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How to Make $1 Million

If you start young enough, winding up rich from investing is easy. The strategy goes something like this:

  • Step 1: Invest.
  • Step 2: Wait.
  • Step 3: Profit.

If you've got a long enough time horizon, you can wind up wealthy, indeed. With a single $1,000 investment at 10% annualized returns, $1 million can be yours in around 73 years, and $2 million could be yours within 80 years.

That's easier said than done
Of course, if you're like most of us, you weren't investing while in preschool -- or even in high school, for that matter. If you're starting later than that, by the time you wait for that one-time investment to reach its potential, you'll likely be too old to enjoy it.

As easy as winding up rich might be for the preschool-aged investors of the world, for regular people, there's a little more complexity involved. For us, the strategy looks closer to:

  • Step 1: Invest regularly.
  • Step 2: Wait patiently.
  • Step 3: Profit.

Without seven or eight decades to let compounding work its magic, we regular people have to help things out with a little extra push from additional contributions along the way. In addition, the waiting game is significantly harder for those of us who need to continually add new money into our investments. 

Why waiting is the hardest part
After all, as the past couple of years showed us, the market doesn't move consistently up in a straight line. While the long term trend is for stocks to rise as the companies underlying those stocks grow over time, the day-to-day (or even year-to-year) fluctuations can be quite different. It's one thing to observe those fluctuations in a long-held account, but it's something else entirely to see an amount equal to your recent contribution seemingly evaporate before your very eyes.

But if you're regularly investing new money in a successful portfolio, you'll eventually get to the point where the daily fluctuations can be larger than your routine contributions. And on down days, it can be really tempting to want to just bury that contribution under your mattress rather than do something that feels like little more than throwing good money after bad.

The benefits from keeping up your contributions
If you can keep making those investments, even through tough times, as if they were on autopilot, you can take decades off the waiting game. This chart shows how many years it will take to reach the $1 million target, at various return rates and invested amounts:

Annual Investment

6% Returns

8% Returns

10% Returns

$1,000

70.6

57.1

48.4

$5,000

44.0

36.8

31.9

$10,000

33.4

28.5

25.2

$16,500

26.3

22.9

20.5

$21,500

22.9

20.2

18.2

If you're under age 50, you can max out your IRA annually at $5,000 and your 401(k) at $16,500 (that's a total of $21,500). And, of course, if you're able to invest even more than that, there's nothing preventing you from socking cash away in an ordinary brokerage account. Regardless of the level at you're able to contribute, the key to reaching millionaire status sooner is to continue to regularly invest.

As ugly as 2008 was, for instance, the 2009 stock market recovery helped significantly reverse those losses for investors who held on. And those who kept making regular contributions as the market was bottoming out did even better: Near the bottom, they were able to buy more shares for the same amount of cash. As the market rebounded, those inexpensively purchased shares became significantly more valuable.

Buy stocks worth owning
Of course, knowing the importance of regularly investing is one thing, but actually doing it is something else entirely, especially if the market moves against you. That's why it's so very important to look for companies that are financially strong. There are a few key metrics that'll help you determine whether the company is strong enough to be worth owning:

  • A debt-to-equity ratio below 1 indicates the company has judiciously limited its use of debt to a level that can be supported by its asset base and overall business size.
  • A quick ratio above 1 indicates the company has enough in fairly liquid, near-term assets to cover the bills it has coming due in the near future.
  • Positive net income backed by strong cash from operations indicates the company is both profitable and can back up those profits with cold, hard cash.

Companies like these, for instance, pass all of those tests:

Company

Debt-to-Equity Ratio

Quick Ratio

Cash From Operations
(in Millions)

Net Income
(in Millions)

Microsoft (Nasdaq: MSFT  )

0.15

1.46

$21,774

$13,770

Abbott Laboratories (NYSE: ABT  )

0.73

1.13

$7,025

$5,743

Cisco Systems (Nasdaq: CSCO  )

0.26

3.06

$8,667

$5,720

Schlumberger (NYSE: SLB  )

0.29

1.45

$5,348

$3,488

3M (NYSE: MMM  )

0.50

1.31

$5,022

$2,794

Raytheon (NYSE: RTN  )

0.24

1.31

$2,100

$1,852

Corning (NYSE: GLW  )

0.14

2.48

$1,544

$1,517

Data from Capital IQ, a division of Standard & Poor's.

Buying and owning stocks of fundamentally solid companies like those will help you continue to make those regular investments that are so critical to amassing real wealth over time.

You're not too old to start
While your preschool years may be behind you, as long as you're still drawing a paycheck, you have the opportunity to strengthen your nest egg by making regular investments. If you're ready to start building a strong financial foundation, then join us today at Motley Fool Rule Your Retirement to start putting your plans to work.  

Or if you’d rather first see the online community, tools, and other resources we have assembled for our members, click here to start your free 30-day no-obligation trial.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft. Microsoft and 3M are Motley Fool Inside Value selections. Motley Fool Options has recommended diagonal calls on Microsoft. The Fool has a disclosure policy.


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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy, and he manages the real-money Inflation-Protected Income Growth portfolio on Fool.com based on many of Graham's principles. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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