Literally everyone can build wealth – a half million dollars for example – the tried and true way.
Got $5? I bet you do. And I bet you can figure out how to find $5 a day (or more) if you strive toward a big damn payday. If you’re looking for a get rich scheme, keep searching — this isn’t it. But the reality is, if you have patience, you can make a fortune.
Here are the simple facts
The S&P500 Index, one of many indicator of stock market performance (by tracking big US businesses), averaged 9.5% annual returns from 1928 to 2015 (see here).
Now let’s take our $5 a day, which adds up to to $1,825 a year, and put it into an S&P500 or total stock market index or mutual fund — which just means it should have similar performance, over the long term, as the S&P500’s 9.5% annual returns. We contribute this $5 a day in weekly or monthly chunks (this is important).
Now what happens? Compound interest is a beautiful thing:
You start to accrue both the money you contributed, that $5 a day, and the 9.5% a year returns. Then those contributions and the returns, plus the second year’s contributions, earn another 9.5%. And so on and so fourth. This won’t be the exact case for the year 1 and year 2, because the stock market is SUPER unpredictable in the short term. But in the long term, you can expect decent returns.
After 25 years, we can reach over $180 thousand dollars:
And guess what? Your contributions of $5 a day, only make up 1/4 of that total sum. 75% of that is JUST EARNINGS. See how the graph just takes off as time goes on? That is interest, doing its thang!
After 35 years, we can reach a half million dollars:
Damn. Half a million dollars. And all it cost you was a fancy coffee or half a burrito a day. Can you spare $5 a day for a $500,000 payday? 87% of that is purely earnings!
You only had to pay $64,000 for a half million payday.
This demonstrates the importance of investing over time. Now remember, for the volatile stock market, this works best over the long run, where you are continually purchasing investments (called “dollar cost averaging”). If you have less than 25 or 35 years, you could do a number of things. A great option would be to use a less volatile index or mutual fund, like a balanced fund. These have less year to year risk — and less return, but FAR more returns than you’d get from a savings account or spending the money instead!
Guess what? We are never taught about the importance of investing. But you don’t even need a degree to understand it. It can be simplified. Scroll to the bottom for some more resources!
- The stock market averages great annual returns, even over recessions, and crashes of all kinds (housing, dot com bubble, great depression, etc.)
- A diversified portfolio tracking the stock market can be easily created for anyone with some simple stock market index/mutual funds
- Purchasing in repeated amounts allows you to leverage the long term uptrend of the market
- You can make a ton of money by investing in the long term: the proven way
- If you have less time, choose funds with less risk in the shorter term, like balanced funds
Invest in your future.