People often ask me what to do with $10,000 or $100,000 because they have saved those assets in their 401(k) and want to make sure they are invested appropriately for their retirement. I can’t recall anyone ever asking me what to do with $100, but that question may actually be the key to financial security and building wealth.
It is amazing how much money flows through our hands without us even realizing it. A little bit here and there adds up. Recently a man in his early 60’s discussed retirement with me and said, “I have been working for 40 years! I want to retire!” I can certainly understand where he is coming from but at the same time, the number of years he has worked doesn’t make that much difference in terms of retiring. What matters is what he did with the money he earned during those forty working years. What did he invest and how much income can he get from his investments?
So what does that have to do with $100? What difference does a hundred dollars make? It can make a huge difference.
Investing for future income. If you started your career at age 25 and saved $100 a month and earned just 6% interest, at age 65 you’d have over $200,000. In terms of monthly income, that equals over $650 per month (at a 4% withdrawal rate.) A hundred dollars might not seem like a lot but consistently saved in a 401(k), it could mean a steady lifetime income stream.
Saving in an emergency fund. Hold onto it and put that $100 in your savings account to use later when you need it. According to our research on employee financial issues to be published in early November, only 51% of employees have an emergency fund to cover expenses or pay bills if they lost their job. Without an emergency fund, an unexpected expense can spiral into a financial nightmare – you have to put it on a high interest credit card that you can’t pay off (or you wouldn’t have charged in the first place). Then you are stuck paying interest and that further prevents you from saving! The emergency fund supports all of our other goals – it is important!
If you don’t have an emergency fund at all, plan to save a specific amount…say $300 as a goal. Then once you meet that, shoot for $1000. Once you have at least a cushion, the next goal is to have a minimum of three months of expenses in a liquid account. A hundred dollars doesn’t seem like much but you are a third of the way to starting a savings account – a good start.
Paying down debt. “I hate paying interest on debt,” is a phrase I hear a lot! In fact, a saying I love goes like this, “a credit card is something you use to buy things you don’t need with money you don’t have.” Then you’d have to add, “and keep paying” due to high interest. Once people decide to get out of debt, they get obsessed! Even paying an extra $100 one time toward principal on debt can make a big difference – it seems like it won’t but it will.
Here is an example –
You owe $5000 in credit card debt at 19%. You are paying the minimum payment on your credit card at $84 per month. You would pay off your credit card in 15 years and two months. If you made a ONE TIME payment toward your principal on the credit card, it cuts more than a year and a half of your payments to 13 years and 8 months!!! Here, a hundred dollars saves you almost $1400 in interest.
If you also transfer your balance to a lower interest rate card paying 9% instead of 19%, (AND are making that extra one time $100 payment) you would be out of debt in 6 years and 6 months.
If you transfer your balance to a 9% card and make the extra $100 payment EVERY month, you’d be out of debt in 2 years and 7 months.
Who thinks a hundred dollars isn’t worth much now? Just like your physical health, small changes turned into good habits make the difference. What is your favorite exercise? I like to ride my bike on the bike trails here in Park City, Utah. If I ride once, it’s nice and I breathe in lots of clean air and get my muscles moving but it doesn’t really improve my health. When I ride five days a week, it makes a huge difference in my health – endurance, muscle tone, and overall well being. What you do with a hundred bucks – every month to savings, investing, and paying off debt can mean the difference between financial independence …or not.