Investing in the stock market is one of the most effective ways to generate wealth over time. But it's crucial to make sure you're investing wisely, because putting your money in the wrong places could lead to financial disaster.
Not all investments are created equal, and some are better options than others. These three types of investments can help grow your savings and potentially make you a millionaire someday.
1. S&P 500 ETFs
An S&P 500 exchange-traded fund (ETF) is a collection of stocks that track the S&P 500 index. The S&P 500 includes stocks from 500 of the largest and strongest companies in the U.S., and S&P 500 ETFs include the same stocks as the index itself.
S&P 500 ETFs are relatively safe investments because they're designed to follow the market as a whole. While the stock market will experience corrections and crashes, it has historically always recovered. That means that although S&P 500 ETFs will have their ups and downs, they're very likely to earn positive returns over the long run.
It's also possible to make a lot of money with S&P 500 ETFs. Since its inception, the S&P 500 has earned an average return of around 10% per year. In other words, despite its short-term volatility, its long-term returns have averaged out to around 10% per year.
If you were to invest, say, $400 per month while earning a 10% average annual return, you'd have around $1.3 million after 35 years. While it takes time to become a millionaire, S&P 500 ETFs are hands-off investments. All you need to do is invest consistently and then sit back and watch your money grow.
2. Dividend funds
Dividend stocks are investments that pay you just for owning them. Each quarter or year, you'll receive a small dividend payment for each share you own.
A dividend fund is a group of dividend stocks bundled together into a single investment. By investing in a dividend fund, you don't need to worry about buying individual stocks if that's not something you're interested in. Dividend payments vary by stock, but you'll generally earn a couple of dollars per share in dividends. While that might not sound like much, it can add up to more than you think.
With most dividend funds, you have the option to reinvest your dividends to buy more shares. The more shares you own, the more you'll receive in dividends. Over time, you could potentially build a passive income stream earning thousands of dollars per year in dividend payments.
That passive income is on top of whatever returns you earn on the investments themselves, too. Say, for instance, your investments are earning a modest 8% annual return, on average. If you invested $500 per month, you'd be a millionaire within around 35 years -- plus you'd be earning passive income from your dividend payments.
3. Individual stocks
If you enjoy researching different companies and taking a hands-on approach to investing, individual stocks could be a good fit for you. By investing in individual stocks, you can create a fully customized portfolio built to fit your needs.
While investing in individual stocks does require more research than investing in S&P 500 ETFs or dividend funds, you have a better chance of beating the market and earning higher-than-average returns.
If you do choose to invest in individual stocks, aim to buy stocks in at least 10 to 15 different industries. This will help diversify your portfolio and limit your risk. Also, do your research when choosing stocks, because the wrong investments could wreak havoc on your finances.
Investing in the stock market can be daunting, but it can also put you on the path to becoming a millionaire. By choosing your investments wisely and investing consistently, you can earn more than you might think.