Could Investing $500 a Month in One ETF Make You a Millionaire in 20 Years?
Key Points
Over the course of 20 years, stocks are usually the best path for long-term investing.
Unfortunately, a $500 monthly investment made over 20 years would require a very high annual return to get to $1 million.
Investors would most likely need to increase their investment or increase their time horizon to get there.
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Everybody wants to be a millionaire. Far fewer understand the math that helps you get there.
It's pretty simple actually. It all depends on:
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- How much you invest each month
- How long you stay invested
- The rate of return your investments earn
But reality is harder
You can control the first. Unless there's an emergency or a significant requirement for cash along the way, you can control the second factor too.
The third one, however, is a wild card. That's why you usually hear the most common -- and also the most effective -- investing advice: invest as much as you can, as early as you can. Even if your returns end up coming in lower than expected, you still have a reasonable shot at reaching your goal.
If you have $500 per month to invest for the next 20 years, and your goal is to reach $1 million at the end of that period, it becomes a simple math problem. If you know what you need, you have a greater chance of getting there!
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The math to millionaire status
To figure out the return you need to get to $1 million, you only need a financial calculator. Your monthly investment will be $500. The number of periods will be 240 (20 years * 12 months/year). Your future value will be $1 million. Calculate for the monthly rate of return, and you get 1.42%.
That translates to an average annual rate of return of approximately 18.4%.
Considering that the S&P 500 has returned roughly 10% annually over the past century, it's unlikely that we'll see annual returns of 18-19% over the next two decades if you invest in an ETF, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO), that tracks the index.
That means it's time to look for alternative paths to get to $1 million.
Adjusting the savings plan to get to $1 million
The two most logical ways to get to the $1 million mark are to increase the amount of money you invest monthly or invest for longer than 20 years.
Let's adjust the inputs to see how much closer we can get:
- If you increase your monthly investment from $500 to $1,000, the rate of return needed drops to about 12% annually. That's still a high bar to clear, but it's not out of the question.
- If you keep the $500 monthly investment but increase the time horizon from 20 years to 25 years, the rate of return needed also drops to just a hair over 12%.
- If you increase the monthly investment to $1,000 and the time horizon to 25 years, the rate of return needed falls to just under 9%.
Barring some type of extraordinary performance, a $500 monthly investment made over 20 years won't get you to $1 million. So increasing your monthly investment and the length of time you invest is the best path to hitting the target.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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