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