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When it comes to investing, the multi-million dollar question that everyone wants an answer to often arises: How much do I have to invest to become a millionaire?
Whether people like it or not, the short answer is, it depends.
And while there is so much advice out there when it comes to wealth creation, one of the most important suggestions, which is often repeated (for good reason), is to start investing as early as possible. Young people may be just beginning to split their starting salaries into rent, student loan debt, an emergency fund, and social life, but they should also avoid deferring investments.
Select asked Brian Stivers, a financial advisor and founder of Stivers Financial Services, to help us work out exactly how much money 25-year-olds should invest each month to become a millionaire.
“When it comes to investing, there are three very important components: the amount you pay in each month, your return on investment, and how long you have to save,” explains Stivers.
When calculating the numbers, Stivers took into account three different response rates and used a retirement age of 65, which would give 25-year-olds 40 years to reach $ 1 million. We found the following:
- A 25-year-old making investments that produce a 3% annual return would have to invest $ 1,100 per month for 40 years to reach $ 1 million.
- Instead, if they made investments that yield a 6% annual return, they would have to invest $ 530 per month for 40 years to reach $ 1 million.
- However, if they opted for more aggressive investments that generate a 9% annual return, they would only have to invest $ 240 per month for 40 years to reach $ 1 million.
As we can see, a higher return can allow you to invest less money each month and still achieve the same goal. A 3% return is common for a more conservative portfolio made up mostly of bonds, while a 6% return is a bit more moderate and usually consists of a combination of stocks and bonds. However, a return of 9% is on the more aggressive end and can usually be achieved through an equity-rich portfolio.
Remember, when investing in stocks, you shouldn’t just throw your money on individual stocks. A proven strategy is to invest in index funds or ETFs that track the stock market as a whole, such as the S&P 500. According to Investopedia, the S&P 500 has historically been expected to return an average of 10 to 11% per year that a fund that does this Tracking index, realizing similar returns. Note that past returns do not indicate future success.
Of course, a portfolio made up mostly of stocks is generally considered riskier, but 25-year-olds are often said to be more risk-tolerant as they have more time to weather market dips and recover from losses. However, if you are unsure how to build a portfolio that adequately reflects your risk tolerance, robo-advisors like Wealthfront and Betterment can choose portfolios that best suit your preferences.
On Wealthfront’s secure website
Minimum deposit and balance
The minimum deposit and balance requirements may vary depending on the investment vehicle selected. $ 500 minimum deposit for investment accounts
Fees may vary depending on the investment vehicle selected. No account, transfer, trading or commission fees (fund ratios may apply). Wealthfront’s annual management advisory fee is 0.25% of your balance
Stocks, Bonds, ETFs, and Cash. Other asset classes in your portfolio include real estate, natural resources, and dividend stocks
Provides free financial planning for college planning, retirement, and home buying
On the safe side of Betterment
Minimum deposit and balance
The minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, minimum balance of $ 0; Premium investing requires a minimum balance of $ 100,000
Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing 0.25% of your fund balance as an annual account fee; Premium Investing has an annual fee of 0.40%
Up to one year of free administration service with a qualifying deposit within 45 days of enrollment. Valid only for new individual investment accounts with Betterment LLC
Stocks, Bonds, ETFs, and Cash
Betterment RetireGuide â¢ helps users prepare for retirement
If you want to buy individual stocks, index funds and / or ETFs directly, you should open a free brokerage account such as Schwab or Fidelity.
The other important element of Stivers’ investment is time. Thanks to compound interest, people in their twenties who want to retire at 60 can invest less money each month than someone who starts investing in their thirties. However, according to a survey by Business Insider and Insider Intelligence, 48% of Millennials don’t invest because they think they don’t make enough money to do it.
There has long been the notion that you must already be rich to start investing. However, many investment apps allow users to invest in fractions of a stock – also known as a portion of a stock, which is based on the amount of money you want to invest rather than the number of stocks you want to buy – with just 1 US dollar. And apps like Acorns even allow users to invest the “spare money” they accumulate from everyday purchases such as coffee, textbooks and clothing.
However, rising cost of living and crippling student loan debt can also present challenges when you feel you have enough money to cover your basic expenses and still invest in your future. As a result, 25-year-olds (and other people in their twenties and thirties) may feel like they don’t even know how to free up money for investment.
“I would encourage them first to look at their three months’ worth of debit or credit card statements and make a list of where they spend their money,” suggested Stivers. Knowing where your money is going can help identify unnecessary expenses that are eating up your income. Then you can cut back on those things and free more of your money on investments and expenses that really matter to you.
And of course, when it comes to investing, one of the most powerful things you can do is just to get started – even if you’re starting out with just a small amount of money. “I tell clients, if you don’t invest now, just start somewhere,” said Stivers. âIf you can’t contribute $ 30 a week, maybe you can only invest $ 10 a week.
Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.