Here's How You Could Save $300,000 in 20 Years

When most people think about growing their wealth, they think of landing a job that pays six figures. But where you put your money can be just as (if not more) important than what you earn. Keep it in a savings account and you'll grow your wealth, but inflation will probably reduce your buying power over time.

If you want to increase your buying power and quality of life, you have to find a way to beat inflation. Below, we'll take a look at one way that could take you from $0 to $300,000 in 20 years.

How to put your money to work for you

Investing is the best option for your long-term savings. Yes, there's a risk of loss, but if you keep your money diversified and invest in strong companies, losses will likely be temporary. And there's a good chance your investments grow faster than inflation over the long term.

If you invested the current maximum $7,000 annually in an IRA and earned a 7.5% average annual return on that money, you'd end up with over $313,000 after 20 years. A 7.5% average annual return isn't unreasonable. The S&P 500 -- a well-known market index -- has a 7.7% average annual return since 1928. But it's important to recognize that past performance doesn't guarantee future returns. If your investments grow more slowly, it might take longer to reach $300,000.

There's also the chance you could reach $300,000 in less than 20 years. Our example doesn't take into account future increases to IRA contribution limits. In the coming years, you'll probably be able to set aside even more, allowing you to reach $300,000 in savings even faster.

The downside to saving in an IRA is that you generally face a 10% early withdrawal penalty if you take your cash out before age 59 1/2. There are exceptions, including using your funds to pay for large medical or educational expenses. And you can withdraw your Roth IRA contributions tax- and penalty-free at any age. But for most people, it's not the best choice if you hope to access your money before 59 1/2.

In that case, you might prefer to keep your cash in a taxable brokerage account instead. These accounts don't offer the same tax advantages as retirement accounts, but they have fewer restrictions about what you can invest in, how much you can contribute per year, and when you can take the money out. You could also split some of your savings between an IRA and a taxable brokerage account if you prefer.

How to get started

The first step is to open an IRA or a taxable brokerage account if you don't already have one. Review several popular brokers to see which one appeals to you the most. Consider fees, investment options, and customer support when weighing your choices. 

Next, you'll need to open an account. Most of the top brokers enable you to do this online. You may need some initial cash to fund your account. Exact rules vary by broker. Many also enable you to set up automatic transfers from a linked bank account so you don't have to remember to manually transfer funds.

It might seem as if you're done here, but there's still a critical step: You have to actually invest your funds. What you invest in is up to you, but index funds are a great option for beginners looking to diversify their savings and reduce their fees. These are bundles of investments that track popular market indices. When the index does well, the fund does well and so do you. 

Once you've got your investments set up, all you have to do is periodically monitor your savings. You don't need to check on your investments every day and it's probably good that you don't if you're prone to panicking at the first dip in value. Just check in a few times a year and whenever you experience a major shakeup to your finances.

Schedule some time to review your investment strategy at least annually. Make adjustments to your portfolio as needed and increase your contribution rate when you're able to do so. Then you'll have a sizable nest egg waiting for you when you need it.