The average American saves nearly $1,000 a month, according to Nerdwallet's 2023 Consumer Savings Report. However, a recent survey by CNBC found that only 16% of Americans had socked away at least $1 million for retirement.
That gap isn't too surprising, since it would take over 83 years to accumulate $1 million in savings by putting away $1,000 a month. Even if you put $1,000 a month into a savings account with an average annual yield of 3%, it would take 43 years.
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So instead of putting your cash in a standard savings account, you should invest in the Vanguard S&P 500 ETF (NYSEMKT: VOO), a simple exchange-traded fund (ETF) that tracks the S&P 500. Let's see how this popular ETF could help you turn $1,000 a month into more than $1 million in just over two decades.
What does the Vanguard S&P 500 ETF track?
The S&P 500 is a stock market index that includes about 500 of the largest publicly traded U.S. companies. It's a capitalization-weighted index that holds larger positions in higher market cap companies and smaller positions in lower market cap companies.
The S&P 500's diversification makes it practically synonymous with the U.S. stock market, and many investors aspire to outperform the index over the long term. But over the past few decades, the vast majority of actively managed funds failed to beat the S&P 500.
That's why the late John Bogle, founder of The Vanguard Group, famously argued that it was smarter to simply invest in funds that tracked the S&P 500. To test out that claim, Vanguard launched the market's first index fund, which simply tracked the S&P 500 in 1976.
In 2010, Vanguard launched the ETF version, which can be traded actively throughout the day instead of once daily like an index fund. It passively invests in the S&P 500, and it only charges a low expense ratio of 0.03% because it doesn't need to be actively managed. That makes it a great option for investors who want to buy some stocks but don't have the time to follow multiple earnings reports and micromanage their portfolios.
So how can this ETF turn $1,000 into $1,000,000?
The S&P 500 has delivered an average annual gain of about 10% since its inception in 1957. For this long-term forecast, let's assume it can keep growing at that rate over the next few decades. If you invest $1,000 in the Vanguard S&P 500 ETF today, then consistently add $1,000 to that investment each month regardless of its trading price, it could take you around 23 years to save $1,000,000.
You would have only directly invested $277,000, but the magic of compound returns might give you an additional $805,000 in long-term gains. But you shouldn't expect the S&P 500 to consistently grow 10% every single year -- just look how bumpy that ride has been over the past three decades.
Source: YCharts
You probably would have been ecstatic when the S&P 500 soared 49% in 1997, 42% in 1999, and 39% in 2021. But you might have started to question your investment thesis when the index plunged 35% in 2002, 33% in 2008, and 13% in 2022.
Instead of fretting over those inevitable market swings, you should consistently invest $1,000 each month and simply let dollar-cost averaging smooth out your long-term returns. By firmly sticking to that plan, you could passively outperform a lot of professional investors and join the seven-figure club.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
