Thanks to falling gas prices, you’re saving money every time you fill up your car or truck. But are you actually saving it, or are you spending it like found money? It’s by putting our gas savings in an emergency fund, a retirement fund or a child’s registered education savings plan that we redeem our borrowing excesses. Spending the money on a better cable package or more restaurant dining is a blown opportunity.
In April 2016, the U.S. Energy Information Administration (EIA) forecast that the average full price of regular grade gasoline will be lower in July 2016 ($2.07 per gallon) than at the same time last year ($2.79 per gallon),
That means the average American will save about $1,000 on gas this year, money saved and invested compounds over time, and a mere $1000 could turn into tens of thousands, instead.
Here is why you’re wasting up to $42,532 by not making smart use of your gas savings.
Make an investment
Today is the best day to start an investment, even if it’s with a small amount. If you were to invest $83.33 every month (about $1,000 a year) for 20 years in an online high-yield savings account with a 1% annual interest rate, you would have a total of $22,137.21 at the end of the 20-year period.
With such a long-term investing period, you would do even better with alternate forms of investment. For example, if you were to make the same string of deposits in an investment account paying a 4% annual rate of return, your investment would be worth $30,418.19 at the end of the 20-year period.
Of course, you would do best by putting that series of monthly $83.33 deposits in an exchange-traded fund (ETF), which is a marketable security tracking a market index, such as the S&P 500 or Russell 2000 indexes. The historical average annual return for the S&P 500, adjusted for inflation is around 7%. So, if you were to put $83.33 every month in an ETF tracking the S&P 500 for 20 years, you would end up with $42,532.14 after 20 years before applicable fees or taxes.
Making a consistent monthly deposit over a long period of time allows you to leverage the power of interest compounding, making the most of your gas savings.
Pay down high-interest debt
Of course, you may want more immediate gratification with your gas savings. By using your gas savings to pay more than your minimum monthly payment on high-interest credit cards, you can potentially save up to a few thousands of dollars every year.
Let’s assume that you have a total balance of $4,534 on a credit card with a 25.24% annual percentage rate (APR) and that your monthly minimum payment is $140.56. By making only the minimum payment, you wouldn’t pay off the total card balance for 18 years, and would end up paying an estimated total of $12,592!
By just increasing your monthly payment an extra $40.44 (about half of the estimated gas savings), you would pay off the credit card in only three years and save an estimated $6,081.
Gas prices will eventually go back up. For now, the EIA predicts that the average retail price for U.S. regular grade gas will be around the $2 mark until December 2017. Make the most out of your gas savings for the next year by investing the extra cash or paying down your high-interest debt.