$100 a month doesn't sound like too much money, no matter if divided into $25 a week or multiplied to $1,200 a year. After all, that's probably what most of us spend on streaming services every month alone. But today, let's talk about the difference investing $100 a month into ASX shares can make to your net wealth.
Every successful investor in ASX shares knows that the success you can achieve with investing relies on the power of compounding. Thus, any additional money you can spare, even if it's $25 a week, can have a major impact on your long-term wealth. To demonstrate, let's look at two scenarios.
Under the first, let's assume an investor invests $50,000 for 30 years into ASX shares and is able to enjoy an average annual rate of return of 7%, assuming they reinvest any dividends. That's about the rough long-term average return of a typical S&P/ASX 200 Index (ASX: XJO) fund.
If that investor dropped $50 large into the stock market, and just left it alone for three decades, they would end up with a nest egg worth around $405,825. Not bad.
Investing in ASX shares and compounding your wealth
But let's now assume that that same investor invests their $50,000, but also tops it up every month with a cash injection of $100.
After 30 years, that extra $100 a month would add a staggering $121,997 to our total, for a nest egg worth $527,822. Adding that $100 a month (or $25 a week if you prefer) results in an improvement of more than 30% to this investor's long-term wealth.
Let's get even crazier and assume that our investor pulls out all of their financial stops and is able to invest $200 a month (or $50 a week) into ASX shares. Well then, our bottom line would improve even more, resulting in a lump sum of $649,819 after the three decades are up.
That's compounding in action.
So if you want to maximise your long-term wealth in ASX shares, make sure you are following these key rules:
- Invest as much capital as you sensibly can.
- Aim to achieve the best rates of return possible.
- Reinvest any dividends.
- Keep reinvesting any surplus capital at your disposal (maybe your tax return, or Christmas bonus).
If you follow these four steps, then you have a shot at harnessing the full power of stock market compounding. Your future self won't be able to thank you enough for doing so.
