For example, investing $200 per month is creating $1 million by retiring | The motley fool (2024)

You don't need thousands of dollars to start investing and saving for retirement. Breaking that down into a few hundred dollars a month invested in stocks can make a big difference in your retirement years. Whether it's reducing the number of times you eat out or go to the movies, these changes together can free up money in your budget, which can make a big difference.

Here's how to set aside $200 each month for 30 years and investing it could earn you more than $1 million by the time you retire.

Investing in growth funds can lead to good returns

A big challenge for many people when it comes to investing is that it can be confusing and difficult to know which stocks to buy and which ones not to buy. However, exchange-traded funds (ETFs) can dramatically simplify this equation for you. By giving you exposure to a diverse mix of stocks, you no longer have to worry about tracking individual stocks and deciding whether to change anything in your portfolio.

Instead, you can invest in funds that focus on long-term growth. An example of this isVanguard Growth ETF(VUG-2,25%).

This ETF has a small expense ratio of just 0.04%, which is important in the long run because it means fees won't be a big part of your total returns. It focuses on investing in major US stocks with strong growth potential. This is certainly not the only growth fund that may be suitable for a long-term investment strategy, but it is certainly one of the better ones to consider.

The Vanguard Growth ETF contains more than 200 stocks, where it is the largest holdingAppel,Microsoft, InAmazon. About 55% of the fund's investments are technology stocks, while consumer discretionary stocks come a distant second at 20%. Over the past ten years, the fund has generated a total return (including dividends) of 280%, which is much better thanS&P500's total return of 217% over the same period.

The Road to $1 Million

The ETF's returns over the past ten years have averaged a compound annual growth rate of 14.3%. The good news is that if you invest $200 a month, you'll need less than that to reach $1 million.

If you were to invest $200 per month for the next thirty years, that would amount to a total investment of $72,000. That's significant, but it's the effects of compounding that would give your portfolio a valuation of over $1 million.

For a growth-oriented fund like the Vanguard Growth ETF to make your portfolio worth more than $1 million after 30 years, it needs to grow at least 13.6% on average. However, that is lower than the average annual return over ten years. that's above the long-term growth rate of the broader stock market as a whole. This assumes that you continue to invest €200 per month in the fund.

Here's an overview of what your portfolio balance would look like every five years in this scenario:

Calculations by author.

The power of compounding only comes in later years, when you have built up a large balance sheet. At that point, an increase of 13.6% per year will have a much bigger impact than if your portfolio is much smaller.

So a key part of making this strategy work is to make sure you expect to have thirty or more years before retirement. You can still generate good returns even if you don't, but to reach $1 million with a $200 monthly investment, you ideally want to have about that number of years of investment left. If you don't, you can compensate by investing more money each month.

Investing early and often is the key

Whatever ETF you want to invest in, focus on one ETF you invest ingrowth sharescan put you in a good position to benefit from strong returns in the future. As long as you commit to investing $200 a month or whatever you can afford, you will be in a much better financial position when you retire.

Ideally, you can reach $1 million, but even if not, saving money every month and putting it away in a diversified fund like the Vanguard Growth ETF can be a decision that pays big dividends in the future.