These days five dollars doesn’t buy very much. A bit over three litres of petrol; around one-third of a packet of cigarettes if you’re a smoker; or a schooner of beer at your local watering hole. But used wisely, over time, five dollars can be a powerful sum. Let’s take a look at three scenarios to see how.
Okay, first up, let’s look at the example of ‘Bob’ and ‘Sue’, a hypothetical couple who purchase their first home in their mid-20s. They take out a $300,000 mortgage payable over 25 years at an average interest rate of 7%.
Bob and Sue decide to add an extra $5 a day to their mortgage repayments. By following this strategy the couple will have paid off the loan four years ahead of time, saving themselves almost $61,800 in interest payments.
A few years later, the couple decides to start a family. From the time their child is born, Bob and Sue tuck $5 each day into a savings account for their newborn.
The account pays average interest of 6% – though plenty of today’s accounts pay more. We’ll also assume there are no regular account fees, which is often the case with online savings accounts.
If Bob and Sue keep adding $5 to the savings account each day, by the time their child reaches age 21 the balance will have grown to around $76,544. Not a bad gift for a young adult.
By the age of 30, Bob is on an annual salary of $50,000 but he has only $20,000 in super. Bob has opted to invest in a balanced fund providing exposure to growth assets like shares as well as investments like cash, and it earns a return of about 7.5% per annum.
Bob’s financial adviser explains that by relying solely on his employer’s super contributions, Bob will have close to $293,000 in super by the time he retires at age 67.
So Bob decides to add an extra $5 a day to his super fund. As his annual income is below $61,920, Bob will receive a government co-contribution. But the big kick comes in retirement. By adding just five dollars to his fund each day, Bob will have a nest egg worth around $413,500 by age 67. That’s over $120,000 more to live on in his old age, and remember, Bob can withdraw the money tax free once he turns 60.
So far we’ve seen how a small sum like $5 a day can pack a real punch when it’s part of a long term strategy.
No matter whether you’re paying off a loan or credit card; investing in a savings account or the sharemarket; or just hoping to boost your retirement payout, one thing is certain. Small steps made consistently will add up to something impressive over time.
I realise that many people with a home loan are doing it tough right now. But there are also plenty of households where five bucks each day wouldn’t cause too much damage. Put your small change to good use, and the rewards will be there in the long run.