Saving money and putting it into stocks has undoubtedly become more difficult because of rising costs. But one way you can invest more money than you might otherwise be able to is by investing your tax refund every year. If you can afford to do so, putting that money into some quality exchange-traded funds (ETFs) can have a significant effect on your portfolio’s balance in the long run.

Turn a $100/month investment into more than $300/month
The average tax refund this year is approximately $2,850, and it normally increases over the years. If you were to take that money and invest it evenly throughout the year (this can help avoid the temptation to try to time the market), that would allow you to invest approximately $237/month. Assuming you can afford to invest $100/month through your own savings and cost-cutting efforts, a combined $337/month could be enough to lead to some significant wealth creation over the years.

How long would it take for that investment to grow to $1 million?
The S&P 500 long-run average return is approximately 9.7%. But that’s a fairly safe investment option. By targeting growth funds, you could potentially earn an even higher return in the long run. Here’s how your portfolio’s balance might look if you invested $337/month over a period of 25 to 30 years, at varying annual returns.

If you end up averaging a return of more than 13%, it may take around 27 years to get your portfolio to $1 million or more. At a rate of 11% or less, however, it could end up taking more than 30 years. It may seem like a nominal change, but even one or two percentage points can make a significant difference. This is why investing in a low-cost ETF can be a great idea. Not only can you gain some valuable diversification, but you can ensure that costs aren’t eating up those valuable returns.

A low-cost fund to buy and hold for years
For a strategy such as this, which involves investing for not just years but decades, ETFs that focus on growth can make a lot of sense. They can ensure you generate significant returns. While they can possess more risk than dividend stocks, in the long run, they can lead to far superior returns.

A top fund to consider for this purpose is the Vanguard Growth Index Fund ETF (VUG), which holds the U.S.’s largest growth stocks in its portfolio. Apple, Microsoft, and Nvidia are its top three holdings, accounting for a little over 36% of the total weight. Tech stocks make up 60% of the portfolio, but with this ETF, investors will also get a lot of exposure to consumer discretionary stocks, healthcare stocks, industrials, and many other sectors. With 188 holdings, investors can tap into some good diversification with the fund. And the Vanguard ETF charges a fairly low expense ratio of 0.04%, which will have a minimal effect on your long-term returns.

Over the last 20 years, the fund has generated total returns (which include dividends) of 900%. That averages out to an annual return of 12.2%, which is right around the type of return you would want to target to grow your portfolio to $1 million under this strategy.

Accelerate your gains with any unexpected windfalls
Whether it’s a tax return, inheritance, the gain on the sale of property, or any extra cash you aren’t expecting, it can be a good idea to consider putting at least some of that money toward an investment. Doing so can drastically accelerate how quickly your portfolio grows to $1 million or more, and that can reduce how much you need to save each month as well. Having a go-to fund like the Vanguard Growth ETF or another investment can also make it easy to know where you want to put that money when the opportunity arises.

— David Jagielski

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Source: The Motley Fool