How Just $5 a Day Can Improve Your Financial Future

By Dr Penny Pincher on 19 January 2018 0 comments

As a penny pincher, I sometimes get into debates with people about whether cutting back on small expenses really makes much difference in the grand scheme of things. For example, if you are trying to put away $1 million, is it worth the effort to save only a few dollars every day?

Let’s look at what investing $5 per day could do for your financial future. The easiest way to come up with an extra few bucks per day is to simply spend less — and that can be easy, since there are plenty of mindless ways you're probably wasting money. If your spending is already throttled back as far as you want to take it, you could find a side hustle for fast cash.

Stuffing $5 per day under your mattress

Now that you have identified a way to find $5 per day that you can save, let’s look at how your fund would grow if you put your cash under your mattress with no interest or growth:

  • After 10 years: $18,263.

  • After 20 years: $36,525.

  • After 30 years: $54,788.

  • After 40 years: $73,050.

  • After 50 years: $91,313.

  • After 60 years: $109,575.

As you can see, saving $5 per day does add up to real money over time if you do it long enough. But to really get the benefit of putting money away for the future, you need to put it to work so it can grow.

Due to inflation, your stash of cash will eventually lose value if you keep it under your mattress or in a low-interest savings account. Since prices tend to rise over time, your money will have less buying power in the future than it has now. If you invest your money instead, it will grow faster than inflation and your funds will have more buying power as time passes by.

Invest $5 per day

Here’s what would happen if you invested your $5 per day. Let's assume a return of 8 percent (instead of the 0 percent you would get by simply stuffing it under your mattress):

  • After 10 years: $27,843.

  • After 20 years: $89,643.

  • After 30 years: $226,818.

  • After 40 years: $531,296.

  • After 50 years: $1,207,130.

  • After 60 years: $2,707,236.

Investing $5 per day with a return of 8 percent can turn into $1 million after about 48 years. Clearly, this has a huge advantage over simply hoarding the cash. But how can you invest your money so that it grows at around 8 percent? No one knows how future investments will perform, but historical average returns from stock market and real estate investments have been around 8 percent.

How to invest small amounts of money

Can you really invest a small amount of money such as $5 at a time? I faced this situation when I wanted to start contributing $50 per month ($1.67 per day) to a Roth IRA. I found a great mid-cap growth fund with a low expense ratio, but a minimum initial investment of $2,500 was required to open an account. I corresponded with the fund manager, and he agreed to set up the account with automatic deposits of $50 per month from my checking account. The balance of this investment fund from my contributions of $1.67 per day has grown to over $4,000 so far. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

A good way to manage investing small amounts is to accumulate your daily savings in your bank account and set up an automatic monthly contribution to an investment account.

If you have any high-interest credit card debt, making extra payments on that debt can have a bigger financial impact than investing the money. Set up an automatic payment to your highest interest credit card from your $5 per day funds. After your credit cards are paid off, you can switch to paying down other debts or start contributing to an investment account. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

Benefits of investing $5 per day

The small step of setting aside an extra $5 per day to invest can boost your fund balance down the road, but taking this action has other benefits. Establishing the habit of identifying extra money and investing it is the key to financial success. You don’t need to wait until someday when you have more money — you can start saving and investing today with whatever small amount you can scrape together. Even the process of finding “extra” money to invest can have benefits. You might find that cutting back spending on things you don’t really need makes life less stressful. (See also: 18 Times in Life When Less Is More)

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How Just $5 a Day Can Improve Your Financial Future

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