Key insights
- This article discusses strategies for accumulating $1 million by investing $500 per month, highlighting the importance of time and rate of return. It uses the S&P 500's historical 10% return as a benchmark. While generally positive, the article's direct impact on the US equity market is minimal, serving more as general financial advice.
While having $1 million doesn't mean as much as it used to, earning the title of "millionaire" does still convey a sense of financial independence.
On the surface, the road to building a $1 million portfolio may seem long and daunting. With proper planning, time, and discipline, however, it's not nearly as impossible as it seems. In fact, with just a few hundred dollars a month, you can successfully amass a $1 million nest egg that turns into $40,000 per month or more in passive income.
Here's your game plan.
The first step to investing $500 per month is figuring out where that $500 is going to come from.
For someone making $50,000 a year, that would require saving 12% of their salary. Definitely doable, but that can feel like a lot if you're going from zero to $500.
Fortunately, there are a lot of options for where that money can come from:
If you break a savings goal into pieces, it's not nearly as intimidating.
How that $500 per month turns into $1 million depends mostly on two things: your average annual rate of return and how long it'll be invested. The latter part you can control. The former, you can't.
It's usually best to start with a more modest rate of return assumption. The S&P 500 (^GSPC +1.20%) has returned about 10% annually over time, but that's no guarantee of future returns. Best to think conservatively and keep expectations in check.
Here's a table of various rate-of-return and time-frame combinations to see how much that $500 per month can grow to.
For example, $500 per month invested for 30 years, earning a 10% average annual return, results in a $1.14 million portfolio. Reduce the return to 9% annually, and the sum total drops to $922,000.
To achieve the $1 million goal, you may need to make adjustments. Save more money. Save for longer. Not everyone has decades to save. The sooner you can make any necessary changes, the better your chances of success.
One suggestion: You probably don't want to assume anything higher than a 10% rate of return. I know that U.S. stocks have done much better than that over the past several years. I know it's possible it could happen again. When planning, however, you don't want to get overoptimistic. It just increases the chances that you'll feel you're falling behind and want to give up.
If you've hit your savings goal, it's time to turn that pot of cash into a steady income.
There are three ways you could go about this:
If you want to stick with more conservative income-producing investments, it's possible to use any number of different options to generate a 4% yield.
The key to making all of this happen, however, is discipline. If you start saving, keep saving, and can leave it alone over time, the elusive $1 million prize isn't so elusive.