How to turn $5,000 into $998,000

By Tim McArthur

We all want to get rich but obviously not everyone achieves this goal.

While it would be naive to say 'getting rich is easy', by utilising the following steps, it certainly is achievable. In fact, Dr. Shane Oliver, the chief economist at AMP Limited (ASX: AMP), recently outlined one process for achieving a comfortable retirement, and arguably, it's within range for many Australians.

Here's the rub.

The three little words that could unlock a lifetime of wealth…

To begin with, investors like you need to acknowledge that the key to growing your wealth is to compound your earnings.

Working through a practical example quickly highlights this point:

So for starters, imagine that you can save $5,000 per year over your working life. From a standing start – let's say at the age of 25 – you begin setting aside $5,000 each year and investing it in the stock market, perhaps in a high quality listed investment company such as Argo Investments Limited (ASX: ARG) or via a market-beating fund managed by the likes of Macquarie Group Ltd (ASX: MQG) or Platinum Asset Management Limited (ASX: PTM).

Let's be fairly conservative in our assumptions and say you are able to achieve a 7% annual return on your investments. The maths is quite straight forward: an investment plan of $5,000 every year for 40 years at an annual return of 7% will grow thanks to the beauty of compounding into $998,176 by the time you are 65.

Who doesn't want to be a millionaire?

If you're eager to start building your long-term wealth, make sure to remember these 3 key takeaways from the example above.

  1. It takes time to build wealth. The earlier you start and the longer you allow your wealth to compound, the better.
  2. Compounding is a must – that means not taking any of your money out and it also means reinvesting all your profits, too. Easier said than done, I know.
  3. It's necessary to spend less than you earn so that you can regularly add to your investment portfolio.

And keep your eye on this ball, too: Your average annual return matters. A lot. The good news is that, while we used 7% in this example, the long-term market average returns of the ASX are substantially higher!

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