If you’re a young investor looking to start a retirement fund, first off, good for you! While there are certainly many young investors that have savings, there aren’t as many worried about retirement just yet.
So, today, let’s see if you can put those savings to work. Start investing just $500 a month, and you could turn that into $500,000.
Start off with a budget
It sucks to think about but if you want to plan for retirement and any other financial goal or emergency fund, you need a budget. Luckily, there are many budgeting apps out there that can help you. This includes through Canadian banks that have access to your accounts.
You simply put in the information requested by the application or find pre-made spreadsheets online. It will ask you line by line what your income is along with your spending. These will be broken down by essentials like food and rent and non-essentials like take out and miscellaneous purchases.
Then see what you can get away with each and every month. If you need to pay off debt, this can also be a great way to get on top of debt before you start investing. Then put that cash for debt and savings aside each month through automated contributions.
Let’s say it’s $500
If you start putting aside $500 per month, that already is amazing. That comes to $6,000 per year, which is around the contribution room provided by the TFSA on an annual basis. You can therefore continue to keep up with payments, while not worrying about going overboard and getting dinged by the Canada Revenue Agency (CRA).
Now, if you do this starting at 25 years old, and do that for the next 25 years, that alone would create $150,000 in savings! But what if we could make that even more?
That’s why I would recommend an exchange-traded fund (ETF) like iShares S&P/TSX 60 Index ETF (TSX:XIU). XIU follows the top 60 stocks on the TSX today, managed by fund managers to constantly change up your investment. That means it’s like having a top portfolio, without doing the heavy lifting.
How to create $500,000
If you decide to invest in XIU ETF, let’s see how long it would take to reach that $500,000 mark. You’ll need to check on the compound annual growth rate (CAGR) for both the stock and dividend over the last decade as well as reinvest that dividend income. The CAGR for this ETF is 5.84% in share price and 10% for its dividend CAGR. So, let’s put that cash to work.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Annual Contribution | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $27 | 222 | $1.03 | $228.66 | $6,222.66 | $6,000 | $28.58 | 217.94 | 439.94 | $12,451.39 |
| 2 | $28.58 | 439.94 | $1.13 | $497.13 | 6497.095 | $6,000 | $30.25 | 214.78 | 654.72 | $19,491.29 |
| 3 | $30.25 | 654.72 | $1.25 | $818.40 | $20,309.69 | $6,000 | $32.01 | 213 | 867.73 | $27,127.82 |
| 4 | $32.01 | 867.73 | $1.37 | $1,188.79 | $28,316.61 | $6,000 | $33.88 | 212.18 | 1079.91 | $35,505.27 |
| 5 | $33.88 | 1079.91 | $1.51 | $1,630.66 | $37,135.93 | $6,000 | $35.86 | 212.79 | 1292.70 | $44,766.58 |
| 6 | $35.86 | 1292.70 | $1.66 | $2,145.88 | $46,912.46 | $6,000 | $37.95 | 214.64 | 1507.35 | $55,058.05 |
| 7 | $37.95 | 1507.35 | $1.82 | $2,743.38 | $57,801.43 | $6,000 | $40.17 | 217.66 | 1725 | $66,544.83 |
| 8 | $40.17 | 1725 | $2.01 | $3,467.25 | $70,012.08 | $6,000 | $42.52 | 222.65 | 1947.65 | $79,479.16 |
| 9 | $42.52 | 1947.65 | $2.21 | $4,304.31 | $83,783.47 | $6,000 | $45.00 | 228.98 | 2176.63 | $94,087.57 |
| 10 | $45.00 | 2176.63 | $2.43 | $5,289.21 | $99,376.78 | $6,000 | $47.63 | 237.02 | 2413.63 | $110,666.04 |
| 11 | $47.63 | 2413.63 | $2.67 | $6,444.39 | $117,110.43 | $6,000 | $52.39 | 237.53 | 2651.16 | $129,554.63 |
| 12 | $52.39 | 2651.16 | $2.94 | $7,794.41 | $137,349.04 | $6,000 | $55.45 | 248.77 | 2899.93 | $151,143.34 |
| 13 | $55.45 | 2899.93 | $3.23 | $9,366.77 | $160,510.11 | $6,000 | $58.69 | 261.83 | 3161.76 | $175,876.91 |
| 14 | $58.69 | 3161.76 | $3.56 | $11,255.87 | $187,132.78 | $6,000 | $62.12 | 277.78 | 3439.54 | $204,388.47 |
| 15 | $62.12 | 3439.54 | $3.91 | $13,448.60 | $217,837.07 | $6,000 | $65.74 | 295.84 | 3735.38 | $237,285.59 |
| 16 | $65.74 | 3735.38 | $4.30 | $16,062.13 | $253,347.72 | $6,000 | $69.58 | 317.07 | 4052.46 | $275,409.45 |
| 17 | $69.58 | 4052.46 | $4.73 | $19,168.14 | $294,577.59 | $6,000 | $73.65 | 341.72 | 4394.18 | $319,745.27 |
| 18 | $73.65 | 4394.18 | $5.21 | $22,893.68 | $342,638.95 | $6,000 | $77.95 | 370.67 | 4764.84 | $371,532.68 |
| 19 | $77.95 | 4764.84 | $5.73 | $27,302.53 | $398,835.21 | $6,000 | $82.50 | 403.67 | 5168.51 | $432,137.99 |
| 20 | $82.50 | 5168.51 | $6.30 | $32,561.61 | $464,699.60 | $6,000 | $87.32 | 441.61 | 5610.12 | $503,260.99 |
After 20 years, you’ll have $503,260.99 in your portfolio! That will also come with $32,561.61 in annual passive income. Freedom 50, here you come!
