Making £1m from stocks might seem like an unachievable goal at first, but if you put in just a little bit of effort and follow two simple rules, reaching this huge life-changing sum is not as difficult as it might first appear.
Two simple rules
There are two simple steps you need to follow if you want to hit this target. First of all, you need to spend less than you earn.
Most people who struggle to save money don't understand this fundamental concept, which is very simple to implement if you know how. All you need to do is work out a simple budget and make sure you're putting away a little every month depending on your financial situation.
The next step is to achieve a better return on your money. Stocks have always provided a higher return than the interest rate available on cash accounts, and this is particularly the case today, with the average savings account to yielding less than 1% per annum in interest. Equities on the other hand yield an average of 3.8% (FTSE 100) and some individual stocks such as Royal Dutch Shell yield more than 7%.
While individual companies may offer market-beating dividend yields, many part-time investors just don't have the time required to conduct the rigorous due diligence necessary to be able to invest in single stocks with confidence. Therefore, a cheap index tracker fund, which tracks a basic stock index like the FTSE 100 might be a better buy.
Some studies have shown that investors would benefit from adopting such a strategy as it prevents them from overtrading, a practice that can be hugely detrimental to long-term investment performance.
Putting it all together
So how can you make a million with the FTSE 100? Well, over the past five years the index has produced a total return of 9.6% per annum. The lowest-cost tracker fund on the market today charges 0.1% per annum for a total return after fees of 9.5% per annum.
If you've already saved a starting pot of £2,400 (£100 a month for two years) for example, this pot invested in a FTSE 100 tracker producing a return of 9.5% per annum will be worth £5,948 within a decade. If you continue to add to this pot at a rate of £100 a month, over a 10-year period, your initial £2,400 will grow to £25,567. If you keep saving and investing at this rate for 30 years, you will end up with a total investment pot of £225,268.
If you manage to save £200 a month, the returns are even more impressive. After just 10 years your savings will be worth £51,135 and after 30 years the value will have grown to £450,000.
If you want to reach £1m, you're going to have to save around £350 a month for 35 years, at a rate of 9.5% per annum, your pot will be worth £1,162,444 at the end of this period.
Getting rich slowly
It's easy to make a million by using a simple strategy such as tracking the FTSE 100 and letting your money work for you. Unfortunately, most investors over trade and as a result, their returns suffer significantly.
To help you avoid this key mistake, the Motley Fool has put together this free report entitled The Worst Mistakes Investors Make.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.