The saying is true -- the rich do get richer. It's far easier to make money if you've got some socked away than it is to start from scratch -- as long as you manage your money well. The reason is simple: compounding.
When you have money working on your behalf, each percentage point of return adds that many more dollars to your account balances. After all, if a stock you own goes up in value, it's far better to own 10,000 shares than 100.
Start small
Fortunately, anyone with even a little cash to invest can take advantage of the power of compounding. It takes a little longer to reach the point where compounding works its magic.
Here are charts that showcase how many years it takes to reach each $1 million threshold, given regular investments earning a decent rate of return.
To go from $0 to $1 million:
|
Monthly |
8% Return |
9% Return |
10% Return |
11% Return |
|---|---|---|---|---|
|
$100 |
52.9 years |
48.3 years |
44.5 years |
41.4 years |
|
$250 |
41.6 |
38.3 |
35.5 |
33.1 |
|
$500 |
33.4 |
30.9 |
28.8 |
27.0 |
|
$1,000 |
25.5 |
23.9 |
22.4 |
21.2 |
|
$1,291.66 |
22.8 |
21.4 |
20.2 |
19.1 |
To go from $1 million to $2 million:
|
Monthly |
8% Return |
9% Return |
10% Return |
11% Return |
|---|---|---|---|---|
|
$100 |
8.6 years |
7.7 years |
6.9 years |
6.3 years |
|
$250 |
8.5 |
7.5 |
6.8 |
6.2 |
|
$500 |
8.2 |
7.4 |
6.7 |
6.1 |
|
$1,000 |
7.8 |
7.1 |
6.4 |
5.9 |
|
$1,291.66 |
7.6 |
6.9 |
6.3 |
5.7 |
To go from $2 million to $3 million:
|
Monthly |
8% Return |
9% Return |
10% Return |
11% Return |
|---|---|---|---|---|
|
$100 |
5.1 years |
4.5 years |
4.1 years |
3.7 years |
|
$250 |
5.0 |
4.5 |
4.0 |
3.7 |
|
$500 |
4.9 |
4.4 |
4.0 |
3.6 |
|
$1,000 |
4.8 |
4.3 |
3.9 |
3.5 |
|
$1,291.66 |
4.7 |
4.2 |
3.8 |
3.5 |
That $1,291.66 didn't come out of thin air -- it is the current maximum for monthly contributions available in a 401(k) or 403(b) account for most people. These charts mean that you can go from $0 to $3 million in as few as 28 years, if you have the determination to take advantage of the opportunities. Most of that time is spent getting to your first million. Once you hit that milestone, compounding really takes over to help you reach your ultimate goal.
Get from here to there
Starting is the hardest part. After all, if you're not saving money now, going from $0 to nearly $1,300 a month may seem impossible. No matter how much you can set aside now, any little bit puts you on that path to your first $1 million -- and beyond. Fortunately, you can get major assistance in your quest to invest for your golden years.
For instance, money you contribute to your traditional 401(k) or 403(b) plan will most likely come with an immediate tax reduction. Thanks to that tax break, it's as if Uncle Sam were kicking in a significant chunk on your behalf, reducing the total out-of-pocket cost of your contribution.
For folks in the 25% tax bracket, that works out to an out-of-pocket cost of only $75 per $100 of contributions -- a significant savings. A matching contribution from your employer knocks down the costs even further.
You really can get rich
Once you start investing, though, the rest is largely a matter of owning solid companies and letting compounding work its magic. Over the past 20 years, for instance, the following companies have all produced solid returns:
|
Company |
Price on |
Price on |
Dividends/ |
Annualized |
|---|---|---|---|---|
|
McDonald's |
$5.61 |
$55.64 |
$6.28 |
12.8% |
|
Duke Energy |
$11.63 |
$18.93 |
$33.56 |
7.8% |
|
Exxon Mobil |
$10.00 |
$81.71 |
$17.32 |
12.1% |
|
Merck |
$8.42 |
$44.53 |
$21.64 |
10.9% |
|
Honeywell |
$7.91 |
$57.83 |
$11.82 |
11.5% |
|
General Electric |
$3.52 |
$33.84 |
$9.75 |
13.4% |
|
Motorola |
$3.40 |
$11.26 |
$4.62 |
8.0% |
Those solid returns came from companies that were already fairly well known, even 20 years ago. Better yet, owners of those stocks earned those returns in spite of short-term problems, such as Merck's Vioxx recall and Motorola's recent disastrous management missteps.
This goes to show that you don't have to buy the perfect companies to receive solid returns and build your wealth over time. What matters most is freeing up the cash to make those regular investments.
The two most important parts of reaching -- and passing -- your first $1 million in investments are time and regular contributions. If you're ready to put yourself on the path to retirement riches, join us at Motley Fool Rule Your Retirement. You can take the next 30 days to look around the service, free. Once you've set the plan in motion to take you from here to retired, your future self will thank you for it.
This article was first published July 16, 2007. It has been updated.
Fool contributor Chuck Saletta is diligently working on reaching his first $1 million. Chuck owns shares in Merck and General Electric. Duke Energy is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.
