The $1 million mark is a significant milestone. In the past, it's been a luxury to hit that mark, but nowadays, it's becoming more of a necessity for many people to retire comfortably.
Unfortunately, becoming a millionaire through strictly saving is all but impossible for most people. Even if you had 40 years, you'd have to put away $25,000 yearly. That's a tough ask for anyone, but especially for someone not making well into six figures annually during that span.
Luckily, there's compound earnings. In investing, compound earnings happen when the money you make on your investments begins to make money on itself, and it's how many people build their wealth. With time, consistency, and well-diversified index funds, millionaire status can be attainable -- and no luck will be needed.
Let the S&P 500 lead you
The S&P 500 is the most followed index in the stock market, tracking the largest 500 public U.S. companies by market cap. It contains all large-cap or blue chip stocks, pays dividends, and helps investors achieve greater diversification. If you look at the market leaders across all 11 major sectors, they're all a part of the S&P 500.
There's a reason Warren Buffett -- who many consider the greatest investor ever -- is a big preacher of investing in an S&P 500 index fund. It's practical and hard to argue with the results.
Historically, the S&P 500 has returned around 10% annually over the long run. Past results don't guarantee future results, but if we assume that continues to hold true, here's how many years it would take to cross the $1 million threshold, based on monthly investment amounts:
| Monthly Contributions | Approximate Years to Reach $1 Million |
|---|---|
| $500 | 31 |
| $1,000 | 24 |
| $2,000 | 18 |
Calculations by author.
It's about consistency
Most people don't have a large enough lump sum to invest at once that could reasonably grow to $1 million, but they have time. And with time and consistency, you can make up a lot of ground, thanks to compound earnings.
One of the best ways to keep yourself consistent is by using a strategy like dollar-cost averaging, which involves investing a set amount at specific intervals, regardless of stock prices at the time. If you decide to invest $500 every other Tuesday, then every other Tuesday, you should be investing $500 -- no matter what.
Putting yourself on a schedule keeps you investing regularly and helps avoid situations where you find yourself trying to time the market or waiting for the perfect time to invest. (Spoiler alert: There is no perfect time.) It can be hard to continue investing while prices are falling, but you have to trust that if you're investing in well-diversified index funds, they'll weather the storm and produce good returns in the long run.
Save money on taxes
For those eligible, a Roth IRA is one of the best gifts the government has given Americans. You contribute after-tax money to a Roth IRA, and in return, you get to take tax-free withdrawals after age 59 1/2. Having your money compound tax free can easily result in tens of thousands of dollars in additional savings in your retirement nest egg at the end fo your career.
If you contribute $6,000 annually to a Roth IRA and invest it in an index fund that returns, on average, 10% annually like the S&P 500, here's how much you'd have at various points:
| Years Invested | Total Value | Amount You Invested | Capital Gain |
|---|---|---|---|
| 20 | $343,650 | $120,000 | $223,650 |
| 30 | $986,964 | $180,000 | $806,964 |
| 40 | $2.65 million | $240,000 | $2.41 million |
Calculations by author.
The difference between this happening in a Roth IRA versus a traditional brokerage account is that in a Roth IRA, the full amount would be yours. In a brokerage account, you'd owed taxes on the capital gains.
Assuming you're in the 15% capital gains bracket (which most people are), that could mean over $33,500, $121,000, and $361,500 saved in taxes after 20, 30, or 40 years respectively. Making $1 million is great; keeping more of it in your pocket is even better.
Keep it simple
Building wealth doesn't have to be hard. In fact, it shouldn't be hard. You don't need luck, you don't need to be a Wall Street executive, and you don't have to spend hours on end looking through financial statements.
Conventional investment wisdom tells us that hitting the $1 million mark can be done with low-cost index funds and time. And there's a reason conventional investment wisdom has stood the test of time: It works.
