I will never forget the struggle of reaching the point of saving $500 a month. As a student with limited time to work, $500 a month was a huge deal for me. But then I asked myself, is saving $500 a month good? Should you strive to save even more?
Yes, saving $500 per month is good. At an assumed 7% annual return, investing five hundred dollars per month for 37 years grows to roughly $1,000,000.
First of all, if you're currently saving $500 a month - congratulations! You're better than most with your money.
Suggested reading: How Much Should YOU Save Per Year?
In the rest of this article, I'll try to explain where $500 a month will get you, and what might happen to you if you stick with it for years.
I'll also give you a few different strategies as to how I would put those $500's to work (investing). Let's get into it!
Disclaimer: None of this is financial advice. I'm not a financial advisor, and all of this stuff is just informational and my opinion. Also, keep in mind that extrapolation is speculative by nature.
Will Saving $500 Per Month Make You Rich?
This depends on a few factors: Your time horizon and what "rich" means...'
Let's define "rich" as having a $1,000,000 net worth and a time horizon of a few decades. By doing some good ol' math we can calculate the expected outcome:
First of all, I assume you're saving your money in a passive index fund. Basically, saving is equal to investing in the rest of the text. I assume index fund because it's the best way to invest for "retail" investors like you and me. (source)
Given a 7% annual return on our money (from saving in a passive index fund) the numbers turn out like this:
Balance is the total amount of money you have, the principal is what you've out in, interest is the gains from investing.
We see that saving $500 per month turns into $1,000,000 in 37 years, as shown by the red lines.
Another thing to notice is that when you're a millionaire, the interest (blue line) is over $60K a year.
That means you're making a passive income of over $60K a year from your invested money. That's the power of investing - making even more money because you've made a bunch of money!
S_uggested reading: Is Saving $300 Per Month Good?_
Saving $500 per month, with a $50,000 starting point:
What if you already have some money saved up, and wonder where you'll be in 40 years if you continue saving $500 per month?
Let's run the numbers again, with an initial investment of $50,000 and a continued $500 per month investment over 40 years:
Balance is the total amount of money you have, the principal is what you've out in, interest is the gains from investing.
Results from saving $500 a month with a $50K starting point:
In 21 years you'll have a balance of $500K
You'll be a millionare after 31 years
In 36 years you'll have 1.5 million bucks
in 40 years you'll have two million bucks.
After 35 years, you'll have a passive income from your portfolio of over $100,000 per year.
Notice that the $50K starting point saves us six years. Without it, you'll be a millionaire after 37 years, but with the initial investment of $50K, it "only" takes 31 years.
Suggested reading: Is Saving $100 Per Month Good?
Is It Possible To Save $500 Per Month?
A lot of people I talk to think saving $500 per month is unrealistic.
"Five hundred bucks just way too much to put away every single month!"
"Sure, every once in a while I'm able to do it, but not consistently over many years!"
However, this is not the case. It's highly possible to save $500 per month. It's actually not that hard to achieve if you make the right moves.
I'll now give you a few guidelines and principles to follow that'll help you reach $500/month.
If you want a complete guide on saving more money, check out this article instead: The 4 Steps To Save A Lot Of Money Fast
What you need to do in order to make saving five hundred dollars a month possible:
Cut down your housing expenses. Housing is by far the biggest expense for most people. If you can cut down on this one, you'll be able to save a lot more money every month. For example, if you spend $1500 per month on housing, but you're able to cut that down by 33%, you've got $500 per month already!
Cut down on commute related expenses. This is often the next biggest expense people have. If you can cut this one down, you're left with a big chunk of money to save every month.
Pro tip: Move closer to work, in a cheaper house/apartment. This cuts down on your housing expenses and makes getting to work cheaper and faster. It saves you both money and time, making it possible to save $500 a month easily!
Most people think that it's about cutting down on the "small stuff" like the Netflix subscription or the occasional Starbucks coffee. This couldn't be further from the truth...
Small things have a small impact. Big things have a big impact!
If you're able to cut down on the big things like housing expenses and commuting expenses, you'll be saving $500 a month in no time. The best part is that you can keep spending money on small luxuries like Netflix and Starbucks.
Suggested reading: Is Saving $1000 Per Month Good?
The Best Way To Save $500 Per Month (Investing):
Keeping long-term savings entirely in a bank account is a poor wealth-building strategy. After building a safety net, I prefer investing the money intended for long-term growth.
The reason is that inflation decreases the value of your money every single year but 2-5% (exponentially).
When inflation runs above the account's interest rate, the cash loses purchasing power.
Money in a bank account is like a melting block of ice...
My approach is to put long-term money to work so it has a chance to grow faster than inflation.
"Sure, but how the heck should I invest it? I know nothing about investing!"
That's ok, John Snow! Here's what you need to know to get started:
The bread and butter of your investing strategy should in most cases be passive index funds. This is the easiest, and often best, strategy for the average guy/gal.
In the examples above, where saving $500 a month turned into millions, the money was invested in a passive index fund.
What you need to do is to set up an automatic savings plan. As soon as you get your paycheck, the bank should take $500 of that money and invest it in a passive index fund, without you having to lift a finger.
You should NOT wait until the end of the month to save "what's left". You should save at the beginning of the month and spend what's left. You need to "pay yourself first"!
Ways to make higher returns when saving $500 a month:
Most people saving $500 per month should stick to investing in passive index funds, as they are easy to automate, carry low risk, and offer high returns.
However, some of us are hungry for more than 7% returns...
Personally, I'm deeply invested in the cryptocurrency market. In fact, this website started out as a pure cryptocurrency blog. It has now expanded into more general topics around saving money, early retirement, and other stuff I'm passionate about.
If you, like me, are willing to take more risk in pursuit of returns above 7% per year, cryptocurrencies are one market to study.
Know this:
If you put in the work to understand this market, you will see that the range of outcomes is extreme. The volatility and risk are much higher than with traditional investments like passive index funds, and so is the potential upside.
For example, the cryptocurrency market surged in the first half of 2021, followed by a 50% crash in two weeks. I made strong returns during the rise, but the reversal was brutal.
That volatility creates unusual opportunities, but it can destroy capital just as quickly.
Let me give you a concrete example of how I personally would invest my saved $500 a month:
Investment strategy for saving $500 per month:
Let's assume I know next to nothing about cryptocurrencies and don't feel like spending 50 hours researching it. This is what I would do in that case:
Save $325 in a passive index fund
Save $125 in Bitcoin
Save $50 in Ethereum
With the return assumptions used in this historical example, saving 500 bucks a month for 20 years would look like this:
Under these assumptions, the portfolio would grow beyond 1 million USD after 21 years.
The returns assumed in this example are as follows:
Passive Index fund: 7% per year
Bitcoin: 20% per year
Ethereum: 30% per year
These were illustrative assumptions used in this historical chart, not forecasts.
Conclusion: Yes, Saving $500/month Is Good
Saving five hundred dollars per month will eventually make you a millionaire if the money is invested properly, and the time frame is in the decades. With a seven percent return from index funds, your portfolio will reach $1,000,000 in 37 years.
Although some people find it hard, it is far from unrealistic to save $500 a month - even for low-income wage earners. The key is to cut down on housing and commuting expenses, not to cut out the small stuff like Netflix and Starbucks.