Jim Rohn said, “Become a millionaire not for the million dollars, but for what it will make of you to achieve it.”
Mr. Rohn is onto something — because for most of us, becoming a millionaire will require that we learn to be diligent and patient — or be more diligent and patient. And those qualities can serve us well in other parts of our lives, too.
The easiest path to becoming a millionaire is, arguably, simply investing in great businesses regularly — and with meaningful sums — and hanging on for many years.
How money grows
Let’s start with a look at how money grows. Let’s assume an average annual growth rate of 8%, too. That’s because the long-term annual average return of the S&P 500 is around 10%. You can’t expect 10%, though, over your particular investing period. Your investments might average 8% or 12% or something very different. Let’s be a bit conservative and go with 8% for now.
The table below shows how your wealth will grow if you start with $100,000 and do nothing more for years:
Impressive, right? Given enough time, you can become a multimillionaire, without much effort other than having $100,000 to start with. Take a close look at how fast this nest egg is growing at different points: Between year five and year 10, it grows by nearly $67,000. Between year 20 and year 25, though, it grows by more than $200,000! Fast-forward to year 50, when it has grown by a whopping $2.5 million!
In this model, your nest egg keeps growing by 8% every year, but as your account balance is bigger each year, so is each year’s increase. This is the amazing power of compounding.
Of course, you may not have 50 years in which to grow your wealth. You might not have that initial $100,000 investment, either. So now let’s assume that you start with $0. But you invest money in the stock market every year — perhaps via a simple S&P 500 index fund. Here’s how your money can grow that way:
It still takes time to amass significant wealth, but you can get there faster by investing more each year. Remember, too, that you might average more than 8% annual growth.
You can’t give up
When I said at the outset of this article that you’d need diligence and patience, I wasn’t kidding. Those are not always the easiest traits to develop and employ. I’m speaking from experience here — it can get discouraging when the stock market suddenly drops and your portfolio shrinks by, say, 25% or even 35% or more. It can get discouraging when the stock market — or your particular investments — doesn’t grow much for a year or two.
You have to have faith in what you’re doing. If you find that you don’t, or you’re losing confidence, take action: Read and learn more about investing. Learn how stock market corrections and crashes are just things that happen sometimes — and that the market has always recovered and gone on to new highs. Read about great investors and how they’ve gone about investing. Get reinspired.
Amassing a million dollars or more can take 25 or 30 years — perhaps from ages 35 to 65 or from ages 40 to 70. That’s a long time, and it’s easy to take your eye off the ball. If your portfolio grows by only $3,000 in your first year, will you find that unexciting and give up?
Don’t — because it’s (almost) guaranteed that if you keep investing in, say, the S&P 500 for a few decades, you’ll become much wealthier. As long as the American economy is chugging along, and great companies are getting bigger and bigger while upstarts come along and grow, those who have invested in a wide range of American companies should do quite well.
Trust me — I’ve been investing for a few decades now, and I remember how my portfolio grew slowly at first. But now, decades later, the growth can take my breath away. Compounding is a very powerful effect — as long as you let it happen. As the saying goes, it’s a marathon, not a sprint.
— Selena Maranjian
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Source: The Motley Fool