Did I have your attention at millionaire?
Many people dream of becoming a millionaire but stop there, thinking it is only that – a dream. I’m going to demonstrate how you can become one by applying three key steps.
Many people dream of becoming a millionaire but stop there, thinking it is only that – a dream. I’m going to demonstrate how you can become one by applying three key steps.
Time is essential when investing because of the effect of compound interest. Compound interest is the principle of your money-making money.
Let’s use an example to help explain compound interest further. Say you invest $100 and you make a 10% rate of return. In other words, $10 profit. Now you have $110. Now, let’s say you are a brilliant investor, or your advisor is, and next year you have another 10% rate of return. Your profit is not $10 it is $11 this time.
How is that so, well you made $10 on the original $100 you invested, plus $1 on the $10 profit. For a total of $11 return that year. That cycle repeats itself year-over-year with positive returns. (obviously, part of investing is that not all years are positive). Below is a visual of the example I explained.
Year One | Year Two |
$100 Start | $110 Start |
10% rate of retrun | 10% rate of return |
$100* (10%) = $10 profit | $110* (10%) = $11 profit |
$110 end | $121 end |
To maximize the benefit of compound interest it is essential to start early.
That is why consistency is so important. Consistency is putting money aside on a regular basis, often automatic. By setting up automatic deposits to an account, it becomes much easier to save because it is happening without you having to think about it. This is called dollar-cost-averaging, which will be explained further in the next article.
According to a Vanguard study in 2019, if your goal is to have $1 million at age 65 and you save just under $4,500 each year ($375/month) starting at age 20, you will reach your million-dollar goal.
These numbers are based off a 6% rate of return, which is conservative over the long-term.
If you start at age 30 instead, you will have to save about $9,000 each year ($750/month).
Beginning at age 40? You will need to save about $18,000 a year. And if you wait until age 50, you will need to put away over $40,000 a year.
Below you can see the Continuum II Investment Timeline Chart that shows the power of time and consistency in multiplying your dollars.
Age Start | Years Invested | Portfolio Value at Age 65 | Contributions | Returns | Portfolio:Returns |
20 | 45 | $1,017,440 | $240,000 | $777,440 | 76% |
30 | 35 | $570,413 | $180,000 | $390,413 | 68% |
40 | 25 | $298,995 | $120,000 | $178, 995 | 60% |
50 | 15 | $134,201 | $60,000 | $74,201 | 55% |
If you invest $500/month starting at age 20 until 65, your projected portfolio value, assuming a 5% rate of return is over $1million dollars.
If you invest $500/month starting at age 30 until 65, your projected portfolio value, assuming a 5% rate of returns will be about $570,000.
If you invest $500/month starting at age 40 until 65, your projected portfolio value, assuming a 5% rate of return will be about $300,000.
If you invest $500/month starting at age 30 until 65, your projected portfolio value, assuming a 5% rate of returns will be about $135,000.
You can see the trend that the longer the money is invested, the greater the returns. This is the power of compound interest.
No matter what your current age, you will always be better off starting now rather than waiting until later.
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