This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Investing can add an extra zero (or two) to your net worth. It's not a quick process, but it can be an easy one, even if you have no investing experience. Keep reading to find out how.
The doubling rule
The doubling rule is a simple formula that estimates how long it takes to double your money on an investment. To use the formula, divide 72 by your estimated growth rate. The answer is your doubling time in years.
You can use this formula for any appreciating asset -- including your cash savings and government bonds. For those assets, you usually have a stated growth rate. Stocks, unfortunately, are less predictable. The good news is, if you plan on investing in stocks long-term, you can use the stock market's historic average performance as your estimated growth rate.
The long-term caveat is important. The stock market goes up and down from year to year, so it's mostly impossible to predict short-term growth rates accurately. But over 10 years or more, those ups and downs average out with greater consistency. Historically, the market's long-term growth has been about 7% annually, net of inflation.
Back to the doubling rule: Money invested at 7% will double about every 10 years and three months.
From $10,000 to $100,000
Apply the doubling rule to a hypothetical stock market investment of $10,000, and your projected balances over time are:
- $20,000 after 10 years and three months
- $40,000 after 20 years and six months
- $80,000 after 30 years and nine months
- $160,000 after 41 years
By that timeline, you could turn your $10,000 investment into $100,000 in about 35 years.
What stocks to buy
Your actual investment growth rate will depend on what stocks you buy. Some can double your starting investment faster, while others -- say, penny stocks -- can zero out your wealth straight away. Faster growth is obviously the best outcome, but big gains always come with the potential for big losses.
That's why it's smart to take a moderate approach. You can do that with an S&P 500 exchange-traded fund (ETF). This is a fund type that holds 500 of the largest, most established companies in the U.S. These companies in aggregate are so influential that the S&P 500 index is often used as a benchmark for the overall stock market. The index also aligns with our targeted 7% growth rate.
There are many S&P 500 ETFs out there. For the best returns, choose one with a low expense ratio. You can find some S&P 500 funds that charge 0.03% or less for expenses.
From $10,000 to $1,000,000
What if you want to turn your $10,000 into $1 million instead of $100,000? Long-term investing can support that goal, too. To make that happen, you'd invest your initial $10,000. Then you'd add $550 monthly to that investment. Stay with that plan and you should pass the $100,000 mark in about 10 years. Keep going and you're likely to reach millionaire status after 35 years.
You can also follow this plan with less than $550 monthly. Adding in a monthly investment of any size will dramatically expedite your results. The doubling rule isn't sophisticated enough to project timelines for monthly investments, but you can use a compound interest calculator like this one.
Try it out to estimate the wealth potential of your investing budget over the next 10, 20, or 30 years.
Invest long-term for more predictable results
It takes a long-term commitment to build wealth in the stock market. Plan for a timeline of at least 10 years. Kick things off by investing in a diversified portfolio of established, successful companies -- like an S&P 500 ETF. You can always branch out as you gain confidence picking investments, but you don't have to.
Given enough time, your stock market investment can grow $10,000 into $100,000 or more. Start now so you can reach those wealth milestones sooner rather than later.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
