How would you like to be a millionaire?
Most individuals dream of the day they have $1 million to their name. In reality, it needn't be all that difficult, assuming you give it enough time (that's the secret ingredient).
Indeed, many individuals are inclined to wait until their 30s or 40s, or even after they turn 60 to start investing. While it is never too late to start your investing journey, leaving it until well into your working life (or until you're approaching retirement) does limit your chances of ever hitting the illusive $1 million mark.
Consider this chart:
To prepare this chart, I assumed the investor would start off with zero dollars and then generates an annualised return of 10% on any investment thereafter, which is slightly below the long-term returns generated by the Australian share market. I used this rate to compute how much an investor would need to invest per day to become a millionaire at the age of 65, based on their age (for simplicity, I excluded the impact of taxes and brokerage costs, etc.).
It is evident that, as the individual grows older, the daily investment requirement increases substantially. In fact, according to my calculations, a person who is 20 years of age would need to invest $3.08 per day, or $21.56 each week, to hit their target. That daily number increases to $5.11 by age 25 and more than doubles to $8.53 by the age of 30. You would need to put away $24.51 each day by the age of 40 and $78.70 by the age of 50.
The Power of Compounding
The reason this happens is compound interest, which means interest earning interest. By starting your investing journey young, you allow your earlier investment to generate interest, effectively snowballing your wealth over the long-term.
Of course, a 10% return on the share market is by no means guaranteed. Share investing is riskier than, say, putting your money in a term deposit or buying government bonds, but it does carry the potential to generate significantly better returns in the long-run, particularly if you buy high-quality businesses at reasonable prices.
For instance, investors who bought shares of Retail Food Group Limited (ASX: RFG) 10 years ago have gained almost 550% on their investment, including both capital gains and dividends (but excluding franking credits). That equates to a compounded annual return of 20.5%!
Of course, not every share is going to generate that kind of return – the vast majority of shares won't – but the point is, you can earn a good return from the share market by focusing on quality and then holding for the long-run.
I still like Retail Food Group shares as a buy (I also own its shares). I also like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), or Soul Patts, which is an ultra-long-term investment conglomerate trading at a reasonable price.
Again, the point is, the earlier you start your investing journey, the more time it gives you to generate a solid foundation on which to retire on. Retail Food Group and Soul Patts are two of the shares you could consider kick-starting your investing journey with today.
