Ready to build wealth? There's a strategy that 58% of Americans are using -- and you can, too. It involves investing in the stock market.
By following a simple plan, you can turn a small sum of cash into a much larger nest egg. There's a catch, though. Adding zeros to your net worth doesn't happen overnight, so you must commit to the plan for the long term. Give up or get distracted, and it'll be harder to meet your wealth goals.
If you're ready for that commitment, read on for a step-by-step plan to turn $500 a month into $500,000.
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1. Budget
Budgeting comes first. Your budget documents the amount you're committing to invest monthly.
To stick to a monthly investment of $500, for example, you'll need your household budget to support that number. Otherwise, it's too easy to overspend in other areas and leave less money available for investing.
2. Automate your investing
Next, automate your investing process as much as possible. A 401(k) does this well. The contributions come right out of your paycheck, and the account invests it automatically on your behalf. All you must do is pick your securities. Some IRAs have similar automation features.
The hardest part of this will be choosing your investments. A popular starting point is an S&P 500 index fund with a low expense ratio. An S&P 500 index fund holds 500 of the largest, most successful publicly traded companies in the U.S. Owning one share of an S&P 500 index fund is like owning a tiny piece of each of those companies.
The expense ratio represents how much the fund charges you and other shareholders for the fund's administrative costs. Some S&P 500 index funds have expense ratios of 0.03 or lower. That equates to $3 in annual expenses for every $10,000 you have invested. It may not sound like a lot, but every basis point dilutes the returns that flow through to you.
Alongside your stock investments, plan on keeping some cash on hand. For every $500 you invest, you might stash $50 or $100 in a cash account. Take the lower number if you can handle risk or the higher number if you prefer a moderate approach.
The cash is a layer of protection against financial emergencies. If something bad happens, you'll want to use your cash rather than tap your investment account. Liquidating your investments lowers your earnings potential and exposes you to market fluctuations. You'll see more reliable results if you stay invested for as long as possible.
3. Wait
There's just one more step, but it's a hard one. You must continue your monthly investments and wait -- for decades. You should be well-rewarded for your perseverance and patience, though. A $500 monthly investment that earns 7% annually, on average, will grow to more than $500,000 in 29 years.
The 7% return is a realistic expectation for an S&P 500 index fund. That growth rate is in line with the stock market's long-term performance after adjusting for inflation.
Note that you'll see higher or lower returns in a single year. But as you stay invested longer, your average return should move closer to 7%.
The time to start is now
Time is your best friend as an investor. The more time you have to build wealth, the easier it will be. With time, you can rely on long-term stock market trends, rather than having to invest aggressively or get lucky on speculation.
So kick off your wealth plan now. In 29 years, you can look back and see this moment as a turning point for your finances.
