How Money Works
What amount of knowledge do you have about finances?
Most people don’t know much about personal finance Maybe you don’t believe long-term security is possible. No matter your income level, you can achieve financial security. Take the time to learn the principles of how money works.
Principals of how money works
The High Cost of Waiting
Pay Yourself First
The Power of Compound Interest
Debt Stacking
The Theory of Decreasing Responsibility
THE COST OF WAITING TO SAVE FOR RETIREMENT
Do you want to save $1 million by your 67th birthday? If you don’t get started soon, you will be in big trouble.
You will have to put away more money each month to reach your retirement goals if you wait a long time.
- 27 years of age? To get to $1 million, you need $214 a month to save.
- 37 years of age? To get to $1 million, you need $541 a month to save.
- 47 years of age? To get to $1 million, you need $1491 a month to save.
- 57 years of age? To get to $1 million, you need $5,168 a month to save.
- If you waited until the last minute, you would have to save $13,000 a month to reach $1 million by 67.
The sooner you start saving, the less money you will have to put away each month to reach your retirement goals. The high cost of waiting should not be paid by you.
Actual investment is not represented by this example. This works out to a 9% rate of return compounded monthly. It uses a constant rate of return, unlike actual investments, which can fluctuate in value. Fees and taxes aren’t included, which will result in lower results.
PAY YOURSELF FIRST
Do you think you don’t make enough money to save it? Think again.
You will have earned a million dollars if you earn $25,000 a year for 40 years. You have earned more than a million dollars if you earn $35,000 for 40 years. If you earned $45,000 a year for 40 years, you would have made over $2 million.
It’s possible to get ahead in the savings game if you pay yourself first. If you save $100 a month for 40 years, there’s a good chance you’ll end up with a lot of money.
- You have about $93,000 at three percent interest.
- You’d have about $150,000 with five percent interest.
- If you got a nine percent interest, you would have $472,000.
That’s the power of paying yourself first! And remember, it’s not what you earn – It’s not what you get, it’s what you keep.
The percentage rates and values are for illustrative purposes and do not represent an actual investment. Real investments will fluctuate in value, but rates of return are consistent. It’s subject to the applicable taxes. The results wouldn’t be as high if taxes and fees were included.
COMPOUND INTEREST INVESTMENTS
The Power of Compound Interest shows how you can use compounding interest to grow your money.
When you earn interest on savings, that interest earns interest on itself and this amount is compounded monthly. The more money you have, the higher the interest will be.
- If you saved $200 every month, after 35 years, At a three percent interest rate, your money would only have grown to $150,000.
- At a six percent interest, your money would have grown to $286,370.
- If you had a 12 percent interest rate on your savings, your money would have grown to over $1.3 million.
The benefit of compound interest is greater if you begin to save sooner.
Constant nominal rates and compounded monthly are the rates of return. The values of actual investments will change over time. It is assumed that contributions will be made at the beginning of the month The chart is not intended to be a representation of any particular investment or savings vehicle. It doesn’t take into account taxes or other deductions, which will result in lower returns.
DEBT STACKING
Debt stacking identifies a way for you to pay off your debts by taking into account the interest rate and amount of debt. You can begin making payments on your debts by making consistent payments. The debt that debt stacking suggests that you pay off first is called your target account.
You roll the amount you paid toward the next target account after you pay off the target account. As the debt is paid off, you will continue this process. When you don’t accrue any new debts, debt stacking works best and you can make the same total monthly payment each month towards all of your debt.
Once you have paid off all of your debts, you continue this process. You can use the amount you paid towards your debt to create wealth and financial independence when you finish paying your debts.
THE THEORY OF DECREASING RESPONSIBILITY
According to the Theory of Decreasing Responsibility, your need for life insurance goes up when you have family responsibilities.
When you’re young, you may have children to support, a new mortgage payment, and other obligations. You have not had time to accumulate much money. When you need the most coverage, this is the time when the death of a breadwinner is devastating.
You have fewer dependents and financial responsibilities when you’re older. You had years to accumulate wealth through savings and investments. You have your own funds to see you through your retirement years, as the need for insurance has reduced dramatically.