There are three extremely important elements when it comes to investing your money: the amount you contribute each month, the rate of return and how long you have to reach your goal.Keeping this in mind can help you invest your way to financial independence, regardless of how that looks for you — even if it means having $1 million.
Select previously asked Brian Stivers, a Financial Advisor and Founder ofStivers Financial Services, to help us calculate how much money 40-year-olds should invest each month to have $1 million by age 65. He also crunched the numbers to help us figure out how much people would have to contribute each month to become a millionaire if they waited just five years after turning 40 to invest. Here's what we found:
How much a 45-year-old needs to invest to become a millionaire
When making calculations, Stivers accounted for three different return rates: 3% (a conservative portfolio of mostlybonds), 6% (a combination of stocks and bonds) and 9% (a portfolio that's stock-heavy or contains index or mutual funds yielding around 9% on average). And, he used a retirement age of 65, which would give 45-year-olds just 20 years to save. Here's how much 45-year-olds would need to invest each month to become a millionaire by the traditional retirement age:
- If making investments that yield a 3% yearly return, a 45-year-old would have to invest $3,100 per month to reach $1 million by age 65.
- If they instead contribute to investments that give a 6% yearly return, they would have to invest $2,200 per month for 20 years to end up with $1 million.
- But if they choose investments that yield a 9% yearly return, which is comparably more aggressive, they would need to invest $1,600 per month for 20 years to reach $1 million.
If you were to start investing for a 9% yearly return just five years earlier at age 40, you would need to contribute $950 per month to reach $1 million by age 65. That means contributing $650 less per month than you'd have to contribute if you wait until age 45.
The earlier you start investing the less money you have to contribute to your investments to reach $1 million. This is becausecompound interestis most powerful when it has a longer amount of time to grow your money.
Depending on your circ*mstances, making such aggressive contributions may feel like a squeeze. Especially since as you get older you may take on expenses that you didn't have when you were younger, like raising a child, caring for aging parents, making life insurance payments, or even paying tuition for children who are ready to head to college.
All these costs can make it difficult to simultaneously make aggressive contributions to your investments. However, keep in mind that even making smaller contributions can grow and potentially have a profound impact on your financial situation over time. Starting with something is more impactful and puts you in a better position than if you were to not invest at all.
So even if you can't afford to invest $1,600 a month, the sooner you start investing what you can, the more time compound interest has to work its magic.
If you're very new to investing or your income varies so you don't know how much you can comfortably afford to invest, you might consider an app likeAcorns, which allows users to invest the "spare change" they accrue from making everyday purchases like coffee, textbooks and clothing. In other words, you're investing using the change from purchases you were going to have to make anyway.
And if you have some money to invest but can't afford a full share of the companies you're interested in, other apps likeRobinhoodallow you to invest in fractional shares. A fractional share is a portion of a stock's share based on the amount of money you want to invest rather than the number of shares you want to purchase — with as little as $1. This way, you can still get some skin in the game.
But if you're more comfortable with a hands-off approach, some apps, likeWealthfrontandBetterment, userobo-advisorsto help you determine which investments make sense for you based on yourrisk tolerance, goals and retirement date.Robo-advisorsalso take on the task of automatically rebalancing your portfolio as you get closer to the target date for your goals (be it retirement or buying a house). This way, you don't have to worry about adjusting the allocation yourself.
It's also important to note that wheninvesting in stocks, you shouldn't just throw your money at random individual stocks. A tried and true strategy is to invest inindex fundsorETFsthat track the stock market as a whole, like the. According toInvestopedia, the S&P 500 has historically returned an average of 10% to 11% annually, so you might expect a fund tracking this index to produce similar returns. Also note that past returns do not guarantee future success.
Bottom line
Investing can be a very impactful way to grow your money. It can seem daunting at first but regardless of what your money goals are, beginning with small steps can make a difference. But if your aim really is to invest your way to $1 million, the sooner you start, the more time your money will have to grow.
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Disclosure:NBCUniversal and Comcast are investors in Acorns.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
The article you've provided delves into crucial aspects of investing: regular contributions, rates of return, and time horizon. It emphasizes the potential to accumulate wealth, notably aiming for a $1 million milestone, utilizing various strategies and age-related investment scenarios.
Firstly, the importance of consistent contributions is highlighted, showcasing calculations by Brian Stivers, a financial advisor, illustrating the monthly investment needed to attain $1 million by age 65. These projections are based on different return rates of 3%, 6%, and 9% over a 20-year period, showcasing how the rate impacts the monthly contribution required for achieving the goal.
The article underscores the impact of starting early, demonstrating that initiating investments at 40 instead of 45 significantly reduces the required monthly contributions due to the extended duration of compound interest. Additionally, it addresses life circ*mstances affecting investment capacity, such as raising children, caring for parents, or other expenses, suggesting even modest contributions can have a substantial long-term effect.
Moreover, the piece explores entry points into investing, mentioning apps like Acorns, which facilitate investing spare change, and platforms like Robinhood, enabling fractional share investments with minimal amounts. It also introduces robo-advisors such as Wealthfront and Betterment, which automate portfolio management based on risk tolerance, goals, and timelines.
Lastly, the article advocates for diversified, informed investment approaches, highlighting index funds and ETFs as prudent choices, citing the historical performance of the S&P 500 as a reference. It emphasizes that investing in the stock market requires strategic selection rather than random choices.
In conclusion, the article underscores the transformative potential of investing, advising on the significance of initiating investment journeys, even with small steps, and offering guidance on platforms, strategies, and the importance of a well-thought-out investment plan aligned with individual circ*mstances and goals.
