Mailbag: The Most Effective Way to Build Wealth

Shah Gilani|November 22, 2024

Just the other day I got an email from a reader, who asked me pointedly…

“Why should I invest in the stock market when I don’t have much to spare?”

That may be the best question I’ve ever been asked… and I wanted to share my answer with all of you.

Investing in the stock market can feel impossible when you’re living paycheck to paycheck… or dealing with tight finances… or have nonexistent savings.

But the truth is, anyone, regardless of their financial standing, can benefit from investing, even if they’re starting with just $20… or even $1.

With the growth of online brokerage platforms, investment apps, and, more importantly, ETFs, it’s easier than ever to dive into the market and begin building wealth… building a life you thought you could only dream of.

The fact is… investing in the stock market is the best way to create wealth.

Let Us Count the Ways

When you invest, you’re not just putting money into a stock and letting it sit idle. Over time, that money can grow thanks to compounding.

Compounding is what happens when you earn returns on not just your original investment, but also on accumulated returns you receive over time. The more you invest, the more you can earn, and even small amounts can snowball into bigger sums as they generate more returns.

Investing with small sums is easier than ever. Most brokerage firms today allow you to start investing with as little as $1 or $5, with low or no commissions.

There’s no need to wait until you have thousands of dollars saved up. You can start with as little as you’re comfortable with.

And – borrowing from an old adage – there’s no better time to start than today. Even if you’re only investing small amounts, starting now can make a significant difference. The earlier you start investing, the more time your money has to grow.

Time is one of the greatest assets in investing, and the more time your investments have to grow, the better.

The Biggest Fear

“But isn’t the stock market risky? What if I lose my money?”

This is one of the biggest fears people have about investing in the stock market. It’s valid, for sure. Stock prices and the market do fluctuate, and there’s always some risk involved.

But over the long run, the stock market always goes up. It’s just a crazy fact of life. Know that staying invested for the long haul and avoiding emotional reactions to daily market changes, you’ll see your investments grow.

You can mitigate risk by diversifying your investments. Instead of putting all your money into one stock, you can and should buy “the market.”

You can do that by investing in exchange-traded funds (ETFs).

Start with low-cost index funds or ETFs. These funds track the performance of a market index, like the S&P 500, and have low fees. They provide broad exposure to lots of companies, making them less volatile than individual stocks.

What a Difference

While $20 may seem like a small amount, it can have a much greater impact than you think.

By regularly investing $20 every month, for example, you’re using a strategy called dollar-cost averaging. This means you invest a fixed amount of money at regular intervals, regardless of market conditions.

This strategy allows you to buy more shares when prices are low and fewer shares when prices are high, which can reduce the impact of market volatility over time.

Even if you start with just $20, the power of compounding can help it grow. If you invest $20 every month for a year, that’s $240. If your investment grows by an average of 7% annually, by the end of the year, you would have earned about $16. Over the next few years, those small earnings add up and accelerate.

Consistency is key in investing. Even if you can only spare $20 each month, making regular contributions will build up over time. Many successful investors started with small amounts and became wealthy through consistent investing. It’s not about how much you start with… it’s about staying consistent and giving your investments time to grow.

Whether you have $20 or $20,000, investing in the stock market is one of the most effective ways to build wealth.

The key is to start, no matter how small your initial investment.

Time, compound growth, and consistency are your allies, and even small amounts invested regularly can grow into significant sums over time.

So, don’t let a lack of money hold you back. Start today, and let the power of investing work for you – one dollar at a time.