October 2003

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Who Wants To Be A Millionaire?

by Paul B. Crilly

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Attention new engineering graduates: do you want to be a millionaire? If so, you need to invest five to 10 percent of your salary in a good diversified stock mutual fund systematically. If you start early, you could retire a millionaire at age 62. More specifically, if between ages 22 and 62 you set $3,000 a year aside in an average stock mutual fund that historically returns 10 percent, your investment will grow to $1.3 million. Three thousand dollars per year is only six percent of the average $50,000 starting salary. And think about it: if you wait until age 42 to begin investing, it will take $22,500 per year to accumulate $1.3 million. As many “seasoned professionals” will attest, we have even more financial commitments and surprises in our 40s than we ever had in our 20s.

You don’t want to save all your life? Then set aside $3,000 per year in the same mutual fund from age 22 to age 32. If you don’t touch the money, by the time you reach age 62, your investment will have grown to $834,000. The important things are to start young, be systematic and stick with a reliable diversified fund with a good track record. Don’t trade in and out of funds and forget about getting rich quick. Many, if not most, investors are disillusioned speculators. In fact, according to University of Tennessee economics professor Tony Spiva, engineers are some of the most frequent victims of financial scams.

Although retirement is a good motive for investing your money, there are plenty of other reasons to save and invest while you’re young. New engineering graduates have relatively high starting salaries compared to other professionals. However, unless they go into management or change careers, many will eventually experience salary compression their salary growth will flatten out. Sure, some companies like to wine and dine young engineers, but some show a decreased interest for those in their 40s or 50s. Unless we have some specialized skill, the intense interest shown by employers when we were in our 20s and 30s tends to wane as we get older. And no one is more financially vulnerable than a 40-something with two kids, a mortgage, car payments, college bills, a cranky boss, and a potential layoff looming ahead. Therefore, make the proverbial hay while the sun shines; save and invest early in your career. If you have a pot of money saved, you will be less affected by the whims of your company’s employment and retirement plan policies.

Where Do You Start?

So what are the practical steps to be taken? First, before you get your first paycheck, set up an automatic withdrawal of five to 10 percent of the gross amount into a diversified stock fund. If you never even start getting the money in your paycheck, you will never miss it. A 401K or IRA is a good investment vehicle, but keep your investment diversified. The folks from Enron learned the benefits of diversification the hard way.

Second, establish a budget; that is, spend your money on paper first. Your plan should include putting aside cash for emergency expenses and six months’ worth of living expenses, in case your job disappears. To avoid borrowing at high interest rates, put money aside for big-ticket items such as cars, appliances and a home down payment. You also need to include savings for such things as vacations, dinners out, Starbucks coffee, “mad money,” and things that you like to do that will eat up your finances if you don't plan properly.

Many times when I was young, I anticipated that when I reached my 40s, I would have more money put aside in savings. Sure, my salary has increased significantly, but so have my expenses. In the past six months, my oldest daughter has expressed interest in colleges that cost more than $20,000 per year, my dentist is getting rich on my kids braces and my wife's emergency crowns, and we have spent $1,000 on car repairs. And the list goes on. So, my advice to you: save while you're young, employed, and have all your hair.

For Further Reading

In Financial Peace, Dave Ramsey dispenses a great deal of financial common sense salted with humor.

In The Millionaire Next Door, Thomas Stanley and William Danko describe how many wealthy people not in high-earning professions, such as law or medicine, have prospered by living modestly, avoiding high maintenance activities and otherwise not living ostentatiously.




Paul Crilly is a professor in the electrical and computer engineering department at the University of Tennessee. He has worked for 11 years in industry, spent 14 years in academia, and served for 18 months as an IEEE-USA Congressional Fellow. The opinions expressed in this article are his own.



Copyright 2003, The Institute of Electrical and Electronics Engineers, Inc.