How One Small Habit Can Help You Save Thousands of Dollars
Building wealth doesn’t happen all at once. But making a consistent habit of saving regularly can help you reach your financial goals such as buying a house, sending a child to college or retirement.
A small habit that can help you save over $10,000 over two years with minimal impact on your budget is setting aside $100 each week to invest in an index fund. You can make these transfers automatic so you don’t have to think about saving money when your check arrives, and putting it in an index fund means it will grow over time – resulting in more than just the first $10,000.
How to make saving a habit
Financial advisors often say that automating your savings and investing is the key to staying consistent. If you’re investing in a 401(k) or similar employer-sponsored retirement plan, you’re probably already investing automatically. But brokerage firms allow you to make automatic transfers from your bank account to other types of investment accounts, such as individual retirement accounts (IRAs) or taxable brokerage accounts. You can even set up automatic investing so that money is not only transferred, it can also be used to buy shares of stock or a fund.
While investors can choose from many stocks and funds, a low-cost S&P 500 index fund or total market fund can be solid, well-diversified options. The Nasdaq 100 is another contender for investors who want to focus on technology stocks and aren’t afraid to take on more risk for higher returns.
Investors must set up this automatic transfer only once. After that, the financial institutions will take care of the rest, ensuring that your money goes straight to the fund of your choice.
If you’re saving for short-term goals or building an emergency fund, you can also automatically transfer funds to a high-yield savings account instead of an investment account.
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How much can you save
Investing $100 a week in an index fund results in $5,200 in principal at the end of the year. You can reach $10,000 in just two years of principal — and that’s not even including long-term gains: Since 1957, the average annual return of the S&P 500 is 10.54%. Although remember that past performance does not guarantee future returns, and returns may vary from year to year.
Also, depending on your income and other goals, you can increase your monthly contributions. Increasing the amount to $150 per week results in a principal of $7,800 per year. Investing $200 a week ensures that you put more than $10,000 in your portfolio at the end of the year.
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Increase your savings over time
This habit works well because it makes saving money a habit. You don’t need to log into your brokerage account every week and transfer money manually and over time, you may forget that you have that extra money to spend.
Try to increase your savings amount regularly. Even saving $5 more each week can lead to your principal savings of $260 at the end of the year. You can also increase your contribution if you get a promotion or holiday bonus.
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