The Magic of Compound Interest: How to Become a Millionaire on an Average Salary
Most people have absolutely no idea how the stock market can actually make you rich. And to be completely honest with you, neither did I when I first started investing more than 20 years ago. But today, I want to share something that completely blew me away the first time I saw it.
๐ What If You Had Invested $10,000 in Apple in 1990?
If you invested $10,000 in Apple back in 1990, you would have more than $10 million today. And that's just one tiny example of how the stock market can turn an ordinary sum of money into a life-changing fortune.
The profits I've earned in the stock market over the last 20 years have completely transformed my life. I've been able to pay off all of my debts, including my credit cards, cars, and even my house. Stock market investing truly changed everything for me.
๐ค The Story of "Aaron" - An Average Worker
Why should you invest in the first place? Why should you care about the stock market? Let me trace the fictional net worth of a typical worker named "Aaron."
Aaron's Beginning
- 1981: Started his career
- Average US salary at the time: $26,000 per year
- Aaron was not good with money - he lived paycheck to paycheck
Aaron's One Good Financial Decision
In 1981, this brand new thing called a 401k was launched. Aaron decided to invest $400 per month from his average salary into the US stock market.
Aaron didn't follow the markets or investing at all. Whenever the paperwork came to show him how he was doing, he just threw it in the trash. He didn't understand it.
40 Years Later, How Much Is Aaron's 401k Worth?
Fast forward to 2020. After a 40-year working career, Aaron decides to retire. And his 401k value?
$3 million! ๐
๐งฎ The Math Doesn't Add Up?
If you're good with math, you might be puzzled:
$400/month ร 12 months ร 40 years = $192,000
Where did the extra money come from? How did $192,000 turn into $3 million?
The answer is investing in the stock market.
Looking at Aaron's 401k value chart over his 40-year career, there's an enormous gap between his actual contributions (the blue line) and the final value. This gap is the magic of compound interest.
๐ 200+ Years of US Stock Market History
You might wonder, "Was 1981 to 2020 just a lucky period? Did I cherry-pick that data?"
The answer is no. If you study US stock market history, you'll see that the market has generated an average real return after inflation of about 7% per year for more than 200 years.
Comparison with Inflation
Over the last 200 years, the US dollar lost more than 1% of its purchasing power every year. But investing in assets like gold, bonds, and stocks has not only preserved purchasing powerโit has grown it dramatically over time.
| Asset Type | 200-Year Average Real Return |
|---|---|
| Cash | -1% (loss of purchasing power) |
| Bonds | ~3.6% |
| Stocks | ~7% |
๐ The Relationship Between Corporate Profits and Stock Prices
To understand why the stock market goes up, we first need to understand how individual company values are determined.
The Lemonade Stand Example
Imagine a lemonade stand with annual sales of $10,000, expenses of $9,000, making $1,000 profit per year consistently.
- Bought for $1,000? โ P/E ratio of 1, 100% return (too good for the buyer)
- Bought for $100,000? โ P/E ratio of 100, 1% return (terrible for the buyer)
- Bought for $10,000? โ P/E ratio of 10, 10% return (fair deal)
What If Profits Grow?
If this stand's profits grow 20% annually:
- Year 1: $1,000 โ Value: $10,000
- Year 5: $2,074 โ Value: $20,740
When a company's profits grow, the business becomes more valuable, and the stock price goes up.
๐ Real-World Examples: Apple, Microsoft, and Google
Apple
- Launched iPhone in 2008, profits were $6.5 billion
- Then came iPad, Apple TV, Apple Watch, Apple Pay
- Profits consistently increased โ Stock price consistently rose
- $1,000 invested in 2008 โ About $42,700 by end of 2025
Microsoft
- Profits steadily increased over the last 40 years
- Stock price rose proportionally with profit growth
- Profits grew dramatically over the last 20 years
- Stock price reflected that profit growth
๐ 5 Reasons Why the Stock Market Goes Up
US corporate profits have consistently increased for decades. Here's why:
1๏ธโฃ Productivity Improvements
Companies get better each year at making more stuff with fewer inputs.
2๏ธโฃ Inflation
When businesses raise prices, their revenues and profits naturally increase.
3๏ธโฃ Innovation
New products and services create entirely new markets. Compare the global cell phone market in 1995 vs. 2025!
4๏ธโฃ Global Expansion
US companies sell products to consumers all around the world, growing their profits.
5๏ธโฃ Population Growth
More people in the world every year means more consumers, increasing demand for corporate products and services.
๐ฏ The 6 Steps Aaron Followed to Build $3 Million
Here's how Aaron built his $3 million retirement fund:
| Step | Aaron's Choice |
|---|---|
| 1. Investment Goal | Retirement |
| 2. Time Horizon | 10+ years (long-term) |
| 3. Asset Allocation | Aggressive (100% stocks) |
| 4. Account Type | 401k (tax-advantaged) |
| 5. Investment Strategy | Passive (market tracking) |
| 6. Investment Products | Index funds |
This is essentially the same advice Warren Buffett gave to his heirs:
"Put 10% of the cash in short-term bonds and 90% in a low-cost S&P 500 fund."
๐ก The Key Lesson
Aaron made one good financial decision and let his money run for his entire career. As a result, a simple few hundred dollars of monthly investment turned into $3 million in assets.
Harnessing the awesome power of the stock market to generate inflation-beating returns and compounding your wealth over yearsโthis is how true wealth is built.
โจ Final Thoughts
You now know more about the stock market than 95% of the global population. You can do this. You have all the tools you need.
Start today. Your future self will thank you. ๐