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.
Good old George Washington. His eyes peer out at us from the one dollar bill, an amount that today most people see as being a trivial amount. But what happens if we simply save one dollar each day this year? Where will we be at the end of the year? Let’s take a look.
How can I save $1 a day? There are countless ways you can save a single dollar each day. Skip a cappuccino twice a week, eat a less-expensive meal when you go out to eat, and so on. You can easily save $4-5 at a time doing these things, and that will provide enough money to start saving. If you’re a very low wage earner, try just setting up the direct deposit and see if you even notice $7 a week less.
What are the rules? Each day, you put away $1 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 $1 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 $5 opening deposit on January 5 into this account, $1 per day.
On January 1, we start saving $1 per day. We set up a direct deposit of $5 into the HSBC savings account on January 5, then a $7 direct deposit on every Friday for the remainder of the year. This amounts to saving $1 a year.
On February 1, the account balance is $26.02. Where’s the rest, you wonder? It’s because February 1 is a Thursday and your direct deposit for the week will happen on Friday, bringing the balance up to $33.02.
On March 1, the account balance is $54.16. Again, you’re peeking on a Thursday, so the balance the next day would be $61.16.
On April 1, the account balance is $89.42. 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 $117.81. You’ve just about earned a dollar in interest at this point; you’ll be well over that level by the end of the month.
On June 1, the account balance is $153.32. Thus far, you’ve put in $152 this year, so you’ve made $1.32.
On July 1, the account balance is $181.96. You’re at the halfway point in the year and have managed to save $180.00, with $1.96 earned in interest!
On August 1, the account balance is $210.72. You’ve saved $208, with $2.72 earned in interest. In just the last month, the account earned nearly a dollar. Again, all you’ve done this year is set up a direct deposit at the start of the year and just sit.
On September 1, the account balance is $239.61, with $3.61 earned in interest for the year. As you near the $250 mark, you’ll be preparing to open an ING Direct savings account.
On September 9, the account balance is $253.61. Sign up for an ING Direct account with the $25 promotional bonus 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 October 1, the account balance is $300.17, now that the money is back in your main HSBC account. From here on out, the interest earnings will be nice. Also, during the time the $250 was in your ING account, you accrued $0.33 in interest there, so move it back to the HSBC account now.
On November 1, the account balance is $329.74. You earned $1.25 in interest just this month, more than the amount you’re putting in each day.
On December 1, the account balance is $359.12. Since it’s a Thursday, tomorrow will see your balance jump up to $366.12. On December 2, your account balance will exceed the amount you would have by just putting $1 a day into a jar – all interest and additional investments after that date are gravy.
So how much do we end up with? On January 1, 2008, the account balance will be $395.63. You will have made more than $30 this year and the balance in the account right now will earn about $1.60 a month. Of course, at this point, you’ll see how easy it is to save $1 a day and you’re likely to keep it up – or maybe even add more to the amount.
Amount Saved: $365.00
Amount Earned: $35.63
Percent Return: 9.8%