Investing is one of the fastest ways to grow your wealth, and it's pretty much essential for retirement savers. But for most people, it's not like the lottery where you put a couple of dollars in and wake up a multi-millionaire the next day. It takes time to grow your contributions into a fortune.
Below, we'll look at how investing works and how long it could take to turn $100 per month into $1 million or more.
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How investing earns you money
When you invest in a stock, you're betting on a company's future success. You're purchasing a small stake in the company, which you can hold onto as long as you choose. If that company performs well over time, its stock share price will go up.
When you sell, you're trading in your ownership stake in the company for your shares' current value. The difference between the share price of the stock when you sell and the original share price when you bought it is known as your earnings.
For example, if you bought a share of a stock worth $100 and you sold it a year later for $200, your earnings would be the $100 difference between your initial purchase price and your sale price.
So making a fortune in the stock market involves choosing companies with a bright future and holding onto them, often for decades, to maximize your earnings.
Growing $100 a week into $1 million
There are a few factors that influence how much your investments are worth, including:
- How much you invest
- What you invest in
- How long you hold your investments before selling
If you invested $100 per week and your investments earned a 7% average annual rate of return, it would take a little over 39 years to reach $1 million. But changing any of the three above factors could drastically change the timetable.
Bumping your contributions to $200 per week would shave your time to $1 million to less than 30 years, all other factors being the same. And if your $100 weekly contributions earned a 10% average annual rate of return instead, it would take less than 32 years to reach $1 million.
If you hope to save more than $1 million, then holding onto your investments for longer is one easy way to do it. Returning to our original example of $100 per week with a 7% average annual rate of return, it would take a little over 39 years to get to $1 million, but it would only take one more decade to reach $2 million.
What does this mean for you?
The above examples are just hypothetical scenarios, but they can teach you some important things about how to grow your wealth quickly through investing. Contributing as much as you can starting as early as you can will help you maximize your earnings. Raising your contributions whenever possible will help, too.
Make sure you invest in strong companies you believe will still be profitable decades from now, and spread your money around among many different stocks and bonds to ensure that no single one weighs too heavily on your portfolio.
If you follow these tips, you can reach $1 million eventually, but don't stop there. Calculate how much you actually need for retirement and make that your goal. Don't forget about inflation and taxes. Over time, $1 million won't go as far as it does today, so you might need more than you think for retirement.
You can make the task easier for yourself by saving in a tax-advantaged retirement account, like a 401(k) or an IRA. These accounts won't get you out of paying taxes entirely, but they can reduce how much you owe, so you can hold onto more of your savings.
It will still take time to build up a substantial nest egg through investing, but you'll get there much faster than you would with a savings account. If you make investing a priority and follow the tips above, you should start seeing progress toward your goal more quickly than you think.
