Got an Extra $250 a Month? Here’s How to Turn It Into $500,000

For most of us, $250 is no small thing. But alas, it doesn’t look like much besides our monthly bills, which typically run into the thousands of dollars. And it looks even smaller next to the hundreds of thousands or even millions of dollars we plan to spend in retirement.

But if you don’t need the $250 now, there’s an easy way to turn that money into a much larger sum that will go much further in the future. Here’s how.

It’s simpler than you think

Investing your money is the easiest way to grow it over the long term. All you have to do is open an investment account and decide what you want to invest in. Then just leave your money alone for a while and check in regularly.

How much you make depends on several factors, including how long you keep your money invested and what kind of returns you get in that time. But the stock market has averaged a return of about 10% per year for the last 50 years, so you have a good chance of making a decent profit from even a small sum of money.

If you make a one-time investment of $250 and earn an average annual return of 10% over 30 years, it would be worth $4,362 — or over $4,100 more than when you originally started. But if you really want your money to grow, regular contributions are key.

If you invest $250 a month with an average annual return of 10%, you’ll be left with almost $520,000 after 30 years, even though you’re only contributing $90,000 of your own money. That’s a profit of $430,000. And if you’re able to put more money aside each month, or keep your money invested longer, you could end up with a lot more.

Of course, investment returns are never that linear. You’ll likely have a few years where you make more than 10%, a few more years where you make close to or even a little less, and a few years where you lose money. But it’s important to take a long-term view when investing.

If you have money that you plan to spend in the next five to seven years, it’s best to keep it in cash rather than risk losing it. Only invest funds that you don’t need to withdraw in the near future so you can give them the time they need to grow.

How do I start investing

A retirement account is a great place for most people to store their long-term savings. These offer tax benefits that taxable brokerage accounts do not. However, they also come with limitations. In most cases, you won’t be able to access retirement account funds before the age of 59 1/2 without paying a penalty, so don’t keep funds here that you intend to spend sooner.

You may already be investing through a 401(k) offered by your employer. Or if you don’t have access to one of these, you can open an IRA. You have a choice of traditional IRAs, which give you a tax break up front but have to pay taxes on your withdrawals later, or Roth IRAs, which offer tax-free withdrawals in retirement if you pay taxes on your contributions when you make them. Typically, Roth IRAs are the wise choice unless you think your income will decrease significantly after you retire.

What you invest is up to you. Index funds are a great option if you’re new to investing and want to quickly diversify your portfolio. These give you a stake in hundreds of top companies with a single purchase, and they’re also known for being fairly affordable. Most people only pay pennies to a few dollars a year to own one.

You can also build your own stock portfolio, but you should aim for at least 25 different companies across multiple sectors. This will help reduce the damage your portfolio takes if one of your stocks goes down.

If you are currently unable to invest or are unable to invest as much as you would like, see if there are steps you can take to earn more income. This could mean working overtime, starting a part-time job, or finding a better-paying job elsewhere. The earlier you start, the longer your investments will have to grow.