In my mind, I’ve already spent the £42m EuroMillions jackpot many times over. I’ve paid off my mortgage, bought my mum and dad their house outright and I’ve got a pristine 1955 Mercedes Gullwing on the driveway that I’m far too scared to ever take out.
We all dream of life-changing money. That moment you check your bank account and instead of reading minus numbers, there are more noughts than will fit on one screen.
But I know in my heart that £20 or £30 on twice-weekly lottery tickets is not only a total waste of time, it’s money I could be using for the entirely realistic prospect of making myself richer.
You see, £3,000 a year to invest might sound hard to scrape up from nowhere, but it’s only £57.50 a week. With this, a little research, time, and (crucially) compound interest, you’ll be well on your way to a richer future.
Compound your way to £1m
If we reinvest any dividends we get from the companies we buy shares from, that means our gains are compounded over a number of years: effectively, the gains speed up the longer we can leave our money in play.
That’s true whether we invest in stable, dividend-paying FTSE 100 stocks that build up over time, or we try something with a little more risk-reward and go for FTSE 250 company shares that have better growth prospects for capital appreciation.
The interest, or dividends in our case, is added to our principal amount every year.
That means our total balance doesn’t just head up in a linear fashion, it actually grows at an increasing rate every year, whether we pay it any attention or none at all.
Simple strategies like this give you the opportunity to accelerate your wealth with minimal effort.
Legal, general and sound
Take for example one of my favourite long-term buy-and-holds: FTSE 100 life insurance giant Legal & General (LSE:LGEN). A 40-year-old investing £3,000 a year in LGEN shares at current prices would get around 1,000 shares. In 2018, LGEN paid a 16.42p dividend per share just to hold its stock.
Bosses have improved that dividend by an average of 1.3p per share every year since 2014.
At the end of year one, a 40-year-old would add £164.20 (1,000 x 16.25p) to his or her principal by doing nothing at all.
If the individual reinvested that dividend payment in a Stocks and Shares ISA, at the start of year two it would mean £3,164.20-worth, or around 1,039 shares. At the end of the next 12 months, adding another £3,000 to the LGEN stockpile would give our investor another 1,000 shares on top. With the additional 1.3p average dividend per share rise, those 2,039 shares would bring in £357.84 (2,039 x 17.55p).
From £3,000 to £6,357.84 in two years. Project 10 years into the future, add in a few growth shares and a FTSE 100 index tracker to the portfolio and you can see how by his or her 50th birthday, simple, repeatable, ever-increasing gains are not only perfectly possible but actually quite likely.
If the investor had put that £3,000 into EuroMillions tickets, the most he or she would have is two disappointing days a week and 1,200 pieces of crumpled up paper.
Life-changing money doesn’t appear in an instant. But you can make you and your family happier, smarter and richer if you start investing today.
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Tom owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.