Building your retirement savings? This 1 trick will earn you exponential wealth
"Exponential" is defined as "growing" or "increasing very rapidly." Here's a good way to use it in a sentence: Saving and investing early and often is a clear path to creating exponential wealth.
If your money grows enough, you'll have the means for a comfortable retirement. Even if that seems far off, now is the time to start. And you don't have to be an investing wizard to reap the rewards.
That's because the key to building a nest egg isn't necessarily about finding a hidden investment gem or buying and selling lots of them. The simple trick? Leverage the power of long-term investing and compound interest. A passive approach works just fine.
A dollar saved is a growing dollar
Think of compound interest as your money's earning potential on steroids. Let's say you started with $100 in a credit union or bank savings account on Jan. 1, 2000, and added $100 a month through the end of 2023. That would make $28,800 your total contribution, and with an average interest rate of, say, 5%, you would actually have more like $54,937. (Note that getting 5% on a savings account would be an incredibly good rate.)
That's the beauty of compounding interest and leaving the money alone to grow. You earn interest on a larger and larger amount. Investing in the stock market can be even more effective. A rising market is not guaranteed, but using a time-tested passive investing strategy – $100 a month since the turn of the century – would now total $77,869 based on the average 7.5% a year in total return posted by the S&P 500 index, a key benchmark that comprises America's 500 largest publicly traded companies.
Actively add to your passive investments
Passive investments such as the Vanguard S&P 500 ETF, a widely held exchange-traded fund, are an ideal way to set it and forget it for those who would rather not actively follow and manage their stocks.
ETFs require minimal effort and expertise, and by diversifying your investments across a wide range of companies, you mitigate the risk associated with individual stocks while still capturing the overall growth of the market, though growth is not guaranteed. The market does go down, and if you don't have time to ride out the inevitable downs before you need your money, that can be a problem.
The chart below shows how $100 placed in that Vanguard ETF as the new century dawned would now be worth more than $600. Adding $100 a month after that yields the nearly $78,000 mentioned above using a 7.5% average return. That's the power of both compounding and regularly investing in your future.
VOO Total Return Level data by YCharts
Need to find a financial adviser?Here's a rank of the top firms.
Boost your retirement prospects exponentially
The power of compounding lies in the ability to generate returns on your returns, allowing your money to grow exponentially over time. By starting early and consistently investing, even small amounts can accumulate into a substantial nest egg.
Each dollar saved today has the potential to multiply – well, exponentially – by the time you reach retirement age. It's not really a trick. It's just that simple.
Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
What stocks should you add to your retirement portfolio?
Offer from the Motley Fool: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now. The 10 stocks that made the cut could produce monster returns in the coming years, potentially setting you up for a more prosperous retirement.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,342!
*Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »