Keithen Drury, The Motley Fool
·4 min read
Investing $500 per month is a lot for many people. But by reducing your spending in some areas, you'd be surprised at how much you can set aside with a proper budget.
With enough time and a proper investment, this simple strategy could even turn $500 per month into $1 million.
The market can provide the returns you need to become a millionaire
If you think you can save $500 monthly in cash and keep it stashed away to become a millionaire eventually, you'll need to live for a long time. This would take 2,000 months or about 167 years. No one is living that long, so you'll need the help of an interest-bearing asset to accelerate this goal.
Instead of stashing the money in a box, you could put it in a bank. While interest rates on savings accounts have fluctuated for many years, using a 3% average interest rate, it will take 60 years for $500 a month to transform into $1 million. While this is possible, other investments provide a much better return.
The stock market is one of the most popular places to turn to produce meaningful returns, and it has done quite well over a long period. Since 1926, the S&P 500 (the collection of the 500 largest profitable companies in the U.S. markets) has returned 10.2% a year, with dividends reinvested.
That's a much better return than a savings account and can turn $500 per month into more than $1 million in 29 years. This is a much more reasonable time frame than any previous ones, and if you can start when you're 30 you will be a millionaire before you're ready to retire.
Granted, that requires historical trends to hold. But with a near century-long track record, I'd say this is a fairly surefire bet.
So, how do you get in on this fantastic investment?
Multiple investments are available to provide the required return
You don't have to go out and buy all 500 stocks in the proper weighting to mirror the S&P 500 index. Instead, companies like Vanguard and SPDR have already done that with their Vanguard S&P 500 (NYSEMKT: VOO) and SPDR S&P 500 (NYSEMKT: SPY) exchange-traded funds (ETFs). For their work, these two charge a small fee (0.03% of the assets in your account at Vanguard and 0.09% for SPDR) to create and update their S&P 500 funds.
These ETFs trade like stocks on public exchanges and can be purchased in a brokerage or other account, such as an individual retirement account (IRA) or a Roth IRA.
The biggest note with this investment strategy is that you must be consistent and not sell. By buying these funds each month, you'll balance out the highs and lows of the market. Additionally, even if the world looks grim, don't sell. Think of all the reasons to sell since the inception of the S&P 500: The Great Depression, World War II, terrorist attacks, tech bubbles, the Great Recession, COVID-19, and more. However, even if the market tanked during these events, it eventually recovered and set new highs.
You can become a millionaire by investing $500 per month consistently for almost 30 years. This is a low-effort strategy, but you can achieve this goal even faster through the right combination of individual stocks.
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Keithen Drury has positions in SPDR S&P 500 ETF Trust and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Want to Get Rich? $500 a Month in This Fund Could Make You a Millionaire. was originally published by The Motley Fool
