Dontcha love finding forgotten cash in an old pair of pants? It doesn’t happen all the time, of course, but it’s one of those sweet and unexpected pleasures in a modern life full of credit cards, online banking and electronic reminders. Surprise! You’re $5 or $10 less poor (err richer) than you were a minute ago. ‘Here’s $20,’ Life says, ‘and have a nice day!”
But what now? Do you just shove it into your purse or wallet and forget about it until its time to splurge on a candy bar or a magazine or some dinner you won’t remember later? Naaaah.
Let’s look at some money-smart things you could do with that bill to help get yourself started with better money habits.
It might be easy to think of that unexpected bill in your pocket as just throw-away cash to use on some little impulse purchase, but that bill is worth more than the $5, $10 or $20 printed on its front. If you instead deposited it into a high-yield savings account and kept it there, you’d realize that it could be worth a little more. In fact, in 20 years, at a high-yield savings account of 0.75% APY like those offered by ING’s Orange Bank and depending on inflation rates, that $5 could be almost $5.80, that $10 could be almost $11.50 and that $20 could be almost $23.25.
You may or may not be impressed by that, but that additional money might be better than if you had spent the bill and then been left with just $0 and a memory you’ll soon forget. Plus, you may find that you build a habit of saving small amounts until you’ve started saving really significant sums!
You’ve probably heard people talk about the stock market before—but outside of a retirement account that you probably don’t actively manage, you might not have ever bought or sold a stock before. Why not use that extra bill to start to learn a new skill—equity investing—and test the waters a bit by buying a few shares.
One easy way to start is to sign up for some online service like Sharebuilder that doesn’t require minimums to trade. Then just do a little bit of internet research until you find a company you like that has a shares that you can buy for less than $5, $10 or $20 each. Whether the stock’s price goes up or down does not have to matter at these small sums as long as you can use the experience to learn how stock markets work. And learning how stock markets work is very important because over the long-term, equities offer one of the best possible returns for your money. In fact, the average annual return on the market is about 9.3% over many years—or about 6.2% annually when adjusted for inflation.
(Keep in mind that we warned you earlier that the typical $7 trading fees charged by companies like Sharebuilder can really add up! But for what it’s worth, Sharebuilder also gives you $50 in free money when you make your first trade. Thus, it’s easy to start, but don’t get carried away with those fees. We’ll discuss a fee-free alternative next.)
There’s an old saying that in the long run, nobody can beat the market. That means that you shouldn’t put a lot of effort into picking one stock over another, because in the long run on average, you will have been better off just buying a tiny slice of the entire market instead of placing your bets on a few specific stocks that will make you money some years and lose you money in other years. Buying a tiny slice of the market can be achieved through buying ETFs, or exchange traded funds, that represent most or all of the stocks in the marketplace. They are a good bet, because on average, more stocks overall increase in value instead of decrease in value. By buying a slice of the whole market, you get to enjoy the benefit of the long-term average increase—without the hassle and worry of trying to parse the winners from the losers.
ETFs can also be very cheap to buy compared to full shares in specific companies, and you’ll find that many brokers like TD Ameritrade, Charles Schwab and Fidelity don’t charge any fees at all for trades on certain ETFs—making them extra affordable and easy to access if you just have a few dollars that you want to start with.
Start smart-money habits today
Well, that was an unexpected list, huh? Take it to heart though, and remember that you can start to practice smart-money habits with any amount of money and a little enthusiasm. In fact, take a look at our Seven Days to Financial Fitness Plan and start your journey to a more comfortable life today.