Wealth Building is simple, invest early, invest often, invest consistently, and stay the course.
The reality with building wealth is incredibly simple – compounding interest and time. If we continue to do invest in index funds and take advantage of tax-free investment options, wealth building is simple! Imagine getting 8% interest every year, (the long-term S&P500 return is about 9-10% per year) we can build wealth into a large nest egg by the time we retire – from half a million dollars into over 2.8 million dollars!
We can walk through an example or two; for example, if we invest $6,000 dollars one time, in 20 years it will be roughly $27,965.74 at 8% interest.
However, if we decide to deposit an additional $6,000 every year over that same 20-year period, putting $6,000 in at the end of the year, the total deposits amounting to $126,000 will have turned into $324,503.27.
However, further still, lets say we continue this for another 40 years (working from age 25 to 65). Contributing $6,000 every year will put you at a total contribution of $246,000. But that will have grown into a total balance of $1,809,033.37.
Just doubling the amount of time an investment has to grow can more than quadruple your overall investment returns. And $6,000 is an important number as it’s the current amount you can invest into IRA. However, let’s say you want to invest both in an IRA and HAS which is a total of $3,600 for individuals. So, let’s say you’re maxing out both your IRA and HSA every year for a yearly amount of $9,600. With a 20-year time horizon your total contributions would be $192,000.00. But your total balance would be $519,205.23 with $317,605.23 in interest.
And if you doubled this time horizon to a normal number of working years of 40. You will have contributed a total of $384,000.00, and accumulated $2,500,853.39 in interest for a total account balance of $2,894,453.39! That is more than enough to retire on!
Compounding interest and time are really the best way to build wealth. Even with lower-than-average investment returns of 5%, with a maxed IRA and HSA every year, you will end up with $1.2 million dollars at retirement. Which is more than enough for most people to live on. The point is, get started early in your investment career and deposit as much as you reasonably can each year. Obviously, the more you invest, the better off you’ll be long term.
The principles behind building wealth using the stock market are very easy and simple. Invest early, invest often, and invest consistently. If you have time on your side, you’ll eventually get there. Just stay the course. If you’re just starting out you should learn about asset allocation, feel free to check out that post, here. However, if you’re trying to build wealth and want to invest, try using m1 finance (you’ll get an extra $30 dollars with the referral link) it’s a great platform for long term investing. And finally, if you’re looking for further ways to enhance returns check out our high risk and ultra-high risk newsletter.