How to turn your savings account into a gold mine starting with $10,000

Here's why shares could be superior to savings accounts.

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If you have $10,000 sitting in a savings account and no plans for it, then it could be worth putting it to work in the share market.

That's because the potential returns on offer in the share market could turn your savings into a gold mine if you are willing to be patient.

Turn $10,000 into a gold mine

If you leave $10,000 in a Commonwealth Bank of Australia (ASX: CBA) saving account, it will grow. But at a much slower rate compared to what would be expected from ASX shares.

For example, let's imagine you are able to average a 4% interest rate on your savings account over the next 20 years. This would turn your $10,000 into approximately $22,000.

Now let's imagine that you also add an extra $10,000 to your account each year. Doing this for 20 years with an average 4% interest rate would lead to your savings account growing to be worth $330,000.

That's a bit of a gold mine itself, but just wait until you see what could happen with the share market.

Share market vs savings accounts

Over the long term, the share market has generated an average total return of approximately 10%.

And while there's no guarantee that this will happen again in the future, I think it is reasonable to base our assumptions on this return.

If you were to invest your $10,000 into ASX shares and averaged a 10% per annum return, your investment portfolio would compound to be worth $67,000 in 20 years.

That's $45,000 more than if you had just left it in your savings account for two decades.

Now let's see what would happen if you put an additional $10,000 into the share market each year over the 20 years.

If you did this and achieved a 10% per annum return, your investment would grow materially and become worth approximately $700,000.

That is $370,000 greater than what would have happened if you just stayed with your savings account.

And while it is worth remembering that savings accounts are risk free and ASX shares carry risk, I believe the potential rewards are compelling enough to justify choosing stocks.

Which ASX shares should you buy?

Rather than risking your money in speculative stocks, investors may want to consider buying companies that have strong business models, sustainable competitive advantages, and fair valuations.

This is a strategy that Warren Buffett has used for decades. And given that he has smashed the market return since the 1950s, it's fair to say the strategy has its merits.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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