Saving money isn’t always easy but the long-term benefits make it a fundamental aspect of personal finance management. Over the years I have been writing about money, I have come across dozens of people who say something along the lines of, “I know I should be saving, but I can’t save enough to make it worthwhile.”
That statement makes me cringe! Thanks to the power of compound interest, saving even a few dollars here and there can lead to big savings. Here’s how it works and how you can get on track to better savings, even just a couple of dollars at a time.
A Few Dollars Can Add Up Fast
When you look at your bank account and your bills, it is easy to dismiss the power of a couple of dollars. Beyond a couple of candy bars or something from the fast food dollar menu, there isn’t much you can buy with just a few dollars these days, but that doesn’t mean that saving a few dollars is not worth the time of the effort.
Let’s say you want to start saving $5 per week. That’s only $20 per month, less than a round of beers at a local bar. But over a year, that adds up to $260. That’s enough for a round-trip plane ticket or a minor car repair. Let it go on for five years and you’ll have $1,300, enough for a round-trip plane ticket to Europe or to treat yourself to a very nice long-weekend trip.
The power of savings gets more and more impactful over time, but when you take into account compound interest, it gets even more lucrative!
Add Compound Interest for a Bigger Impact
So far, we have just looked at saving money as if you had put the cash under your mattress or stashed it in an account with no interest. If you invest the funds, they will grow even faster.
Let’s say you save the same $5 per week, but at the end of each year you put the $260 into a low fee S&P 500 index fund. If you invest at the end of each year and earn 9% per year, you would have over $1,500 at the end of five years. Of course, investments come with risk and it could also go down in value, but over a long time horizon, the market always goes up.
Over any 25 year period starting in 1970, the worst return of the S&P 500 was 9.28% compound annual growth rate, so a 9% estimate isn’t too far off. The best 25-year average compound annual growth rate over the same period is 17.25%. If you average that return, you’ll end up with $1,800 over five years.
But as you can see, I am quoting a 25 year average compound annual growth rate, so this is over a longer period of time. If you save $5 per week for 25 years and have a 12.98% annual return, which is the median 25 year compound annual growth rate average since 1970, you will end up with over $40,000!
Saving a Little is Better Than Nothing
$40,000 is not enough to retire on, but it is enough to make a difference in most people’s lives, and that is only $5 per week! If you were to save $10, $20, or more each week, you would end up with $80,000, $160,000, or more. It is all a factor of how much you save and how your investments perform.
But even if you can’t afford to put away $20 each week, you can save as little as a dollar or two, and that’s better than no savings at all. It helps you get into good saving habits so as your finances improve over time, saving more is no big stress.
Apps Can Make it Automatic
If you’re on board with starting small, one of the hardest parts of saving is remembering to actually save the money. Physically taking cash out of your wallet or logging into your bank’s website to do a transfer works, but there are much easier options today. Here are a few of my favorite apps for automated savings and investments.
Digit – Digit is a free savings app that you control via text message. After connecting to your bank account, Digit will automatically make small transfers from your checking to your Digit Savings. Digit checks your account balance before transferring and guarantees it will not overdraft your account. With a quick text message, the cash is back in your checking the next business day.
Dobot – Dobot is a mobile app for iOS and Android phones. After connecting your account, Dobot makes weekly transfers from your checking into a Dobot savings account. Within Dobot, you can attribute your savings to specific goals. Right now I’m saving for a trip to Iceland and buying my own small airplane. It’s cool to see my goals get closer every week!
Acorns – Acorns is a savings and investment app for iOS and Android. After connecting your accounts, Acorns will “round up” each transaction and invest the savings for you. For example, if you purchase something for $22.50, Acorns will round the transaction up to $23, and save the 50 cents for you. Over time, those round ups add up to a lot of money, which is automatically managed for you in low fee investments.
Make a Commitment to Save in 2017 and Beyond
Savings isn’t a boring topic, and almost every American can come up with at least a few dollars each week. Sticking to your budget and working on a side hustle makes it even easier to save more, so keep those in mind as you move forward with your savings and investments to reach your goals this year and for many years to come.