This week, The Simple Dollar is investigating how you can take a small amount each day for the year 2007 and end up with a solid amount of money at the end of the year.
These calculations take advantage of offers and promotions available in December 2006 and also use interest rates from that time to calculate returns. While the plan still works, the exact dollar amount returned will differ.
Honest Abe winks at us from behind the five dollar bill. His eyes hide an interesting mystery: what happens if we simply save five dollars each day this year? Where will we be at the end of the year? Let’s take a look.
How can I save $5 a day? There are countless ways you can save five dollars per day for a year. Do you eat out for lunch each day, or stop at a coffee shop each day? Cutting the majority of these visits will free up the money you need. Are you like me, a book addict? Start “shopping” at the library instead of feeding your three-book-a-week habit at Barnes and Noble and suddenly you’ll have $5 extra a day to sock away.
What are the rules? Each day, you put away $5 towards an investment goal. The goal is to not risk any principal in this investment, to keep it liquid, and to have it set up so that the investment is as easy as possible. To do this, we will be using two online savings accounts in tandem: HSBC, because of the 5.05% APY interest rate, and ING Direct, because of the solid 4.5% interest rate and the $25 signup bonus.
How much can we turn $5 a day into by the end of the year? First, sign up for an account at HSBC Direct immediately. They offer a 5.05% APY interest rate on their basic savings account with no minimum. For the purposes of this exercise, we’ll assume that you make a $25 opening deposit on January 5 into this account, $5 per day.
On January 1, we start saving $5 per day. We set up a direct deposit of $25 into the HSBC savings account on January 5, then a $35 direct deposit on every Friday for the remainder of the year. This amounts to saving $5 a day for the year.
On February 1, the account balance is $130.12. That’s a good start; the $0.12 is what you’ve already accrued in interest, and it’s just going to get better from there. Be ready: by the end of the month, you’ll be opening an ING account to get the signup bonus.
On February 23, the account balance is $270.81. Sign up for an ING Direct account with the $25 signup bonus promotion and deposit $250 from your HSBC account into it. You’ll earn a $25 bonus just for signing up, but you won’t be able to withdraw the balance or the bonus for ten days. When you’re able to withdraw, move the money back to HSBC.
On March 1, the account balance is $20.81 plus the $275 that’s currently sitting in ING, making a total of $305.81. You’ve already made more than $26 this year, so keep it up! Don’t forget to transfer back to HSBC on March 7 (or so)!
On April 1, the account balance is $471.74. Just keep it up, slow and steady. You’re building up money that’s going to earn money for itself.
On May 1, the account balance is $613.76. This month alone, your cash in the bank made $2.02 just sitting there, earning for itself. Keep it up and this “self earning money” will just accelerate.
On June 1, the account balance is $791.41. Thus far, you’ve put in $760 this year, so you’ve made $31.41. Good work!
On July 1, the account balance is $934.70. You’re at the halfway point in the year and have managed to save $900.00, with $34.70 earned!
On August 1, the account balance is $1078.63. Your earnings are $38.63 and the account is now bringing in about $4 a month on its own. This doesn’t even include the pride you have at saving more than a thousand dollars of your own money, slowly and steadily.
On September 1, the account balance is $1223.18, with $43.17 earned in interest for the year. Your new thriftiness has earned you almost $50 this year.
On October 1, the account balance is $1403.36. You earned $5.19 in interest during this past month, which amounts to more than a day’s worth of savings. You’ve reached the point where the account itself is giving you a bonus day of savings each month.
On November 1, the account balance is $1549.20. You earned $5.84 in interest just this month, an amount that beats your daily investment by almost a dollar and will keep climbing as you stay steady.
On December 1, the account balance is $1695.69. As the year ends, you’ll notice that on December 23, your account balance will exceed the amount you would have by just putting $5 a day into a jar – all interest and additional investments after that date are a reward for keeping up the savings.
So how much do we end up with? On January 1, 2008, the account balance will be $1892.83. You will have made more than $67 this year and the balance in the account right now will earn about $7.50 a month. Of course, at this point, you’ll see how easy it is to save $5 a day and you’re likely to keep it up – or maybe even add more to the amount. Now, imagine where you’ll be if you do this for a few more years – buying an automobile with cash or paying for a semester or two of college – just from giving up a few lattes. Even though the percent return might be low, remember that it’s just because you were investing steadily throughout the year; your return would have been much higher had you started the year with $1825 in the bank.
Amount Saved: $1825.00
Amount Earned: $67.83
Percent Return: 3.6%