I think that nearly anyone can create a $1 million portfolio by investing just $1,000 a month.
I'm not suggesting you do this over two years and invest $500,000 a year. The key to making it happen is time and using the power of compound interest.
Trying to save $1 million without actually using compound interest would take too long for most people. It would take 20 years saving $50,000 a year if you weren't earning any interest.
One of the smartest people to ever live, Albert Einstein, once supposedly said "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't… pays it." If he thinks it's great then it's definitely something you want to be taking advantage of.
What's the best way to utilise compound interest?
Bank accounts, term deposits or bonds are probably the safest way to do it. But safe over the long-term could actually be very detrimental to your long-term wealth.
Most Australian bank accounts are offering interest rates below 3%, that won't get you anywhere.
The best two assets to own over the long-term are property and businesses. The best selling point about property is that you can use leverage/debt at low interest rates, but taking on huge amounts of debt whilst house prices are falling is a pretty bad idea.
History has shown us that share markets like Vanguard Australian Share ETF (ASX: VAS) and iShares S&P 500 ETF (ASX: IVV) have returned a rough average of 10% a year, which doesn't include the benefit franking credits from Australian businesses.
So, thinking about your $1 million goal. If you invest $1,000 a month and it compounds at the historical average of 10% a year it would take less than 24 years to get to $1 million. A 20-year old could become a millionaire before they turn 45. Talk about 'getting ahead'!
The above calculation assumes that you invest $1,000 a month for the entire duration of the 24 years. Think how much wealthier you could become if you invested $1,500 a month or $2,000 a month. Or, if you could generate returns of 12% a year, the $1 million goal would become reality in around 22 years.
How can you go from creating returns of 10% a year to 12% a year? If you could build a time machine you'd go back several years and invest in Altium Limited (ASX: ALU), Appen Ltd (ASX: APX), Google, Amazon and Apple. But from here you need to find the winners of tomorrow.
