Let’s recap the previous posts: We started out by setting S.M.A.R.T. financial goals and then explored how the power of compound interest can be harnessed to achieve those goals. Then to help with quick calculations, we went over a mental math trick known as the rule of 72. I think the logical next step is to discuss how to invest your money. There are a bazillion* options: stocks, bonds, certificates of deposit, plain old savings accounts, real estate, mutual funds, commodities, etc. The list goes on and on. With so many options, the hard part is choosing which ones to entrust your money with and how much to allocate to each. I definitely want to touch upon all of the aforementioned topics, but there is simply too much to say about each—at least in a post of reasonable length. So the content will be spread out from post to post.
I’ll start with the concept that saving money is investing. Most people would probably look at me funny when I tell them that. Investing usually conjures up images of stocks and bonds dancing like sugar plums in people’s heads. But, when you think about it, what is investing? According to Dictionary.com, it is “[committing] (money or capital) in order to gain a financial return.” All right, I admit, relating that to saving might be a bit abstract, but hear me out.
Let’s say Emily goes shopping and sees some jeans for $50. If she bought those jeans, she’d be out $50. However, if she didn’t buy those jeans, she’d still have that $50. In this case, the financial return is theoretical since there was no actual change in wealth, but it was preemptive in that she’d be $50 wealthier than if she had bought those jeans.
Now, I’m not saying you should go overboard with saving and just not spend any money at all. You still have to pay for necessary expenses including food, clothing, and shelter. But just saving on little things here and there such as using coupons, taking advantage of sales, not eating out as much, and not buying trendy clothes that you will only wear a few times before they are relegated to the back of the closet, add up. If you manage to save just $100 a month, that is $1,200 more a year than you would have had.
Furthermore, if you saved $1,200 every year and earned 11% annual return, you’d have $238,825.05 at the end of 30 years. That is not bad for just cutting your expenses by $100 a month. Similarly for those with high-interest credit card debt, paying those down quickly would minimize the powerful effects of compound interest on your debt.
So in the spirit of investing, I encourage you to save a few bucks. Who knows? You might even have fun.
* Apparently, bazillion is a real word meaning “an extremely large, indeterminate number.” Sadly, brazillion is not yet in the dictionary.