Time is money. Source: DeviantArt user Rexem.
Continue Reading Below
Everyone wants to be rich, but almost nobody gets rich overnight.
Warren Buffett made more than 80% of his wealth after he turned 50, and famed oil investor T. Boone Pickens' greatest wealth came after he turned 60.
The point? Instead of finding some get-rich-quick scheme, it's better to use the tried-and-true wealth-building method that works just as well today as it did half a century ago.
The power of time and money
The process I'm talking about is as simple as it gets. The catch is that it takes time to work -- years, in fact. But here's what investing $10 per day can do:
Totals based on actual annualized return of S&P 500 since 1904.
Continue Reading Below
Putting $10 per day into an individual retirement account over the course of 30 years adds up to $109,000 in contributions. Factor in the tax savings for this pre-tax deduction -- about 15% savings based on the median family income -- and that $109,000 would only reduce your take-home pay by $93,000.
The real magic is what happens to that $109,000 when you put it to work. Compound interest is the force that can drive your comparatively modest contributions to an ending balance topping $1 million. And as your savings grow over time, so does the power of that compounding:
*Out-of-pocket figure based on tax savings for 2012 median annual household income.
The tables above are based on the actual 10% annualized average return of the S&P 500 over the past 100 years -- a rate of return that would turn your meager $10 per day into more than $660,000 over the course of 30 years.
It gets even better: That $10 per day would really only be about $8.50 out of pocket, as contributions to your employer's retirement plan reduce your taxable income. That $1.50 may not look like much, but over 30 years, it's worth a whopping$16,000in your pocket.
But the chart shows $1.3 million...
Employer-matching funds are the pension of the 21st century. Unfortunately, millions of workers leave them on the table every year. Frankly, there's almost no excuse not to contribute at least enough to collect the full employer match available to you. According to a Department of Labor study, employers contributed more than $122billionto defined-contribution plans like 401(k)s in 2011, while employees contributed $185 billion.
Here's the rub: As many as 61 million Americans don't participate in an employer-sponsored retirement plan. If we filter out the roughly 26 million full-time employees who don't have access to a plan at work, we have about 17 million full-time workers not participating in a plan that they have access to.
If you're in that boat, you're probably leaving money on the table, because that's where the other half of the returns above comes from. Factor in your employer's matching contributions, and they could help build a life-changing $1 million-plus nest egg in retirement. The secret is simply investing in great businessesfor long periods of time.
Yes, there is some risk to investing in stocks, but that's where diversification and a long-term strategy will pay off. Warren Buffett put it best:
In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
Keeping a long-term view and focusing on the process of saving
In the six years since the Dow reached 11,497, it has gone on to gain another 53%, even after going through the greatest economic crisis the world has seen since the Great Depression. It really is all about a long-term focus.
The people who continue to put money in their accounts every month -- in good markets and bad ones -- get the best returns. It's when peopl try to outsmart the market, jumping in and out in an effort to time market cycles, that they lose money in stocks. Putting a little money to work on a regular basis, for as many years as you can, works better than anything else.
Factor in the power of tax-friendly accounts and employer matching funds, and you can reach your retirement goals, too.
The article How to Turn $10 a Day Into $1.3 Million originally appeared on Fool.com.
Jason Hall owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.