Being broke is really stressful. But just because you may not have money now doesn’t mean you’re doomed to being poor forever.
In fact, if you can follow these three steps, within 25 years you could have a whopping $1.5 million saved. Here’s how.
1. Find an extra $940 a month to invest
Consistent investing over time is, and always has been, the best and most reliable path to wealth for most people. So if you want $1.5 million in 25 years, you’ll need to amass that amount over time. And you can do it by investing $940 per month every month over that 2.5-decade period.
Now, $940 seems like a lot. But it’s $235 a week. You might be able to pick up a side job for an extra few hours a day to make that much, or make lifestyle changes like driving an older used car into the ground instead of buying a new one so you no longer have to worry about a monthly car loan payment.
If you invest in a tax-advantaged account, such as a 401(k) or IRA, you may not even need to come up with that entire $940 on your own. If you’re in the 22% tax bracket, your $940 monthly contribution could cost $733 a month after accounting for your tax break. And if your employer matches part of your 401(k) contributions, it’d cost you even less.
2. Research your investment options carefully
In order for a $940 monthly investment to turn into $1.5 million in 25 years, you’ll need to earn around a 12% annual return on investment. That’s higher than the average returns the S&P 500 has produced over time, so you’re going to have to beat the stock market by a little bit.
That’s a challenge. You probably aren’t going to be able to just stick your money into an index fund and do that. But, the good news is, a 12% average annual return isn’t unrealistic if you build a diversified portfolio that includes shares of carefully chosen individual stocks.
Becoming a good investor requires you to develop an investment plan. But it doesn’t take as much time as you think for one simple reason. If you do it right, you’ll buy investments you hold on to over that entire 25-year period. That’s because investing for the long term reduces risk.
Once you’ve picked your core investments, you just have to keep tabs on them and check in periodically to see if there are any fundamental changes that necessitate a stock sale ,or if there are any new opportunities you want to take advantage of.
3. Leave your money alone
This is both the easy part and the hard part. If you just invest your $940 a month steadily in a solid mix of investments and you do nothing, you’ll have $1.5 million in 25 years’ time. And what could be easier than doing nothing?
The trick is, though, that you can’t react in a panic to market crashes and pull your money out, and you can’t raid your accounts to cover short-term costs. And you can’t stop investing consistently (unless of course you want to make up for a break later by investing much more in the future).
This can be difficult, since life happens. But if you set up automatic contributions to your account and make a promise to yourself to just leave your money to grow, hopefully it’s something you can accomplish. When you’re looking at a $1.5 million bank balance in 25 years, you’ll be glad you made the effort.