I believe that almost anyone can make a $1 million portfolio by investing just $1,000 a month.
I’m not going to suggest that you can make a $1 million portfolio in two years by investing $500,000 a year. The most important things to making it happen is time and using the power of compound interest.
Imagine trying to save $1 million without actually using compound interest. It would take too long for most people. It would take 20 years saving $50,000 a year if you weren’t earning any interest.
Albert Einstein is one of the smartest people to ever live. He supposedly once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” If one of the smartest people ever thinks compound interest is great, then it’s definitely something you want to be taking advantage of.
What’s the best way to utilise compound interest?
Saving 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 growth.
Due to the Reserve Bank of Australia (RBA) cuts, Australian bank accounts are offering interest rates below 2%. That’s not going to get you to $1 billion unless you’re saving tons of cash.
I think that the best two assets to own over the long-term are property and businesses. In good times, one of the best things about property is that you can use debt, also called leverage, at low rates. However, taking on huge amounts of debt whilst house prices are shaky could be a pretty bad idea.
History has shown us that share markets like iShares S&P 500 ETF (ASX: IVV) and Vanguard Australian Share ETF (ASX: VAS) have returned a rough average of 10% a year over the long-term, which doesn’t include the benefit franking credits from Australian businesses.
So, let’s think 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. That’s definitely ‘getting ahead’ in my book!
My 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 shares like REA Group Limited (ASX: REA), Altium Limited (ASX: ALU), Pro Medicus Limited (ASX: PME), Alphabet (Google), Amazon and Apple. But from here you need to find the winners of tomorrow.
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Tristan Harrison owns shares of Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REA Group Limited. 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 Scott Phillips.