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A Savings Plan for 2007: The Alexander Hamilton Plan
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.
For me, Alexander Hamilton has always been a bit of a mystery. He founded the U.S. Treasury, but he was never a President. His eyes ask many questions, including this one: what happens if we simply save ten dollars each day this year? Where will we be at the end of the year? Let’s take a look.
How can I save $10 a day? There are countless ways you can save ten dollars per day for a year. Start taking your lunch to work. Visit the library instead of buying books, CDs, or DVDs. Eat at home instead of eating out. Wait for a while before buying that new article of clothing that you must have. If you implement these three things, you’ll suddenly you’ll have $10 extra a day to sock away.
What are the rules? Each day, you put away $10 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 $10 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 $50 opening deposit on January 5 into this account, $10 per day.
On January 1, we start saving $10 a day. We set up an account with HSBC Direct and make our first deposit of $50 on January 5, and a scheduled $70 deposit every seven days thereafter.
On January 26, 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 $10.23 in our primary account and wait ten days to earn the bonus and withdraw $275 (and a bit of interest).
On March 1, there is $566.21 in the account. We’ve already earned more than a dollar in interest this year 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 $919.25. In the last month, we made $2.72 in interest alone, and for the year we’ve made $29.25 in income just from putting the money in the bank. Considering the short term of investment, that’s an amazingly good return.
On May 1, the account holds $1203.20. We’ve already got more than a grand in the bank, and last month we made almost $4 in interest. The money is starting to build on itself, as the interest on the interest for the past month topped a penny.
On June 1, the account holds $1558.41. The account is now generating more than $5 a month in interest. Keep it up!
On July 1, the account holds $1844.89. We made $6.48 in interest over the past month. At the halfway point in the year, we’ve not only managed to sock away $1800 of our own money, but we’ve also made $44.89.
On August 1, we’ve topped the two grand mark at $2132.66. We made almost $8 in interest over the previous month. Slowly and steadily, the amount is building up.
On September 1, the account balance is $2491.71. We’re a quarter of the way to the ten grand mark at this stage! If you can keep this up for just 24 months, you’ll have five digits in the bank.
On October 1, the account balance is $2782.06 and it earned $10.36 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 $3073.72. 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 December 1, the account balances out at $3436.68. We’re getting close to an interesting threshold, which we cross on December 22, when the balance crosses the $3650 mark. Why is this interesting? $3650 is the amount you’ll put in for the year, so all balance increases after December 22 are pure income.
On January 1, 2008, the account balance is $3730.94. During the year, the account earned $80.94, and that’s with your money slowly being deposited throughout the year, not sitting in the account at the start. You’ve probably also noticed how easy it is to trim $10 from your daily spending, so you’re likely to stick with the plan for the future. Two years 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: $3650.00
Amount Earned: $80.94
Percent Return: 2.22% (for the whole year, even though you only had most of the money in the account near the end of the year)