The stock market can be intimidating, especially during periods of volatility. But with the right strategy, it's also one of the best tools to build life-changing wealth.
Whether you're preparing for retirement, saving for a child's college tuition, or simply trying to increase your net worth, investing in the stock market can help you reach your financial goals -- and you don't need to be wealthy to get started.
The market is incredibly powerful and could turn $5,000 into $140,000 or more with little effort on your part. Here's how.
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The power of compound earnings
Compound earnings are cumulative. You're not just earning returns on your initial investment but on your entire account balance. The more your savings grow, the more you'll earn, and the cycle continues.
In other words, compound earnings have a snowball effect on your savings, and the sooner you start investing, the more time you're giving that snowball to grow. After a decade or two, your savings will start increasing exponentially.
Perhaps the best part about compound earnings, though, is that you don't need a lot of money to get started. If you're able to invest a few thousand dollars at the beginning, that's fantastic. But even if you only have $20 to invest right now, that's also fine. It's far better to invest a little now than to put it off.
The simple way to build wealth
The investments you choose will have an enormous impact on your overall earnings. But for simplicity's sake, let's assume you're investing in an S&P 500 tracking index fund earning average returns.
Historically, the S&P 500 has earned an average return of around 10% per year. In other words, all the annual returns over the decades have averaged out to roughly 10% per year.
If you were to invest $5,000 today and made no additional contributions, that would grow into around $140,500 within 35 years, assuming you're earning a 10% average annual return.
To supercharge your savings, though, you can consider investing a small amount each month in addition to your initial investment. For example, say you were to invest $5,000 today plus $100 per month. Assuming you're still earning 10% average annual returns, here's approximately how much you'd have over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $102,000 |
| 25 | $172,000 |
| 30 | $285,000 |
| 35 | $466,000 |
| 40 | $757,000 |
Source: Author's calculations via Investor.gov.
Again, no amount is too small to get started. If you can't invest $5,000 right now, that's perfectly fine. But by investing whatever you can afford and saving consistently, you can build a portfolio worth hundreds of thousands of dollars or more.
Managing market volatility
Finally, it's important to note that market volatility can be nerve-wracking, and if you're unsure about investing right now, you're not alone. However, if you're keeping a long-term mindset, this market turbulence shouldn't affect your strategy. Your investments could take a hit in the near term if stock prices fall, but as long as you stay invested until the market recovers, your savings should rebound without you losing any money.
That said, if you can't afford to keep your money in the market for at least several years (or ideally decades), you might want to hold off on investing for now. Double-check you have a solid emergency fund and can pay all your bills, then consider investing any extra cash.
Investing is often daunting, especially if you're just getting started. But by investing consistently and keeping a long-term outlook, you can earn more than you might think.
