The coins rattling around in your pocket can add up to big savings over time
Want a foolproof way to turn $1 a day into $67,815? It doesn’t take a lot of money or time or personal sacrifice. There’s no magic, no multilevel marketing and no salesman will call at your door.
In fact, it’s the simplest and most-proven way to get richer, and if you extend this concept to other parts of your life, you could end up with an enviable retirement nest egg.
To start, all you have to do is take your pocket change at the end of the day and drop it in a jar. If you can do that, and you put away about $1 a day, that’s just $7 a week. At the end of the month, you’ll have about $30.
Since this is money in your pocket, you’ve already paid taxes on it in the form of withholding from your paycheck. (If you’re self-employed, that’s not true, but we’ll ignore that to keep things simple.) Every month, deposit your savings in a Roth IRA account, where it can grow tax-free and — more important — be withdrawn tax-free in the future.
What’s a paltry $30 a month going to do for you? Growing tax-free for 30 years, with a 10% annual return, your investment account will be worth $67,815. (Stocks overall have returned an average of more than 10% a year since 1926, so buying a broad-based stock index fund the Vanguard Total Market Index Fund (VTSMX, news, msgs) is the easiest way to capture that kind of growth.)
Not bad for pocket change, but that’s just the beginning.
Here are some other ideas for saving a few bucks here and there that can add up to big dollars over time.
| Activity | Monthly Savings | Annual Savings |
|---|---|---|
| Take-out vs. dining out once a month | $45 | $540 |
| Manicure less often | $15 | $180 |
| Fewer trips to car wash | $12 | $144 |
| Video rental vs. movie monthly | $11 | $132 |
| Regular coffee instead of cappuccino on weekdays | $40 | $480 |
| Total | $123 | $1,476 |
If you can knock this $123 out of your monthly budget, at 10% it will grow to $278,040 in 30 years. You’ve practically financed your retirement with just a few small sacrifices.
If you want to see for yourself how small savings can multiply over time, spend a little time playing with MSN Money’s Savings Calculator. You’ll see that if you can add in some big-ticket savings, it takes just $443 a month to make yourself a millionaire.
Here are a couple of ways to do it:
Debt on wheels
Often, the same people who bemoan the fact that they can’t save are driving around in a new car and making monthly payments on a 48-, 60- or 72-month loan. But you’ll be amazed by how much you can save by buying a used car.Consider the alternatives:
- 1: You put $6,000 down to buy a new car worth $26,000. You finance $20,000 at 6% interest for 60 months. Your monthly payments are $386.66. Total interest costs are $3,199 making the total cost of the car more than $29,000.
- 2: You pay $6,000 cash for a good used car. (MSN Autos lists used cars by price and mileage, with many in the lower price ranges.) Invest that same $386.66 a month for the same 60 months with an average 9% rate of return. At the end of 60 months, you would have roughly $28,000 in your investment account after paying 15% tax on about $800 of long-term capital gains. (The exact amount of tax would vary depending on your tax bracket.) Even if you subtract the cost of whatever additional repair costs you may have for your older car, you still come out way ahead.
Plastic handcuffs
Buying on credit is a convenient way to pay too much for everything you buy. Consider the costs: Say you spent $1,000 on clothing, using a credit card charging 18% interest, and you make the minimum monthly payment to pay off the balance. It would take you almost six-and-a-half years to erase the debt, and your $1,000 wardrobe would actually cost you more than $1,650.Or maybe you’d rather buy some furniture. Buy $2,000 worth of furnishings with a credit card charging 18.5% interest and consider the consequences if you pay off the balance by making minimum monthly payments. It will take more than 11 years to repay the debt. By the time the loan is paid off, you will have spent an extra $1,934 in interest alone — almost the actual cost of the furniture.
Unlike most things in life, when it comes to saving money, it pays to sweat the small stuff. And when you’re done with that, go after the big stuff too!
Janet Luhrs contributed to this story.
Richard Jenkins is editor-in-chief of MSN Money. Regular readers may know him as the author of “A simpler way to save: the 60% solution” and other articles — or as MP Dunleavey’s “cigar-chomping editor.” Prior to joining MSN Money in 1996, he spent 17 years at newspapers in Southern California, most recently as deputy editor of the Los Angeles Times online service and news editor for the paper’s daily Business section. He is also the author of “Supercomputers: The Parallel Processing Revolution.” Send mail to Richard by clicking here
