There's one key critical thing to do if you want to become wealthy, and even though it may seem kind of obvious, many people just don't think about it too much -- until getting a wake-up call later than they wish they'd gotten it.
The key to building wealth is this: Invest for the long term. How much you can achieve will depend on your growth rate, how much you sock away regularly, how many years you invest for, and how effectively you deploy those dollars. Here's a look at what you can accomplish by investing in stocks.
Image source: Getty Images.
How money grows
In order to solidify your dedication to the mission of saving and investing for the long run, it can help to understand how money grows -- and to appreciate just how much you might amass.
Start with the "rule of 72," which is a simple way to determine how long it will take to double your money through the process of compounding. According to the rule, if you divide 72 by an annual growth (or interest) rate, the result will be the number of years it will take to double your money. So if you expect a 10% annual return, divide 72 by 10, and you'll learn that it will take about 7.2 years to double your money. A 5% interest rate? Your money would double in about 14 and a half years.
See? It's very handy. But there's a catch: The shortcut is fairly accurate much of the time, but less so with high expected growth rates, such as ones above 25% or so. For example, with a 72% annual growth rate, the rule suggests it will take a year to achieve doubling, but doubling is an increase of 100%, not 72%.
Comparing growth rates
Clearly, much depends on the rate at which your money is growing. The table below shows what a difference a growth rate can make, illustrating what annual investments of $10,000 can grow to:
|
Growing for |
Growing at 4% |
Growing at 8% |
Growing at 10% |
|---|---|---|---|
|
10 years |
$124,864 |
$156,455 |
$175,312 |
|
15 years |
$208,245 |
$293,243 |
$349,497 |
|
20 years |
$309,692 |
$494,229 |
$630,025 |
|
25 years |
$433,117 |
$789,544 |
$1.1 million |
|
30 years |
$583,283 |
$1.2 million |
$1.8 million |
Data source: Calculations by author.
An annual average of 10% (or more!) would be great, but you can't really count on that from the stock market. Over your particular investing period, you might average that much -- or less. (Note that in some rare periods, interest rates can be very high and you may be able to lock in some double-digit growth rates for certain periods -- but we're currently in a low-interest-rate environment.)
Image source: Getty Images.
How much you invest
Besides your growth rate, another factor in how much you can amass is how much you sock away each year. Here's how your money will grow at 8% annually, if you make annual investments of various sizes:
|
Growing at 8% for |
$5,000 invested annually |
$10,000 invested annually |
$15,000 invested annually |
|---|---|---|---|
|
10 years |
$78,227 |
$156,455 |
$234,682 |
|
15 years |
$146,621 |
$293,243 |
$439,864 |
|
20 years |
$247,115 |
$494,229 |
$741,344 |
|
25 years |
$394,772 |
$789,544 |
$1.2 million |
|
30 years |
$611,729 |
$1.2 million |
$1.8 million |
Data source: Calculations by author.
Let these tables inspire you. Even if you only have a decade until you retire, you can amass a significant sum -- especially if you save aggressively. If you're able to sock away more than $15,000 each year, you can accumulate even larger sums.
Invest effectively
The final factor determining how much wealth you can amass is how effectively you invest. For best results, you might spend a lot of time learning about how to evaluate various companies as possible investments, and then choose some and monitor their progress over time. That takes a lot of effort, though, and it's hard to achieve above-average results consistently.
So consider just being average and accepting the overall market's return, which you can enjoy by parking your hard-earned dollars in one or more low-fee, broad-market index funds. Even Warren Buffett has recommended them for most investors. Good candidates for your money include the SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI), and Vanguard Total World Stock ETF (VT). Respectively, they will distribute your assets across 80% of the U.S. market, the entire U.S. market, or just about all of the world's stock markets. There are index funds targeting bonds, too, and other segments of the market.
If you want to become wealthy, you stand a good chance of being able to achieve that goal, if you have some time, determination, and money to invest -- for the long term.
