Many people assume you need to work magic in order to become a millionaire. But, on a certain famous wizard's birthday, it's worth remembering that you don't have to wave a magic wand to become wealthy.
You just need to be a disciplined investor who puts your money into the market regularly — and you need to make certain you have a solid investing approach.
It doesn't take magic for investing to make you a millionaire
When it comes to amassing a $1 million nest egg, you don't need to cast a magic spell or even spend years training to become an investing wizard.
Instead, you just need to take these three simple steps, which are all but guaranteed to leave you with a seven-figure investment portfolio without any witchcraft required.
Determine how much to set aside each month
While investing can make you a millionaire, there's no magic spell that's going to make it happen instantly. It takes time. And the sooner you want to amass your fortune, the more money you're going to have to devote to your goal.
To decide how much you'll need to invest, estimate your likely returns and set a target date for hitting millionaire status. If you plan to invest heavily in stocks, it's reasonable to expect around a 10% return on investment. If you want a more conservative mix, estimate about an 8% return.
As for your timeline, it depends on how much you can afford to devote to your goal. The table below shows the monthly investment it would take to make you a millionaire given your likely return.
To become a millionaire in:
You'll need to invest this much at an 8% average annual return
You'll need to invest this much at a 10% average annual return
Build a diversified mix of investments
Once you've determined how much to invest each month, it's time to build a solid portfolio of assets.
Now, you have the option to become an investing wizard if you're willing to take the time to learn to pick individual stocks. And it doesn't even take magic to predict which companies are likely to perform well. But you do need to develop a strategy for identifying solid companies that have good long-term potential.
If you aren't interested in spending the time to pick individual stocks, you can still get your money into the market using exchange-traded funds (ETFs) that track financial indexes. If you invest in an S&P fund, you'll gain exposure to 500 or so stocks from some of the largest companies in the United States.
An S&P index fund provides instant diversification and minimal risk. It's not quite as easy as waving a magic wand to make money appear, but it's as close to a sure thing as you can get. Now, if you pick individual stocks, it's crucial to choose them carefully to get a good mix of different companies and industries to limit the added risk this strategy has.
Leave your money to grow
Finally, once you've got your money invested, you should leave it alone and let it grow.
You can stick with your S&P fund for the entire duration of the time it takes to become a millionaire. Investing in an S&P fund is a solid long-term strategy because the fund has a long history of averaging around 10% annual returns. Or, if you've chosen to invest in stocks, you'll hopefully have picked companies you're comfortable leaving your money in for the long term, as this limits your investing risk.
The best part is, your money will earn returns that are reinvested and go on to earn additional returns for you. This is called compound growth, and it makes it really easy to become a millionaire even though you'll invest far less than a million dollars over time.
The effects of compound growth really are magical, because if you just leave your money alone after building a diversified portfolio, you can amass your $1 million effortlessly with no wizardry required.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.