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S&P 500 40 year chart

How to get rich with $150

Jul 10, 2021   Category: Advice, Compounding, Education

It’s a pretty sensational headline – I know. However, I want to get you thinking about a simple formula for wealth creation called compounding.

I’m not joking when I say you can get rich with $150. Let’s say you’re 25 years old. You have a job, it’s not fancy but it helps you pay the bills. Let’s assume this job gives you a little extra cash at the end of each month. Let’s say it’s $150. What are you going to do with it?

Again, I’ll assume you want to start investing. Let’s say you take that sum of cash and put it into an ETF. That ETF tracks the S&P 500 index. The index has an average return of 11 – 12% per year. How much would you have at the end of 40 years?

The answer is $1,057,037.05.

You would have over a million dollars. Does it seem impossible? If you want to see how the math works out, go to this compound interest calculator and fill in the form with the numbers I just used.

See how incredible and simple compounding is?

Of course, not everyone is 25 years old. Many of you are probably like me, much older! However, you can still apply the same rules to your financial situation as you see fit. For example, you don’t have to invest in an ETF that tracks the S&P 500. You could invest in Berkshire Hathaway.

The average return for Berkshire Hathaway is 20% per year. Let’s say you’re only going to invest for 25 years because you’re older. However, being older you can also afford to bump up your contribution to $200/month. Any idea how much you’d have then?

The answer is $1,151,833.84.

Again, you’d have over a million dollars.

There’s another investing advice guy named JL Collins who subscribes to this theory. He’s written a book about it, and he has a blog with lots of great information for those of you who you curious to learn more.

Personally, I believe that with a little bit of work you can do better than the S&P 500 which is why I’m more of a stock picker. However, if you don’t want to spend time researching companies but still want to get rich, compounding is the way to go.