It really is possible to become a millionaire by investing regularly. This is not a quick route to millionaire status by any stretch of the imagination, but it’s a great way to save a nest egg for retirement.
Committing to regular investments
Investing just £250 a month over four decades could help you realise a very comfortable retirement. Investing this in an index fund with an average annual return of 9% would create a final pot worth close to £1.2m. Providing an annual income of £30k for 40 years.
A lump sum deposit to start with will move the goalposts. Reaching your £1m end goal in a shorter time or at a lower annual interest rate. Equally, with a higher monthly contribution, you’ll hit the million-pound mark in less time.
Here are some examples of how this works.
If you invest that same £250 a month at an interest rate of 5%, then four decades later the total sum would be approximately £383,000.
If you have a lump sum to get started with, then the regular monthly investment can realise a greater fortune. By investing an initial £10k, followed by £250 a month at an average annual interest rate of 9% for 40 years, you’ll achieve a final pot worth over £1.5m. This equates to an annual income of £37.5k for 40 years.
Adjusting the monthly investment, increasing the percentage return or starting with a lump-sum deposit, will affect the final amount achieved.
Investing in the stock market is a great way to reap the benefits of compound investing and achieve annual interest rates for your savings that beat regular cash account savings rates with a bank.
The four most popular investment vehicles for individual investors are stocks, bonds, mutual funds and exchange-traded funds (ETFs). The amount you get back with each of these varies and the risk attached also fluctuates. The riskier the investment, the higher the returns should be, but equally, more risk means just that, so you could end up losing more than you invested.
I think long-term stock market investing is the most sensible option. It’s the style advocated by Warren Buffett, one of the most successful investors ever.
The UK financial indices have produced good returns for investors in recent years. Over the past decade, the FTSE 100 has given us an average return of 7% and the FTSE 250 has produced an average annual return of 11%.
These returns are far better than bank account interest rates. I think an index tracker, that aims to echo one of these indices, is a great investment vehicle. It’s a simple, but an often lucrative way of investing regularly.
Reinvesting dividends is also the key to long-term wealth for long-term stock market investors. By earning interest on your interest, it unlocks the power of that compounding I mentioned above. This is how you rapidly increase your savings and ultimately reach your millionaire goal.
Do you have the discipline required to become a future millionaire? The earlier you start, the better.
The post How investing £250 a month could make you a future millionaire! appeared first on The Motley Fool UK.
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Motley Fool UK 2020