A mere £5 a day doesn’t sound like very much. It wouldn’t even get me a cheese sandwich in most airports these days. But it’s actually surprising what this modest sum of money invested in the stock market could produce after 25 years.
Finding £5 a day
A fiver a day adds up to £1,825 at the end of a year. Unfortunately, due to the ongoing cost-of-living crisis, investing such an amount straight into the stock market might be unrealistic for some people.
But finding £5 a day to save seems a lot less demanding. Speaking personally, I’m pretty sure I could scale back on a few non-essential items here and there to save that sum.
Specifically, I could sacrifice things I might want now (a takeaway meal delivered) for things I’ll need in future (more money to live comfortably).
The power of compounding
Now, many investment platforms still charge trading commissions. So it wouldn’t make sense to invest a small amount each day. These fees would wipe out any potential gains before I’ve even started.
Therefore, I’m going to assume that I invest a lump sum of £1,825 at the start of every year. And I’m going to assume an annualised average return of 8.7%.
Why this arbitrary figure? Well, according to IG, the FTSE 100 delivered an average total return of 7.5% per year from 1984 to 2022. That figure includes dividends being reinvested.
Meanwhile, the S&P 500 in the US has delivered an average annualised return of 9.9% over the long term. Again, that includes reinvested dividends.
So, I could split my investments between the US and UK markets in the hope of achieving superior annual returns. That could give me a blended median return of 8.7%.
With this, my £1,825 a year invested into shares could generate nearly £148,000 after 25 years.
| YEAR | TOTAL BALANCE |
| 1 | £1,825 |
| 5 | £10,857 |
| 10 | £27,333 |
| 15 | £52,336 |
| 20 | £90,281 |
| 25 | £147,873 |
Due to the power of compounding, the total interest earned on this final amount would be a staggering £102,240!
Obviously, I’m oversimplifying here. In reality, the stock market doesn’t go up every year. Its annual returns can fluctuate wildly one year to the next. And past performance doesn’t guarantee future returns.
But by investing my savings into the stock market, and aligning my money with world-class businesses, I’m giving myself the best shot at generating long-term wealth.
Investing ally
The longer I leave my money invested, the more time compounding has to grow my wealth. If I invested £5 a day for 50 years, for example, I could end up with over £1.5m.
While that’s certainly an enormous sum, I’d need to take half a century’s worth of inflation into account. As we’ve all seen recently, the purchasing power of money diminishes over time. Though I think this reality makes it even more vital that I put my money to work sooner rather than later.
I find the possibility of investing the equivalent of £5 a day and ending up with nearly £150,000 after 25 years very impressive. Imagine if I could find £10 or £20 a day!
It certainly demonstrates the power of small but consistent effort, and shows how time is the investor’s ally.
