For any 20-year-old (or younger) reading this, there's one incredible retirement asset on your side that a lot of ASX stock investors don't have: time.
Compounding is a very powerful force that can help a small number grow into a much larger figure over the long term. As one of the greatest ever minds, Albert Einstein, once reportedly said:
Compound interest is the most powerful force in the universe. Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it.
If someone starts investing early, younger Aussies can take advantage of having more time to compound their wealth and let the snowball roll for longer.
Image source: Getty Images
The power of compounding
I'll demonstrate how much a single $250 ASX stock investment could grow.
For starters, it's good to know that the local and global share markets have returned an average of 10% per year over the ultra-long term.
If $250 grows by an average of 10% per year – which includes volatility along the way – it reaches $648 after a decade, according to the Moneysmart calculator. That's a return of 159% over that time.
After 20 years of growing 10% per year, it becomes $1,682 – that's a gain of 573%.
In 30 years, $250 will become $4,362. That translates into a gain of 1,645%.
After 45 years, that single $250 investment could become $18,223, a huge rise of 7,189%.
Of course, I'd suggest investing more than $250 if someone wants to retire. I'd want to regularly put in an amount towards building a great retirement figure. A monthly total is usually a good target to save for
But, I'd also recommend investing at least approximately $1,000 per investment, just so that not too much money is being lost to brokerage. There are some online share brokers that can offer a brokerage fee of less than $10 for a $999 buy. So, saving $250 per month could mean saving $3,000 per year, or making three investments of around $1,000 each year.
Saving $250 per month towards ASX stocks
If someone can save at least $250 per month towards investing, I think they're going to make a very noticeable difference by retirement. I'm going to provide a variety of timelines so people of different ages can see what it could turn into.
If an Aussie invested $250 per month and it returned 10% per year for a decade, that would become $47,812.
Over two decades, that strategy would reach $171,800.
In three decades, the figure becomes $493,482.
If a 20-year-old followed this strategy for 45 years until they're 65 – and didn't increase the monthly investment amount – it would become $2.15 million. Increasing the investment amount during prime earning years would probably be a smart thing to do.
Time and compounding can really make a massive difference with ASX stocks.
If I were following this strategy, I'd want to choose globally diversified exchange-traded funds (ETFs) as a core investment that gives exposure to businesses with good earnings growth potential, such as Vanguard MSCI Index International Shares ETF (ASX: VGS), VanEck MSCI International Quality ETF (ASX: QUAL), and Betashares Global Quality Leaders ETF (ASX: QLTY).
If I came across any extra savings, I'd consider putting them towards compelling long-term ASX growth shares that could help accelerate my wealth building.
