It's amazing what just a little bit can do when compounded over a long time. But why stop there?
Chuck Saletta| The Motley Fool
It may seem impossible to believe, but investing $5 a day can make you a millionaire. At best, it will probably take you at least 40 years to get there at that savings rate, but even that is within a typical working career. In today's era of commission-free investing and fractional share purchases, that makes reaching millionaire status by retirement within reach of far more people than ever before.
Even better, there's no restriction limiting you to investing just $5 a day. As you progress through your career and get raises or figure out how to cut costs from your lifestyle, you can increase your savings rate. That'll help your reach millionaire status faster or go past it and become a multimillionaire.
Just how quickly can you get there?
The following table shows how many years you need to save to reach a $1 million nest egg, based on the amount you save every day and the annualized rate of return you earn.
Daily savings | 10% Annual returns | 8% Annual returns | 6% Annual returns | 4% Annual returns |
|---|---|---|---|---|
$100 | 13.2 | 14.5 | 16.2 | 18.5 |
$50 | 18.7 | 21.0 | 24.3 | 29.0 |
$20 | 26.9 | 31.0 | 37.0 | 46.7 |
$10 | 33.5 | 39.1 | 47.6 | 62.0 |
$5 | 40.2 | 47.5 | 58.7 | 78.3 |
Data source: author. Assumes 365.25 days per year and daily compounding at the listed annual rates
Although stocks can be volatile on a day-by day and even year-by-year basis, over the long haul, the stock market has delivered returns near that 10% annualized rate for those that reinvested dividends. There are no guarantees in stock investing, but with "guaranteed" returns from Treasury bonds sitting below 1.5% for 30 years, the risk/reward trade-off certainly looks as if it favors stocks over the long haul.
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With a stock-heavy portfolio and a long-term focus, becoming a millionaire is within reach over the span of a career, even with a remarkably small amount to invest. The secret is to invest consistently in stock-type investments and let compounding work its magic over time.
Get there even faster, or on less
Remarkably, you might even be able to reach millionaire status with an even smaller impact on your budget. If you have a traditional 401(k) at work, you can contribute to the account with pre-tax dollars directly from your paycheck. In addition, many employers offer matches that puts some of the company's money to work on your behalf, right alongside your own investment. Depending on your tax and match rate, that combination might even help you instantly double your money.
In other words, that $5-a-day contribution might actually cost you as little as $2.50 out of your pocket. Alternatively, for $5 per day of out-of-pocket contributions, you might get $10 per day working on your behalf. Either way, with a potential $1 million prize awaiting for you at the end of your journey, it's seriously worth taking the time to fill out the paperwork and start contributing to your 401(k).
Remember, you're not limited to just investing a few dollars a day in your 401(k). In 2020, people under age 50 can contribute up to $19,500 per year, and those aged 50 and up can contribute up to $26,000 annually. If contributed to a traditional 401(k), everything you sock away qualifies for a tax deduction, and depending on your employer's match policy, some or all of it might qualify for a match as well.
You don't need to be a market guru to get stock market type returns
Perhaps best of all, you don't need to be a brilliant stock picker to get stock market type returns. All you need to do is invest your money in a low cost, broad-market index fund or ETF. Then, whatever the market returns overall, you'll get as your returns, less a nominal fee that could be as low as 0.03% per year.
That combination of low cost, broad market investing strategy, low dollar minimum investments, and the ability to invest in fractional shares makes reaching millionaire status far more achievable. If you haven't started investing yet, there is literally no better time than today to get yourself in the position where you can get started.
After all, as the preceding table shows, the longer you have until you need to cash in your investments, the less you need to sock away every day for it to reach a pretty substantial amount. You will never again have more time before you retire than you do today, so now is the best time to put the foundation in place you need to enable you to invest what it takes to become a millionaire.
Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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