Get $50,000 Per Year From $3,000 Annual Investment?

Most people think of index funds as boring but that’s because the majority don’t have a good understanding of how these funds actually work. To simplify it, consider the following analogy.

Imagine you’re betting at a horse race but you don’t know which horse will win so you’re permitted to bet on all the horses and whoever wins you win. That’s more akin to how an index fund works but it doesn’t stop there.

Now imagine that some horse is really slow, and another enters the race and gallops ahead to take over from the slow horse, your bet changes now so you have exposure to the new winner and have none to the loser.

In a nutshell that’s how the S&P 500 works. If one company way outperforms, you get to benefit from its upside while if another underperforms you no longer have exposure to it. It’s the best of both worlds.

And the vehicle can make you a millionaire that pays you as much as $50,000 annually by committing to a steady inflow of capital over time, but how much?

Key Points

• A $250 investment monthly can turn into as much as $50,000 annually with the tailwind of compounding.
• Throughout the investment time horizon, expect pullbacks and other investment options to prove highly tempting.
• By committing to the investment no matter what the macroeconomic or stock market conditions, history forecasts a highly profitable outcome.

How Much To Invest

Where investing gets tricky is not that it’s hard but that it’s boring. If you squirrel away $250 monthly into an S&P 500 index fund, such as Vanguard’s VOO, it’s hard to get too excited by a $3,000 nest-egg at the end of the year.

But at the end of 5 years, with compounding, that $3,000 can rise to as high as $19,000 and by 10 years it can grow to as high as $50,000, assuming the historical 10% annual growth rate.

The hard part is that the market won’t go up by 10% most years. It may rise by 15% one year and drop by 8% the next year. In 2022 the market fell by 20% and in 2023 it rose by 25%. After two years it was essentially in the same spot but if investors panicked at the end of 2022 they would have missed a fierce rally in 2023.

The way the math works out, by sticking with it over the long term, the numbers grow astronomically. How much exactly?

How Much Can You Make?

Within 20 years, the nest egg can grow to $180,000 and by 30 years all the way to $500,000 and by 40 years to as much as $1,300,000. You can see how impactful that final decade can be to overall growth. That’s when the effects of compounding really kick in.

By then if we assume a 4% return from dividends or the bond market you can earn as much as $50,000 annually from your nest-egg having invested just $250 monthly over the 40 years.

Is it an exciting plan to get rich? No. Along the way you will be tempted by all sorts of get rich schemes from investing in bitcoin in 2013 to buying the latest high growth stock that could multiply your principal in months.

Throughout you would need to stay firm in your resolve to commit to the $250 monthly and stick with the plan no matter how low the market falls and no matter what other bright and shiny tempting investment comes along.

Even then, it’s fair to say there is no guarantee as the world changes a lot with each passing decade. But history would suggest it’s as good a plan as any to lock in $50k annually for a relatively modest sum monthly.