Saving up money is never easy. With the skyrocketing costs of living and draconian tax rates in Canada, it’s little wonder that most people are struggling to save. And 30% of Canadians have no retirement savings at all and another 19% have less than $50,000 saved up, according to research published by the Canadian Imperial Bank of Commerce.
Meanwhile, less than 4% of Canadians are millionaires. For most people, reaching this coveted seven-figure club is a mere dream. Nevertheless, here are three ways a disciplined and savvy investors can turn very little capital (say, $10,000) into a million within their lifetime.
The quick way
The quickest (and perhaps riskiest) way to generate a 100% return is to bet on stocks that are focused on aggressive expansion. Some companies sacrifice their profits and shareholder dividends to reinvest every penny they earn into long-term growth.
If the growth rate is anywhere close to 20% compounded annually, an investor could turn $10,000 into $1 million within just 25 years, which means that even an investor in her 50s could retire as a millionaire with the right growth stocks.
Consider this: an over 20% growth isn’t as implausible as it might seem. Shopify’s stock has delivered a 63.2% compounded annual growth rate since going public in 2015. Even non-tech companies with reasonable profits and dividends have surpassed the 20% threshold. Grocery giant Alimentation Couche-Tard has delivered 30% CAGR over the past 10 years, for example.
In other words, hyper-growth companies are practical options for most investors.
The slow way
Of course, not every investor is interested in picking individual stocks or facing volatility. A low cost index fund is a better alternative for patient investors looking for a more passive approach.
The iShares S&P/TSX 60 Index, for example, isn’t very expensive and tracks the performance of the country’s 60 largest corporations.
The expected return for a passive portfolio could be between 5% and 7% compounded annually. However, even the upper end of that estimate won’t be enough to deliver a 100 times return within a reasonable time frame. To boost performance, investors may have to add at least $2,000 in additional savings every year.
With $10,000 in capital and $2,000 in extra annual savings, an investor could reach her $1 million goal within 49 years. Unsurprisingly, this slow-burn approach is only recommended for young investors with plenty of patience and discipline.
The practical approach
Now that we’ve discussed the quickest and the safest approaches, here’s a look at the most practical option for most investors.
The best way for an investor to become a millionaire over time is to simply save as much as possible every year and adopt a passive approach to investments. For example, by simply maximizing the Tax-Free Savings Account (TFSA) contribution limit every year and investing in low cost index funds, an investor could accelerate wealth creation drastically.
Starting off with just $10,000 in capital and adding $6,000 every year into the TSX 60 index fund through a TFSA could help you reach the $1 million goal within 37 years. For most investors, this is the most practical and time-tested way to become a millionaire.
Bottom line
There are plenty of ways to generate wealth and become a millionaire, even if you don’t have much capital today. However, any wealth-creation strategy will need either an appetite for risk or plenty of patience and discipline.
