Money

Do Yourself a Huge Favor: Save 10%

Aug 9, 2007 - The first step to becoming a successful investor, and to setting yourself on the right path towards retirement, is to simply save something each and every month from your income. It is the flip side of the investment coin, you can't invest what you haven't saved, so you can't have one without the other. And like most things in life, the sooner you start saving, the less you will actually need to save, and the easier saving will be as it becomes second nature to you. However regardless of your age and household economics, setting aside 10% each month is a manageable goal for most everyone. The younger you are, particularly if you are without dependents or children, the easier this goal is to achieve because you alone have complete control when it comes to cutting back on your expenses. Of course there are only two ways to scrape up an additional 10%, you can either increase your earnings or cut your expenses, the choice is yours. But the one choice you should make is to simply do it, save 10% of your income and begin today.

Still require more convincing to save? Are you familiar with the concept of compounding? Simply stated compounding is the process of interest earning interest. The concept works by simply leaving the interest you've earned on the balance of your funds to remain in your account and to add it to the principal balance rather than withdrawing or spending it. Compound interest is the money you earn on interest earned in a previous period and it will allow your money to grow at an exponential rate. Compounding cannot occur when interest earned is not added back into the principal balance. The impact of compounding depends entirely on how often interest is compounded on the account, i.e. annually, semi-annually, quarterly, monthly or on a daily basis. Seems like a simple enough concept to follow and it is, it is also a very powerful way to build wealth. Allowing the elements of time and money to work their magic together generates the power of compounding. It has been said of compound interest that it is one of the greatest mathematical discoveries of all time.

The “Rule of 72” is an easy way to illustrate the amazing potential of compound interest. Once you understand the basics of compounding, you can then use the “Rule of 72” to determine how long it will take for you to double your money based on the applicable interest rate earned. To apply the rule, simply divide the number 72 by the applicable interest rate to determine the number of years it will take for your money to double. It is important to note that an assumption made in applying the rule, is that the rate of interest will remain unchanged, therefore you may need to use it as an average interest calculation.

For example: how long will it take $25,000 at a rate of 6% to grow to $50,000? Based on the “Rule of 72” you would then divide 72 by 6% which equals 12, so the answer is 12 years. Here's the simple formula: i = the interest rate and n = the number of time periods required to double your principal.

72 = n
i

*Sample: "Rule of 72" Chart:*

Interest Rate			# of Yrs. Req'd to Double your $

5%			14.4
6%			12
7%			10.3
8%			9
9%			8
10%			7.2
11%			6.5
12%			6
13%			5.5
14%			5.1
15%			4.8

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Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.