I have to admit, financial prowess has never been the number one talent on my resume of life. I'm the type of woman whose heart goes all aflutter and chills run up my spine at the thrill of hearing someone whisper those three little words in my ear: “It’s on sale!” I’ve learned (and continue to learn) over the years that on sale doesn’t mean free. One major department store has a wonderful marketing tool – at the bottom of the shopping receipt it shows how much money you have saved. It’s designed to make you feel like the most proud and prudent purchasing agent of the day -- “Oh look, I saved $30!” Cool, but was the $50 you spent to save the $30 in your budget to begin with? Honey that just don’t make cents!
I’ve been investing in (yes, pun intended) research and study on finances - reading, talking with financially savvy friends, and learning all I can about spending plans and matters of the pocketbook. In fact, I just got a Coach bag yesterday at a consignment shop that originally sold for $350 and I got it for $30. Ah, got to love those field trips about pocketbook matters! But, that being said, I need to make certain that (a) I have that $30 in my budget to spend, and (b) that I have a cash flow that I can put in that wickedly wonderful purse. Did I mention I got it for $30?!?!?!? I’m still giddy.
The bottom line is - we need to step back, get a rock solid grip on our money, and put a plan into action to do everything we can to be sassy and SOLVENT wild women! Savings are sexy! These are some hard times for many of us, but even if you can get a mason jar and put your change in it at the end of the day, that’ s a start. My Mom always said if you can even put $5 a week away, that’s $5 more than you had last week and at the end of the year, you’ve got $260 more than you did at the beginning of the year! Every little bit adds up.
Today begin to exercise your financial muscles and acumen – below is a very good article from the financial website The Motley Fool. It’s quite an eye-opener, and I hope it will catch your interest on all levels. You can also read it at their website by clicking HERE.
And always, always invest in yourself and spend your most precious commodity -- time -- with those you love. That’s priceless!
P.S. Did I mention my fabulous new purse? Just sayin'...
Step 1: Change Your Life With One Calculation
If there were an eighth wonder of the world, we'd nominate the equation for compound interest: Your money x (1 + i)^n. (If you're not a math geek, don’t worry; we're going to decipher that for you.)
Albert Einstein (or maybe it was Yogi Berra) called this deceptively simple formula the "greatest mathematical discovery of all time." We call it your ticket to financial independence.
That's right, just three straightforward inputs can change your life: the amount of money you invest; the rate of return you get; and how much time you have to let your money grow.
Hate math but like money? Read on.
Since words cannot adequately describe the magical nature of compound interest, let's try a few visuals.
Here's how a single $1,200 investment grows over time in four savings scenarios.
How a single $1,200 investment grows
*Based on the stock market's historical rate of return.
As you can see, simply socking away one lump sum and leaving it put could turn $1,200 into nearly $40,000 over 40 years. Not only have you earned interest, but you've earned interest on your interest. And all you had to do was invest your first paycheck.
That said, let’s be honest: $37,691 ain’t what it used to be. So let’s make one small revision and invest $1,200 every year. Behold compound interest in a mildly caffeinated state.
A more compelling table than the previous one
Now we're at half a million. Not bad, right? Still, we think you can top it. In fact, it’s not a stretch to get near that magical $1 million milestone. Just save $2,500 a year (a mere $208 a month), and at 9% you’ve got a million dollars in 40 years. Or stick with the $1,200 annual contribution but improve your investing skills (which the rest of this series will show you how to do). If you are able to best the stock market’s average annual returns by a mere 3 percentage points, the $1 million prize is yours.
If we could, we would cue a soaring chorus of angels opening the doors to usher you into the Valhalla of investing … but we misplaced that file somewhere on our hard drive.
And the best part about compound interest is that it works the same for everyone, whether you have $20 to invest or $200,000. Go ahead, tinker with this compounding calculator to see what we mean. If you don't believe you can become a millionaire with just the resources you have right now, keep reading.
The amazing tale of the Mississippi washer woman
Oseola McCarty was born in Mississippi in 1908. For nearly 75 years, she lived in the same simple house, washing other people's clothes for a living and putting whatever money she could into savings accounts at local banks.
In the summer of 1995, Oseola made local and then national headlines when she donated $150,000 to the University of Southern Mississippi to establish a scholarship fund. "I just figured the money would do [scholarship recipients] a lot more good than it would me," she said. It soon came out that this washer woman had managed to amass nearly one quarter of a million dollars over her lifetime.
Time -- a key part of the compounding equation -- helped turn her meager early investments into hundreds of thousands of dollars.
We like this ending better
As remarkable as the Oseola McCarty story is, the ending could have been a blockbuster. After she died in 1999, one of her bankers wrote to us saying: "Time was able to turn even the modest returns of her early investments into hundreds of thousands of dollars. If we had been able to introduce her to equities earlier, she would have left millions instead of thousands."
Remember, the amount you save and your time horizon -- how long you have until you need the money you've invested -- are only two-thirds of the compounding equation. Oseola excelled in both. But she did pay a price for ignoring the rate of return on her investments.
Typically, the more risk you are willing to take on (by, say, investing in stocks rather than bonds), the higher your potential return. But risk is a four-letter word to a lot of folks: They're happy to settle for lesser returns to avoid it.
Bad idea. Stuffing all your savings into the Serta -- or sticking only with safer investments like Treasury bills or bonds -- is even more disastrous. It's not simply that they return less. It's that they barely keep up with the rate of inflation, and that means your retirement dollar is not going to go as far as you think. We Fools believe the best place for your long-term (key word … as you'll discover in Step 4) savings is the stock market.
Your golden ticket to financial independence
There you have it: Financial independence is just three variables away. So start saving now (as much as you can), and invest it well. Because the sooner you get the wonder of compounding working for you, the sooner you'll reach your financial dreams. And that's exactly what this series will help you do.
Action: Who wants to be a millionaire? That's what we thought. Here's the magic code you need: 10,000, 8, 400, 35, 0, 0, 0. Plug in those numbers -- in that exact order -- here.