How to Build Your Wealth $1 at a Time!
I’m sure that at some point in your life you have heard of the snowball on a hill analogy. If not, then I’ll give you a brief summary of what it’s all about. Imagine that you’re on top of a snowy hill, and you make a snowball that’s no bigger than the size of your fist. You then lay that snowball on the ground, and it starts to roll down the hill. As it’s rolling down the hill it picks up more snow and grows in size. You can’t believe what you’re seeing, but that tiny snowball you made is now as large as a boulder by the time it reaches the bottom of the hill!
The reason why I’m sharing this analogy with you all is that it conveys the power of compound investing. This may be another term that you’re not familiar with, but I can assure you that it’s very simple. Compound investing is the process of growing a small amount of money into a large amount over time through various types of investments.
Time is the key variable when it comes to compound investing. The more time you keep your money in an investment, the greater potential it has to grow. To give you a better idea of how much of a role time plays in the amount of money you can earn from an investment let’s refer back to the snowball analogy
Imagine there’s a small hill and a big hill and you rolled a snowball down both of those hills. Which snowball do you think is going to be larger? The one that rolled down the small hill or the big hill? Obviously, the snowball that rolled down the big hill because it had more time to pick up more snow and grow in size.
So how in the world does this analogy connect to compound investing?!? Well, the snowball represents the initial amount of money that you invested and the small hill and the big hill represents how long you kept your money invested. Let’s say that at 20 years old, you started to invest $100 every month into the S&P 500, which is an index that tracks the performance of the top 500 companies in the United States. With the S&P 500 having an average annualized return of 12% the total amount you would have by the time you’re 60 years old is $1,176,476 with having invested only $48,000 of your own money over that period.
Now let’s say that you decided to wait to invest until you’re 30 years old. If you invested $100 every month into the S&P 500, how much do you think you would have by the time you’re 60 years old? If you guess $349,496 then you would be right! So that just goes to show you’re much better off investing early on, even if you don’t have a lot of money because that small amount of money grows exponentially as time goes on.
So what platforms can you use to start investing for your future? Well, to start off I suggest that you use M1 Finance, which is an investment app that lets you choose what investments you put your money in and the percentage that’s allocated toward each investment.
The investment strategy that I’m currently going with on my M1 Finance account is allocating $100 every week into four different ETFs and those are VOO, which tracks the S&P 500; VTI, which tracks the total stock market; VTWO, which tracks small-cap stocks; and VUG, which tracks growth stocks. I invest my money into these four ETFs every week regardless of whether the stock market is up or down because it’s much better to consistently invest in the stock market rather than trying to time it.
If you want to come up with an investment plan then I highly suggest you use the investment calculator provided on Dave Ramsey’s website, which is very simple to use.
It’s easy for us not to invest our money because we don’t receive any instant gratification from doing that. We also tend to think that it’s not worth going through the trouble of investing a small amount of money. But as you all learned from this blog, a small amount of money can grow into a large amount of money if you give it time to grow. So if you’re 20 years old like me, and only have $1 to invest, you would have $110 by the time you’re 60 years old if you invested that $1 into the S&P 500.
So start investing now, so that you can build your wealth sooner rather than later. I hope that you all become financially free someday!
Sources
Ramsey, Dave. “Investment Calculator.” Ramsey Solutions, www.ramseysolutions.com/retirement/investment-calculator.
Storjohann, Mary. “Compound Interest - Your Money's Best Friend.” Workable Wealth, workablewealth.com/2019/05/01/compound-interest-your-moneys-best-friend/.
