If you can invest consistently over the long term – and you start at a young age – you may be surprised at how little you have to set aside to generate big long-term returns. While setting aside $1 a day won’t make you a millionaire, you might be surprised at how much your account can grow over time with even that small amount of savings.
Here’s a look at how you can grow your account size by allocating $1 a day in a high-yield savings account with an S&P 500 stock index fund, as well as a discussion of how you can grow your savings even more.
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High Yield Savings Account
Perhaps the easiest way to save and invest $1 a day is to use a high-yield savings account. You can automatically switch transfers from your checking account or other institution to your high-yield savings account to ensure you never miss a contribution.
While you won’t get rich using a high-yield savings account, it’s a better home for your short-term money than a traditional, brick-and-mortar bank account. According to the Fed, the average interest rate on savings accounts until September 2024 is only 0.46%. But even with the recent cut in interest rates, some high-yield savings accounts are paying 5% or more.
If you invested $1 a day in a high-yield savings account paying 5%, after one year, the $365 you contributed would be worth $374.25. That may not sound like a lot, but if you invested it at an average rate of 0.46% instead, it would only be worth $365.84.
The difference becomes more pronounced over 10 years. At that time, you would have contributed $3,650 to your high-yield savings account, but your balance would have been up to $4,738.55.
Over 40 years, you will see the most amazing results. The $14,600 you invest will grow to $46,706.65. With a regular savings account, your balance will only grow to $16,041.43, a $30,000 shortfall.
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Stock Market
Although a high-yield savings account will grow your money faster than a regular savings account, it should only be used for short-term money that you need to keep safe. For example, if you’re saving for a down payment on a house or building an emergency fund, the safety and security of a high-yield savings account is important. But if you’re looking to generate long-term real wealth over your lifetime — such as in your retirement account — the stock market is generally a better option. This is because the long-term average return of the S&P 500 is about 10%, and it has never lost money over any 20-year period.
If you invest $1 a day for 10 years in the stock market and earn that average annual return of 10%, your $3,650 will turn into $6,275.81. Over a period of 40 years, the compounding effects will be even greater. The $14,600 you invest over 40 years will grow to $196,070.46.
How to Make Your Savings Even More
While the stock market returns in the example above are impressive, it will take more than $196,070.46 for most seniors to enjoy a happy retirement. But it’s important to remember that this example only shows results if you invest $1 a day, or about $30 a month. You can easily overcome this retirement deficit by investing more — and maybe not as much as you might think.
If you have a 40-year investment window for retirement, you can reach $1 million in savings by investing just $159 a month, if you can earn an average annual return of 10%. That’s more than $1,900 a year, or more than $5 a day.
In a high-yield savings account, you’ll have to increase your savings rate by a lot more — but you won’t be taking any financial risk in the process. To earn $1 million over 40 years while earning 5% per year, you would need to set aside around $655 per month.
It is important to note that any investment carries risk and that no return is guaranteed. The stock market, for example, can be very volatile in the short term, and rarely returns an “average” of 10% in a given year. Savings accounts are protected by FDIC insurance, but the rate they pay will fluctuate based on current market rates — and since the Fed is starting a rate-cutting cycle, there likely won’t be any high-yield 5% savings accounts. in the near future.
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This article appeared on GOBankingRates.com: 2 Best Ways to Invest $1 a Day – and What Can Grow
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