not what it used to be. It is certainly not the ticket to the good life that it was 20 or 30 years ago. But it’s still a really nice down payment on it. Plus, they always say the first million is the hardest.

I decided to conduct a little thought experiment to determine what it would take someone graduating from college, from a standing start, to accumulate $1 million. According to the National Association for Colleges and Employers, the average starting salary for a college graduate was about $45,000. Additionally, the Bureau of Labor Statistics shows that the unemployment rate for those with a bachelor’s degree or higher is 3.2% as of November. So it seems like a good assumption that a bachelor’s graduate could reasonably expect to find employment, even in today’s slow growth economy. I constructed a little spreadsheet with the following assumptions:

Recommended: Turn your kids into super-savers: six tips for parents
  • Starting salary of $45,000
  • 3% raise per year
  • 10% initial savings rate of gross (pre-tax) salary
  • Every year 50% of our grad’s raise goes to increase savings
  • Earnings on investment of 6.5%

And the result: 25 years. Which means if you started at age 22, you could reasonably expect, depending on your investment returns, to have $1 million by age 47.

There are some interesting details in this thought exercise. If you follow the assumptions above, you will be saving over 50% of your income by the time you are 50. I suspect that this is not a reasonable assumption for most people (although it works great for this guy). If you change the assumptions to stop raising your contribution level once you hit 25% of your salary (year 11), then you don’t hit a million for 28 years, or a decrepit 50 years old. How about if you start saving 25% of your salary in Year One, and never change it? Same result: 25 years. How about higher investment returns? At a 7.5% average return, you shave one year off your goal and get there in 24 years.

What can we learn from this exercise? Here are three important things:

  • You need to start saving—the earlier the better.
  • You need to save a significant portion of your income. You can either start high and leave it, or start low and increase every year. But you need to get to a big percentage of savings.
  • Investment returns don’t matter as much as your saving rate.

The good news: Once you reach the $1 million mark, it gets easier. If you never contribute another dime, you can expect to get your second million 12 years later; and your third, nine years after that. Maybe the first million really is the hardest.

By Brian McCann

Learn more about Brian on NerdWallet’s Ask an Advisor

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

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