How much is $1 a day over 40 years?
The simple answer, of course, is approximately $14,400 since that’s how much money would be in your piggy bank if you had actually put a dollar in it every day for last 40 years (note: for convenience of the calculations below, I used 31 days/month).
However, what if you had invested this money instead. For example, suppose you had:
- Saved $1/day for the past 40 years;
- Invested those savings at the end of each month ($30/month) in the entire US stock market (e.g., b using an ultra-low cost US index fund);
- Re-invested all dividends and stayed the course through all of the ups and downs of the market.
When I challenged the group with this question, the answers ranged from a low of $30,000 to a high of about $100,000.
It may surprise you to learn that over the past 40 years, the average compound annual rate of the Dow Jones Industrial Average Index, with dividends re-invested was just a bit over 11% (check it out here).
Using a compound rate of return of 11% per year (why 11%), the investment of $1/day would have resulted in a value of almost $215,000.8
A great motivation to start saving now
Most of us can afford to put aside $1/day. In fact, if we start early enough, chances are, we’ll increase our savings rate over the course of a 40-year saving/investing horizon and end up with much more money.
Now, just for fun, I challenged the same group to guess the value of the investment if, instead of saving $1/day over 40 years, the entire amount of $14,800 was invested on day 1. This time, the answers came back quite a bit more optimistic – ranging from $400,000 to $600,000.
The real answer is somewhat higher!