There are many ways you can reach the milestone of becoming a millionaire, and one of the simplest way is to start investing early. Statistically, a 20 years old person could accumulate $1 million by the time they turn 65 simply by investing $100 a month. If you don’t have the money right now, here are some ideas to help you save $100 a month. Now…let’s get started…here is how you can become a millionaire.
“It is not necessary to do extraordinary things to get extraordinary results.” — Warren Buffett
3 Steps to Investing $100 a Month
1. Find a Suitable Investment
First we have to look for an investment that can return about 10% a year.
- Our own analysis of the S&P 500 Index indicates that 9% annualized return is reasonable, and probably leaning on the conservative side.
- According to Investopedia, the average annual return for the S&P 500 since its inception in 1926 through 2018 is about 10%.
- According to MoneyChimp.com, the average return for the past 30 years was about 11.66% and for the past 45 years was about 11.62%. Based on these historical data, the 10% annual return should be achievable over the course of 30-45 years.
To invest in the S&P 500 Index, you can invest in the Fidelity 500 Index Fund (FXAIX) which has a super cheap Expense Ratio of 0.015%. Lower investment expenses means that it is easier to achieve the full 10% annual return target.
Also, you’ll see why this fund is used as an example instead of an ETF or other S&P 500 Index Funds.
2. Automatic Investment
Secondly, we have to make sure that this can be done as cheaply as possible and we want to set it up once and forget about it — make your investment works on its own!
One way to do this is by utilizing Automatic Investment. For example, Fidelity’s Automatic Investments program will take money out of your bank on a regular basis (e.g., monthly, quarterly, etc.) and purchase additional shares of mutual funds you already own. In our example, you will set it up to invest in the FXAIX fund.
Alternatively, you can also use M1 Finance and set up an automatic investment in SPDR S&P 500 (SPY) which has an Expense Ratio of 0.09%. See how we use M1 Finance for our Dividend Income Investing here.
You will also direct the broker to reinvest any dividend payments back into the fund. This way, you don’t have money sitting around in the cash account doing nothing and let the power of compound interest do its thing.
3. Sit Back and Relax
The key to success for this strategy is:
- Time in the Market – You’re going to be investing consistently over the course of 46 years (from 20 to 65).
- No Selling – You are not going to touch investment. Come hell or high water, you are putting in $100 a month…every month!
That’s it! You’re all done. Now just sit back and watch your investment grow. Yes, there might be some bad years but the key is to wait it out and keep investing.
Mathematically and statistically, you can achieve this. Here’s the calculation from Calculator.net.
Turbo Charge Your Investment
1. Tax Advantage
You can make this even sweeter by using a tax advantaged account instead of a regular account. There are two options.
- Traditional IRA – You get tax deduction on the amount of money you put into the account, and you get taxed when you’re ready to withdraw money from you account once you reach eligible age.
- Roth IRA – You put in after-tax money, but your investment grow tax free — TAX-FREE MILLION!
2. Double Down
Invest $200 a month and become a millionaire by 58 and have $2 millions by 65 — SWEET!
What If You’re Older?
If you’re older than 20, don’t sweat it. You can also become a millionaire by the time you turn 65…you just have to put in more money each month to catch up. But I have to warn you that it is not easy to catch up, because when it comes to investing TIME IS MONEY has never been so true.
Here’s the summary of how it plays out.
If you start at 25, you’ll need to invest about $160 a month. This goes up to $260 a month for 30 years old, $425 for 35 years old, etc.
Basically, each decade you wait, you have to invest almost 3 times as much to catch up.
If you start early enough, you can invest $100 a month and be on track to become a millionaire by the age of 65 simply by investing in an S&P 500 Index Fund. It is vital to start as early as possible because time in the market makes a huge difference in how much your investment grows. However, everyone can be a millionaire even if you start later — you just have to invest more to catch up.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.