How to Turn $25 a Week Into Almost $7000 in 5 Years

by Darren Wu on 7 August 2014 6 comments

According to Bankrate, certificates of deposit with a 5-year maturity (as of 7/18/14) offer a meager 1.74% growth rate — hardly anything to brag to your friends about. What do you do if you want to make your money grow even more? (See also: A Low Risk Investment Plan)

One option could be to invest in the stock market. But with such a short time frame as five years, stocks may not be your best option.

Instead, a more suitable investment would be to invest in bonds.

Specifically, to invest in bond funds.

Why Bond Funds?

Bonds are a more suitable investment than stocks for a shorter period (like five years) because they don't usually fluctuate in value as much as stocks in the short term. They're more conservative, but they won't crater your savings in the short term, either.

All of this means that you have a smaller chance of losing your money, and a greater chance of growing your money steadily.

So how much could your money grow by investing in bonds? (Bonds are just loans to the government or a company, where you get regular interest payments and the return of your money after a period of time.)

According to author and Chartered Financial Analyst Rick Ferri, bonds are expected to grow at a rate of 5% over the next 30 years. Historically, they've grown at a rate of about 5% as well.

With those figures in mind, by investing $25 every week for 5 years — at a growth rate of 5% — your money will grow to $6,694.84 ($194.84 more than if you'd just stuffed it in a mattress) and more if you take the advice below to invest via a Roth IRA.

Choosing Your Bond

The first step is to find an investment company to partner with.

These days, there are many companies to choose from. But with minimum requirements often ranging from $1,000 to $3,000, not many will let you invest with a relatively small amount of money.

Fortunately, there is one that does, and that company is Schwab. Here's how you can get started investing with them.

Buying Bonds Through Schwab

The first step is to open an investment account. You can open your account online, or have someone help you through the process by calling an 800 number.

If you're eligible, choose a Roth IRA. That's because bonds are best held in a tax-advantaged account such as a Roth. (Check out the "Tax efficiency of bonds" section of this article on fund investing for a more in-depth explanation as to why). Doing so will allow your earnings to escape Federal tax and grow to $6,928.94.

After you've opened up an account, your next step is to choose the bond fund. Although there are many to choose from, this one is probably your best bet: Schwab Total Bond Market Fund

This portfolio provides the proper asset allocation and diversification needed to build long-term wealth. It's the same fund recommended by the many Bogleheads who invest using a Three Fund Portfolio. The Bogleheads are a community of people dedicated to helping others achieve returns far greater than those achieved by the average investor.

Now that you have both an account and an investment, the next step is to add money to it.

How Much to Invest

To invest in the bond fund, you need to start with $100. And to continue growing your money, each additional investment needs to be a minimum of $100.

Here's how to do it.

First, save $25 each week. (See also: 101 Ways to Save Money Around the House)

Need ideas on how to do this? Consider these:

  • Buy your groceries in bulk and split the food costs with your friends.
  • Rent a video instead of going to the movies.
  • Carpool/walk/bike to work.
  • Bring your own lunch.
  • Make your own coffee.

After one month, you'll have saved $100. Using this money, open your account, choose the bond fund, and start investing with that $100.

The next step is to make this automatic, so that you no longer need to think about it. Set up an automatic monthly transfer of $100 (from the $25 you're saving each week). You can make this happen easily through direct deposit, using their Automatic Investment Plan.

After your automatic system is set up, all you need to do is sit back and watch your money grow.

So what would you do with $7,000 in five years? Please share in comments!

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Guest's picture
Guest

$25 * 52 (weeks in a year) * 5 (years) = $6500
Color me unimpressed.

Guest's picture
Guest

I'm not getting it. After saving $25/week for 5 years the principle will be $6,500. If you put that money into the bond market and bonds go down (assuming that the stock market will rebound),...then you'll LOSE money !

Guest's picture
Guest

Darren, I believe you need to update your math. You would have $6,500 if you saved $25 a week if you put it in your mattress. $25 x 52 weeks per year x 5 years=$6,500.

Guest's picture
Perry

Not sure i understand.

$25 x 52 weeks x 5 = $6500

What's the ROI/growth?

Lars Peterson's picture

Thank you Perry and Guests for pointing out the error.

This is an example of an editor -- me -- going with a conservative number in the headline and the article rather than misleading readers and then failing to double-check the numbers again. Mea culpa.

According to the calculator at TreasuryDirect (linked above), $25 per week (or $100 per month) invested in Bonds earning 5% would grow to $6,694.84 (assuming a 28% Federal tax hit) in five years. It's a modest increase of $194.84, after taxes.

However, following Darren's advice to invest via an IRA to avoid the tax hit, the money would grow to $6,928.94 -- a much more significant increase of $428.94. Of course, investing that way makes the funds more difficult to access.

Apologies to both Darren and the readers for my error. The text has been updated.

Guest's picture
Guest

Great article, I think that this bond investing can be called like value investing, because this is we are looking for the long term. And still I think this is a little a conservative, but still value investing is the best way to invest at least this is my point of view.