Do you have $1 to spare? Start Saving Now!

Posted by Mr. B

March 31, 2007

One of my friends recently told me that he did not have any money saved - any money that he receives is immediately spent that month. Now, my friend is not in dire straits. He’s in his 20s, single, and has a modest income. One look at my friend’s designer shoes and ever-changing wardrobe will reveal where much of his money is going - he enjoys fine food, clothes, and various electronic gadgets.

I have nothing against living The Good Life, but to live a luxurious life at the expense of one’s future is not only foolish, but downright scary. Accidents can happen, and if life takes an unfortunate turn of events, my friend has no source of emergency income. Plus, he’s missing out on the great power that is compounding interest.

No matter your station in life, all it takes is $1 to open a high-yield savings account, most of which offer 5% APY or more and are FDIC insured. You can even do it online, from the comfort of your own home. Two examples are:

HSBC Direct Savings - 6% APY until April 30, 2007 (5.05% APY thereafter)
E-Trade Complete Savings - 5.05% APY

Of those two, I prefer E-Trade for its fast transfers (see my comparison of three savings accounts).

Automatic Transfers

Both of these accounts offer the ability to schedule transfers to/from the savings account. Automatic transfers are a couch potato’s best friend. With this tool, you can set how much money you want to send to savings at varying amounts of frequency. When paired with reducing one’s frivolous spending, this is a powerful tool.

Here is a screen shot of E-Trade’s automatic transfer option:

Starting small, if you simply schedule a transfer of $10 on a monthly basis into a savings account earning roughly 5%, that’s at least $126 saved per year. Continue socking away $10 per month for ten years, and you’re looking at something closer to $1,544 saved. That may not seem like much, but given the small investment, it’s a significant return. Plus, it’s money that you could have just frivolously blown on coffee.

For a much better return, try this: if you tell yourself, “I will choose to dine out one less time each week,” and schedule a transfer of $10 a week into an account earning roughly 5% interest, that’s at least $504 saved in the first year. Keep that pattern going, and after ten years it could yield $6,172 or more. That’s a nice chunk of change!

As you can see, it pays to invest even a little bit of money regularly. Set up an automatic transfer and forget about it. Just make sure you have enough money in your funding source (such as a checking account) to cover for the automatic investments, otherwise overdraft fees will completely negate your investments.

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