Women are making great strides in gaining wealth with more entering the millionaire club every year. In fact, Forbes found that the collective net worth of the top 10 richest women in the world grew to a whopping $223 billion in 2014. This amount is worth more than every U.S. professional baseball, basketball, football and hockey team put together, says Forbes.
If you are just starting your working career, you too can be a future member of the millionaire club. Whether you strive to be CEO, an entrepreneur or a stay-at-home mom, with an initial investment of just $30,000, any young woman in her 20s can become a millionaire by the time she retires.
The Secret is Investing Early and Compounding
Here’s the simple plan. From age 24 to 29, invest $5,000 per year in the stock market. Even if you never add another dime after age 30, chances are if history holds form, you could retire a millionaire.
While socking away $30,000 when you are in your 20s can seem overwhelming, it pays off in the end. That’s because the key is starting early, as it allows your money to compound for longer time periods and ultimately reach impressive dollar levels.
Compounding may sound technical and complicated, but simply, the money you contribute today—the principal—will appreciate several-fold over time.
Use the “Rule of 72” to Estimate your Future Amount
By using the Rule of 72, you can estimate how long it takes for an investment to double in value. All you need is an estimated return for a given investment. For example, over the past 50 years ending December 31, 2014, the U.S. stock market, as measured by the S&P 500 Index, had an average annual return of approximately 10%. You simply divide 72 by the assumed rate of return, so, 72 would be divided by 10. Therefore, mathematically, it would take a little over 7 years for your investment to double.
Using the Rule of 72, here is what the growth of a $5,000 investment at age 24 would roughly look like: At age 31, the initial investment of $5,000 would nearly double to $10,000, $20,000 at age 38, $40,000 at age 45, $80,000 at age 52, and $160,000 at age 59, assuming a 10% average annual rate of return.
$1 Million by Retirement
The Rule of 72 is helpful to understand an approximate future value of an investment. The chart below illustrates the growth of your cumulative $30,000 investment by a retirement age of 65 or 70, assuming a 10% average annual return. With decades of accumulation, you can see how a relatively modest figure can eventually climb to seven digits!
Specifically, each individual $5,000 climbs to a considerable amount over the years. At age 24, the initial investment reaches nearly $250,000 by a retirement age of 65. At age 70, the $5,000 grows to just over $400,000. At age 25, the $5,000 grows to approximately $225,000 by age 65; by age 70, this $5,000 investment balloons to over $350,000.
In total, the $30,000 invested on a cumulative basis before you reach age 30 climbs to approximately $1.2 million at age 65, assuming a 10% return. By age 70, it grows to approximately $2 million.
Of course, both of these calculations just give an estimate using the Rule of 72 and the power of compounding. However, even if a 10% average annual return doesn’t occur, you are well on your way to a more secure financial future.
When it comes to compounding returns, time is your ally. After investing $30,000 in your 20s, it is always wise to develop a discipline for saving and keep investing to ensure you have enough money to fund all your future goals.