Building wealth doesn’t happen all at once. But making a consistent habit of saving money 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 more than $10,000 in two years with minimal impact on your budget is setting aside $100 every week to invest in an index fund. You can make these transfers automatic so you don’t need to think about saving the money once your paycheck hits, and putting it in an index fund means it will grow over the long term — ideally resulting in much more than just the initial $10,000.
How to get in the habit of saving
Financial advisors tend to say that automating your savings and investing is key to staying consistent. If you’re investing in a 401(k) or similar employer-sponsored retirement plan, you’re likely already automatically investing. But brokerage firms let you conduct automatic money transfers from your bank account into other types of investment accounts, like individual retirement accounts (IRAs) or taxable brokerage accounts. You can even set up automatic investing so that the money isn’t only transferred, it’s also automatically used to buy shares of a stock or fund.
While investors can choose from many stocks and funds, a low-cost S&P 500 index fund or total market fund can be strong, well-diversified options. The Nasdaq 100 is another contender for investors who want to focus on tech stocks and aren’t afraid to take some additional risk for a higher potential return.
Investors only have to set up this automatic transfer once. Then, the financial institutions will take care of the rest, ensuring that your money goes straight into the fund of your choice.
If you’re saving for short-term goals or building an emergency fund, you can also automatically transfer the funds to a high-yield savings account instead of an investment account.
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How much you can save
Investing $100 per week in an index fund results in $5,200 in principal by the end of the year. You can reach $10,000 within two years just with principal — and that doesn’t even include long-term gains: Since 1957, the S&P 500’s average annual return is 10.54%. Though keep in mind that past performance doesn’t guarantee future returns, and returns are likely to vary year to year.
Plus, depending on your income and other goals, you could boost your monthly contributions. Raising the amount to $150 per week results in a $7,800 principal per year. Investing $200 per week ensures you put more than $10,000 in principal into your portfolio by the end of the year.
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Increase your savings over time
This habit works well because it makes saving money somewhat of a passive practice. You don’t have to log into your brokerage account each week and manually move money and over time, you may forget you even had that extra money to spend.
Try to increase your savings amount regularly. Even saving $5 extra every week would result in $260 more of your principal savings by the end of the year. You can also increase your contribution if you get a raise or holiday bonus.
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