How to invest $25,000 and arrive at $1 million is a math question that has endless inputs. There are different ways to get to $1 million depending on how much risk you’re willing to take, and the investment opportunities available in the current macro environment. The investment decisions you make will affect how long it’ll take to become a millionaire.
I’ll discuss some possibilities in an asset class that has historically delivered the highest returns in the long run — stocks.
The math to $1 million
Based on an investment of $25,000 today, it’d take a return of 13.08% per year to transform into $1 million in 30 years. If you require a shorter time to grow your investments, you’ll need a higher return to arrive at $1 million sooner.
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If you’re able to save and invest more every month, you can accelerate your journey to $1 million. Let’s say you’re able to invest an additional $500 each month. That’ll make $6,000 of additional investments a year. If your investment returns remained constant at 13.08% per year, you’d reach $1 million in exactly 21.9 years.
In reality, we never get constant returns in the stock market, because the macro environment and businesses are ever-changing. For example, from the March 2020 pandemic stock market crash to the end of 2021, the stock market had an incredible run. In a span of about 1.75 years, it delivered total returns of about 76% (or annualized returns of approximately 38%). In contrast, year to date, the stock market has declined about 7.6%.
The Foolish investing philosophy believes that investing in a diversified basket of stocks driven by wonderful businesses will deliver solid long-term returns.
Where to invest today
Dividend investing is a proven way to invest. Many investors use dividends to pay their bills, but if you don’t need the extra income, you can reinvest your dividends along with your savings every month to speed up your wealth creation (as long as you get positive returns).
Right now, an interesting dividend stock you can consider for a diversified investment portfolio is Algonquin Power & Utilities (TSX:AQN). Given its smaller size to larger peers in the regulated utility and renewable power spaces, AQN stock was able to increase its dividend at a higher annualized rate of 9.5% in the past 10 years.
Due to a rising interest rate environment, utility stocks that inherently have debt-heavy financial positions, have corrected meaningfully. AQN stock has declined about 18% year to date, which has elevated its dividend yield to 6.6%. This is the highest level its yield has been in more than a decade!
Algonquin’s last dividend hike in March was 6%. Assuming it’s able to maintain this growth rate supported by profitability, the approximated annualized total returns would be about 12.6%. Additionally, the stock is undervalued. So, valuation expansion could drive additional returns over the next five years. It’d need valuation to drive price appreciation of only 0.48% per year — which is very little to ask for — for our target 13.08% return.
Before you consider Algonquin Power and Utilities, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in November 2022 ... and Algonquin Power and Utilities wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 15 percentage points. And right now, they think there are 5 stocks that are better buys.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Kay Ng has no position in any of the stocks mentioned.
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
Bonds and money market accounts may be a good option for those with more conservative risk tolerance. Treasury bonds and municipal bonds typically offer lower returns but come with less risk. With a bond paying a 2% interest rate, a $1 million investment could earn you $20,000 per bond pay interest income annually.
4 Ways To Grow $100,000 Into $1 Million for Retirement Savings
An S&P 500 index fund. An S&P 500 index fund isn't going to provide market-beating returns, but it will ensure that you don't fall behind the average. ...
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Open a High-Yield Savings Account. If you want to take the risk out of the equation and need to be able to readily access your money, a high-yield savings account is a great option. ...
Although $25,000 isn't infinite, it's certainly not insignificant — anyone earning less than six figures gets sufficient emergency savings with cash to spare. If those with $40,000 salaries scaled down to a more modest four-month emergency fund, they'd have $11,680 left over to play with.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.
To potentially turn $10k into $100k, consider investments in established businesses, real estate, index funds, mutual funds, dividend stocks, or cryptocurrencies. High-risk, high-reward options like cryptocurrencies and peer-to-peer lending could accelerate returns but also carry greater risks.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Let's say you want to become a millionaire in five years. If you're starting from scratch, online millionaire calculators (which return a variety of results given the same inputs) estimate that you'll need to save anywhere from $13,000 to $15,500 a month and invest it wisely enough to earn an average of 10% a year.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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