This 1 Simple ETF Could Turn $500 a Month Into $500,000

Jake Lerch, The Motley Fool

Sat, Sep 21, 2024, 5:26 AM 4 min read

Getting started

First things first: In order to grow a nest egg, you must save. So, let's imagine a hypothetical investor who has it within their means to save $500 per month.

Next, let's imagine a base case where our hypothetical investor poured this $500 per month into a five-year certificate of deposit (CD) that paid 5% annually. Furthermore, let's also assume that our hypothetical investor could roll their nest egg every five years into a new CD with the same 5% annual rate.

Time Period	Value of Nest Egg
Year 5	$33,907
Year 10	$77,182
Year 20	$202,902
Year 25	$292,867

Calculations by author.

As you can see, after five years, our investor's nest egg will have grown to nearly $34,000. In 10 years, it would be worth more than $77,000. And in 25 years, their nest egg will have grown to almost $300,000.

Not bad. But the stock market can put those 5% annual returns to shame. Here's how.

How to use a basic index fund to grow a nest egg

Let's start by identifying a simple, well-known index exchange-traded fund. I like the Invesco QQQ Trust (NASDAQ: QQQ). It's chock-full of technology stocks like Microsoft, Apple and Nvidia. It also offers some diversification. It has holdings in PepsiCo, Amgen, Costco Wholesale, Starbucks, and CSX, to name just a few.

At any rate, what's of particular interest is the fund's annual returns. Because over the last 10 years, this fund has generated a compound annual growth rate (CAGR) of 17.2%.

Granted, the last 10 years have been excellent for the stock market -- and for tech stocks in particular. So, if we extend the performance window back to 1999, giving us 25 years of data, the fund's CAGR slips to 9.1%.

To be conservative, let's use this lower CAGR of 9.1% and see how 25 years of investing could help our hypothetical investor turn $500 into $500,000.

How stock market returns measure up

By applying a 9.1% CAGR to the nest egg, we begin to see how a seemingly small change in annual return can truly ramp up investment returns.

Time Period	Value of Nest Egg (9.1% CAGR)	Value of Nest Egg (5% CAGR)
Year 5	$37,457	$33,907
Year 10	$95,354	$77,182
Year 20	$323,171	$202,902
Year 25	$536,981	$292,867

Calculations by author.

At first, the difference is small -- almost imperceptible. Five years in, the investment nest egg has only generated about $3,500 more.

However, after 10 years, the difference is more apparent. By then, there is an almost $20,000 difference between the two nest eggs.

By year 20, there's no mistaking the point -- a larger annual return changes everything. After 25 years, the investment nest egg is 83% larger than the money market nest egg.

In summary, the basic index fund outperformed CDs by nearly $250,000. But that's not all. Remember, in this scenario, we've used a very conservative growth rate for the index (9.2%). We've also used a very optimistic interest rate for CDs (5%). Over many periods of time, the stock market has outperformed CDs by an even greater margin.

That's why investing in a simple index-tracking ETF is one of the best ways to grow wealth. And it's one way to turn $500 a month into $500,000.

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Jake Lerch has positions in Invesco QQQ Trust and Nvidia. The Motley Fool has positions in and recommends Apple, Costco Wholesale, Microsoft, Nvidia, and Starbucks. The Motley Fool recommends Amgen and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

This 1 Simple ETF Could Turn $500 a Month Into $500,000 was originally published by The Motley Fool

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