How Saving $2.75 a Day Can Change Your Life
November 15, 2012
The recent presidential election demonstrated how small changes can have a big impact. It's reported that just a few hundred thousand votes in a couple of swing states would have turned the election and made a significant difference in the direction the country will take in the next four years.
The same is true of your finances. Small changes in your daily habits can have a major impact on your financial future. Unlike politics—which can change direction quickly—once these habits are in place, the results are all but guaranteed since they're based on the facts of life and mathematics.
First, the fact of life: People who lend money charge interest. If I loan you $100 for a year, I expect to get more than $100 back. Perhaps I’ll only bank a few dollars extra, so the interest might not seem like much, but it becomes more important because of the mathematic rule.
That rule has to do with the cumulative nature of math. It says that small amounts add up over time—no rocket science there. But it is profound—the greater the time, the greater the cumulative effect.
Let's examine two examples. Suppose you borrowed $1,000 on your credit card and continued to carry that exact balance. Assume you pay 15 percent interest (just a bit above the current average rate of 14.58 percent). Since you're not repaying the principal, you'll be paying $150 each year in interest.
In just 10 years, you will have paid $1,500 in interest. Think of it this way: If you borrowed the money when you were 30 and didn't pay it back until you turned 60, it would cost you $4,500 over those 30 years. That’s equivalent to four-and-a-half times what you borrowed.
Our second example will look at the opposite side of the coin. What happens if you had $1,000 to invest? Let’s assume you earn a steady 8 percent per year on the investment. That's less than the historic average going all the way back to 1928.
That $1,000 investment will be worth $2,159 in 10 years and $10,063 in 30 years, all without any additional money or work on your part.
We’re talking about quite a big difference. Instead of working hard to earn and pay $4,500, you can relax and collect $10,063—a swing of nearly $15,000.
This raises an obvious question: If you're $1,000 in debt, where will you get the money to pay off the debt and make a $1,000 investment? Here is where the little change comes in. Saving just $2.75 a day, or $19.25 a week a, will produce $2,000 in two years. That's an amount that most of us can find in our daily expenses. Think of a latte a day, or a small change in your daily lunch habits (maybe you’ll drink water instead of soda).
Suppose you've already cut everything but the essentials out of your budget. Consider taking a part-time job until you manage to save $2,000. Even a minimum-wage job will pay that in a fairly short period of time.
You may think your financial station in life is fixed. “I’m broke now and always will be.” But that's not true. Little changes can make a big difference over time.
Gary Foreman is a former financial planner who founded TheDollarStretcher.com. The site features thousands of articles, including this one on compound interest.