This Vanguard ETF Could Turn $250 Monthly Into $500,000

I find it helpful to set financial goals and milestones, regardless of how seemingly small or large they may be. It gives me a “purpose” behind good financial management and provides an extra reason to be disciplined in difficult situations.

One common milestone along the way to a million-dollar portfolio is the $500,000 mark. And you don’t have to invest a lump sum to get there, either. All you have to do is take advantage of compounding and make consistent investments of modest amounts.

If you’re looking to turn $250 monthly into $500,000, the Vanguard S&P 500 ETF (VOO -0.30%) could be your ticket.

You can’t go wrong with this ETF’s historical returns

Past results don’t guarantee future performance, but they’re worth looking at to get a sense of potential. Since the exchange-traded fund (ETF) was created in September 2010, it has produced impressive returns.

VOO data by YCharts.

Achieving 12% to 14% annual returns over the long haul would be outstanding, but let’s take a more conservative approach in our example. From the ETF’s inception through the bottom of the latest bear market in 2022, it averaged around 10.6% annual returns, so we’ll go with that figure since this period is long enough to represent the market’s return over complete economic cycles.

Investing $250 monthly and averaging 10.6% annual returns could get you to $500,000 in just over 29 years, accounting for the ETF’s 0.03% expense ratio.

It won’t happen overnight, but it’s very attainable if you’re investing throughout your career (which you should be if you can).

Short on time? Increase your contributions.

A monthly $250 is a modest amount to invest to reach $500,000, but time and compounding make it possible. However, for those who may be a bit older and don’t have 29 to 30 years to hit the mark, increasing your monthly contributions by a slight amount can still get the job done.

Here’s a look at how long it would take you to hit $500,000 by investing different monthly amounts and averaging 10.6% annual returns.

Calculations by author. Years rounded to the nearest whole year. Calculations include the ETF’s 0.03% expense ratio.

What may seem like a small increase in monthly investments on paper can shave years off the time to reach $500,000.

What makes this ETF a good investment?

Historical returns aside, investing in an S&P 500 ETF is one of the smarter decisions an investor can make. It’s a trifecta: diversified, led by blue chip companies, and low-cost.

The S&P 500 tracks the largest 500 U.S. companies on the market, so this ETF constitutes some of the world’s most successful and promising companies. For perspective, take a look at its top 10 holdings (as of Sept. 30):

• Apple: 7.25% of the ETF
• Microsoft: 6.55%
• Nvidia: 6.11%
• Amazon: 3.56%
• Meta Platforms: 2.56%
• Alphabet (Class A): 1.99%
• Berkshire Hathaway (Class B): 1.73%
• Alphabet (Class C): 1.64%
• Broadcom: 1.64%
• Tesla: 1.49%

When investing for decades, you want to ensure you’re investing in companies that are well positioned for longevity, and that’s what you get with this ETF.

There will inevitably be ups and downs along the way, but in the long term, an S&P 500 ETF has proven to be a solid investment you can lean on.

Let compound earnings do the heavy lifting for you

Regardless of your specific investments, investors should never lose sight of the power of compounding. In investing, the compounding effect happens when the money you earn by investing begins to earn money itself.

Imagine you invest $1,000 and earn a return of 10%, or $100. If you reinvest that $100 and earn 10% on that amount as well, you will now be earning 10% on your original $1,000 investment plus the $100 you previously earned. It’s a lucrative cycle that gets more powerful with time.

Aside from having a lump sum to invest at once, taking advantage of the compounding effect is the most surefire way to build wealth in the stock market and get you to the $500,000 mark. All it takes is time and consistency.