Can You Really Become a Millionaire by Investing Just $100 per Month?

Becoming a millionaire by investing just $100 per month? It sounds too good to be true. However, it is not some far-flung, fantastic idea. In fact, if you start early enough in life and are diligent about your savings, it’s mathematically possible — and perhaps even likely.

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The key is investing consistently throughout your entire working career and picking the right investments. Perhaps the easiest option is to invest in an S&P 500 index fund starting in your early 20s. Here’s how to do it.

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The Power of Compound Interest

The biggest asset you have as an investor is the power of compound interest. When you earn a return on your gains and not just your principal, your wealth can really grow over time.

For example, if you invest $10,000 in the stock market and earn a 10% annual return, your account will grow by $1,000. But if you keep that money invested and earn another 10% the next year, you’ll earn $1,100, not $1,000.

As you compound these returns over multiple years, the growth will be exponential. After 10 years, for example, your account will be worth $27,070 if you keep all of your returns invested compared with just $20,000 if you didn’t compound your returns.

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The Mathematics of Becoming a Millionaire

Over a long enough time period, if you can consistently add to your account while it’s compounding, you can reach that mythical seven-figure account balance, even with a small amount. Here’s how it works.

Imagine that you start investing $100 per month at age 20 and you plan to retire at 65. That gives you 45 years to contribute to your account and benefit from the effects of compound interest.

After 45 years of $100 monthly contributions, you will have put just $54,000 into your account. But if you earn a consistent 10% annually on that money — which is just about the long-term average of the S&P 500 index with dividends reinvested — you’ll end up with an account balance of $1,048,246. Thanks to the power of compounding, your $54,000 will have generated $994,246 in profits over that 45-year period.

But the key is to start early. If you wait just 10 years to begin your investment program, starting at age 30, your $100 per month earning 10% per year will amount to only $379,662.

Caveats

Of course, nothing in the investment world is that easy. For starters, past performance is not a guarantee of future results. Although the S&P 500 has a long-term average return approximating 10%, that doesn’t mean this will continue for the next 45 years. In fact, the return could be much higher or lower.

Another factor to consider is something academics and analysts refer to as “sequence of returns.” While the stock market might return about 10% over the long run, it rarely provides a 10% return in any particular year. If the market returns 20%, 25%, 35%, -24% and -3.8%, its average return over those five years will be about 10%. However, your actual return might be more or less depending on when you’re adding your funds.

The real risk, however, is that you get scared out of making your contributions when the market sells off violently — or, even worse, if you take out some of your money during a bear market. If you do that, you’ll miss the recovery, which can be equally violent on the upside, and it will significantly impair your long-term returns.

Consistency Is Key

There is no guarantee that if you sock away $100 per month at age 20 that you’ll have $1 million by age 65. However, if you consistently invest your $100 per month in an instrument like an S&P 500 index fund, over a 45-year period, you’re likely to build a substantial nest egg — perhaps even more than $1 million.

The key is to remain consistent through the market’s ups and downs. You’re even more likely to succeed if you increase your monthly contributions as you begin earning more and if you put in additional contributions when the market is down. But if you wait to begin even just 10 short years, you’ll have to significantly boost your contributions if you want to reach $1 million.

This article originally appeared on GOBankingRates.com : Can You Really Become a Millionaire by Investing Just $100 per Month?