Building wealth takes time and an effective strategy. Having both short- and long-term goals makes it much easier to increase your savings and succeed.
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One good savings goal would be to save $500,000 over the course of 20 years. To do this, you’ll need to know how much to put away each month.
How To Save $500k in 20 Years
To determine how much you’ll need to invest each month to reach $500,000 in 20 years, you need to decide what assets you’ll invest in. Index funds, such as the S&P 500, are conservative investments that follow the market as a whole. Over the past 20 years, the S&P 500 produced an average annual return of 8.4%. However, considering inflation, the rate drops to 5.7%. Using 5.7% as a realistic return over the next 20 years, it’s possible to figure out what you’ll need to contribute each month.
Remember to factor compound interest into the equation. Compound interest happens when you reinvest your returns to earn interest on your previous interest. For example, investing $300 per year with a 10% return means you’ll make $30 the first year. Going into the second year, you’ll make 10% interest on $330 instead of just $300, which means you’ll make $33. In the third year, you’ll earn 10% interest on $363. The interest continues to compound the longer you reinvest your returns, leading to significant increases over time.
So, with 5.7% interest that compounds annually, you’ll need an initial investment and monthly contributions of $1,162 to end up with $500,220.92 after 20 years. This may sound like a large sum of money to save each month, but there are things you can do to boost your savings potential.
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Track Your Spending
Saving more money to invest means being more aware of your spending. When you track your spending, you become aware of bad habits and impulse buying. You can correct these issues and be aware of your short-term goals of saving enough each month to reach your long-term goal of having $500,000 in 20 years.
Get More Income Streams
Saving can only help if you make enough to hit your goals in the first place. Finding passive money-making opportunities can give you multiple income streams. Some ideas for creating more income streams include:
- Start a vending machine or ATM business
- Create an online course
- Become an affiliate marketer
- Rent out a room in your house
- Sell a digital product
- Pet sit
- Build a mobile app
- Become a social media influencer
- Start a podcast
- Write an ebook
Most of these require an initial amount of work that continues to pay you over time. The more income streams you have, the easier it will be to put more into savings.
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This article originally appeared on GOBankingRates.com: How Much You Need To Invest Monthly To Have $500K in 20 Years
