How Investing Just $25 a Day Could Make You a Millionaire by Retirement

There's a misconception that only the wealthy can afford to invest. In reality, even a beginner can build wealth by investing $25 a day. The younger you are when you begin investing, the more time compound interest has to work for you, and the faster you'll hit the $1 million mark. If you're quickly approaching retirement, you may not reach $1 million, but investing $25 each day can ensure that you have money to fall back on.

Looking toward retirement

Regardless of your age, retirement planning is vital. Even if you plan to keep working well into your 80s because you love your job, it's a good idea to hope for the best but plan for the worst. The best way to plan for the worst is to contribute as much as possible to a retirement plan.

Aim to save and invest enough to enjoy your golden years and cover the unexpected expenses, like the high cost of healthcare in retirement.

Image source: Getty Images.

Whether you contribute to a qualified retirement plan through your employer or open a brokerage account online, the keys to building wealth come down to how many years you have available to save and invest and how consistently you make contributions.

Imagine that you begin investing $25 a day. That's $760 a month, or $9,125 annually. Your investments are well diversified to reduce risk to your portfolio, and you earn an average annual return of 7% or 8%. Your goal is to retire at age 67. This table illustrates how much you can expect to have in your account by the time you retire.

Data source: Author's calculations.

As you can see, the earlier you begin, the more time your money has to grow. It's all about that compound interest.

Compound interest

As a consumer, paying compound interest makes it more expensive (and difficult) to pay off credit cards -- which is precisely why credit card companies charge compound interest. As an investor, compound interest is a powerful tool that allows your investments to grow exponentially with time. Unlike simple interest, which is applied only to the loan or investment balance, compound interest is calculated on the balance and the interest accumulated from previous periods. It's like a snowball rolling down a hill, growing ever larger.

It's compound interest that helps provide impressive returns over time. While there will be years when the market is sluggish and the return on your investments will lag, there will also be years when your returns soar.

Historical snapshot

There's no way to predict how quickly your money will grow, and there's no guarantee of returns. However, a look back in history offers a picture of how the market has performed over the past 150 years. For example, here's how the S&P 500 fared over that time.

Data source: TradeThatSwing.

What's interesting is that these positive returns occurred despite years when the market was in the tank. Here's a table showing some of the worst years for the S&P 500.

Data source: AssetMark.

After the worst years, the average three-year historical return was 35%, and after five years, market growth was even more dramatic. For example, five years after the 1974 bear market, the S&P 500 was up by 99.2%. Following the Great Recession of 2008-2009, the market rebounded, averaging returns of 126.1%.

Again, while that's no guarantee, it's a good indication of what investors who stick with the market through both good and bad years may have to look forward to. Whether you're hoping to retire a millionaire or you're getting a later-in-life start on retirement savings, investing $25 a day can help you reach your goal.

Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.