For many people, the idea of becoming a millionaire may feel impossible. It's common to think the only way to make that kind of money is to win the lottery, inherit money, or start a popular tech company.
The good news is there's a much more reliable -- if less exciting -- way to build serious wealth. One that doesn't require you to have extreme luck, wealthy relatives, or to be the next Steve Jobs. If you're able to consistently invest a portion of your income, over time you can build your own fortune.
Becoming a millionaire takes time
Time is a powerful force when it comes to wealth building. By first investing your money and then reinvesting any gains, you essentially earn interest on your interest. Think of it as a tiny snowball that grows as it picks up more and more snow. It is called compound interest, and it's a powerful phenomenon.
The good news is that if you are 30 years old, time is on your side. Depending, of course, on when you want to reach that six-figure milestone. Let's say, hypothetically, that you're able to get average annual returns of 8% on your investments (we'll discuss how that might work in a second). Here is how much you'd need to invest each month to become a millionaire.
| Age you'd become a millionaire | Total investment | Monthly investment |
|---|---|---|
| 70 (40 years) | $158,400 | $330 |
| 65 (35 years) | $205,800 | $490 |
| 60 (30 years) | $270,000 | $750 |
| 55 (25 years) | $360,000 | $1,200 |
| 50 (20 years) | $456,000 | $1,900 |
Data source: Author's calculations.
Being able to stop work aged 50 with a million dollars might sound like a dream scenario. But, investing $2,000 a month for the next 20 years won't be realistic for most people. Particularly given the Bureau of Labor Statistics puts the average annual earnings of a 24 to 35 year old at around $55,000.
Look at what happens if you instead invested $490 a month for 35 years. Time can do the heavy lifting. You could still reach the million-dollar mark, but it would cost you much less overall.
How investments can help you become a millionaire
I mentioned a hypothetical 8% average annual return on your investments earlier. That's a benchmark used by financial planners because the average annual of the S&P 500 since 1928 is 7.7%. The S&P 500 is an index that tracks the biggest 500 companies in the U.S.
Before we jump into the hows of investing, some caveats. Firstly, that 7.7% does not factor in inflation. Secondly, there are no guarantees when it comes to stock market investments. There will be years when the market falls. Thirdly, we can only use history as a guide. We can't be sure what the next 20 or 30 years will bring.
Now the warnings are out of the way, here are some ways to maximize your investments.
1. Know that you don't have to be an expert to start investing
One of the things that puts people off opening a brokerage account is the fear that they don't know enough. Sure, it is important to learn how to set goals, manage risk, and build a diversified portfolio. But you don't need huge amounts of specialized knowledge to begin investing.
For example, rather than buying (and researching individual stocks), you might opt to buy an index fund or ETF that tracks the S&P 500. This will give exposure to a broad mix of companies without you having to evaluate each one individually.
2. Make the most of tax-advantaged accounts and 401(k)s
The government wants you to save for your old age. So do many employers. Understanding how to use tax-advantaged accounts can translate to more money for you to invest.
- See if your company offers a 401(k) plan. If it does, find out if it will match your contributions and ask how to get involved. In addition to the tax advantages, any employer contributions can significantly boost your nest egg.
- If a 401(k) Is not an option, look into individual retirement accounts (IRAs). These can either reduce your tax bill now or in the future, depending on whether you choose a traditional or Roth IRA.
Bear in mind that the downside to these tax-advantaged accounts is that you'll have to pay a penalty if you want to access the cash before you reach age 59 1/2.
3. Invest as much as you can, as early as you can
The bigger the gap between what you spend and what you earn, the more money you'll have to build wealth. If the idea of investing $490 a month seems impossible, go through your budget and find an amount that is achievable. You can always increase your contributions further down the line -- what's important is to get started.
Having cash in an emergency fund will also help you stay the course, investing-wise. That way you won't have to dip into your portfolio if you're hit by an unexpected financial curveball.
Key takeaway
If you're 30 years old, and want to become a millionaire by the time you are 65, you'd likely need to start investing at least $490 a month. There are no guarantees, but the power of compound interest could help you build a sizable amount of wealth over time.
