Saving Money - part 3

Saving for Wealth Building:

The third thing you save money for is wealth building. We are going to have more segments in the future about retirement planning and college funding, so we're not going to really touch on those tonight.

We are going to talk a little about investing, but mostly to illustrate a couple key points. The first is Consistency. Consistency is KEY. It is important to stick with a plan and do it every single month.

I want to show you all something cool. I am a huge dork and love math, when it relates to money. Do you know what compound interest is and how it works? Well, compound interest is a geometric progression and a mathematical explosion! It is absolutely amazing.

Let's look at Ben & Arthur (handout so make sure to look at it). This is an example from Dave Ramsey's FPU course. Ben starts saving $2000 a year at age 19 and stops at age 26. That is $166.67 a month. Chances are we spend that much in cable, cell phones, internet, and movie rentals a month. Some may spend that alone in eating out. So it's not too far fetched to save that much money. So Ben just leaves that money alone in his good growth stock mutual fund. (And yes, I realize that nothing is making 12% this year, but when looking at mutual funds, you want to look at them over a long period of time - like 10 years to get an idea of what they average).

His brother Arthur starts saving at 27 years of age. He saves $2000 a year until he's 65. By age 65 he will have put in $78,000 and still comes up $757,000 short of the guy who started early.

"Well, that’s a great example if you’re 19." If you’re under 25, I just made you a multi-millionaire. The point of this is that you better start! You have to start where you are, you can’t go back. If you're still breathing and have a pluse, then you're not too old, so get up and get with it, wherever you are. Anyone over 40, would you tell those of us who are under 30 to do it? (a thunderous "Do it" erupts) Good, because if it’s good enough for them, it’s good enough for you. So, DO IT! Do it and be consistent. Ben & Arthur were consistent, they put money away every month. If you put $100 a month in a good growth stock mutual fund from ages 25-65 at 12% interest, then you will have $1,188,241! What do you do with that much money? ANYTHING YOU WANT!

Just for fun, let's look at compound interest a little more. I'll use an example, and yes, I realize that these rates are not obtainable this year, but that doesn't mean that they won't be in 3,4, 5, 10 years. So let's think again of the long haul. We need to be more like the tortoise not the hare when doing this stuff. Slow and steady wins the race. So, if you have $1000 cash for investing (not the emergency fund - leave it alone!) and you get 6% from age 25-65, you'll have $10,000. If you double your rate of return (12%) it wouldn't go from $10,000 to $20,000. It would go from $10,000 at 6% to $93,000 at 12%. If you tripple it, then it would go from $10,000 to $750,000. COMPOUND INTEREST IS COOL! Where can you get these rates? Again, not this year, but maybe (hopefully) some time in the future, they could be 6% - a CD, 12% a good growth stock mutual fund, and 18% an aggressive growth mutual fund (a little more volitile and risky but has good returns).

There is one other way you are guaranteed an 18% return on your money. It's called a plasectomy - plastic surgery. A pair of scissors cutting up those credit cards will give you 18% or more on your money every single time you stop using those credit cards. When we borrow money, even for an emergency (at whatever percentage) we are on the other side of the compound interest snowball. It's not making us money, it's costing us money.

Dave Ramsey said, "Compound interest is a huge snowball. You're either going to be pushing it (saving money) or you're going to be running from it (being in debt)."

Now is a good time to decide which side of the snowball you want to be on. You may be asking, "Well, how can I get on the other side of the snowball from where I am right now." We will discuss a very simple and effective plan for getting rid of debt next month, but another way to take a torch to that snowball is to start cutting yoru costs and expenses.