​​How to Turn $500 a Month Into a $1 Million Nest Egg

You don't need to win the lottery or inherit a fortune to build a $1 million nest egg. Indeed many of today's millionaires got there by consistently investing a portion of their income and letting that money work for them. Over time, those monthly contributions really can add up to millions.

If you've got 35 years ahead of you, millionaire status is very much within your reach. Time aside, there are two big questions to consider: What type of brokerage account will you use? And what types of investments will you put in it?

1. Choose your investment account

The government wants to help you build wealth for your old age. There are several different tax-advantaged accounts that can boost your retirement nest egg. These include workplace plans, individual retirement accounts (IRAs), and others.

Here are some tax-advantaged accounts to investigate:

• Traditional IRAs: The attraction of a traditional IRA is that you can use it to reduce your taxable income right now. Your contributions are pre-tax; you pay tax on the money you withdraw in retirement.
• Roth IRAs: If you contribute after-tax dollars to your Roth IRA, your investments can grow and you can make tax-free withdrawals later in life. There are pros and cons to both types of IRA, but a lot depends on what tax bracket you are in now and what tax bracket you expect to be in when you retire.
• 401(k)s: This is a workplace retirement plan. In addition to tax benefits, a perk of 401(k)s is that some employers will match a percentage of your contributions, up to certain limits. If this happens in your company, try to contribute enough to max out the employer match.
• HSAs: A health savings account (HSA) can supercharge your contributions. You get the best of a Roth IRA and a traditional IRA in one go. Your contributions can reduce your tax bill today, the money can grow tax free, and you can make tax-free withdrawals as long as you use them for medical expenses. The catch? You need to have a high deductible health plan to open an HSA. Plus, if you want to use the money for non-medical expenses after you hit 65, you'll pay tax on your withdrawals.

In terms of IRAs, it's important to consider contribution limits. For 2024, the maximum you can contribute to your IRAs is $7,000 ($8,000 if you're over 50). If you're investing $500 a month, that comes to $6,000 a year, which would be below the threshold.

• For illustration purposes, let's say you put $6,000 into a traditional IRA. If you're in the 24% tax bracket, that could reduce your tax bill by $1,440.

There are several different tax-advantaged accounts, so it is important to think about what combination works best for you. And don't assume you need to work a nine-to-five job. There are IRAs and 401(k)s designed for freelancers and small business owners, too.

2. Choose your investments

Part two of building your $1 million nest egg is putting your money to work. The idea is to build up a balanced portfolio with a level of risk that you're comfortable with and that works for your financial goals.

It's important to keep a long-term mindset when you invest, particularly if you're using some of the tax-advantaged accounts above, as there are restrictions about when you can access your funds. As such, make sure you have a solid emergency fund that will see you through any of life's curveballs.

Here are two investments that could help you become a millionaire:

• Index funds and exchange-traded funds (ETFs): ETFs are baskets of securities that follow a particular theme, such as a type of asset or industry. Index funds track specific indexes such as the S&P 500. Both are a great way to get exposure to a mix of assets without having to pick individual stocks.
• Real estate investment trusts (REITs): REITs are companies that own and manage a mix of properties. REITs have to pay 90% of their taxable income in dividends, which can be a powerful source of passive income. They can be a great way to get exposure to real estate without having to own property.

The advantage to both options above is that you don't need to have a ton of investment knowledge. Some people enjoy researching and picking individual stocks. That may make sense for them and could generate higher returns. But it also carries more risk and won't suit investors who want to invest passively.

Here's how you can turn $500 a month into $1 million

Let's say you put $500 a month into an S&P 500 index fund within a traditional IRA. Historically, the S&P 500 has generated annual average returns of over 8%, though there are years when it gained more and years where it lost value. Let's assume a return of 8% and look at how that monthly contribution will compound.

If you invest the extra money you get from tax breaks, you could hit the million dollar mark even sooner. Experiment with compound interest calculators and learn about the pros and cons of different tax-advantaged accounts. If you're not sure of the best route, a financial adviser might be able to help.