Ready to build your wealth? There’s a strategy that 58% of Americans use – and you can do it too. It’s about investing in the stock market.
By following a simple plan, you can turn a small amount of money into a much bigger nest egg. There is a catch, however. Adding zeros to your net worth doesn’t happen overnight, so you need to commit to the long-term plan. Give up or get distracted, and it will be harder for you to achieve your wealth goals.
If you’re ready for that commitment, read on for a step-by-step plan to turn $500 a month into $500,000.
Budgeting comes first. Your budget documents the amount you commit to investing monthly.
To stick with a monthly investment of $500, for example, you’ll need your household budget to support that figure. Otherwise, it’s all too easy to overspend in other areas and leave less money available to invest.
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2. Automate your investments
Next, automate your investment process as much as possible. A 401(k) does it well. Contributions come directly from your paycheck and the account automatically invests it on your behalf. All you have to do is choose your titles. Some IRAs have similar automation features.
The hardest part will be choosing your investments. A popular starting point is a S&P 500 Index Fund with low spending. An S&P 500 index fund owns 500 of the largest and most successful publicly traded companies in the United States. Owning a stock of an S&P 500 index fund is like owning a tiny fraction of each of these companies.
The expense ratio represents the amount the fund charges you and other shareholders for the cost of administering the fund. Some S&P 500 index funds have expense ratios of 0.03 or less. This equates to $3 in annual expenses for every $10,000 invested. It might not seem like a lot, but every basis point dilutes the returns that come your way.
In addition to your stock investments, plan to keep cash in hand. For every $500 you invest, you can put $50 or $100 into a cash account. Take the lower number if you can handle the risk or the higher number if you prefer a moderate approach.
Money is a layer of protection against financial emergencies. If something bad happens, you’ll want to use your money instead of tapping into your investment account. Liquidating your investments reduces your earning potential and exposes you to market fluctuations. You will get more reliable results if you stay invested for as long as possible.
There is only one more step, but it is difficult. You have to continue your monthly investments and wait – for decades. You should, however, be well rewarded for your perseverance and patience. A monthly investment of $500 that returns an average of 7% per year will grow to over $500,000 in 29 years.
The 7% return is a realistic expectation for an S&P 500 index fund. This growth rate is consistent with long-term stock market performance after adjusting for inflation.
Note that you will see higher or lower returns in a single year. But as you stay invested longer, your average return should get closer to 7%.
Now is the time to start
Time is your best friend as an investor. The more time you have to build wealth, the easier it will be. Over time, you can rely on long-term stock market trends, rather than having to invest aggressively or get lucky on speculation.
So start your wealth management plan now. 29 years from now, you can look back and see this moment as a turning point for your finances.
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