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.
The face of Andrew Jackson is a face many of us are familiar with; he adorns the $20 bill, a currency value that many of us use on a daily basis. He was a natural born leader who made things happen, and his stern face issues a challenge: what happens if we simply save twenty dollars each day this year? Where will we be at the end of the year? Let’s take a look.
How can I save $20 a day? To save $20 a day, you have to be willing to trim some fat from your budget. Some great ways to do this are learning to cook at home, utilizing simple energy saving techniques, buy groceries in bulk, and cut down on frivolous spending at the electronics, music, and book stores. If you do these, there’s a good chance you can free up $20 a day for building your future.
What are the rules? Each day, you put away $20 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 $20 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 $100 opening deposit on January 5 into this account, $20 per day.
On January 1, we start saving $20 a day. We set up an account with HSBC Direct and make our first deposit of $100 on January 5, and a scheduled $140 deposit every seven days thereafter.
On January 19, our account tops $250, so we sign up for an ING Direct savings account so we can earn a $25 signup bonus. We deposit this $250 in it, leaving $130 in our primary account and wait ten days to earn the bonus and withdraw $275 (and a bit of interest).
On February 1, we withdraw our money from ING and see that our account currently holds $545.70. $25.70 in the first month is a very nice return; let’s keep it up.
On March 1, there is $1108.22 in the account. We’ve already socked away a grand and our earnings are going to go up greatly in the coming months. It will be a fun ride.
On April 1, the account holds $1813.56. In the last month, we made $5.33 in interest alone, and for the year we’ve made $33.56 in income just from putting the money in the bank. Considering the short term of investment, that’s a very good return.
On May 1, the account holds $2381.34. We’ve already got more than two grand in the bank, and last month we made almost $8 in interest. The money is starting to build on itself, as the interest on the interest for the past month was three cents.
On June 1, the account holds $3091.66. Once you’ve crossed the three grand mark, you’re eligible for a lot of interesting investments, such as a Vanguard 500 index fund, that can potentially earn a lot more.
On July 1, the account holds $3664.51. We made $12.85 in interest over the past month. At the halfway point in the year, we’ve not only managed to sock away $3600 of our own money, but we’ve also made $64.51.
On August 1, we’ve topped the four grand mark at $4239.95. We made almost $16 in interest over the previous month. Slowly and steadily, the amount is building up.
On September 1, the account balance is $4957.94. We’re basically halfway to five figures at this stage! If you can keep this up for just nine months, you’ll have five digits in the bank.
On October 1, the account balance is $5538.55 and it earned $20.61 in interest over the past month. At this point, the account is earning enough interest each month to match what you’re putting in each day. Your money is really starting to work for you!
On November 1, the account balances at $6121.77. The money is steadily rising, like rainwater in a puddle. Keep it up!
On December 1, the account balances out at $6847.57. We’re getting close to an interesting threshold, which we blow away on December 28, when the balance crosses the $7300 mark (actually leaping over it). Why is this interesting? $3650 is the amount you’ll put in for the year, so all balance increases after December 28 are pure income.
On January 1, 2008, the account balance is $7435.99. During the year, the account earned $135.99, and that’s with your money slowly being deposited throughout the year, not sitting in the account at the start; even more, it also doesn’t include the deposit from the final four days of the year (another $80 above and beyond the current balance). You’ve probably also noticed how easy it is to trim $20 from your daily spending, so you’re likely to stick with the plan for the future. About five months from now, if you continue with this plan and just let it sit at HSBC, your balance will be in the five figures!
Amount Saved: $7300.00
Amount Earned: $135.99
Percent Return: 1.86% (for the whole year, even though you only had most of the money in the account near the end of the year)