How much is 10 bucks a week? It’s probably less than you spend on one weekday lunch, or for a week’s worth of morning commute mocha lattes or one Thursday night takeout when you’re just too tired to cook dinner.
The point is, for most of us, 10 bucks a week is not a lot to save. Plus, if you avoid any of the dine-out items noted above to save those 10 extra bucks, you’ll also avoid a few extra calories. Bonus!
Wherever you scrimp to get 10 bucks a week — save it, and help it grow. Try this simple, and above all, safe investment plan to achieve a modest return, and learn some basic money management and investing concepts, too.
The Strategy
We’ll make a few assumptions that will help determine where and how to invest.
First, two years is not a lot of time, so we won’t tie up the money in a retirement account such as a Roth or a traditional IRA. That’s unfortunate, because those accounts come with some tax advantages that would help the money grow faster, and the longtime horizon levels out the ups and downs. Of course, retirement accounts also come with a cost, which is liquidity, or the ability to use the money you put there. Once the money goes in, it doesn’t come out until retirement (with a few exceptions, especially for a Roth IRA).
The short horizon also means you can’t tolerate a lot of risk. If you invested in stocks or mutual funds, and the market goes south sometime in the next two years — even for a brief period of time — there wouldn’t be enough time to recover the losses. You could lose a big chunk of that coffee money saved, which you suffered so many groggy mornings for, and never get it back.
That leaves bonds, which are generally regarded as safer investments. They don’t grow like individual stocks and mutual funds do, but they are not as volatile. Because one of our goals is to keep this simple, we’ll look for reliably managed bond funds, which are a collection of individual bonds.
The Plan
Most brokerages have high minimum investment requirements — usually $1,000 to $3,000 or more. Several low-cost brokers or even a credit union like USAA offer low or no account minimums. Account holders can buy and sell a wide variety of bond mutual funds that each have their own minimum investment requirements. The trick is to find a broker that also offers low minimums to purchase bonds and bond funds. For example, Charles Schwab, a low-cost brokerage, offers several bond funds with $100 minimum investments.
For the first 12 weeks, stuff your Hamiltons into a cookie jar and get acquainted with the website, investing terms and concepts of whichever brokerage you choose. When you’ve got your $120, set up your account, make monthly contributions of $40 and don’t stop saving for 92 more weeks.
Most brokers offer both taxable and nontaxable bond funds. The nontaxable funds are generally preferred for high-income investors with big tax bills. But tax-exempt works for people investing $40 every four weeks, too, especially if you’re nervous about future performance of bonds.
The Math
Based on historic performance of the bond market, we might assume a (conservative) 5 percent return. But because bonds are sensitive to interest rate changes, there has been speculation that bonds may not perform as well in the near term. That’s because rumors are circulating the Federal Reserve might consider interest rate hikes in the coming months. So let’s work with an even more conservative 4.25 percent.
Using an online compound interest calculator, an initial deposit of $120 (that three months of savings) with $40 monthly deposits at 4.25 percent interest will yield $1,090.30 in just over two years (two years and two months, to be precise).
The Next Steps
If you were to simply take your 10 bucks and stuff it in a jar, in two years you’d have $1,040. Not bad! Most of us could do a lot with $1,040. Unfortunately, that also means that strategy nets $50 less.
What might you do with the investment revenue? You could continue to save and invest in your bond fund.
Or you could set up a traditional or Roth IRA and try some riskier investments. Besides accumulating enough money to meet many firms’ account minimums, in the two years your money grows, you will accumulate a fair bit of knowledge about saving and investing, too.
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How to Turn $10 a Week Into $1,090 in 2 Years originally appeared on usnews.com
