Investing in the stock market is a great way to grow wealth because it allows you to increase your income with no additional work on your part. It is like you’re starting a business, but without needing to spend all of the long hours, deal with hiring employees, or need to leave the security of a regular paycheck. It is not a fast process, however, unless you are wealthy to start with since the amount you increase your income is proportional to the amount you invest.
If you’re not starting with a multi-million dollar portfolio, you need to rely on the power of compounding to build wealth. This process works slowly, but will get you there given enough time. To see the power, try putting a penny on the first square of a chess board, then doubling it every square. For the first several squares you’ll be placing only pennies, but by the time you reach the last square, you’ll be putting more than a million dollars down.
To grow wealthy in the stock market, you must free up some of your cash flow to allow you to start making regular investments. This can seem difficult, but if you budget and create a cash flow plan, it can be done over a period of a few years by controlling your spending and using opportunities like raises to direct some money towards investments. To learn how to setup a cash flow plan and great tips on little the ways you can find money to invest, check out FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early
The easiest way to invest is to setup a mutual fund account, which will require a few thousand dollars to start, but then will allow you to send in whatever you can. Start with a large-cap index fund like an S&P 500 fund. A good guide for mutual fund investing comes from the purveyor of index funds,Jeffery Bogle, called The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
Once you have maybe $10,000 built up, which may take a few years if you’re sending in only a couple of hundred dollars per month, sell half, pay taxes on any gains you have had, and buy shares of a small- cap index fund. After that, send in additional contributions to whichever fund you have less invested in at a time. Keep this up, and keep reinvesting any gains you have, and you’ll grow wealthy in 20 to 30 years, depending on how much you contribute.
This is just a summary. For more details, check out this article. You should also start reading books on investing, focusing on those with a long term investing approach like the Bogleheads’ Guide to Investing, since this is the strategy that actually works.
