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How to Turn $200 a Month Into $5 Million

Time is a funny thing. Months and years seem to fly by. Yet days at the office can move so slowly.

But when it comes to investing, sometimes a simple chart can reveal why time can be such a valuable resource, yet at the same time, a terrible thing to waste.

The incredible benefit

Imagine if I told you $200 a month could be turned into $5 million. You'd likely think I was crazy. But as you can see in the chart below, it's not only possible, but some could even argue it's probable:

The chart is showing what $200 put into an S&P 500 index fund through a retirement account each and every month beginning at age 20 and stopping at age 80 would be worth after decades and decades of patient saving and investing. Of course we can't project what the future returns will be, but you can see the remarkable growth even at a very conservative 7% annual interest rate.

And if you think "conservative," isn't the best description, consider in 2008 the stock market fell by 37%, the second worst year on record. But in the 60 years that ended December 31, 2008, the S&P 500 delivered an average annual return of 10.9%. In fact, at the conclusion of the 10 single worst years on record, the average annual return over 60 years was 8.8%.

The reality is, the average return over each of the last 60 years for the S&P 500 stands at a staggering 10.4%.

All of this is to say, projecting you'll see an average return 9% over such a massive period isn't some pie-in-the-sky assumption, it's a reality.

The simple savings

The thing is though, $200 a month sounds like a lot. Yet in small steps, you can get there.

According to the latest data the average American made roughly $46,500 a year. That means saving a little more than 5% of what you earn would equal to $200 a month.

But even more realistically, that means saving $6.58 each day.

In 2012, Americans spent nearly $20 a day on things like eating out, apparel, and entertainment. Sure there's fun to be had, but isn't possible to eat in a little more, or perhaps get the $1.29 movie from Redbox instead of a $10 ticket at the theater? Maybe it's a question of whether or not you really need that new shirt or if you just want it, even if it's marked on sale.

Source: Flickr / DeusXFlorida.

Instead of going to a sit-down restaurant for lunch and getting a $10 meal, a $2.50 Coca-Cola, and leaving a 20% tip -- so you're out $15 plus tax -- maybe you should head to a Chipotle or a Panera Bread. Or next time you're at the supermarket, buy the store brand peanut butter instead of Jiff. They're just peanuts. 

Or instead of getting the Spinach Feta Wrap and a Venti Skinny Vanilla Latte at Starbucks you stick to a Multigrain Bagel and a Grande Brewed Coffee, saving you $4.50. Maybe it's time to hold off on the newest pair from Nike, or perhaps wait until next summer for the latest handbag from Michael Kors.

Heck, thinking big, maybe instead of an Acura, you could get a Honda.

When we really sit down to look at what we need, versus what we want, saving $6.58 a day may be easier than we think.

The key takeaway

Having 60 years to save is easier said than done, and as you can see, starting early is the key to this scenario. If you wait 10 years, the total amount you save out of pocket falls by a little more than 15%, but the value of your investment is cut in half thanks to the powerful work of compound interest.

But there's always time to catch up, and you shouldn't be discouraged. You can nearly match the returns if you double your savings from $200 to $400 starting at age 30.

As they say, there's no time like the present to start saving and investing. You'll be glad you did.

Read/Post Comments (8) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2014, at 5:30 PM, aajh23 wrote:

    I think this is great data for us all to analyze in our own personal lives as each individual circumstance may differ. For instance, saving 5 million dollars from a 200 dollar a month investment over 60 yrs would mean having to work until you were 80 if you started out when you were 20. But what if you double your contributive amount? Theoretically speaking, you should be able to reduce the amount of time needed to reach the financial goal of 5 million dollars by 40 years. Providing that the S & P 500 continues to perform at its current rate or better.

    Now if your goal is simply to leave a nest egg for your children or grand children, perhaps the first option of the 200 dollar investment would be best. However, if it is for yourself personally that you are doing this for, in the name of retirement then the second option might be the way to go. It's all based on what our personal financial goals are and this article may be a reminder to some but a revelation to others on how investing a small amount of your earnings today can add up big in the future.

  • Report this Comment On August 18, 2014, at 12:15 PM, gsned57 wrote:

    I love these articles from the Fool. Always good to get reminders of the power of a little savings, some patience, and compound interest! It's articles like these that show you guys are concerned with helping folks save and invest vs. trade and gamble.


  • Report this Comment On August 18, 2014, at 1:14 PM, KombatKarl wrote:

    It's also amazing to see that difference of only 1% a year over time can mean the difference of millions of dollars.

  • Report this Comment On August 18, 2014, at 1:51 PM, moremilk wrote:

    of course, those 5 million will be worth around 500K or less in real value when accounting for inflation (using the same historical data as for stock market returns).

    Since most people don't self invest, the 7% is a far more likely return rate after all the fees you pay, so the article's title should have been:

    How to turn $200/month into 200K in only 60 years ...

    not quite the same bite ... :)

  • Report this Comment On August 18, 2014, at 2:08 PM, djlaino wrote:

    I know this isn't meant to be advice for everyone, but it got me wondering: what if everyone took this advice and started to save $200/month? What would that massive economic shift do to the economy?

  • Report this Comment On August 18, 2014, at 3:55 PM, dragonmonkey wrote:

    The important matter what you that you continue to go to Starbucks and buy stuff. I don't mind you cutting back a little; perhaps just buy something less expensive, but with a higher profitability margin? As a stockholder, I still need to get my kids through college.

  • Report this Comment On August 18, 2014, at 5:45 PM, wealthzoom wrote:

    Also, lets say you just invested $200 per month for ONE year at age 20 and NEVER saved again. That $2,400 @ 9% will have grown to $422,475 by age 80. (2,400 X 1.09 ^ 60 = 422,475) Not too shabby. If you're young, now is the time to invest!

    What if you saved for just another year at age 21, and never saved again? That's 2,400 x 1.09 ^ 59 = $387,592. So at just 2 years of saving starting at age 20, you could have over $800,000 at age 80! The key of course is having the discipline to do this in the first place.

  • Report this Comment On August 18, 2014, at 8:47 PM, essnerific wrote:

    I'm confused. You own Starbucks, Coke, and Nike shares, but you used them as examples, to explain what we should cut spending on? Why not Second Cup or Tim Hortons?

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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