It seems like everywhere you look, someone is promising you a foolproof strategy to get rich. While many promise overnight success through elaborate schemes, the real way to get rich is to leverage the power of compounding returns.
When thinking about where to invest money to get the best returns, the answer is almost always the stock market. What may surprise you is that the stocks you pick are less important than you think. What will allow for wealth creation is investing, and more importantly, keeping your money in the stock market.
How To Become Rich By Investing
It is often said that the amount of time you are invested in the stock market is more important than the timing of the investment. Starting as early as you can and keeping your money in for as long as you can, are the two secrets to creating wealth from the stock market.
An example is the best way to illustrate this effect. The table below shows how fast you can expect to reach 1 million dollars on an initial investment of $100,000 and a 10% annual return.
As you can see, the value of your investment goes up by only $10,000 in the first year. In contrast, your investment will increase by over $98,000 from years 24 to 25.
This example is for illustrative reasons only, and your returns in the market may be more or less.
| Years Invested | Investment Value ($) |
| 0 | $100,000 |
| 1 | $110,000 |
| 2 | $121,000 |
| 3 | $133,100 |
| 4 | $146,410 |
| 5 | $161,051 |
| 6 | $177,156 |
| 7 | $194,871 |
| 8 | $214,358 |
| 9 | $235,794 |
| 10 | $259,374 |
| 11 | $285,312 |
| 12 | $313,843 |
| 13 | $345,227 |
| 14 | $379,749 |
| 15 | $417,724 |
| 16 | $459,497 |
| 17 | $505,447 |
| 18 | $555,992 |
| 19 | $611,591 |
| 20 | $672,750 |
| 21 | $740,025 |
| 22 | $814,027 |
| 23 | $895,429 |
| 24 | $984,972 |
| 25 | $1,083,469 |
5 Investments That Can Make You a MillionaireÂ
Here are some investments that can grow your net worth.
Low-Cost ETFs
Low-cost ETFs are a great way to build wealth. The main benefit of ETFs over individual stocks is that you do not need to worry about picking the correct stocks. Investing in an index or specific sector through an ETF allows for diversification and takes the guesswork out of investing.Â
While you may miss out on the large gains from individual stocks, low-cost ETFs give you peace of mind, making them good investments for beginners and experienced investors alike.
Looking specifically for low-cost ETFs will allow for more of your money to be reinvested, maximizing the impacts of compound interest.
Stocks
On the flip side, those who are more confident in their research abilities may find picking individual stocks to be most profitable. While generally riskier than ETFs, stocks also present the opportunity for higher returns.
Mutual Funds
Another popular choice is mutual funds. Similar to ETFs, mutual funds are generally a basket of stocks that can be purchased as a single product. The main difference is that mutual funds are professionally managed.
Mutual funds come in various forms, allowing investors to choose from low and high-risk options.
Real Estate
Investing in real estate is another creative option for building wealth. One important thing to note with real estate is that a larger initial investment is necessary.
While stocks, ETFs, and even mutual funds are good investments for beginners as they can be purchased for just a few dollars, real estate investing requires a substantial down payment to get started.
Once you have secured that initial investment, real estate can be a lucrative investment. You can choose to rent your property out or flip and re-invest profits to purchase additional properties.
For those who may not have a large initial investment to work with, investing through a Real Estate Investment Trust can be a good option.
Starting a Business
Perhaps the hardest but most profitable option on this list, starting a business can be a great idea for those who are entrepreneurial.
Ideas for starting a business are endless, from online businesses like starting a blog to real-life businesses like selling handmade goods. Depending on your skillset and demand for your goods and services, there is no ceiling to the amount of money that can be made.
10 Tips for Building Wealth
Use these tips and strategies to secure your financial future.
Pay Off High-Interest Debt
One of the most important things to do when trying to build wealth is to pay off high-interest debt. Continuing to pay monthly interest on credit cards or personal loans will make it impossible to get rich.
Identify all the payments you are making and focus on paying off the highest-interest loans first before making your way down the list until you are debt-free.
Build an Emergency Fund
Ensuring you have enough money to deal with unexpected situations is always a smart financial decision. A general rule is to ensure 3-6 months of expenses can be covered by your emergency fund.
Having an emergency fund in place means that if something were you happen, you would not have to pull money out of your investments. Allowing that money to keep growing in the stock market, even in times of personal crisis, is vital to building wealth.
Get Financial Education
Building financial literacy is one of the best ways to build wealth. Understanding how to make your money work for you and how to get rich through investing takes time and patience.
Reading books, taking courses, or learning from other investors are all great options.
Start Investing Early
As mentioned, compounding growth is the most powerful tool for building wealth. Starting as early as you can, even with a small initial investment, can lead to larger returns many years down the road.
Diversify Your Portfolio
While the stock market is a great tool for building wealth, it is also important to ensure that you have a variety of investments in your portfolio. Having a range of low to high-risk investments in stocks, bonds, and GICs is a great way to ensure you are protected during economic uncertainty.
Increase Your Income
Maximizing the amount of income you make means that you have more money to invest. Upgrading your skills and seeking out promotions to further your career are important steps to take to build wealth.
Think Long-Term and Stay The Course
While economic downturns can spook investors, ensuring you are keeping a long-term view is one of the most important factors in building long-term wealth. Keeping your investment strategy the same over decades is how to get rich through investing.
Automate Your Contributions
Automating your contributions is a great way to ensure you keep your investment strategy steady. A few hundred dollars each pay period automatically going into your TFSA or RRSP may not seem like much, but it will add up over time.
Maximize Tax-Efficient Accounts
Prioritizing investments in your TFSA, RRSP, or FHSA will ensure that you are paying minimal taxes on your capital gains. Each individual will need to evaluate factors such as age, life goals, and career trajectory to ensure they are maximizing their tax efficiency.
Spend Below Your Means
While it is important to spend on things you enjoy, ensuring that you are sticking to a budget and setting money aside for investments is equally important. Sacrificing some short-term happiness for long-term wealth creation can be difficult but worthwhile.
