Here's how to invest $200 a month and generate $1 million by retirement

You don't need thousands of dollars to start investing or saving for retirement. Investing just a few hundred dollars a month in stocks can make a big difference in your retirement. Together, these changes, such as eating out less and going to the movies less often, can save your budget and make a big difference.

I'll show you how if you save and invest $200 a month for 30 years, you can earn more than $1 million by the time you retire.

Investing in growth funds can bring big returns

A big challenge for many people when it comes to investing is that it can be overwhelming and difficult to know which stocks to buy or not to buy. However, exchange-traded funds (ETFs) can greatly simplify that equation. With exposure to a diverse mix of stocks, you no longer have to worry about tracking individual stocks or determining whether you need to change something in your portfolio.

Instead, you can invest in funds that focus on long-term growth. One such example is Vanguard Growth ETF (VUG -0.19%).

This ETF has a low expense ratio of just 0.04%, which is important in the long run because it means fees won't make up a large portion of your overall returns. We focus on investing in large-cap U.S. stocks with significant growth opportunities. This isn't the only growth fund that might be suitable for your long-term investment strategy, but it's definitely one of the better funds to consider.

The Vanguard Growth ETF includes over 200 stocks, with its largest holdings being apple, microsoftand Amazon. About 55% of the fund's holdings are in tech stocks, with consumer discretionary stocks a distant second at 20%. Over the past 10 years, this fund has generated his 280% total return (including dividends). this is, S&P500The total return for the same period was 217%.

The road to a million dollars

Over the past 10 years, ETF returns have averaged a compound annual growth rate of 14.3%. The good news is that if you invest $200 every month, you'll need less money to reach $1 million.

If you invest $200 every month for the next 30 years, your total investment would be $72,000. Importantly, it is the effect of compound interest that allows the portfolio to be valued at more than $1 million.

For a growth-oriented fund like the Vanguard Growth ETF to have a portfolio worth more than $1 million in 30 years, it would need an average growth rate of at least 13.6%, which is lower than the 10-year average annual rate. The returns exceed the long-term growth rate of the broader stock market as a whole, but this assumes you continue to invest $200 into the fund each month.

Here's a breakdown of what the portfolio balance would look like every five years in this scenario:

Calculations by the author.

The power of compound interest comes into play when you build up a big balance later in life. At that stage, a 13.6% increase each year is much more impactful than if your portfolio were much smaller.

So the key to success with this strategy is to be able to anticipate that you have at least 30 years until retirement. Even if you don't, you can still make big profits, but to reach $1 million by investing $200 a month, ideally you should have that many years left in your investment. Probably. If not, you can offset this by investing more money each month.

Investing early and often is key

Regardless of which ETF you invest in, focusing on ETFs that invest in growth stocks can put you in a great position to benefit from higher returns in the future. As long as you commit to investing $200 a month, or whatever you can afford, you'll be in a much better financial position by the time you retire.

Ideally you can reach the $1 million mark, but even if you don't, putting aside money each month in a diversified fund like the Vanguard Growth ETF can be a decision that will pay big dividends down the road. There is a possibility that