I used to think that being a successful investor meant having the skills to analyze companies and to buy them when the price was right. Those things are still important. But one thing I've learned through years of investing is that you don't need to be a stock-picking whiz to make a lot of money.
In fact, if your goal is to grow a lot of wealth, there's one move that's more important than any other you might make. And it's a tip I won't hesitate to share over and over again.
When it comes to growing wealth, time may be the most powerful weapon you have at your disposal. And the more time you give your money to grow, the easier it will be to amass a lot of wealth in your lifetime.
Let's imagine you know nothing about picking stocks, so instead, you fall back on investing in S&P 500 index funds. The S&P 500 has historically delivered an average annual return of about 10.5%. But let's be a bit more conservative and go with an 8% average annual return in your portfolio.
If you were to invest $500 a month starting at age 35, you'd have about $680,000 by age 65. That's a $500,000 gain -- not too shabby.
But watch what happens when you start saving that $500 a month just 10 years earlier. Assuming that same 8% return, you'll be looking at a cool $1.55 million by age 65. You'll also be looking at a very impressive $1.3 million gain.
Now you may be thinking -- how is that possible? We're only talking about 10 extra years and an additional $60,000 invested.
But that's the beauty of compounded returns. When you invest your money and enjoy gains in your portfolio, you can then reinvest those gains for added growth. And the more years you give yourself to do that, the more wealth you stand to accumulate.
Make saving and investing a priority from the start
A big reason so many people lose out on the ability to save and invest from a young age is that money is tighter during their 20s and 30s, and the temptation to spend may be higher (think peer pressure). But one of the smartest financial decisions you can make in your lifetime is saving and investing from a young age, whether by pumping money into a brokerage account or funding an IRA or 401(k) plan.
You may need to make some sacrifices to free up cash for savings and investments earlier in life. That could mean getting roommates rather than living solo, or taking budget road trips instead of spending two weeks every year at a high-end resort. It might also mean driving a boring old car instead of a nicer one loaded with bells and whistles.
But one day, you could end up being rewarded quite generously for those sacrifices, so they're worth making -- especially when you're looking at gains of more than $1 million in your investment account.