It adds up faster than you think.
Investing is the best way to grow your wealth over the long term, but misconceptions keep a lot of people from giving it a shot. For example, some might worry they could lose their life's savings while investing. But if you diversify your portfolio and invest for the long term, major, lasting losses like this aren't likely.
Another common misconception is that you need a lot of money to make investing worthwhile. More cash certainly helps, but it's never been easier to start investing with small sums. Here's a look at how much you could make investing just $5 a day.
Image source: Getty Images.
How to grow $5 a day into six figures
Five dollars a day amounts to about $150 per month or $1,825 per year. You might earn a small amount of interest on your funds if you kept them in a savings account, but your final balance isn't going to be that much different than your total contributions. If you really want to grow your savings, you need to invest them.
Your investment return depends on several factors, including:
- How much you invest
- The investments' rate of return
- How long you hold the investments
Because there are several things at play here, it's not possible to predict exactly how much you'll earn over time. But the following table can give you an idea. It shows how much you'd end up with over different time periods with different average annual rates of return while investing $5 a day.
Time Frame | 6% Average Annual Rate of Return | 8% Average Annual Rate of Return | 10% Average Annual Rate of Return |
|---|---|---|---|
1 year | $1,875 | $1,893 | $1,911 |
5 years | $10,570 | $11,107 | $11,669 |
10 years | $24,716 | $27,427 | $30,461 |
20 years | $68,977 | $86,640 | $109,470 |
30 years | $148,244 | $214,475 | $314,398 |
Source: Calculations by author.
As you can see, there are a lot of possible outcomes. But the table illustrates two key points: The longer you leave your money invested and the better your investments do, the more you end up with in the end.
But only one of those factors is under your control. You can choose how long to invest for, but you can't decide what kind of return you get. That's why it's usually best to be conservative when estimating your savings' growth. Being too optimistic can be dangerous, especially when planning for long-term goals like retirement. If your investments don't do as well as you had hoped, you might not have enough to cover all your expenses.
How to invest $5 a day
A lot of brokerage accounts enable you to get started with small sums these days. There are also robo-advisors that will help you choose your investments after you answer a few questions about your goals and timeline. Then, all you have to do is link a bank account to transfer the funds, and the robo-advisor will do the rest for you. There are fees associated with these services, though.
Another option is to open an account with a broker that allows you to invest in fractional shares. Like the name implies, this allows you to purchase a fraction of a stock share if a whole share is too expensive. But there's usually minimums on how low you can go, so review these before you open your account. If you decide to do this, you can invest in whatever stocks you want, and you'll be able to spread your money more easily among multiple companies, which helps reduce your risk of loss.
Remember to only invest funds you don't plan to use within the next five to seven years. There's a good chance you earn money investing over the long term, but as we've seen the last few years, the stock market can be volatile in the short term. Putting money you plan to spend soon into the stock market is a big mistake.
If you can't spare $5 a day, maybe $5 a week or $5 a month is more feasible. You won't grow your wealth as quickly, but every little bit counts. You can always increase your contributions in the future if your budget allows it.
