Make Your Money work for You
When you want to get your money to work for you one concept that is very important to understand is call “THE RULE OF 72” The rule works this way if you take the amount of interest you are receiving on a sum of money and divide it by the number 72 it will tell you how long it will take for your money double.
$10,000 @ 8% interest (72 / 8 = 9) there for in 9 years your $10,000 would double.
Consequently if you wanted to know what interest rate you would need to double you would:
$10.000 – (72 / 9 years = 8 ) you would need 8% over nine years for your $10,000 to double.
To make your money work for you this concept is important to understand.
Simple INTEREST Vs Compound Interest
Another important fact to make your money work for you is simple interest vs compound interest. There are many fine-tooth details you could get into when looking for the best ways to invest your money. But when you’re just beginning your journey to financial independence, the big YES and NO below are important to keep in mind. In a nutshell, interest will either cost you money or earn you money. Here’s how…
The Pro of Simple Interest:
Credit cards, mortgages, car loans, student debt – odds are that you’re familiar with at least one of these loans at this point. When you take out a loan, look for one that lets you pay back your principal amount with simple interest. This means that the overall amount you’ll owe will be interest calculated against the principal, or initial
amount, that was loaned to you. And the principle decreases as you pay back the loan. So the sooner you pay off your loan, you’re actually lowering the amount of money in interest that you’re required to pay back as part of your loan agreement.
The Con of Simple Interest: Growing Money
When you want to grow your money, an account based on simple interest is not the way to go. Setting your money aside in an account with compound interest shows infinitely better results for growing your money.
For example, if you wanted to grow $10,000 for 10 years in an account at 3% simple interest, the first few years would look like this:
- 1: $10,000 + 300 = $10,300
- 2: $10,300 + 300 = $10,600
- 3: $10,600 + 300 = $10,900
In a simple interest account, the 3% interest you’ll earn is a fixed sum taken from the principal amount added to the account. And this is the amount that is added annually. After a full 10 years, the amount in the account would be $13,000. Not very impressive.
But what if you put your money in an account that was less “simple”?
If you take the same $10,000 and grow it in an account for 10 years at a 3% rate of interest that compounds, you can see the difference beginning to show in the first few years:
- 1: $10,000 + 300 = $10,300
- 2: $10,300 + 309 = $10,609
- 3: $10,609 + 318 = $10,927
At the end of 10 years, this type of account will have earned more than the simple interest account, without your having to do any extra work! And that’s not even considering adding regular contributions to the account over the years! Just imagine the possibilities if you can get a higher interest rate and combine that with a solid financial plan for your future.
Steps To Make Your Money Work For You
- Make sure you are receiving the highest return with the least risk
- Let your age and the amount of money you can afford to lose determine the amount of risk to take
- Protect as much of your money as possible from the tax man (legally). Remember the only money we can spend at retirement is the money we haven’t lost and the money the government has not taken.
- Set financial goals of where you want be 5 years, 10 years retirement
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