Want to make $500,000? All you need is $20 per week. This sounds like an impossible feat, but the math is easy. The hard part is a secret ingredient that only young investors have: time.
While most investors fret over which investments they should own, young investors should fear not taking advantage of their time — not just in living life to the fullest, but to capitalize on the magic of compound interest. Einstein once called compound interest “the eighth wonder of the world.” If you want to get rich, take advantage of its powers.
For example, investing just $20 per week would allow you to save $1,040 per year. After 40 years, you would have saved $41,600. That’s hardly enough to retire on, but that’s where the magic of compound interest comes in. If that money earned 10% per year, your $41,600 in invested capital would have actually grown to roughly $500,000! That’s an incredible return on your money.
ADVERTIsem*nT
Getting to $500,000 doesn’t require a huge amount of capital, nor does it rely on you beating the market for decades straight. All you need is time. In the previous example, instead of investing $20 a week for 40 years, what if you only invested $20 for 20 years? That’s half the amount of time, but your nest egg would be worth just $60,000. That’s a huge hit! That’s how important time is.
The most important thing you can do is start today. But what exactly should you be starting? Instead of worrying about which investments you’ll choose, begin by establishing automatic investment contributions. If time is your secret ingredient, automatic investing is your secret weapon.
Today, most Canadians save money on an irregular basis. That is, whenever they feel like it. Weeks, months, or ever years can go by between contributions. When was the last time you contributed to your investment account? When was the last time before that? How consistent have you been? The answers to these questions may surprise you. I’ve met many investors who believe they’re contributing on a regular basis, but in reality, they only deposit new money a few times per year.
Most financial institutions allow you to establish automatic transactions. For example, you can have $20 withdrawn from your bank account each week and deposited into your TFSA. As I wrote earlier this year, “Nearly all research has shown that this simple trick will considerably boost how much money you’re stashing away.”
Where to invest
Only move onto this step when you have automatic contributions established. It doesn’t matter if it’s $20 per week or $100 per month; the critical thing is to get to process in place. From there, all you have to do is decide how the money is invested and wait. Waiting is self-explanatory, but where should you be investing?
If you’re young, you can take advantage of volatility and invest in hyper-growth segments of the market. These stocks can swing wildly, but if you have a few decades to spare, the end result is often too lucrative to pass up. The cannabis industry is a perfect example. In 2019, many pot stocks have declined by more than 50%, but despite the steep drop-off, many companies have still doubled or tripled in value over the last few years.
If you’re willing to stomach the ups and downs, the pot industry is an ideal place to invest for young investors with a long-term outlook. Companies like Cronos Group are building the infrastructure necessary to capitalize on this emerging $200 billion opportunity. In 2020, Cronos is expected to increase sales by 250%. That should be a common occurrence for many pot stocks.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.
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If you're just getting started investing, you might not have a lot of cash you can put to work. Maybe you only have $20 to invest right now. The good news is that most brokerages have done away with account minimums and commissions, which means you can get started with any amount of money, even $20.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
For example: $20 Per Week invested in a Bank Account earning 3.5% after 30 years is estimated to be worth $55,169, or $20 Per Week invested in an Investment Portfolio earning 7.0% after 30 years is estimated to be worth $106,298. Use our Savings Calculator to project the impact of implementing a Savings Plan.
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100. If you make a monthly investment of $200, your 30-year yield will be close to $400,000.
A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means that to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield.
One of the easiest passive income strategies is dividend investing. By purchasing stocks that pay regular dividends, you can earn $2,500 per month in dividend income. Here's a realistic example: Invest $300,000 into a diversified portfolio of dividend stocks.
Let's consider some examples: Investor A can only invest $1,000 every month and has nothing in savings. If he earns a 10% annual rate of return (compounded quarterly) in a portfolio created by a robo advisor, Investor A will need 22 years and seven months to become a millionaire.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
When you're in your 20s, time may be your most valuable asset. Consider saving 10% to 15% of your pre-tax income for retirement, but even if you only have a smaller amount to invest each month, it may still be worth it. Time in the market is key. Get started as soon as you can.
Make sure that you invest consistently once you start. Even if you can only set aside $25 a month, that's a start. No, $25 a month isn't going to provide you with what you need to retire comfortably. But it does get you in the habit, and it can provide you with a foundation for your portfolio.
Investing just $20 a week in the S&P 500 isn't just about saving money; it's about building a future. It's a commitment to your long-term well-being and a testament to the power of small, consistent actions.
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