Investing in index funds has grown in popularity over the past few years and is slowly becoming the dominant form of investing. But one may wonder how much time and money do they have to invest in an index fund to eventually become a millionaire?
Investing in index funds can make you rich or a millionaire. However, to become a millionaire from index fund investing, you need to have invested a certain amount of money over several years. Index fund investing will make you rich in the long term, but not in the short term.
Read on to learn just what an index fund is and exactly how it can make you a millionaire.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
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Becoming a Millionaire — The Numbers
Here are some figures to give you an understanding of the time and money contributions you’ll need to make to become a millionaire through index fund investing:
- 5 years. You’ll have to invest $14,000 per month at an average 8% interest rate. This figure is too expensive for most people, and for holding your investment for such a small amount of time, you’ll have almost no benefit from compound interest. 80% of your return will be your investment!
- 10 years. You’ll have to invest $5,500 per month. Again, you’ll receive almost no benefit from compound interest over this time.
- 20 years. You’ll need to invest $2,000 per month. This is when you’ll start to notice the effects of compound interest, as over 60% of your return will be compound interest!
- 50 years. You’ll need to invest $150 per month. This figure is much more attainable for most people and also benefits the most from compound interest. In fact, your total deposits will equal less than $90,000.
Overall, you can see the benefits of long-term investing. For most people, becoming a millionaire will mean investing over a very long time.
However, consistently investing a small amount is better than throwing in one lump sum and then leaving it, so stick with it, and you’ll be a millionaire by the time you retire!
How Index Funds Help You Make Money?
An index fund is a collection of stocks and shares. An investment company or broker creates these investment products by raising money and creating a portfolio directed towards mimicking the performance of the targeted index. Buying shares of this portfolio, you essentially buy into a diversified portfolio of all companies in the index, thereby reducing your overall investment risk.
You can invest in all kinds of index funds. Popular ones include the S&P 500 and the FTSE 100. With these funds, you invest in every company in either the S&P 500 or FTSE100.
Advantages of Index Funds
Index funds come with many advantages:
- They offer incredible diversification. Instead of putting your money in a single company, which could go bust, index funds give you exposure to hundreds, if not thousands of companies. So, if one company fails, another will succeed, and your money will go even out.
- The fees associated with index funds are deficient. Instead of paying an actual stockbroker a considerable cut of your earnings, you’ll be paying an online stockbroker less than 1% to pick and manage your stocks. This advantage is compounded by the fact that index funds usually beat stockbroker’s investments!
Factors Affecting Your Wealth From Index Funds
2 main factors affect your wealth when you invest in Index funds: how much money you invest into your portfolios and how much time you allow your investments to grow over time. I’ll discuss these factors below.
The More You Invest, the Better
To become a millionaire from index funds, you’ll, of course, need to invest your fair share of the money. The more you invest, the faster your wealth will grow, as you’ll have more capital to increase with the market.
If you want to become a millionaire from index fund investing, don’t expect to be able to put the minimum deposits into your account every month. You’ll have to pour every penny you can as soon as you can to allow that money to grow.
Let’s use some numbers as an example. If you invested $100 a month for 25 years at an 8% interest rate, you’d be left with $95,000. However, if you invest $500 a month for the same time, you’d have nearly $500,000. The importance of regular investments is paramount to become a millionaire from index funds.
The Longer You Invest, the Better
Time can make or break your investment strategy due to something called compound interest. Simply put, this is when the money you invest creates money, meaning there’s more money to invest and make more money.
It’s like a cycle that keeps getting bigger, making you more money over time. To put the importance of time into perspective, if you invested $100 for 10 years at an 8% interest rate, you’d end up with $222. However, if you invested the same amount for 20 years, you’d end with almost $500.
The importance of compound interest means that you should start investing as early as possible to become a millionaire.
Tips for Index Fund Investing
Here are some tips for index fund investing:
- Buy more when the markets are down. Many people panic and sell when there’s an economic crash. However, times of depression can actually be great opportunities to buy more shares while they’re cheap and reap their rewards later down the line.
- Consistency is key. When you look at your investments and see that it’ll take 50 years to become a millionaire, you may start to get disheartened. This is, of course, completely understandable, but your effort will be worth the wait. Imagine retiring as a millionaire, — you could live a life of luxury after a lot of hard work!
- Put your money in a 401(k) or ISA. If you put your money into one of these accounts, your capital gains will be tax-free. However, if you don’t, then prepare to be taxed up to 40% on your capital gains. It’s such a simple thing to do, but one that’ll save you so much money and help you become a millionaire that little bit faster.
Other Investments You Can Make To Become a Millionaire
Index fund investing can be a long-term and challenging journey to become a millionaire. Here are 2 other methods if you’re looking for a faster way:
- Real estate. Investing in real estate opens your world up to something called passive income, which is when you reap the rewards of an upfront investment, be this time or money. Real estate can make you thousands of dollars of passive income every month, all of which contribute to your wealth, helping you to become a millionaire.
- Cryptocurrency. While crypto carries extreme risk, it carries rewards equal in measure. You can earn potentially unlimited returns, as high as 1000x. This easily beats the average 8% return on index funds and can be a quick way to become a millionaire. However, you’re more likely to lose money in cryptocurrency, so index funds might be a safer bet.
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Index fund investing can absolutely make you a millionaire. The key is to be consistent and patient. Remember that it takes years, if not decades, for your money to grow. But it’ll grow, slowly but surely, and at the end of all of that work will be more money than you could imagine.
Also, remember that your capital is always at risk when you invest in index funds. So only invest what you can afford to lose, and remember that you’re solely responsible for your financial decisions.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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