Building Wealth for the Average American Worker

The average American worker made around $50,000 per year as of 2021 with around 3% growth from one year to the next. As an average American worker, you may be wondering how to build $1 million of wealth over your working lifetime. One key strategy is to consistently save and invest a portion of your income. In this post, we’ll discuss how contributing 20% of your pre-tax income ($833 per month) to a diversified investment account can help you reach this goal.

The first step in building wealth is to create a budget. This will help you understand how much money you have coming in and going out each month. Once you have a clear picture of your financial situation, you can set financial goals and begin to plan for the future.

One of the most effective ways to save and invest for the long-term is to contribute to a 401(k) or individual retirement account (IRA). These types of accounts allow you to save money on a pre-tax basis, which can help lower your tax bill and increase the amount of money you have to invest.

If you’re able to consistently contribute 20% of your pre-tax income to a 401(k) or IRA for 40 years, you could potentially accumulate over $1 million, assuming an average annual return of 7%. This is a conservative estimate, and if you’re able to get a higher return, you could potentially accumulate even more.

If you invest $833 per month at an average annual return of 7% for 40 years, you would have accumulated approximately $1,738,966.07. The exact amount will depend on the compounding of interest. Compounding is the process where the interest earned is added back to the principal, so that interest is earned on interest. The longer the time horizon, the greater the impact of compounding. This is why a small consistent investment can yield a large sum over a long period of time.

However, it’s important to note that relying on a single investment account may not be sufficient. Diversifying your investments across different asset classes, such as stocks, bonds, and real estate, can help spread out the risk and increase the chances of earning higher returns.

Another important strategy for building wealth is to try to increase your income. This can be done by getting a better-paying job (though this is generally the most difficult to do), starting a side business, or pursuing education or training to improve your skills. Though, for many Americans, $833/month to an investment account may seem unachievable, so these routes may help to make that a reality. It can also help to take advantage of any employer retirement account matches to help hit your goal.

Paying off high-interest debt, such as credit card debt, is also crucial for building wealth. The high-interest rates on these types of debt can eat into your savings and make it harder to build wealth over time.

In summary, building $1 million of wealth over a working lifetime is possible for the average American worker. By consistently contributing 20% of your pre-tax income to a diversified investment account, setting financial goals, increasing income, paying off debt, and diversifying investments, you can increase your chances of reaching this goal.

Keep in mind that past performance is not indicative of future results, and that investing carries a degree of risk. It’s important to consult with a financial advisor before making any investment decisions.

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