How you could become a millionaire starting with just $25,000

Credit: Angie Nan

Being a successful stock picker is no cinch and achieving outperformance isn’t easy, however, the beauty of compounding your money for many years is that you don’t actually have to achieve a supercharged percentage return to get rich.

One ‘easy’ way to achieve your financial goals can be to outsource the investment decision making process to a high-quality listed investment company (LIC) such as Argo Investments Limited (ASX: ARG) or Australian Foundation Investment Co.Ltd. (ASX: AFI), or you could utilise the services of a highly-regarded fund managed by the likes of Platinum Asset Management Limited (ASX: PTM) or Magellan Financial Group Ltd (ASX: MFG).

Let compounding work for you.

The maths is quite straight forward. A $25,000 investment at a rate of return of 10% per annum (pa) will grow thanks to the beauty of compounding into $1,131,481 in 40 years.

So, for example, from a standing start at the age of 25 with $25,000 in savings and no further external investment, aided by a solid investment return of 10% compounded annually for 40 years, at the age of 65 you’re a millionaire!

There are a few key takeaways from this example worth noting:

  • Firstly, it takes time to build wealth. The earlier you start and the longer you allow your investments to compound, the wealthier you will become.
  • Secondly, spending less than you earn is necessary so that you can save for your initial investment.
  • Thirdly, compounding is a must. That means not taking any of your money out and reinvesting all your profits too.
  • Fourthly, the average annual return achieved matters and makes a big difference. While 10% was used in this example, should your portfolio achieve a return just 2% higher (i.e. 14% pa), then your portfolio’s value at age 65 skyrockets to $2,326,274 – that’s a big reminder of what a difference stock picking can make!

If you're proactively managing your portfolio to build wealth then you need to read this...

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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