Five dollars and twenty-five cents doesn’t go very far today, but you might be surprised to hear what you could do with that amount if you saved it instead of spending it.
A 25-year-old who saves $5.25 a day and invests the monthly savings at 10% over time would have more than $1 million by age 65. That may seem impossible, but it’s true (thanks to the power of compounding). If the average annual return is 8%, the total at age 65 would be over half a million dollars; at 5%, the total would be just under a quarter of a million dollars. These figures are all greater than the amount saved for retirement by 62% of baby boomers, according to a 2017 PwC Survey.
Depending upon your financial situation, there may be many relatively painless ways to save $5.25 every day. Here are a few suggestions (some of which would have to be combined to reach these totals):
- bring a brown-bag lunch to work instead of buying lunch
- cook dinner at home instead of eating out or ordering in
- quit smoking or cut back on the amount (if you are a smoker)
- skip one beer or one glass of wine at the bar or restaurant (or two at home)
- order water instead of two soft drinks at a restaurant
- use some digital coupons or rebate programs for grocery or online shopping
- find ways to be more energy efficient at home to lower your utility bills (and be eco-friendly as well)
- eliminate unused or unnecessary monthly subscription plans that auto-renew every month
- buy or lease a less expensive car (if you need a car)
- if you are going to be moving soon, consider a less expensive place
- use dry cleaning only when absolutely necessary
- skip that fancy morning coffee from the coffee place (brew your own)
- automate $5.25 a day (or $160/month) into a savings account and see if you miss those funds
If you track your spending, you might be able to identify $5.25 of “fat” in your budget every day. If you invest those daily savings over time, the results could potentially be significant (assuming that the market continues to perform the way it has historically over the long term, which of course is never guaranteed).
The table below shows the future value of saving $5.25 every day and investing the monthly amount for different time periods and with different average annual return assumptions (without accounting for inflation). These figures are impressive, regardless of the return rate assumption or the age at which this plan is begun.
(Compounded monthly at different return rates and time periods – results rounded)
Compounding is extremely powerful and works best over long periods of time. That’s why the 25-year-old could potentially generate over $1 million at 10%, but the 35 year-old saving and investing the same amount would produce almost one-third as much. When it comes to compounding, time is one of the most valuable assets you have. So the earlier a person begins this type of savings, the larger the sums that could potentially accrue (again, assuming positive market conditions over the long term).
There are lots of people who work long hours to cover monthly necessities and who could not easily find $5.25 a day to save or invest. But starting with any amount, whether now or at some future date when there might be more room in the budget—even $1 a day if doable—could be a step in the right direction. Even small amounts invested regularly over the long term can potentially generate large sums.
According to the 2017 PwC Survey, 46% of baby boomers have saved $100,000 or less for retirement, and 30% have saved less than $50,000. Only 17% of baby boomers have saved more than $500,000. These figures represent a harsh reality for many boomers. To avoid being in those same shoes down the road, people in their 20s, 30s, and 40s should try to save money any way they can and invest those savings for the long term.
It’s easy to spend small amounts of money every day without even thinking about it, and the totals can mount very quickly. The flip side is that small changes in day-to-day spending habits can have a large impact on your wallet. If you are able to cut back on $5.25 a day or more in unnecessary spending (or if you can automate $160/month or more into savings) and invest those savings every month over time, you might be surprised at how much these amounts could potentially grow to down the road.
See Investing 101 for a discussion of investing basics.
