Savings and Investments

Pay Yourself First. What is Compounding Interest? Power of Compound Interest Savings Goals Savings Tips Investment Scams

Power of Saving Early Watch Your Money Grow

Pay Yourself First.

Although money doesn’t grow on trees, it can grow. It grows when you save and invest wisely. Savings is money or other assets you set aside, sometimes for a particular goal.

Paying yourself first means that when you get a paycheck, you first put away the money you want to save for your goals. There are many reasons to pay yourself first. Some of the benefits of paying yourself first include:

• You can learn to manage your money better.
• You can increase your savings.
• You can improve your standard of living.

These factors may have an effect on savings growth:

• The earlier you start saving and the longer you save, the more savings you will have.
• The more income you save each year, the more savings you will have.
• The higher the interest rate or rate of return, the more savings you will have.

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What is Compounding Interest?

Suppose you put $100 into an investment account that earns 10 percent interest. You leave it there for 10 years. You might expect to have earned $100 and to have a total of $200 in your account ($100 x 10% x 10 years = $100). If you assumed you would have $200 in your account, you would be wrong. You would have more than that because of compound interest. The return would be higher because you earn interest not just on the principal but also on the interest you have already earned. This is called compounding interest.

Here is how compounding works. Let’s assume that 10 percent interest is compounded annually. The first year you earn $10 in interest. Now you have $110. The second year you earn interest on $110. ($110 x 10% = $11).

You can find out how long money will take to double by dividing 72 by the interest rate or the rate of return. With the "rule of 72" you can calculate how long it will take your money to double at a certain interest rate as long as you don’t spend the earnings. For example, at 10 percent interest, money will double in 7.2 years if the interest is compounded (72/10 = 7.2 years)

Interest Compounding Exercise

With annual compounding, at the end of the first year you would have $1,050. With daily compounding, at the end of the first day you would have earned $0.14. The next day, interest is calculated on the entire amount of your original deposit of $1,000 PLUS the previously earned interest of $0.14. This table shows that the more frequently interest compounds, the faster it grows.

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Power of Compound Interest

Compound Interest

Understanding compounding interest can be the motivation to start a savings program.

Saving $1 a day (excluding leap years)

Saving $5 a day

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Savings Goals

Most people set goals in order to be successful at saving so that they can buy the things they want. Goals are end points that keep you going so that you can stay focused on saving. Set short-term goals if you think it will take you fewer than two months to save enough money. Set medium-term goals if you think it will take between 2 months and three years. Set long-term goals if you think it will take more than 3 years.

My savings goals:

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Savings Tips

1. Consider needs vs. wants. Think about the items you purchase on a regular
basis. These add up. Where can you save?

• Do you eat out at restaurants a lot?
• Can you cut back on daily expenses, such as coffee, candy, soda, or cigarettes?
• Do you have services you do not really need, such as cable television or a cell phone?

2. Direct deposit or automatic transfer to savings.

• When you get paid, put a portion in savings through direct deposit or automatic transfer.
• If you have a checking account, you can sign up to have money moved into your savings account every month. What you don’t see you don’t miss!
• U.S. savings bonds can be purchased through payroll deduction.

3. Pay your bills on time. This saves the added expense of:

• Late fees
• Extra finance charges
• Disconnection fees for phone, electricity, or other services
• Fees to reestablish a connection if your service is disconnected
• The cost of eviction
• Repossession
• Bill collectors

4. If you use check-cashing stores regularly, you might pay $3 - $5 for each check you cash. This can easily add up to several hundred dollars in fees every year. Consider opening a checking account at a bank or credit union.

5. If you get a raise or bonus from your employer, save that extra money.

6. If you have paid off a loan, keep making the monthly payments to yourself. You can save or invest the money for your future goals.

7. If you receive cash as a gift, save at least part of it.

8. Avoid debt that does not help build long-term financial security. For example, avoid borrowing money for things that do not provide financial benefits or that do not last as long as the loan. Examples include: a vacation, clothing, and dinners out in restaurants. Examples of debt that helps build long-term financial security include:

• Paying for college education (for you or your child)
• Buying or remodeling a house
• Buying a car to get to work

9. Save your change at the end of the day. Take that change and deposit it into the bank (every week or month).

10. When you get a tax refund, save as much of it as possible.

11. If your work offers a retirement plan, such as a 401(k) or 403(b) plan that deducts money from your paycheck, join it! Most employers will match up to $.50 on each dollar you contribute, so your retirement nest egg will grow even faster.

12. Avoid using ATM's in stores or at rival banks that may require a service fee. Instead, use the free ATM machines located at branches of those banks where you hold accounts.

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Investment Scams

To get the things you want with your money you must work for your money as well as let your money work for you. You have learned about setting goals, saving early, interest, etc. It is also important to be aware of scams and how to avoid them.

Some investment scams are:

• Pyramid schemes - Operate on the principle that each member of a group will receive a profit or a cut for recruiting others to join the scheme.
• Precious metal frauds - Con artists urge jittery investors to put their savings into something they can hold on to, as opposed to paper investments such as stocks and bonds.
• Franchise & business opportunities - Con artists realize that the desire of many people to own their own businesses may make these investors less cautious when it comes to evaluating franchises and business opportunity deals.
• Affinity fraud - Affinity fraud is the term used to describe investment schemes that prey upon members of identifiable groups, including religious communities, the elderly, African Americans, and Hispanics.

Steps to protect yourself from investment scams:

• Get written information about the deal and evaluate it.
• Check out the salesperson and firm. You can get this information from your state’s Attorney General’s office.
• Stick with investments you understand, particularly when it comes to their potential risks and rewards.
• Do not sign papers you have not read or do not understand.
• Be skeptical.
• Remember --- If it sounds too good to be true, it most probably is!

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Thank you for completing this CD "Take Control of Your Financial Future Now!" For more information, please contact Consumer Credit Counseling Service of MD & DE Inc at http://www.cccs-inc.org (You must be connected to the Internet to be able to view this link.)

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