Building wealth does not usually come from one big decision. It's the result of investing regularly, staying patient, and giving your money enough time to grow.
That's the part many people underestimate. In the early years, the progress can look slow. But over time, the numbers can start to build quickly.
Image source: Getty Images
Why compounding is so powerful
Compound interest is what happens when your returns start earning returns of their own.
At the start, most of the growth comes from the money you put in. But over time, the balance gets larger, and the returns can start doing more of the work.
That's why the later years matter so much. An 8% return on $20,000 adds about $1,600. The same return on a $500,000 portfolio adds roughly $40,000 in a year.
The percentage is the same, but the dollar impact is very different.
The numbers behind a $1 million goal
The biggest advantage is time. A 20-year-old does not need to invest anywhere near as much each month as someone starting at 50, because their money has far longer to grow.
Using the average annual return of 8%, a person starting at 20 would need to invest roughly $190 a month to build a $1 million portfolio by age 65.
Someone waiting until 30 would need closer to $436 a month. By 40, that jumps to about $1,050 a month.
The numbers get much harder later on. A 50-year-old would need to invest almost $2,900 every month to target the same result by 65.
Someone starting at 60 would need more than $13,000 a month.
One way to keep investing simple
For those who don't want to pick individual shares, a high-growth ETF can be a simple way to start investing.
One example is the Vanguard Diversified High Growth Index ETF (ASX: VDHG). It gives investors exposure to a mix of Australian, international, and emerging-market shares, along with some defensive assets, in a single investment.
This can suit people who want long-term growth, but don't want to spend every week researching individual companies.
The trade-off is that it still comes with risk. A high-growth ETF can fall when share markets are weak, and investors still need to be comfortable with volatility.
But over long periods, a diversified ETF can make investing easier to stick with. Instead of trying to pick winners, investors can focus on building their portfolio and letting time do the heavy lifting.
The real key to reaching $1 million
The point isn't to get rich overnight. It is to make investing something you can keep doing through the good and bad times in the market.
Regular investing can also take some pressure off each decision. Instead of trying to pick the perfect entry point, investors can keep adding over time and let the market cycles play out.
Compound interest is not exciting day to day. But give it enough years, and it can turn steady investing into serious wealth.
