This Is the Second-Best Strategy to Being Rich, According to Your Rich BFF Vivian Tu

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The No. 1 strategy isn’t an option for most people, but No. 2 is. 

Former Wall Street trader Vivian Tu often shares wealth-building tips on her social media channel, Your Rich BFF. Recently, she revealed what she believes is the second-best strategy to being rich.

Wait, why aren’t we focusing on the best strategy? Because Tu says that’s having rich parents, and it’s hard to argue with her there. Getting rich is a whole lot easier when Mom and Dad are loaded. Fortunately, the second-best strategy is a more widely accessible approach.

The second-best strategy to being rich

According to Tu, the second-best strategy to getting rich is being young and investing. Specifically, she recommends investing in the S&P 500. That’s an index that tracks the 500 largest publicly traded companies on U.S. stock exchanges, and it returns about 10% per year on average.

When you’re young, time is your biggest asset as an investor. Starting at a young age means you’ll be able to invest more and that your money will have more time to grow.

The example that Tu uses is investing $500 per month in a Roth IRA, a type of retirement account where you don’t need to pay taxes on withdrawals. If you start doing that at 17 and earn a 10% annual return, you’ll have over $3.9 million you can withdraw tax-free by the time you’re 60. Most of that is compound interest, too. Your contributions will only make up $258,000.

Now, Tu’s example is probably on the ambitious side. Most people can’t save $500 per month, without fail, from 17 through all of adulthood. But let’s say you start at 25, instead. Maybe you’ve finished school and gotten your first well-paying job. At 60, you’ll have nearly $1.8 million. It’s much less, but it’s still a sizable amount, and you’ll only have contributed $210,000 of that. And if you keep working, you could contribute for another few years and make up some of that difference.

Why the S&P 500?

There are all kinds of investment options out there. Tu’s typical recommendation is an index fund that invests in the S&P 500. You can invest in one of these through retirement accounts or an individual brokerage account. Practically all the best stock brokers have this type of index fund available.

An S&P 500 index fund is definitely a good choice, especially for younger investors. Here’s why:

You get a diversified portfolio with a strong average return.Index funds have low fees.Since you aren’t picking stocks yourself, it makes investing quicker and easier.

Your portfolio will be stock-heavy if you just invest in the S&P 500, but that’s not an issue when you’re young. While stocks can be volatile, they also provide much greater returns than fixed-income investments, such as bonds. When you’re building wealth for decades down the road, it’s fine to go for the higher-growth option. You can always incorporate bonds when you get closer to retirement.

If you’re just looking for something simple and effective, an S&P 500 index fund fits the bill. It’s far from the only quality investment, though, so you can shop around if you want to see what else is out there. Some investors like target-date funds that are managed based on a specific retirement year. Others like to invest in a few different funds or build their portfolios themselves.

Being young helps, but it’s not a must

Tu’s advice is great if you’re a young adult. But what if you don’t have 40 years to go until retirement?

Investing still works and will get you much better returns than just keeping your money in a bank. Because you’re starting later, your money won’t have as much time to grow. You can still build wealth; you just likely won’t see the same type of massive returns as someone who invests for several decades.

Keep in mind that most investors wish they had started sooner, so you’re not alone here. None of us can go back in time and invest sooner, but starting today is better than starting tomorrow.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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